Surrender of Allotment Right in Immovable Property Constitutes

Surrender of Allotment Right in Immovable Property Constitutes Transfer of Capital Asset Generating Capital Gains

Issue

Whether the right to obtain conveyance of an immovable property under an allotment letter constitutes a “capital asset” under Section 2(14) of the Income-tax Act, and whether compensation received upon its surrender constitutes a “transfer” under Section 2(47), making the resulting income or loss taxable under the head “Capital Gains” rather than “Income from Other Sources.”

Facts

The assessee, an individual, filed a return of income for the Assessment Year 2020-21, which was subsequently selected for scrutiny.
The Assessing Officer (AO) discovered that the assessee had received a compensation amount from a builder, upon which tax was deducted at source (TDS) under Section 194A (interest other than interest on securities).
In response to a Show Cause Notice, the assessee explained that a flat had been allotted to them, the right to that flat was subsequently surrendered, and the compensation received from the builder resulted in a long-term capital loss.
The AO rejected the explanation, treated the entire compensation as “Income from Other Sources,” and disallowed the claimed long-term capital loss.
The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO’s decision, ruling that without a registered agreement, a mere allotment letter does not constitute an enforceable right or a capital asset under Section 2(14).

Decision

Held, that Section 2(14) defines a capital asset expansively as “property of any kind held by an assessee,” which legally encompasses the right to obtain a conveyance of an immovable property.
Held, that Section 2(47) defines a “transfer” to include the sale, exchange, relinquishment, or extinguishment of any rights in a capital asset; surrendering an allotment right qualifies as a relinquishment/extinguishment of rights.
Held, that the mere deduction of tax by a payer under a specific section (such as Section 194A) does not conclusively determine or dictate the actual legal nature of the receipt in the hands of the recipient.
Held, that the compensation received for surrendering the allotment right is a consideration for the transfer of a capital asset taxable under “Capital Gains,” and therefore, the assessee’s claimed long-term capital loss is fully allowable. [Decided in favour of the assessee]

Key Takeaways

Allotment Rights as Property: A formal registered agreement is not a prerequisite for a capital asset to exist; a right to secure possession of a property via an allotment letter holds intrinsic value and falls squarely under “property of any kind.”
TDS Section Not Determinative: The category under which a payer deducts TDS is an administrative action and cannot alter the true legal character of the income in the hands of the taxpayer.
Relinquishment is a Transfer: Voluntarily giving up booking rights or surrendering an allotment back to a builder constitutes an extinguishment of rights, satisfying the definition of a transfer under tax laws.

IN THE ITAT MUMBAI BENCH ‘SMC’

Ketan Pravinchandra Kamdar

Deputy Commissioner of Income-tax

Pawan Singh, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 170 (MUM) OF 2026
[Assessment year 2020-21]

JUNE 12, 2026

Paresh Shaparia, CA for the Appellant. Vivek Singh, Sr. DR for the Respondent.

ORDER

Pawan Singh, Judicial Member. – This appeal by assessee is directed against the order of ld. CIT(A)/NFAC, Delhi dated 26.11.2025 for Assessment Year (AY) 2020-21. The assessee has raised following grounds of appeal:

“I. Confirming the addition of Rs.26,93,950/- by treating the compensation received on surrender of right in immovable property as Income from Other Sources instead of Long Term Capital Loss arising on transfer of a capital asset.

The Ld. CIT(A) erred in law and on facts by confirming the addition of Rs. 26,93,950/- for compensation received on surrender of right in immovable property as Income from Other Sources instead of Long-Term Capital Loss arising from transfer of Capital Asset.

The Ld. CIT(A) failed to appreciate the facts that:

(i)

On issue of allotment letter by the builder on 11.6.2012 for a Flat No. A1402 in Sai Proviso Aashlesha Building there is a right in immovable property which constitutes a Capital Asset within the meaning of section 2(14) of the Income Tax Act, 1961.

(ii)

On issue of surrender letter dated 03.07.2019 there is transfer of right in Flat No. A-1402 being an immovable property and compensation received thereof is taxable as Long Term Capital Gains/Loss.

(iii)

Surrender/termination of right in an immovable property tantamount to a “Transfer” as defined under section 2(47) of the Income-tax Act, 1961.

(iv)

Merely in the absence of a registered sale deed executed does not mean there is no transfer of a capital asset for an immovable property.

(v)

Merely because the builder on surrender of right in the flat gave compensation for which deducted TDS u/s 194A (applicable for Interest) treated the income as Income from Other Sources instead of Capital Gains.

(vi)

Case Laws relied upon on the subject have not been correctly interpreted or distinguished.

