of Income Tax, Mumbai Vs. D.P. Sandu Bros. Chembur (P) Ltd  Insc 68 (31 January 2005)
Pal, Arijit Pasayat & C.K. Thakker Ruma Pal, J.
primary question involved in this appeal is whether the amount received by the
respondent-assessee on surrender of tenancy rights is liable to capital gains
tax under Section 45 of the Income tax Act, 1961. The assessment year in
question is 1987-88. The lease agreement was entered in 1959 for 50 years under
which an annual rent was paid by the lessee to the lessor. The lease would have
continued till 2009. During the relevant previous year, in March 1986, the
respondent surrendered its tenancy right to its lessor prematurely. In
consideration for such premature termination, the lessor paid the lessee a sum
of Rs. 35 lakhs.
assessee's return the sum of Rs.35 lakhs had been credited to its reserve and
surplus account. This was disallowed by the Assessing Officer who held that the
amount of Rs.35 lakhs was taxable as "income from other sources"
under Section 10(3) read with Section 56. The assessee appealed to the
Commissioner of Income Tax (Appeals) who came to the conclusion that the assessee
was liable to pay capital gains on the amount of Rs. 35 lakh after deducting an
amount of Rs.7 lakhs as the cost of acquisition. The Commissioner had
determined the cost of acquisition at Rs. 7 lakhs on the basis of the market
value of the property as on 1.4.1974. Both the Department and the assessee
challenged the decision of the Commissioner before the Tribunal.
Tribunal relied upon the decision of this Court in Commissioner of Income Tax
V. Srinivasa Setty 128 ITR 294 = (1981) 2 SCC 460 as well as the amendment to
Section 55(2) of the Act in 1995 and held that the assessee did not incur any
cost to acquire the leasehold rights and that if at all any cost had been
incurred it was incapable of being ascertained. It was therefore held that
since the capital gains could not be computed as envisaged in Section 48 of the
Income Tax Act, therefore capital gains earned by the assessee if any was not exigible
Department preferred an appeal before the High Court. The High Court dismissed
the appeal. Being aggrieved by the decision of the High Court, this further
appeal has been preferred by the Department.
Department has contended that the surrender value of the tenancy rights was
chargeable to capital gains under Section 45 of the Act. If not, it was liable
to be taxed as 'income from other sources' under Section 10(3) read with
Section 56 of the Act.
2(24)(vi) defines 'income' as including "any capital gains chargeable
under Section 45". Section 45 provides that any profits or gains arising
from the transfer of a capital asset effected in the previous year is
chargeable to income tax under the head 'capital gains' and is deemed to be the
income of the previous year in which the transfer took place, subject to
certain exceptions which are not material in this case. Section 48 provides for
the mode of computation of income chargeable under the head 'capital gains'.
The method of computation prescribed is by deducting from the full value of the
consideration received or accruing as a result of the transfer of the capital
asset, certain prescribed amounts including the cost of acquisition of the
assets and the cost of any improvement thereto.
the tenancy right is a capital asset, the surrender of the tenancy right is a
"transfer" and the consideration received therefore a capital receipt
within the meaning of Section 45 has not been questioned before us and must in
any event be taken to be concluded by the decision of this Court in A. Gasper
v. Commissioner of Income Tax . Normally the consideration would therefore be
subjected to capital gains under Section 45.
1981 this Court in Commissioner of Income Tax V. B.C. Srinivasa Setty held that
all transactions encompassed by Section 45 must fall within the computation
provisions of Section 48. If the computation as provided under Section 48 could
not be applied to a particular transaction, it must be regarded as "never
intended by Section 45 to be the subject of the charge". In that case, the
Court was considering whether a firm was liable to pay capital gains on the
sale of its goodwill to another firm. The Court found that the consideration
received for the sale of goodwill could not be subjected to capital gains
because the cost of its acquisition was inherently incapable of being
determined. Pathak J. as his Lordship then was, speaking for the Court said:
is contemplated is an asset in the acquisition of which it is possible to
envisage a cost. The intent goes to the nature and character of the asset, that
it is an asset which possesses the inherent quality of being available on the
expenditure of money to a person seeking to acquire it. It is immaterial that
although the asset belongs to such a class it may, on the facts of a certain
case, be acquired without the payment of money." In other words, an asset
which is capable of acquisition at a cost would be included within the provisions
pertaining to the head 'capital gains' as opposed to assets in the acquisition
of which no cost at all can be conceived. The principle propounded in Srinivasa
Setty has been followed by several High Courts with reference to the
consideration received on surrender of tenancy rights. [See: Among others Bawa Shiv
Jaipuria (1991) 192 ITR 533(Cal.); Commissioner of Income Agamma (1987) 165 ITR
386 (A.P.); Commissioner of Income all these decisions the several High Courts
held that if the cost of acquisition of tenancy rights cannot be determined,
the consideration received by reason of surrender of such tenancy rights could
not be subjected to capital gains.
