Consistency in Transfer Pricing Methods and Business Deductions

Consistency in Transfer Pricing Methods and Business Deductions Upheld, While Additional Depreciation Requires Integral New Capital Acquisition

Issue

Whether the Internal Transactional Net Margin Method (TNMM) can be replaced by the Comparable Uncontrolled Price (CUP) method if the Tribunal and High Court have consistently accepted TNMM for identical transactions in previous years.
Whether Transfer Pricing (TP) adjustments on sales promotion and marketing payments are sustainable when identical services in previous years were accepted as genuine and arm’s length.
Whether additional depreciation can be claimed on the routine replacement of spares and parts of an existing plant and machinery.
Whether prior-period expenses can be added back to increase the book profit calculation under Section 115JB (Minimum Alternate Tax – MAT).
Whether interest on External Commercial Borrowing (ECB) loans can be mandatorily capitalized to Capital Work-in-Progress (CWIP) without the Revenue proving a direct link/nexus to fixed asset acquisition.
Whether the Assessing Officer (AO) can restrict an in-house R&D deduction under Section 35(2AB) based on a DSIR quantification report for assessment years prior to April 1, 2016.
Whether storage tanks used for hazardous raw materials qualify as plant and machinery for the purpose of claiming additional depreciation.

Facts

TP (Methods & Services): The chemical manufacturing assessee used Internal TNMM to evaluate finished goods sales to Associated Enterprises (AEs) vs. Non-AEs. The TPO imposed the CUP method. Separately, the TPO disallowed marketing payments made to AEs, alleging no proof of service delivery. In past years, both the Internal TNMM and the marketing expenses had been legally cleared on identical facts.
Additional Depreciation (Spares vs. Tanks): The assessee claimed additional depreciation on two distinct items: (a) routine replacement spares/parts for existing machinery, and (b) newly capitalized storage tanks used to house hazardous manufacturing materials. The AO rejected both.
MAT Book Profits: The AO added prior-period expenses back into the commercial book profits while computing the MAT liability under Section 115JB.
Interest Capitalization: The AO presumed that ECB loans were automatically routed into CWIP and disallowed/capitalized the corresponding interest, without mapping a direct financial trail.
R&D Expenses: The AO limited an in-house R&D deduction for AY 2012-13 and 2013-14 by relying on an allocable expenditure report from the DSIR.

Decision

Regarding Transfer Pricing (Issues I & II): Decided in favor of the assessee. The rule of consistency applies. Because the facts remained completely unchanged from earlier years where the High Court and Tribunal accepted Internal TNMM and verified the AE marketing services, the TPO’s adjustments were completely deleted.
Regarding Spares Depreciation (Issue III): Decided in favor of the revenue. Additional depreciation is explicitly meant for the acquisition and installation of new plant and machinery. Merely replacing components or spares in existing setups does not qualify.
Regarding MAT Book Profits (Issue IV): Decided in favor of the assessee. Explanation 1 to Section 115JB contains a specific, exhaustive list of adjustments. Prior-period expenses are not listed there; hence, the AO cannot add them back to alter book profits.
Regarding Interest Capitalization (Issue V): Decided in favor of the assessee. Interest cannot be capitalized to CWIP based on mere assumptions. Since the AO failed to establish a clear factual nexus between the ECB inflows and the fixed asset construction, the interest deletion was justified.
Regarding R&D Deductions (Issue VI): Decided in favor of the assessee. The statutory mandate requiring the DSIR to quantify eligible expenditure was introduced prospectively from April 1, 2016. It cannot be retroactively applied to restrict deductions for AY 2012-13 and 2013-14.
Regarding Storage Tanks (Issue VII): Decided in favor of the assessee. Since the hazardous storage tanks were vital to the factory’s operation and already granted normal depreciation as “plant,” they constitute an integral part of the plant and qualify for additional depreciation. Missing vouchers alone cannot invalidate a claim if the asset’s active existence is already accepted for normal depreciation.

Key Takeaways

The Rule of Consistency in TP: Unless the Revenue demonstrates a material shift in economic reality or transaction structures, it cannot arbitrarily switch transfer pricing methodologies (like TNMM to CUP) from year to year.
Strict Construction of Section 115JB: Book profits computed under MAT are sacrosanct. The AO possesses no general power to tinker with profit figures certified under the Companies Act unless an item is explicitly named in the adjustment clauses of Explanation 1.
Additional Depreciation Thresholds: Additional depreciation requires a functional expansion (i.e., new capital assets). While it covers integral auxiliary infrastructure like specialized raw-material storage tanks, it strictly excludes standard operational maintenance like replacement parts.

