Exemption u/s 54

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Goutam Jain (Querist)
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07 February 2012 Tenancy right is a Capital Gain. There are two questions on this as follows:
1. As per Supreme Court decision in case of CIT v. B.C. Srinivasa Setty [2008 - TMI - 5845 - SC], there is no cost incurred to acquire the leasehold right & hence capital could not be computed u/s 48 & hence not eligible to tax. Therefore our question is whether capital gain arising on sale of flat on Tenancy Rights is taxable?

2. Whether any exemption u/s 54 is allowable to the assessee if flat on Tenancy rights is sold?

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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07 February 2012 As per section 55(2)(a), cost of tenancy right (not purchased) is 'NIL' and capital gains has to be worked out and assessed accordingly.

Goutam Jain

Goutam Jain (Querist)
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22 February 2012 Sir,

Thank you for your reply. However we want further clarification on this query as follows:

1. Tenancy Rights is a capital Asset. Therefore capital gain on its sale should be liable to tax. Whether exemption can be claimed against such capital gain on account of further investment made?

2. If yes, in which section it should be claimed? Since to avail exemption u/s 54, there must be sale of "Residential House Property which is used for residential purpose & Income on which is chargeable under the head Income from House Property". Here income from flat on Tenancy Rights is not chargeable under the head IFHP since the assessee is not owner but merely a tenant.

Please advise suitably.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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21 July 2024 Let's address each of your queries regarding the taxation of tenancy rights and the possibility of claiming exemptions under Section 54 of the Income Tax Act:

### 1. Taxation of Tenancy Rights:

- **Capital Asset**: Tenancy rights are considered as capital assets under the Income Tax Act. Therefore, any gain arising from the transfer or sale of tenancy rights would typically be taxable under the head of capital gains.

- **Exemption Eligibility**: Exemptions from capital gains tax can generally be claimed if the gains are reinvested in specified assets, such as residential property, under Sections 54, 54F, or 54EC, depending on the circumstances.

### 2. Exemption under Section 54:

- **Requirements under Section 54**:
- Section 54 allows for an exemption from long-term capital gains tax if the gains from the sale of a residential house property (used for residential purposes) are reinvested in another residential house property.
- The original property must be owned by the taxpayer, and the income from it should be chargeable under the head "Income from House Property".

- **Challenge with Tenancy Rights**:
- If the capital gains arise from the sale of tenancy rights (not a residential house property owned by the taxpayer), then technically Section 54 may not apply because the income is not chargeable under the head "Income from House Property" for the assessee (since they are a tenant, not an owner).

### Suitability of Exemption:

- **Alternative Exemptions**: Given that Section 54 specifically requires the capital gains to arise from the sale of a residential house property used for residential purposes and owned by the taxpayer, it may not directly apply to the sale of tenancy rights.

- **Other Provisions**:
- If the intent is to reinvest the gains from tenancy rights into another property to claim exemption, one could explore other provisions like Section 54EC (investing in specified bonds within 6 months) or Section 54F (investment in a new residential property).

### Conclusion:

Based on the current provisions of the Income Tax Act:
- Section 54 is specifically tailored for exemption from capital gains arising from the sale of a residential house property used for residential purposes and owned by the taxpayer.
- Since tenancy rights do not fall under this category (as they are not owned residential property), Section 54 may not be applicable in this case.

For situations involving tenancy rights and capital gains, it's advisable to consult with a tax advisor or chartered accountant who can provide guidance based on the specific details of the transaction and applicable tax laws. They can help explore alternative provisions and ensure compliance with tax regulations while optimizing tax implications.

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