Occupancy Right

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Mkk

36 Points Posted on 10 May 2007

X company has given godown on rent from last 25 years to a Y proprietorship firm for business purpose. Now the X company wants to sale the godown to Z company for Rs. 10 lacs, The proprietorship firm also demands Rs. 2 lacs for vacating the godown. Whether Rs. 2 lacs paid by Z company to Y will include in the cost of acquisation of the property and cost will be Rs. 12 lacs. What will be the treatment of Rs. 2 lacs received by Y in his return of income. Whether Y can invest in REC bond to get relief.

Replies (2)

Pavani Turaga

45 Points Posted on 10 May 2007

2 lacs will be the sale consideration to the firm for tenancy rights (capital asset).
he can invest in rec bonds

also the total COA for Z will be 10 lacs for building separately
and 2 lacs for tenancy rights
they are separate assets & hence separate costs

Aashok Kumar Sharma

Finance/Compliance Consultant

77919 Points Posted on 06 November 2026

Compensation for surrendering tenancy rights is capital gains:

• Tenancy or occupancy rights are a "capital asset". Sec 55(2)(a) deems the cost of acquisition of a tenancy right to be nil unless it was purchased (in which case the purchase price is cost). Sec 2(47) covers relinquishment.

• So the Rs 2 lakh (or whatever amount the firm receives for vacating) is a capital gain in the firm's hands. Held for 25 years, so long-term. For a firm, 12.5% (transfers after 23 July 2024), with no indexation since cost is nil.

• The landlord company pays the tenant to obtain vacant possession. For the company, it is part of the cost of improvement / transfer cost of the godown (often allowed as an expense incurred for transfer, reducing its own gain on sale).

• Sec 54EC (bonds up to Rs 50 lakh, within 6 months) is available to the firm to save the tax.

• Document it with a surrender agreement specifying the amount for tenancy rights. TDS doesn't apply to such payments to residents, except Sec 194-IA if structured as part of property consideration.