IN THE ITAT MUMBAI BENCH ‘H (SMC)’

Sarjit Ghanshyam Desai

Income-tax Officer

ANIKESH BENERJEE, Judicial Member
and Om Prakash Kant, Accountant Member

IT Appeal No.1620 (MUM) of 2026
[Assessment year 2011-12]

MAY 8, 2026

B.N. Rao for the Appellant. Pravin Salunkhe, SR. DR for the Respondent.

ORDER

Om Prakash Kant, Accountant Member.-This appeal by the assessee is directed against order dated 13.01.2026 passed by the Learned Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre, Delhi [in short “the Ld.CIT(A)”] for the Assessment Year 2011-12, raising following grounds:

“1. The Ld. Commissioner of Income tax (Appeals) erred in upholding the addition made by the Assessing Officer

2. The order of the Commissioner of Income Tax (Appeals) is bad in law and void as opposed to the facts of the case and the applicable law thereto.

3. The CITA erred in not appreciating the facts correctly and therefore erred in upholding the order of the AO. He ought to have appreciated that the shop held by him on tenancy was converted into ownership property and in terms of the Development agreement, he got the new shop against his rights, under the Development agreement executed on 21^st September, 2010 that he obtained possession of the property in 2010, that his cost to the shop was the market value of the shop on the day it was handed over by the Developer, that the differential consideration between the above cost and the consideration received was only chargeable to tax for the subject assessment year in appeal.

4. The CITA should have appreciated that the cost in the hands of the appellant was the market value of the property at the date of receiving possession from the Developer.”

2. Briefly stated, the facts giving rise to the present appeal are that the assessee, an individual, filed his return of income for the year under consideration on 24.09.2011 declaring total income at Rs.3,30,760/-. The return was processed under Section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) accepting the returned income. Subsequently, the Assessing Officer (for short “the AO”) noticed that deposits aggregating to Rs.30,51,000/- had been made in the savings bank account maintained with Jan Sahakari Bank Ltd., but said deposit along with interest accrued thereon, had not been disclosed in the return of income. The AO, therefore, recorded reasons to believe that income chargeable to tax had escaped assessment and accordingly issued notice under Section 148 of the Act on 21.03.2016, which was duly served upon the assessee. In response thereto, the assessee requested that the original return of income filed on 24.09.2011 be treated as the return filed in compliance with the notice issued under Section 148 of the Act. During the reassessment proceedings, while explaining the source of deposits in the said bank account, the assessee submitted that he had sold an immovable property, being a shop situated at Punya Apartment, Girgaum, Mumbai, for a consideration of Rs.38,62,000/- on 27.09.2010 and that the sale proceeds thereof had been deposited in the said account.

2.1 Before the AO, the assessee furnished a copy of the agreement for sale in respect of the aforesaid shop at Punya Apartment, Girgaum, Mumbai. Upon examination of the said agreement, the AO observed that the assessee was originally a tenant in respect of Room No.6 situated in the building known as Mani Mansion, V.P. Road, Girgaum, Mumbai. The said building underwent redevelopment and, in lieu of the tenancy rights held by the assessee therein, a Permanent Alternate Accommodation (“PAA”) in the form of Shop No.2 at Punya Apartment was allotted to him. The assessee thereafter transferred the said Shop No.2 vide agreement dated 21.09.2010, which came to be registered on 27.09.2010, for a total consideration of Rs.38,62,000/-. Since the gain arising from the said transfer had not been offered to tax in the return of income, the assessee was called upon to explain as to why the capital gains arising from sale of the immovable property should not be brought to tax in his hands.

2.2 In response, the assessee contended before the AO that the shop in question had been allotted to him in lieu of his pre-existing tenancy rights and that no consideration had been paid by him at the time of acquisition of such tenancy rights. It was further submitted that the redevelopment had taken place in the year 2007 and possession of the redeveloped premises was handed over to the assessee in the year 2010. According to the assessee, since there was no ascertainable cost of acquisition in respect of the tenancy rights surrendered, no capital gains could be computed or charged to tax on transfer of the Permanent Alternate Accommodation received in exchange thereof. The aforesaid explanation, however, did not find favour with the AO.

2.3 The AO observed that three material facts stood admitted by the assessee, namely: firstly, that the assessee was holding tenancy rights in the erstwhile building known as Mani Mansion; secondly, that pursuant to redevelopment, he became owner of the shop allotted in the redeveloped premises, namely Punya Apartment, in lieu of such tenancy rights; and thirdly, that the said shop premises had subsequently been transferred by way of sale. Proceeding on the aforesaid admitted factual position, the AO rejected the contention of the assessee that no capital gains were exigible to tax. According to the AO, the Permanent Alternate Accommodation received by the assessee constituted a capital asset and its transfer squarely attracted the provisions of Section 45 of the Act. The AO further held that the tenancy rights surrendered by the assessee also constituted a “capital asset” within the meaning of Section 2(14) of the Act. It was further observed that tenancy rights could not be regarded as having been acquired without cost, since acquisition thereof ordinarily involves payment of rent, deposits or other monetary incidents attached to tenancy. The AO, therefore, concluded that the plea of absence of cost of acquisition was untenable in law.