The Income from transfer of the right in an immovable property is required to be considered as transfer of a capital asset and accordingly to be taxed under the head Capital Gains instead of Income from Other Sources.

II. Confirming of disallowance of claim of Long-Term Capital Loss of Rs. 5,67,922/

The Ld. CIT(A) erred in facts and in law in confirming the disallowance of the claim of Long-Term Capital loss of Rs.5,67,922/- and treating the compensation received of Rs 26,93,950/- as Income from Other Sources.

The Ld. CIT(A) failed to appreciate the fact that;

(i)

On allotment of flat is a right in immovable property consequently it is a Capital Asset as per section 2(14) of the Income Tax Act, 1961.

(ii)

On surrender of right in an immovable property is Transfer as per section 2(47) of the Income Tax Act, 1961.

(iii)

Compensation received on surrender of right in a capital asset is taxable under the head Capital Gains.

The Appellant craves leave and reserves the right to add, alter, amend, modify or delete any of the ground/s before or during the course of the hearing.

The Appellant reserves the right to produce additional evidence before or during the course of the hearing.

Each one of the above grounds of appeal is without prejudice to the other.”

2. Brief facts of the case are that assessee is an individual, filed his return of income for assessment year (A.Y.) 2020-21 on 14.12.2020 declaring income of Rs. 11,00,090/-. Case was selected for scrutiny. The Assessing Officer (AO) was having information that assessee has received interest income from Proviso Builders and Developers of Rs. 26,93,950/- on which TDS was made under section 194A. On show cause notice, the assessee submitted that assessee was issued allotment letter of a flat by builder on 11.06.2012. The said flat was surrendered by assessee on 03.07.2019 and on surrender of such capital asset, the assessee earned long term capital loss. The reply of assessee was not accepted by AO. The AO disallowed the claim of capital gain and treated the compensation of Rs. 26,93,950/- as income from ‘other sources. Consequently, the long-term capital loss of Rs. 5,67,922/- was disallowed.

3. Aggrieved by the disallowance / additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee again furnished detail written submission and reiterated that assessee is high net worth individual and having own capital of more than Rs. 104.81 crore. He has diversified in investment into various capital assets. The details of various investments were furnished along with fixed asset and investment in mutual fund, loan and advances and other investment. The assessee reiterated that he was allotted Flat No. 1402 in Sai Proviso Aashlesha Building on Plot no. 13,14,15,16, Sector 4A, Kopar Khaine Navi Mumbai. The assessee surrendered the flat and discontinued with the purchase of the said flat sold was sold to Anita U. Kutte and Umesh Kutte. In lieu of surrender of Flat, the builder paid compensation of Rs. 26,93,950/-. The builder deducted TDS under section 194A. The assessee further explained that flat was purchased for a cost of Rs. 81,44,500/-, out of which Rs. 73,30,050/- was paid to the builder. The assessee held right in the Flat for a period of seven (7) years and that is why he claimed long term capital gain (loss) of Rs. 5,67,922/- on the basis of indexation. The builder deducted TDS on wrong section, which will not change in the character of income in the hand of assessee which is capital gain. The assessee relied on certain case law.

4. The ld. CIT(A) on considering the submission of assessee upheld the action of AO by taking view that there is no registered agreement or instrument to demonstrate enforceable right, capable of specific performance. Mere existence of allotment letter without any other right would not automatically translate into a capital asset within the meaning of section 2(14) for the purpose of capital gain. The builder has deducted TDS under section 194A by treating it as interest. The reliance in case law in Movaliya Bhikhubhai Balabhai v. ITO 388 ITR 343 (Gujarat) was not accepted by ld. CIT(A) by taking view that ratio of decision is distinguishable and cannot be mechanically extended to a private commercial arrangement for booking and subsequent cancellation of a flat, particularly when the fundamental existence of a capital asset itself is not established. Once the treatment of other sources was upheld, the claim of ‘long term capital loss’ also become out of consideration. Further, aggrieved the assessee filed present appeal before Tribunal.

