The Income Tax Appellate Tribunal, Mumbai, has reaffirmed a foundational principle in direct tax law: the surrender of tenancy rights, even when cost of acquisition cannot be established, constitutes a capital receipt and cannot be taxed under the residuary head of 'Income from Other Sources'. This judgment resolves a recurring dispute in property-related assessments and clarifies the non-transferability of capital receipts to other heads when capital gains computation fails.
Background & Facts
The Dispute
The dispute centers on the tax treatment of Rs.3,67,68,000 received by the assessee, an individual, on the surrender of tenancy rights in two premises located at Senapati Bapat Marg, Lower Parel, Mumbai, in favor of Phoenix Mills (P) Ltd. The assessee had acquired these tenancy rights in 1994 and surrendered them in August 2019. The Assessing Officer (AO) rejected the assessee’s claim that this receipt was taxable as long-term capital gains under Section 45, citing failure to substantiate cost of acquisition. The AO then assessed the entire amount under 'Income from Other Sources' under Section 56.
Key Facts
- The assessee acquired tenancy rights in Premises No. 11 on 12.02.1994 for Rs.31,59,003 and in Premises No. 12 for Rs.15,02,887.
- The surrender agreements for both premises were executed on 28.08.2019, for total consideration of Rs.3,67,68,000 (Rs.2,45,76,000 and Rs.1,21,92,000 respectively).
- The assessee submitted copies of both acquisition and surrender agreements during assessment proceedings.
- The assessee claimed indexed cost of acquisition based on fair market value as on 01.04.2001 under Section 55(2)(a), and deposited the entire consideration in the Capital Gains Account Scheme.
- The AO rejected the cost of acquisition claim, stating the assessee had merely submitted a 'working' without documentary proof, and treated the cost as NIL.
- The AO assessed Rs.3,67,68,000 under 'Income from Other Sources', increasing total income to Rs.5,98,38,100.
Procedural History
- 15.02.2021: Assessee filed return for AY 2020-21 declaring income of Rs.2,44,02,200.
- 29.06.2021: Notice under Section 143(2) issued.
- 11.11.2021: Notice under Section 142(1) issued.
- 29.09.2022: Assessment order passed under Section 143(3) read with Section 144B, adding Rs.3,67,68,000 under 'Income from Other Sources'.
- 27.11.2025: CIT(A) allowed the appeal, deleting the addition, relying on D.P. Sandu Bros. Chembur Pvt. Ltd. v. CIT.
- 30.04.2026: ITAT Mumbai dismissed the Revenue’s appeal.
The Parties' Positions
For the Assessee: Tenancy rights are capital assets under Section 2(14). Surrender constitutes transfer under Section 2(47). Even if cost of acquisition is unproven, the receipt remains a capital receipt and cannot be taxed under Section 56. Documentary evidence (acquisition and surrender agreements) was furnished and not discredited on genuineness.
For the Revenue: Since cost of acquisition could not be established, capital gains computation under Section 48 failed. The receipt, being unexplained and substantial, must be taxed under the residuary head 'Income from Other Sources'. The assessee’s 'working' was not sufficient proof.
Relief Sought
The Revenue sought to restore the AO’s addition of Rs.3,67,68,000 under 'Income from Other Sources'. The assessee sought confirmation of the CIT(A)’s order deleting the addition.
The Legal Issue
Can a capital receipt arising from the surrender of tenancy rights be taxed under the residuary head 'Income from Other Sources' under Section 56 if the cost of acquisition is unproven and capital gains computation under Section 48 fails?
Arguments Presented
For the Appellant (Revenue)
The Revenue contended that Section 48 requires a determinable cost of acquisition to compute capital gains. Since the assessee failed to provide verifiable documents substantiating the 1994 acquisition cost, the cost was rightly treated as NIL. With no capital gain computable, the receipt could not be classified under 'Capital Gains'. In such circumstances, the AO was justified in invoking Section 56 to tax the amount as income from other sources, citing the principle that unexplained receipts must be brought to tax. Reliance was placed on the AO’s finding that the assessee had merely submitted a 'working' without original documents.