2.4 The AO further noted that the assessee had failed to establish the precise date from which the tenancy rights had come into existence and had also failed to furnish any documentary evidence evidencing payment towards acquisition of such tenancy rights. Invoking the provisions of Section 55(2)(a) of the Act, the AO treated the cost of acquisition of the tenancy rights as “Nil” and consequently computed the entire sale consideration received on transfer of the Permanent Alternate Accommodation as taxable long-term capital gains. The AO accordingly assessed long-term capital gain at Rs.38,62,000/- and added the same to the total income of the assessee as under:

“3.3. In view of the above, it is clear that tenancy rights can be purchased or Acquired by the operation of law and for chargeability of capital gains, there is no precondition that there must be cost of acquisition. The assessee earned capital gain on sale of shop premises in Punya Apts and he has not disclosed this income for taxation, hence the assessee is liable to pay capital gain in respect of this transaction. As discussed above, the capital gain earned by the assessee in respect of sale of shop at Punya Apartment is computed as under:

Total Sale consideration – Rs. 38,62,000/-

Less: Index cost of acquisition (as discussed above) – Rs. NIL

Long term capital gain assessed – Rs.38,62,000/-

3.3 Under the above circumstances, it is clear that the assessee has understated his income of capital gain amounting to Rs 38,62,000/-, hence the same is added to the total income of the assessee as his income from long term capital gain. Since the assessee has not disclosed fully and truly her income under the head capital gain, hence being satisfied penally proceedings uis 271(1)(c)are hereby initiated separately.”

3. Aggrieved by the reassessment order, the assessee preferred an appeal before the learned Commissioner of Income Tax (Appeals). The learned CIT(A), however, concurred with the findings recorded by the AO and upheld the addition. The learned CIT(A) observed that the assessee had not incurred any actual cost for acquisition of the property in question and that the market value of the property, as sought to be relied upon by the assessee, could not be equated with “cost of acquisition” for the purposes of computation under the Act. It was further held that the assessee had acquired ownership rights in the redeveloped premises by virtue of surrender of tenancy rights and, therefore, the cost of acquisition of such rights was liable to be taken at “Nil”. Consequently, the relinquishment and transfer of such rights gave rise to taxable capital gains. On the aforesaid reasoning, the addition made by the AO under the head “Long-Term Capital Gains” came to be confirmed observing as under:

“5.4. I have considered the issue. The appellant’s argument is not acceptable as there was no cost of acquisition to the appellant. Even the market value quoted by the appellant is not the cost incurred by the appellant to acquire the property. It is the prevailing value of the land which can be applied when any individual or appellant had actually incurred cost for acquisition of such land. In the instant case the appellant had become the owner of the property not by purchase but by tenancy rights. The property was acquired by virtue of tenancy rights the value of i,e the cost of acquisition is nil and relinquishment of the said rights will result in capital gains. Therefore the addition made by the Assessing Officer is legal and the addition as Long term Capital Gains is upheld.”

4. We have heard the rival submissions and carefully perused the material available on record, including the judicial precedents cited at the Bar. The controversy arising in the present appeal lies within a narrow compass, namely, the determination of the correct cost of acquisition for the purpose of computing capital gains arising on transfer of the Permanent Alternate Accommodation (“PAA”) received by the assessee pursuant to surrender of tenancy rights in a redevelopment scheme

4.1 The case of the Revenue proceeds on the premise that since the assessee had not incurred any identifiable monetary outlay for acquisition of the tenancy rights, the cost of acquisition of the resultant ownership premises was liable to be taken at “Nil” by virtue of Section 55(2)(a) of the Act, thereby rendering the entire sale consideration exigible to tax as long-term capital gains. The assessee, on the other hand, contends that the tenancy rights constituted a valuable capital asset and the Permanent Alternate Accommodation received in exchange thereof represented consideration for surrender of such rights. According to the assessee, the fair market value of the tenancy rights, or correspondingly the market value of the ownership premises received at the time of exchange, ought to be regarded as the cost of acquisition while computing capital gains on subsequent transfer of the redeveloped premises.

4.2 Before us, the learned counsel for the assessee placed heavy reliance upon the decision of the Co-ordinate Bench of the Tribunal in the case of Murtuza Kothari v. ITO in Murtuza Kothari v. ITO [ITA No. 4080/Mum/2025, dated 6-1-2026], wherein an identical controversy came up for consideration. In the said case, the assessee had inherited tenancy rights from his mother and, upon redevelopment of the property, received an ownership flat in lieu thereof. Upon subsequent transfer of the ownership flat, the assessee claimed the fair market value of the flat on the date of possession as the cost of acquisition. The Tribunal, after an elaborate consideration of the statutory provisions and judicial precedents, accepted the principle that the market value of the rights exchanged on the date of conversion constituted the appropriate cost of acquisition for purposes of Section 48 of the Act.

