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Tenancy rights are a capital asset


Friday, Nov 10, 2006, 21:05 IST Can you explain the position of income tax law in respect of tenancy rights acquired in 1965 surrendered now and investments options in respect of consideration received in cash? Tarun Ghia Can you explain the position of income tax law in respect of tenancy rights acquired in 1965 surrendered now and investments options in respect of consideration received in cash?

Pari N Shah
It has been an accepted position of law that tenancy rights are a capital asset. In respect of transfer of tenancy rights before April 1, 1994, the position of income tax law was that when there was no cost of acquisition of tenancy, no capital gain arose on transfer of such capital asset in those cases. However, the position has changed in respect of transfers of tenancy rights and some other assets taking place from and after April 1, 1994 as section 55(2)(a) of the Income Tax Act, 1961 has been amended. This provides that for the purpose of computation of capital gain in a case where there is no cost of acquisition of tenancy rights, the same will be taken at nil. Thereafter, the provisions of computation of capital gains will follow as a result whereof the cost of acquisition of tenancy rights being nil, the entire net consideration received on transfer of such tenancy rights would amount to capital gains. If the tenancy rights were held for more than 36 months, the same would be considered as long-term capital asset and transfer thereof would give rise to long-term capital gain. Conversely, if the tenancy rights were held for 36 months or less then the same are a short-term capital asset and transfer thereof would give rise to short term capital gain. In respect of a capital asset, which was acquired before April 1, 1981, the benefit of substitution of the fair market value of the asset as on that date in place of its cost is available in general. But such benefit is not available in respect of some of the capital assets which have been assigned deemed nil cost and tenancy rights are one of such assets. Therefore, the benefit of substitution of fair market value of the asset as of April 1, 1981, is not available in place of its original cost. As substitution of fair market value is not possible in your case, there is no point in getting it valued as of April 1, 1981. Further in case of a zerocost asset, indexation does not benefit. But since holding period of your tenancy rights was more than 36 months on the date of surrender thereof, the resultant capital gain was a long-term gain and would be entitled to benefits under Section 54EC and 54F subject to conditions and time limits specified in those section. Due to space constraint investment options have not be analysed in detail.