Transfer of inherited tenancy rights in immovable property is taxable as capital gains; computation provisions apply via FMV as on 01.04.2001 despite inheritance, distinguishing from self-generated intangibles.

आदेश/ORDER

PER MAKARAND VASANT MAHADEOKAR, AM:

This appeal by the assessee is directed against the order dated 31.10.2025 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as "CIT(A)"] under section 250 of the Income-tax Act, 1961 [hereinafter referred to as "the Act"], arising from the assessment order passed by the Assessing Officer under section 143(3) read with section 144B of the Act dated 26.09.2022 for the Assessment Year 2020–21.

Facts of the Case

2. The facts, as emerging from the assessment records, are that the assessee is an individual who filed his return of income for the Assessment Year 2020–21 on 07.01.2021 declaring total income of Rs. 42,96,950/-. The return was processed under section 143(1) on 05.04.2021. Subsequently, the case was selected for limited scrutiny through CASS, inter alia, to examine the issue of large deduction/exemption claimed. Notice under section 143(2) dated 29.06.2021 and notices under section 142(1) issued from time to time were duly served upon the assessee. The assessee participated in the assessment proceedings, furnished details and explanations, and also responded to the show cause notice dated 09.09.2022, including through video conference.

3. During the course of assessment proceedings, it was noticed that during the Financial Year 2019–20, the assessee had transferred tenancy rights in respect of a property situated in Shyam Kunj building vide Transfer of Tenancy Agreement dated 15.04.2019 for a consideration of Rs. 7,00,00,000/-. In the return of income, the assessee computed long-term capital gains by adopting the fair market value as on 01.04.2001 as cost of acquisition and claimed exemption under section 54 amounting to Rs. 4,91,50,715/-.

4. The assessee explained before the Assessing Officer that the tenancy rights were inherited from his father and were of a very old origin, and therefore the cost of acquisition in the hands of the previous owner was not ascertainable. It was contended that in such circumstances, the computation provisions fail and no capital gains could be charged. Alternatively, it was submitted that the cost of acquisition should be taken as nil or that the fair market value as on 01.04.2001 be adopted with indexation. The assessee also contended that what was transferred was effectively a residential unit and therefore deduction under section 54, or alternatively under section 54F, ought to be allowed. The assessee further requested that the matter be referred to the Departmental Valuation Officer under section 55A for determination of fair market value.

5. The Assessing Officer, however, did not accept the contentions of the assessee. It was held that the Transfer of Tenancy Agreement clearly evidenced transfer of tenancy rights and not ownership of a residential house. The Assessing Officer further held that since the tenancy rights were acquired by inheritance, the provisions of section 49(1)(ii) were applicable and the cost of acquisition was required to be taken as the cost to the previous owner. In absence of any evidence regarding such cost or the fair market value at the relevant time, no deduc