When Mr Devshichhadva, a tenant from Matunga, Mumbai got two flats in lieu of surrending his tenancy rights in a housing society stated for redevelopment, he got an income tax notice. He challenged this tax notice and won the case in ITAT Mumbai after a long fight. The ITAT Mumbai ruled that a Section 56(2)(x) tax notice cannot be sent to a tenant since he got two flats in exchange for surrendering his tenancy rights in a redevelopment building.
To tell you more about Mr Devshichhadva, he was renting four shops in a housing society in Mumbai. When the society decided to redevelop this building, the builder signed an permement alternative agreement (PAA) with him. Under this agreement, Devshichhadva would have to surrender his tenancy rights, and in exchange the builder will give him two flats in the redeveloped building as permanent alternate accommodation (PAA).
These two flats which he got under the PAA agreement were worth Rs 1.38 crore according to the stamp duty authorities.
However, the Income Tax Assessing Officer (AO) from Parel invoked Section 56(2)(x) and added the entire stamp duty value of Rs 1.38 crore as “income from other sources” in Devshichhadva’s hands, making him responsible for paying income tax.
The Commissioner of Appeals (CIT A) upheld this addition of income on the ground that the transaction, in substance, involved receipt of valuable property by Devshichhadva in exchange for extinguishment of his tenancy rights.
The CIT(Appeals) held that by executing and registering the redevelopment agreements, Devshichhadva had acquired absolute ownership rights over the alternate premises which could not thereafter be altered without his consent. Therefore, the property was deemed to have been received during the relevant assessment year notwithstanding the fact that physical possession had not been handed over.
The CIT(Appeals) also ruled that the Assessing Officer had rightly invoked Section 56(2)(x) as Devshichhadva had acquired valuable property without paying adequate monetary consideration and upheld the addition of Rs 1.38 crore to his income.
Unhappy with the order, Devshichhadva appealed to the Income Tax Appellate Tribunal (ITAT) Mumbai. Chartered Accountant Ketan V. Vajani represented Devshichhadva in ITAT Mumbai. On July 16, 2026, he won the case.
Mihir Tanna, associate director, S.K Patodia LLP, pointed out to ET Wealth Online that a similar issue arose before the Mumbai ITAT in March 2026. It was the case of Varun Jaisingh Asher, but the facts of that case were different. Tenancy rights constitute a capital asset, and its surrender amounts to a transfer, chargeable as capital gains.
According to Tanna, allotment of a property under the redevelopment scheme represents consideration received in exchange for surrendering those tenancy rights.
Tanna says: “Therefore, the transaction squarely falls within the ambit of capital gains and cannot be brought to tax under the residuary provisions of Section 56(2)(x)”
Summary of the judgement
Chartered Accountant Suresh Surana explained to ET Wealth Online : Devshichhadva was occupying four shops as a tenant and entered into a redevelopment arrangement with the builder under which he agreed to surrender his tenancy rights in exchange for permanent alternate accommodation.
Devshichhadva argued that the alternate premises had not actually been received because the redevelopment project was still under construction and possession had not been handed over.
Devshichhadva also said that the allotment of the new units in the redeveloped building was not without consideration, since the new units (permanent alternate accommodations) were being provided to him by the builder in exchange for the surrender of his valuable tenancy rights.
The principal issue before the Mumbai ITAT was whether Section 56(2)(x) could be invoked merely because the redevelopment agreements had been executed and registered during the relevant year, notwithstanding the fact that the project was incomplete and the taxpayer had neither received possession nor acquired the right to enjoy the alternate premises.
The ITAT Mumbai observed that Section 56(2)(x) applies only where a person “receives” immovable property during the relevant previous year. The expression “receives” could not be interpreted artificially or notionally so as to tax a taxpayer merely on the registration of a redevelopment agreement. Before invoking the deeming provision, the existence of an actual receipt of immovable property had to be established.
According to Surana, the evidence placed on record, including the status reflected on the RERA portal, demonstrated that the redevelopment project was still incomplete and no occupation certificate had been obtained.
Moreover, possession of the alternate premises had not been handed over even on the date of hearing before the ITAT.
Therefore, ITAT Mumbai ruled that the registered agreements merely created a contractual right to receive the premises in the future upon completion of construction; they did not result in the actual receipt of immovable property during the relevant year.
The ITAT Mumbai further held that the transaction was not without consideration. The permanent alternate accommodation was being allotted in exchange for the taxpayer’s surrender of valuable tenancy rights. The arrangement was therefore based on reciprocal and valuable consideration and constituted a commercial exchange rather than a gratuitous transfer.
Surana says: “The absence of a separate monetary payment did not mean that the property had been received without consideration.”
Why did Devshichhadva win the case?
Surana says that ITAT Mumbai explained that Section 56(2)(x), is a deeming and charging provision, and must be interpreted strictly and cannot be extended beyond the language used by the legislature.
ITAT Mumbai also relied on their tribunal’s earlier rulings in cases of Snehalata Heramb Dhayagude, Anil Dattaram Pitale and Amar Narendra Joshi, where their tribunal recognised that the receipt of alternate premises following the surrender of existing tenancy or property rights does not amount to receipt of immovable property without or for inadequate consideration.
Thus, Devshichhadva succeeded because two essential conditions for invoking Section 56(2)(x) were absent.
Surana says that firstly, there was no actual receipt of immovable property during the relevant previous year, since the building remained under construction and possession had not been delivered.
Secondly, the transaction was supported by valuable consideration in the form of surrender of tenancy rights.
Surana says: “Mere registration of the redevelopment agreements could neither be treated as actual receipt of the alternate premises nor convert a reciprocal redevelopment arrangement into a gratuitous transfer.”
Accordingly, the ITAT deleted the addition of Rs 1.39 crore and allowed Devshichhadva’s appeal.
However, this ITAT Mumbai judgement is confined to the applicability of Section 56(2)(x) and does not determine whether any capital-gains implications may arise from the surrender or extinguishment of tenancy rights. That is a separate issue.