5. We have heard the submissions of both the parties and have gone through the orders of lower authorities carefully. The learned authorised representative (ld AR) of the assessee submits that the assessee was allotted Flat No. 1402 in Sai Proviso Aashlesha Building, Sector 4A, Kopar Khaine Navi Mumbai. By way of allotment letter the assessee got transferrable right in the asset (flat). The assessee held such right in the Flat for a period of 7 years. The assessee surrendered the said flat in favour of Anita U. Kutte and Umesh Kutte, copy of surrender letter dated 03.07.2019 is placed on record. In lieu of surrender of Flat, the builder paid compensation of Rs. 26,93,950/-. The builder wrongly deducted TDS under section 194A. The flat was purchased for a cost of Rs. 81,44,500/-, out of which Rs. 73,30,050/- was paid to the builder, on the basis of indexation, the assessee suffered long term capital loss of Rs. 5,67,922/-. The builder deducted TDS on wrong section, which will not change in the character of income in the hand of assessee which is capital gain. To support his submissions, the ld AR of the assessee relied on the following case laws;

CIT v. Tata Services [1980] 122 ITR 594 (Bombay) (Bombay),

CIT v. Vijay Flexible Containers 186 ITR 693 (Bombay),

CIT v. Smt. Laxmidevi Ratan [2008] 296 ITR 363 (Madhya Pradesh),

ACIT v. Smt. Hansaben B. Mehta [2004] 90 ITD 44 (Mumbai),

Satnam Overseas Export v. DCIT (Delhi – Trib.),

Rupesh Rashmikant Shah v. Union of India /417 ITR 169 (Bombay),

ITO v. Sangappa S. Kudarikkannur 172 ITD 332 (Bangalore – Trib.)

6. On the other hand, the Ld. Sr. DR for the Revenue supported the order of lower authorities. The Ld. Senior departmental representative (Sr. DR) for the revenue submitted that the private agreement between the parties will not determine the nature of head of income. Admittedly, the builder has deducted TDS under Section 194 A and the receipt is to be treated as income from other sources.

7. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by Ld. AR of the assessee. We find that the lower authorities have not disputed the allotment of flat in favour of assessee. Further, payment of Rs. 26,93,950/- paid by the builder is also not in dispute. The builder while making the payment deducted in TDS under Section 194A. The assessee has claimed that on surrender/transfer of his right in flat in favour of Anita U. Kutte and Umesh Kutte, he was paid a compensation of Rs. 26,93,950/- in addition to the payment made by assessee to builder. As a result of the assessee suffered long term capital loss. Before us, the Ld.AR of the assessee vehemently argued that mere deduction of tax (TDS) under wrong provision will not determine the nature of receipt in the hand of assessee. We are conscious of the facts that the section or category under which a payer deducts tax at source (TDS) is a machinery provision for tax collection. Mere deduction of tax at source does not conclusively determine the character, classification, or “head of income” in the hands of the recipient. The payer deducts TDS based on their internal accounting interpretation or a cautious approach to avoid penalty/disallowance. However, the exact taxability must be evaluated based on the true nature of the recipient’s activities and surrounding facts and circumstances. In other way, the TDS cannot decide the chargeability to tax of the receipt and not to decide whether receipt is ‘capital’ or ‘revenue’ in nature in the hands of recipient or to decide the ‘head of income’ under which a particular receipt is to be taxed must be evaluated based on the true nature of the recipient’s activities and surrounding facts and circumstances.

8. We find that Hon’ble Jurisdictional High Court in. Vijay Flexible Containers (supra), while considering the question of law whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the compensation received by the assessee, cannot be treated as ‘capital gains’ in the hands of the assessee. It was held that capital asset is defined by section 2(14) to mean “property of any kind held by an assessee”. The word, ‘transfer’ in relation to a capital asset is defined in section 2(47) to include, the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein. Thus, the right to obtain a conveyance of immovable property fell within the expression ‘property of any kind ‘used in section 2(14) and was, consequently, a capital asset. The Hon’ble High Court further held that the assessee acquired under the agreement for sale the right to have the immovable property conveyed to him. He was under the law entitled to exercise that right not only against his vendors but also against a transferee with notice or a gratuitous transferee. He could assign that right what he acquired under the agreement for sale was, therefore, property within the meaning of the Act and, consequently, a capital asset. His giving up of the right to claim specific performance by conveyance to him of the immovable property was a relinquishment of the capital asset. There was, therefore, transfer of a capital asset within the meaning of the Act. The assessee acquired a capital asset by reason of the agreement for sale and there was a transfer of that capital asset when the assessee entered into consent terms and relinquished it, and that capital asset had been acquired for the cost paid as and by way of earnest money under the agreement for sale. Thus, the amount of compensation received by the assessee minus the earnest money paid and the legal and other expenses was correctly treated by the ITO as capital gain in the hands of the assessee.

9. Thus, in view of the aforesaid factual and legal discussion, we are of the view that mere deduction of tax by payer under a particular section will not determine the nature of receipt in the hand of the recipient. Thus, the ground of the appeal raised by the assessee is allowed.

10. In the result, the appeal of the assessee is allowed.