Opinion Of Eminent Legal Luminaries On Controversial Issues

Capital gains -Cost of acquisition -Fair Market Value of flat on surrender of tenancy right to be taken – S. 45

QUERY: An old lady was residing at Malad in tenanted chawl having about 1000 sq. ft. area. After her death her daughter-in-law became successor and continued to live there.
Subsequently the building was re-developed and she was allotted two flats of 650 sq. ft. each in her name in exchange of surrender of tenancy right. Out of which one was sold by her at an handsome price.
Now the ITO wants to tax the whole sum as long term capital gain without allowing any deduction as purchase value or cost price plus index cost.
Kindly advice whether the AO is correct?
ANSWER: The Finance Act, 1994 has amended the provisions relating to capital gains for the purpose of taxing the capital gains arising from transfer of tenancy right. For this purpose, the amendment provides that the cost of acquisition of the tenancy right be taken at NIL.
From the facts, it is clear by surrendering the tenancy right, the lady got in exchange two flats. So on surrender of tenancy right the cost of tenancy right was Nil. But, here the consideration for surrender of tenancy right was in – kind i.e. by way of exchange of two flats. Therefore, the fair market value of the property exchanged to be ascertained in order to arrive at the figure of consideration as per the Bombay High Court in Baijunath Chaturbhuj v. CIT [31 ITR 643].
Out of the two flats received, the lady sold one flat at handsome price. So for purpose of calculation the capital gains the index cost of this sold flat has to be ascertained and deducted. The flat being long-term, the index cost has to be worked out on the basis of fair market value of the flat in exchange of tenancy right at the date of surrender. Therefore, the view of the AO is not correct.
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