Receipts From Capital Asset Transfer Cannot Be Taxed Under Residuary Head: ITAT Mumbai

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 30 April 2026 held that once a receipt is characterised as arising from the transfer of a capital asset, the tax authority cannot reclassify it under the residuary head of income merely because computation under the capital gains provisions is disputed or fails.

The Bench comprising Judicial Member Pawan Singh and Accountant Member Makarand Vasant Mahadeokar dismissed the Revenue's appeal against the order of the Commissioner of Income Tax (Appeals) dated 27 November 2025, which had deleted an addition of Rs. 3.67 crore made under the head “Income from Other Sources”. It held:

“once the nature of receipt is held to be capital in nature arising from transfer of a capital asset, the same cannot be re-characterised under a residuary head.”

Dinesh Gulab Mirchandani, the taxpayer, received Rs. 3,67,68,000 on surrender of tenancy rights in respect of two premises in Mumbai. He treated the amount as long-term capital gains and claimed exemption under provisions relating to reinvestment in residential property.

During assessment, the Assessing Officer held that the taxpayer failed to establish the cost of acquisition of the tenancy rights and treated it as nil. On that basis, the officer concluded that the computation mechanism under the head “Capital Gains” failed and taxed the entire receipt under “Income from Other Sources”.

On appeal, the Commissioner (Appeals) held that tenancy rights constitute a capital asset and that their surrender gives rise to a capital receipt chargeable, if at all, only under the head “Capital Gains”. He relied on Supreme Court precedent and held that if such a receipt cannot be taxed under capital gains provisions, the Revenue cannot bring it to tax under the residuary head. He therefore deleted the addition.

Before the Tribunal, the Revenue argued that since the taxpayer could not establish the cost of acquisition, the receipt could not be taxed as capital gains and must therefore fall under “Income from Other Sources”.

The Tribunal rejected this argument. It held that the existence of tenancy rights and their surrender remained undisputed. It further held that the statute requires authorities to first examine such receipts under the head “Capital Gains”, and only if they do not fall within that computation framework can they not be shifted to the residuary head.

The Bench also reiterated the settled principle that where income falls within a specific head, the tax authority cannot tax it under another head merely because it escapes taxation under the correct head.

Accordingly, the ITAT upheld the deletion of the addition and dismissed the Revenue's appeal.