4.3 The Tribunal in Murtuza Kothari (supra) extensively relied upon the earlier decision of the Mumbai Bench of the Tribunal in Atul G. Puranik v. ITO 141 TTJ 69/132 ITD 499/ITA No. 3015/Mum/2010). In the said decision, the Tribunal undertook a detailed analysis of Section 49(1) of the Act and lucidly explained the distinction between the original capital asset acquired through inheritance and the subsequent capital asset obtained in exchange thereof. The Tribunal held that once the original capital asset stood substituted by another independent capital asset, the deeming fiction embodied in Section 49(1) ceased to operate. It was further held that where rights in immovable property are allotted in lieu of acquisition or surrender of an earlier capital asset, the fair market value of such rights at the time of allotment would constitute the cost of acquisition for purposes of computing capital gains upon subsequent transfer. The relevant part of the decision in the case Sri Atul G. Puranik (supra) is reproduced as under:

“10. In ITA No. 3051/Mumm /2010 (A.Y. 2006-07), in the case of Shri Atul G. Puranik v. ITO- 12(1) (1)”, ITAT Mumbai has observed the issue regarding conversion of tenancy right in ownership and thereafter should be the cost of acquisition on transfer of such ownership property, discussed at length, and held as under:

II “COST OF ACQUISITION OF RIGHTS IN THE PLOT AND SECTION 49 (1) 10. During the course of assessment proceedings, the assessee contended that the cost of acquisition of the Plot was Rs. 2,88,35,000/-, being the amount determined by applying market rate of the Plot at Rs. 3950/- per sq mt. on the date of transfer. The AO, on the other hand, came to the conclusion that the cost of acquisition was liable to be taken at Rs.4,70,362/- as the cost at which the asset was acquired by the previous owner u/s. 49. Such amount was determined by considering the rate of revised compensation at Rs. 11/- per sq. mtr. The Id. CIT(A) echoed the assessment order on this point. The Id. counsel for the assessee contended that the authorities below were not justified in upholding the application of section 49(1) as such a provision was not applicable to the present facts. Per contra, the Id. DR reiterated the reasoning given by the AO in this regard.

10.1 In order to ascertain whether or not sec. 49(1) is applicable to the facts of the Instant case, it is imperative to have a look at the language of the section, which is reproduced as under:

“49(1) Where the capital asset became the property of the assessee-

(i) on any distribution of assets on the total or partial partition of a Hindu undivided family,

(ii) under a gift or will:

(iii) (a)by succession, inheritance or devolution, or

(b) on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 1987 or

(d) under a transfer to a revocable or an irrevocable trust, or

(e) under any such transfer as is referred to in clause (iv) or clause (v) or clause (vi) or clause (via) or clause (viaa) or clause (vica) or clause (vicb) of section 47:

(iv) such assessee being a Hindu undivided family, by the mode referred to in sub- (2) of section 64 at any time after the 31st day of December, 1969,

the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.

10.2 A bare perusal of the provision indicates that where the capital asset became the property of the assessee in any of the situations contemplated in clauses (i) to (iv), the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of improvements, etc. The Explanation below subsection (1) defines the expression “previous owner of the property to mean the last previous owner who acquired it by a mode of acquisition other than those referred to in clauses (1) to (iv) of this sub-section. The sum and substance of sec. 49(1) is that where a capital asset becomes the property of the assessee by any of the modes specified in clauses (i) to (iv), such as gift or will, succession, inheritance or devolution, etc., the cost of acquisition of such capital asst in the hands of the assessee receiving such capital asset shall be deemed to be the cost for which it was acquired by the person transferring such capital asset in the prescribed modes. The rationale behind this provision is that the transfer of such asset by the person receiving in any of the modes prescribed, should not go tax free. In order to compute capital gain on the transfer of any capital asset, the existence of cost of acquisition is an essential element. If there is no cost of acquisition and the case is not covered u/s 55(2), then the computation provisions shall fail and no liability to tax shall arise u/s 45. As no cost is actually incurred by the assessee in acquiring the assets under such modes, and on the further transfer of such assets, the capital gain is contemplated by the legislature, the mechanism of section 49 has been put in place to remedy the situation. This provision deems the cost of acquisition of the assessee as the cost for which it was acquired by the previous owner as increased by the cost of any improvements incurred by the previous owner.