For the Respondent (Assessee)
The assessee argued that tenancy rights are unequivocally capital assets under Section 2(14), and their surrender is a transfer under Section 2(47). The Supreme Court in D.P. Sandu Bros. Chembur Pvt. Ltd. held that if a receipt is of a capital nature, it cannot be taxed under Section 56 merely because capital gains computation fails due to lack of cost. The assessee submitted original agreements, which the AO did not dispute as forged. The burden of proof lies on the department to disprove the claim, not on the assessee to prove beyond doubt. The CIT(A) correctly applied the settled law that capital receipts cannot be re-characterized as income from other sources.
The Court's Analysis
The Tribunal emphasized that the nature of the receipt - capital or revenue - is determined by the underlying transaction, not by the availability of cost of acquisition. The surrender of tenancy rights, as held by the Supreme Court in D.P. Sandu Bros. Chembur Pvt. Ltd., is a transfer of a capital asset and generates a capital receipt. The Tribunal quoted the Supreme Court’s reasoning: "If the income cannot be taxed under section 45, it cannot be taxed at all."
"There is no dispute that a tenancy right is a capital asset the surrender of which would attract section 45 so that the value received would be a capital receipt and assessable if at all only under Item E of section 14... The argument of the appellant that even if the income cannot be chargeable under section 45, because of the inapplicability of the computation provided under section 48, it could still impose tax under the residuary head is thus unacceptable."
The Tribunal noted that the AO’s reasoning conflated two distinct legal questions: (1) whether the receipt is capital in nature, and (2) whether it can be computed under Section 48. The first is a question of classification; the second is a question of valuation. The Supreme Court has consistently held that the former determines the head of income, and the latter does not permit re-characterization.
The Tribunal further observed that the assessee had submitted the tenancy acquisition and surrender agreements, which the AO did not reject as forged or fabricated. The AO’s criticism of the 'working' as insufficient was not equivalent to a finding of absence of evidence. The burden of proving the cost of acquisition lies with the department if it disputes the claim, not with the assessee to prove it beyond all doubt.
The Tribunal concluded that the CIT(A) correctly applied the binding precedent and that the Revenue’s appeal was based on a misreading of the statutory scheme. The legal principle established is that the failure of capital gains computation does not open the door for taxation under Section 56.
The Verdict
The Revenue’s appeal was dismissed. The ITAT upheld the CIT(A)’s order deleting the addition of Rs.3,67,68,000 assessed under 'Income from Other Sources'. The Tribunal confirmed that the receipt arising from surrender of tenancy rights is a capital receipt and cannot be taxed under Section 56 even if the cost of acquisition is unproven or treated as NIL. No further directions were issued as the matter was fully resolved by deletion of the addition.
What This Means For Similar Cases
Capital Receipts Cannot Be Recharacterized
- Practitioners must argue that any receipt arising from transfer of a capital asset - whether property, tenancy rights, or goodwill - is classified as capital gain under Section 45, irrespective of whether cost of acquisition is established.
- The department cannot invoke Section 56 merely because Section 48 computation fails due to lack of documentation.
- The nature of the receipt is determined by the underlying transaction, not by the availability of proof for cost.
Documentary Evidence Must Be Evaluated on Genuineness, Not Completeness
- If the assessee submits agreements or contracts evidencing acquisition and transfer, the AO must assess their genuineness, not merely reject them for lack of supporting valuation reports.
- A 'working' based on fair market value as on 01.04.2001 is a recognized method under Section 55(2)(a) and cannot be dismissed as insufficient without specific adverse findings.
- The onus shifts to the department to prove fraud or fabrication if it disputes the documents.
Precedent Binding Across Tribunals
- The D.P. Sandu Bros. precedent is binding on all Income Tax Appellate Tribunals.
- Any AO or CIT(A) attempting to tax surrender of tenancy rights under Section 56 must now be challenged on the basis of this judgment.
- Similar cases involving surrender of leasehold rights, occupancy rights, or development rights will be governed by the same principle.
