The cost of tenancy is Nil. The cost of the flat on the date of conversion of tenancy will be considered as the cost of acquisition of the Flat. On the sale of Flat after a period of two years, the same will be treated as Long term Capital Gain.

The Hon’ble ITAT – Mumbai (Special Bench) in the case of DR. D.A. IRANI v. First ITO [1984] 7 ITD 160 (Bombay) (SB) where assessee, who had tenancy right over a flat in a building, acquired ownership right and thereafter sold the flat within five months, it was held that for purposes of computation of short-term capital gain on transfer of composite rights, market value of tenancy right as on date of acquisition of ownership right should be taken into account for determining cost of composite rights.

The Hon’ble Bombay High Court in the case of CIT v. Dr. D. A. Irani [1998] 234 ITR 850 (Bom)(HC) where Assessee having tenancy rights over a flat since 1962 acquired ownership rights in 1976 and sold it within five months of acquisition. The same was held to be short-term capital gains as the tenancy stood extinguished.

Thus, to summarize, the cost of the flat on the date of conversion of tenancy to ownership will be the cost of acquisition of the flat. The sale of the Flat will attract long term capital Gain.he cost of tenancy is Nil. The cost of the flat on the date of conversion of tenancy will be considered as the cost of acquisition of the Flat. On the sale of Flat after a period of two years, the same will be treated as Long term Capital Gain.