10.3. However, in order to apply the mandate of sec.49(1), it is sine qua non that capital asset acquired by the assessee in any of the modes prescribed in clauses (1) (iv) should become the subject matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. It is apparent from the language of sub-sec. (1) itself which opens with the words: “Where the capital asset became the property of the assessee and after enumerating certain situations, provides that “the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it.” The phrase the asset used in the later part of the provision relates to the capital asset which became the property of the assessee in the given circumstances. The natural corollary which, therefore, follows is that the cost to the previous owner is considered as the cost of acquisition only of the capital asset, which becomes the property of the assessee in the modes given in clauses (i) to (iv) But once such capital asset is transferred and another capital asset is acquired, there is no applicability of sec. 49(1) to such converted asset.

10.4 Coming back to the facts of the instant case, the view point of the AO that the cost of acquisition in this case on the assigning of rights in the Plot to M/s. Pathik Construction should be considered as the amount of compensation originally awarded on the acquisition of lands from assessee’s father, relying on sec. 49(1), does not appear to be sound. This provision cannot have any application at the stage when the assessee transferred the rights in the Plot to a third party in the year in question, because what has been transferred in this year is the right in the Plot, which was not inherited by the assessee from his father. The assessee only received the capital asset in the shape of right to receive compensation from the Government on the death of his father. Cost to the previous owner u/s 49(1) would be relevant at the time of computing the capital gain in the preceding year, when compensation was received in the shape of right in the Plot. Once the first transaction on the allotment of rights in the Plot came to an end, the provisions of sec. 49(1) also ceased to operate. It could not have been applied to the second independent transaction on the sale of such rights to M/s. Pathik Construction in the year in question. We, therefore, hold that the authorities below were not justified in applying sec. 49(1).

10.5 Having held that sec. 49(1) is not applicable, the immediate question which arises for consideration then is that what is the cost of acquisition of rights in the Plot transferred on 25-08-2005 to M/s. Pathik Construction. The Id. A.R. argued that the market value of the plot of land on the date of allotment should be taken as the cost of acquisition, as has been held by the Tribunal in ACIT v. Nirmal Bhogilal (supra). From the factual matrix of the case, it is noted that the assessee was allotted rights in the Plot on 1608-2004 as compensation for the acquisition of lands acquired by the Special Land Acquisition Officer way back in the years 1970/72. The value of rights in the Plot is quid pro quo for the acquisition of lands from assessee’s father in the past. In other words, the market value such rights in the Plot was considered by the State Govt, as compensation for acquisition of land in earlier years. If such rights in the Plot had not been allotted, then the assessee would have been given cash equivalent to the market value of such rights as compensation for acquisition of lands. As it is a transaction with the Government, the question of any under-hand payment also stands ruled out. Sec. 48 deals with the mode of computation of income chargeable under the head ‘Capital gains. It provides that such income shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition of the asset and the cost of improvement, if any, along with the expenditure incurred wholly and exclusively in connection such transfer. The full value of the consideration received or accruing as a result of the acquisition by the Govt. is the amount given as consideration for such acquisition or in the alternative the market value of any other capital asset given to the assessee against such acquisition. As in the instant case the Govt. has allotted rights in the Plot as the full value of consideration on the acquisition of lands by it in the years 1970/72, the market value of such right is to be considered as full value of consideration at the time of computing capital gain on the first transaction in the preceding year. Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred. Thus, the full value of consideration should mean the market value of the lease rights in the Plot for sixty years at the time of the first transaction which was completed on 16-08-2004, and the same amount shall become the cost of acquisition when such rights in the Plot became subject matter of transfer in the current year on 25-08-2004. We, therefore, set aside the view taken by the Id. CIT(A) on this issue and hold that the market value of such lease rights for sixty years in the Plot as on 16-08-2004 shall constitute the cost of acquisition for the purpose of computing capital gain when it was assigned for a consideration of Rs. 2.50 cores on 25-08-2005. The AC is directed to determine the cost of acquisition in terms indicated above after allowing a reasonable opportunity of being heard to the assessee.”

4.4 Further, the Hon’ble Coordinate Bench of the Tribunal in Murtuza Kothari (supra) referred to the decision in the case of Tauqeer Fatema Rizvi v. ITO [ITA No. 8862/Mum/2011, dated 2-5-2014], wherein the Tribunal dealt with a situation involving surrender of tenancy rights and allotment of ownership flats under a redevelopment arrangement. The Tribunal categorically held that tenancy rights are valuable capital assets within the meaning of Section 2(14) of the Act and that the ownership flat allotted by the developer represented consideration received in exchange for surrender of such tenancy rights. The Tribunal further observed that the market value of the ownership flat on the date of possession constituted the cost of acquisition for the purposes of computation of capital gains on subsequent transfer thereof. The relevant principle emanating from the said decision is that where tenancy rights stand converted into ownership rights, the value embedded in the tenancy rights does not vanish merely because no direct monetary consideration had originally been paid for acquisition thereof. The relevant part of the Tribunal in M/s. Tauqeer Fatema Rizvi (supra) is reproduced as under:

“9. We have carefully considered the rival contentions and perused the relevant findings of the authorities below. The assessee, in the present case, is an old tenant in a building wherein, she was residing with her son in the flat area admeasuring 1,200 sq.ft. The said premise was under the joint tenancy along with her son. On 6th May 1982, the agreement was entered into by a builder, M/s. Abis Construction, whereby the builder undertook to develop the said property and in order to rehabilitate the tenant, he has allocated two flats, one to the assessee and other to her son, admeasuring 728 sq.ft. and 500 sq.ft. respectively, on ownership basis as a permanent alternate accommodation. In this manner, the assessee got the acquisition of the flat on ownership basis in the proposed new building. Besides this, the assessee was also required to deposit Rs. 2,000 with the builder for society membership. Thereafter, the assessee on 29th October 2004, has sold this property and for the purpose of section 50C, the value of the same was taken at Rs. 38,78,375. The Revenue’s case has been that the assessee has not incurred any cost of acquisition and, therefore, no cost can be attributed for acquiring the flat, whereas the assessee’s case is that the flat was allotted to her on ownership basis in lieu of surrender of tenancy right and, therefore, the market value of the acquired flat should be taken as on the date of 16th May 1982. For the purpose of ascertaining the cost, the assessee has taken the instance of sale of similar kind of premise in the same month with the builder which was sold for Rs. 3,64,000. It is now quite settled that for the purpose of cost of acquisition under section 48 and 49, the tenancy rights is to be taken into consideration. This is evident from sub-section (2) of section 55. The builder has given the alternate flat to the assessee only by virtue of surrender of tenancy rights by the assessee. Had there been no tenancy right, the builder would have not offered any flat to the assessee, on ownership basis. Thus, it is a valuable right on which cost of acquisition has to be determined. It is not a case that the cost of acquisition cannot be determined in lieu of the surrender of tenancy right at all. Once the cost of acquisition is determinable, the benefit of such acquisition has to be given while computing the tax on capital gain. In the present case, the tenancy right got converted into acquisition of a flat, when the assessee must have got the possession of new flat constructed by the builder. Thus, the market value of the said flat as on the date of its possession would be the cost of its acquisition and, accordingly, such cost deductible while computing income by way of capital gains, whether long term capital gain, as the case may be. This is as the holding period of the capital assets, being the said residential flat, would only commence from the date the assessee is put in possession thereof after its completion. Accordingly, we set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue back to the file of the Assessing Officer and direct him to take the value of the flat for the purpose of cost of acquisition from the year in which the assessee got the actual possession of the flat and then only he shall compute the capital gain. Thus, the assessee’s ground is partly allowed for statistical purposes.”

4.5 The Tribunal in Murtuza Kothari (supra) also relied on the decision of the Hon’ble Bombay High Court in the case of CIT v. Abrar Alvi reported in CIT v. Abrar Alvi (2003) 03 BOM CK 100. The Hon’ble Jurisdictional High Court upheld the finding of the Tribunal that what was transferred by the assessee was not merely tenancy rights but ownership rights in the redeveloped property and, therefore, the market value of the ownership rights as on the relevant date was liable to be considered while computing capital gains. The Hon’ble High Court treated the issue as essentially one of factual determination and declined to interfere with the conclusion reached by the Tribunal. The relevant part Abrar Alvi (supra) is extracted as under:

“1. By a sale deed dated May 2, 1992, between the appellant, on the one hand, and Sameer Mehta (HUF), on the other hand, property bearing plot No. 22. “Janki Kutir”, came to be sold. The dispute is regarding the cost of acquisition of the said property. The Assessing Officer took the value as on April 1, 1981, at Rs. 750 per sq. ft. After applying the cost index, the acquisition value was worked out at Rs.36,03,680. The appellate authority overruled the decision of the Assessing Officer. The appellate authority came to the conclusion that the assessee was a tenant. Accordingly, the appellate authority valued the cost of acquisition at a nominal amount of Rs. 2,500. Being aggrieved, the matter was carried in appeal to the Tribunal, which came to the conclusion that what was transferred, vide sale deed dated May 2, 1992, was not the tenancy rights but the building “Janki Kutir” itself and, therefore, what was to be allowed as deduction for working out the capital gains was not the cost of tenancy but the cost of ownership rights. In view of the said finding, the Tribunal remanded the matter back to the Assessing Officer to work out the market value of “Janki Kutir” as on August 4, 1983, and allow as a deduction the cost of the asset sold to work out the capital gains. This is a pure finding of fact. No interference is called for. Hence, the appeal is dismissed.”

