ITAT Mumbai: Capital Receipt from Tenancy Surrender Cannot Be Taxed as “Other Sources” Despite Computation Dispute

April 30, 2026 : The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that once a receipt is characterised as arising from the transfer of a capital asset, it cannot be reclassified and taxed under the residuary head “Income from Other Sources” merely because there is a dispute regarding computation under the capital gains provisions. The Tribunal dismissed the Revenue’s appeal and upheld the deletion of an addition of ₹3.67 crore.

The ruling came in DCIT v. Dinesh Gulab Mirchandani (ITA No. 692/Mum/2026) for assessment year 2020–21, decided on 30 April 2026.

The assessee, an individual, had received ₹3,67,68,000 on surrender of tenancy rights in respect of two premises at Senapati Bapat Marg, Lower Parel, Mumbai, in favour of Phoenix Mills Pvt. Ltd. He treated the transaction as long-term capital gains, computed indexed cost of acquisition, and claimed exemption under Shttps://lawnotify.in/ection 54F on investment in residential property.

During assessment, the Assessing Officer (AO) rejected the assessee’s computation on the ground that the cost of acquisition was not substantiated. Treating the cost as nil, the AO held that the computation mechanism under capital gains failed and consequently taxed the entire receipt under “Income from Other Sources”, determining total income at ₹5.98 crore.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] reversed the addition, holding that tenancy rights constitute a capital asset and that surrender thereof results in a capital receipt chargeable, if at all, only under the head “Capital Gains”. Relying on settled law, including the Supreme Court’s ruling in CIT v. D.P. Sandu Bros. Chembur Pvt. Ltd., the CIT(A) held that if such receipt is not taxable under capital gains, it cannot be brought to tax under the residuary head.

The Revenue challenged this finding before the Tribunal, arguing that absence of proof of cost of acquisition rendered the receipt incapable of being taxed under capital gains, thereby justifying taxation under Section 56.

Rejecting the Revenue’s contention, the Tribunal noted that the existence of tenancy rights and their surrender was undisputed. It observed that tenancy rights are recognised as capital assets under the Income Tax Act, and consideration received on their transfer is inherently capital in nature.

The Bench emphasised that the scheme of the Act mandates that income arising from transfer of a capital asset must first be examined under the head “Capital Gains”. A failure or dispute in computation provisions does not alter the intrinsic character of the receipt.

The Tribunal relied on the settled principle that where income falls under a specific head, it cannot be taxed under another head merely because it escapes taxation under the appropriate head. It reiterated that once a receipt is held to be capital in nature, it cannot be recharacterised under “Income from Other Sources”.

On facts, the Tribunal also found that the assessee had furnished tenancy acquisition agreements (dated 12 February 1994) and surrender agreements (dated 28 August 2019), evidencing both acquisition and transfer of tenancy rights. No adverse finding was recorded by the AO regarding the genuineness of these documents.

The Bench further observed that the AO’s conclusion treating cost of acquisition as nil stemmed from non-acceptance of the assessee’s working rather than absence of evidence. Even otherwise, such a conclusion could not justify invoking the residuary head of income.

Finding no infirmity in the CIT(A)’s order, the Tribunal upheld deletion of the ₹3.67 crore addition and dismissed the Revenue’s appeal.