to a Circular issued by the Central Board of Direct Taxes it was to meet the
situation created by the decision in Srinivasa Setty and the subsequent
decisions of the High Court that the Finance Act 1994 amended Section 55 (2) to
provide that the cost of acquisition of inter-alia a tenancy right would be
taken as nil. By this amendment, the judicial interpretation put on capital
assets for the purposes of the provisions relating to capital gains was met. In
other words the cost of acquisition would be taken as determinable but the rate
would be nil.
amendment took effect from 1st April 1995
and accordingly applied in relation to the assessment year 1995-96 and
subsequent years. But till that amendment in 1995, and therefore covering the
Assessment Year in question, the law as perceived by the Department was that if
the cost of acquisition of a capital asset could not in fact be determined, the
transfer of such capital asset would not attract capital gains. The appellant
now says that Srinivasa Setty's case would have no application because a
tenancy right cannot be equated with goodwill. As far as goodwill is concerned,
it is impossible to specify a date on which the acquisition may be said to have
taken place. It is built up over a period of time. Diverse factors which cannot
be quantified in monetary terms may go into the building of the goodwill, some
tangible some intangible. It is contended that a tenancy right is not a capital
asset of such a nature that the actual cost on acquisition could not be
ascertained as a natural legal corollary.
agree. A tenancy right is acquired with reference to a particular date. It is
also possible that it may be acquired at a cost. It is ultimately a question of
fact. In A.R. Krishnamurthy and Ors. v. Commissioner of Income Tax, Madras
(1989) 176 ITR 417 this Court held that it cannot be said conceptually that
there is no cost of acquisition of the grant of the lease. It held that the
cost of acquisition of leasehold rights can be determined. In the present case
however, the Department's stand before the High Court was that the cost of
acquisition of the tenancy was incapable of being ascertained. In view of the
stand taken by the Department before the High Court, we uphold the decision of
the High Court on this issue.
it not for the inability to compute the cost of acquisition under Section 48,
there is, as we have said, no doubt that a monthly tenancy or leasehold right
is a capital asset and that the amount receipt on its surrender was a capital
receipt. But because we have held that Section 45 cannot be applied, it is not
open to the Department to impose tax on such capital receipt by the assessee
under any other Section. This Court, as early as in 1957 had, in United
Commercial Bank Ltd. V. Commissioner of Income Tax Ltd., West Bengal (1957) 32
ITR 688, held that the heads of income provided for in the Sections of the
Income Tax Act, 1922 are mutually exclusive and where any item of income falls
specifically under one head, it has to be charged under that head and no other.
other words, income derived from different sources falling under a specific
head has to be computed for the purposes of taxation in the manner provided by
the appropriate Section and no other. It has been further held by this Court in
East India Housing and Land Development Trust Ltd. V. Commissioner of Income
Tax, West Bengal (1961) 42 ITR 49 that if the income from a source falls within
a specific head, the fact that it may indirectly be covered by an another head
will not make the income taxable under the latter head. (See Co.(1964) 55 ITR
14 of the Income Tax Act 1961 as it stood at the relevant time similarly
provided that "all income shall for the purposes of charge of income tax
and computation of total income be classified under six heads of income,"
Interest on Securities;
Income from house property;
Profits and gains and business or profession;
Income from other sources unless otherwise, provided in the Act.
56 provides for the chargeability of income of every kind which has not to be
excluded from the total income under the Act, only if it is not chargeable to
income tax under any of the heads specified in Section 14 items A to E.
if the income is included under any one of the heads, it cannot be brought to
tax under the residuary provisions of Section 56.
is no dispute that a tenancy right is a capital asset the surrender of which
would attract Section 45 so that the value received would be a capital receipt
and assessable if at all only under Item E of Section 14. That being so, it
cannot be treated as a casual or non recurring receipt under Section 10(3) and
be subjected to tax under Section 56. The argument of the appellant that even
if the income cannot be chargeable under Section 45, because of the inapplicability
of the computation provided under Section 48, it could still impose tax under
the residuary head is thus unacceptable. If the income cannot be taxed under
Section 45, it cannot be taxed at all. (See: S.G. Tax, Calcutta (1972) 83 ITR
it would be illogical and against the language of Section 56 to hold that
everything that is exempted from capital gains by statute could be taxed as a
casual or non recurring receipt under Section 10(3) read with Section 56. We
are fortified in our view by a similar argument being rejected in (1966) 61 ITR
appeal is accordingly dismissed without any order as to costs.