4.6 In light of the above decisions, the Tribunal in Murtuza Kothari (supra) held that the market value of exchange of tenancy rights on the date of the surrender would constitute the cost of acquisition for the purpose of computing capital gains. The relevant finding of the Tribunal (supra) is reproduced as under:

“11. In backdrop of aforesaid decisions, we find force in the contentions raised by the ld. AR that the ownership property received by virtue of surrender of tenancy rights has whatever valuable right on which cost of acquisition has to be determined. The perception is that if the value of right in the tenanted property, if surrendered without any allotment of ownership property in lieu of surrender, the assessee would have received certain cash/compensation equivalent to the market value of such right on the date of such surrender of tenancy right and acquisition of ownership. Accordingly, the market value of such exchange of rights on the date of surrender would constitutes the cost of acquisition for the purpose of computing capital gain and the cost of acquisition would be arrived at accordingly.

12. In terms of aforesaid observations, in the facts and circumstances of present case, we are of the considered view that the cost of acquisition in present case would be the FMV of the flats which the assessee has acquired in exchange of surrender of tenancy right to the developer vide development agreement dated 22.07.2008. The market value of the property shall be as per provisions of law. We accordingly direct the AO to re-compute the capital gain of the assessee and allow deduction of cost of acquisition in terms of our aforesaid observations.”

4.7 Further, the Ld. counsel for the assessee also relied on another decision of the Hon’ble Coordinate Bench of the Tribunal in the case of ITO v. Varun Jaisingh Asher [ITA No. 8251/Mum/2025, dated 6-3-2026] for Assessment Year 2020-2021, wherein the Tribunal reiterated the settled proposition that tenancy rights constitute a capital asset and that allotment of a residential flat by the developer under a redevelopment scheme represents consideration received in exchange for surrender of such tenancy rights. The Tribunal further held that once a transaction squarely falls within the ambit of “Capital Gains”, the same cannot be brought to tax under any residuary charging provision. The relevant finding of the Tribunal is reproduced as under:

“9. We have heard the rival submissions and perused the material available on record, including the documentary evidences placed in the paper book and the judicial precedents relied upon by the parties. The primary issue involved in the present appeal is whether the tenancy arrangement entered into by the assessee was a sham transaction and whether the value of the flat received by the assessee on surrender of tenancy rights was liable to be taxed under s. 56(2)(x) of the Act, or whether the same constituted consideration for transfer of a capital asset entitling the assessee to claim exemption under s. 54F of the Act. From the record, it is evident that the assessee has placed substantial documentary evidence to establish the existence of tenancy rights, including rent receipts, electricity bills, registered tenancy agreement dt. 5th Aug., 2014, MHADA verification records, and the Permanent Alternate Accommodation Agreement executed with the developer. These documents clearly demonstrate that the assessee had been occupying the premises as a tenant since 1st April, 2013 and that the tenancy rights continued until their surrender in the course of redevelopment of the property. The fact that the tenancy agreement was formally registered in 2014 does not invalidate the existence of tenancy, particularly when the surrounding documentary evidence corroborates continuous occupation and payment of rent.

We further observe that tenancy rights constitute a capital asset within the meaning of sec. 2(14) of the Act and the surrender thereof amounts to a transfer under sec. 2(47) of the Act. The allotment of a residential flat by the developer under the redevelopment scheme represents consideration received in exchange for such surrender of tenancy rights. Therefore, the transaction squarely falls within the ambit of capital gains and cannot be brought to tax under the residuary provisions of s. 56(2)(x) of the Act. In this regard, we find support from the decision of the Co-ordinate Bench of the Tribunal in Vasant Nagorao Barabde (supra), wherein it has been held that once a transaction falls under the specific head of capital gains, it cannot be taxed under the head “Income from Other Sources”. We also note that the Hon’ble Bombay High Court, in the case of the assessee’s brother and co-tenant Vivek Jaisingh Asher (supra), has observed that allegations of colourable device cannot be sustained in the absence of cogent material and proper show-cause notice specifying the applicable statutory provision. The observations of the Hon’ble Jurisdictional High Court further lend support to the assessee’s contention that the tenancy arrangement cannot be disregarded merely on the basis of suspicion.

In light of the above factual and legal position, we find no infirmity in the order of the learned CIT(A), who after detailed examination of the documentary evidence rightly concluded that the assessee possessed valid tenancy rights and that the flat received on redevelopment constituted consideration for surrender of such rights. Consequently, the addition made by the AO under s. 56(2)(x) of the Act was rightly deleted and the assessee’s claim of exemption under s. 54F was correctly allowed. Accordingly, we uphold the order of the learned CIT(A) and dismiss the grounds raised by the revenue.

Hence, the appeal filed by the revenue is dismissed.”

4.8 Further, the learned counsel also referred to the decision of the Coordinate Bench of the Tribunal in the case of Balmukund P. Acharya v. Income-tax Officer 48 SOT 385 (Mumbai)/ITA No. 4628/Mum/2009 for the Assessment Year 1996–97, wherein, following the ratio of the Hon’ble Supreme Court in B. C. Srinivasa Setty Judgment, it was held that the computation provisions fail only in those cases where the cost of acquisition is inherently incapable of ascertainment. The Tribunal observed that where an asset is received in exchange for surrender of tenancy rights, the market value of the tenancy rights on the date of surrender furnishes a determinable and legally sustainable basis for computing the cost of acquisition. The Tribunal further, noted that in the said case, the asset sold was a property which was given free of cost to the assessee upon surrender of tenancy rights. The Tribunal held that the consideration for such asset would be the market value of tenancy rights as on the point of the time when it was surrendered, which is the same as market value of this asset as at the point of time when it was given to the assessee without any payments by the assessee.

4.9 Upon careful consideration of the aforesaid authorities, we find ourselves in respectful agreement with the consistent judicial view taken by the Co-ordinate Benches. In the present case also, there are clearly two distinct and independent transactions. The first transaction occurred when the assessee surrendered his tenancy rights in the original tenanted premises and, in consideration thereof, acquired ownership rights in the form of Permanent Alternate Accommodation under the redevelopment scheme. The second transaction occurred when the assessee subsequently transferred the said Permanent Alternate Accommodation for monetary consideration of Rs. 38,62,000/-.

4.10 The issue before us concerns the second transaction, namely, computation of capital gains arising on transfer of the ownership premises. In our considered opinion, the authorities below fell in error in proceeding on the assumption that the cost of acquisition of the ownership premises was “Nil”. Such an approach completely ignores the intrinsic and valuable rights embedded in the tenancy rights surrendered by the assessee. The ownership premises were not acquired gratuitously or without consideration; rather, they were obtained in exchange for surrender of a valuable capital asset, namely, tenancy rights. The extinguishment of tenancy rights constituted the consideration flowing from the assessee in the first transaction. Therefore, the fair market value of such tenancy rights on the date of surrender, or equivalently the fair market value of the Permanent Alternate Accommodation received in exchange thereof, represents the true and legally sustainable cost of acquisition for the purposes of Section 48 of the Act.

4.11 The Revenue’s contention—that because the Assessee paid no liquid cash for the tenancy or the subsequent ownership flat, the cost must be treated as “Nil” under Section 55(2)(a)—is legally tenuous. While the tenancy rights might have been acquired at a “Nil” cost, the ownership rights in the PAA were acquired by “paying” for them with the value of the surrendered tenancy. In the eyes of the law, the surrender of a valuable leasehold interest constitutes the ‘price paid’ for the acquisition of the freehold interest. If the Assessee had surrendered the tenancy rights for cash and utilized that cash to purchase the shop, the purchase price would indisputably be the “cost.” The mere fact that the transaction was settled in kind (Property-for-Right) does not evaporate the “cost” incurred by the Assessee. To assess the entire sale consideration as capital gain, without allowing for the FMV of the rights surrendered, would result in the taxation of the gross receipt rather than the “gain,” which is repugnant to the scheme of Section 45 to 48 of the Act.

4.12 In our view, once the law recognises tenancy rights as a capital asset under Section 2(14) of the Act, the economic value attached thereto cannot be disregarded while computing capital gains merely because the assessee may not have originally paid any ascertainable amount for acquiring such rights. The computation provisions under the Act must be interpreted in a manner that gives effect to commercial and legal reality and not in a manner which artificially renders the entire sale consideration taxable without permitting deduction of the value of the capital asset surrendered in exchange.

4.13 Accordingly, respectfully following the ratio laid down in the decisions referred to hereinabove, we hold that the fair market value of the tenancy rights as on the date of surrender shall constitute the cost of acquisition of the Permanent Alternate Accommodation/ownership premises received by the assessee under the redevelopment arrangement. The Assessing Officer is, therefore, directed to recompute the capital gains by adopting the aforesaid fair market value as the cost of acquisition and thereafter determine the nature of capital gains, whether short-term or longterm, having regard to the period of holding of the Permanent Alternate Accommodation.

4.14 In view of the foregoing discussion, we deem it appropriate to restore the matter to the file of the Assessing Officer for the limited purpose of recomputation of capital gains in accordance with the observations and directions contained hereinabove, after affording reasonable opportunity of hearing to the assessee.

5. The grounds of appeal of the assessee are accordingly allowed for statistical purposes.

6. In the result, the appeal of the assessee is allowed for statistical purposes.