2006 (3) TMI 115 - HC - Income Tax

Transaction of lease and sub-lease - transfers leasehold rights in the land - By way of a sub-lease to another person - Whether Such transfer of lease hold right in the land is falling under the definition u/s 2(47) would amount to transfer of a capital asset or not - HELD THAT - The Supreme Court in A. Gasper v. CIT 1991 (8) TMI 7 - SUPREME COURT . In R. K. Palshikar (HUF) v. CIT 1988 (5) TMI 3 - SUPREME COURT held that the transfer by way of lease would amount to transfer of a capital asset and therefore tax is leviable as capital gains. Thus, it is clear that the transfer by way of lease is treated as transfer of a capital asset on the principle that the lease creates an interest in the land and therefore to that extent, it extinguishes the right of the transferor. If the facts of the present case are analysed in the context of the law laid down by the Supreme Court and the various sections of the Income-tax Act, we have no difficulty at all in holding that when the assessee transfers his leasehold rights in the land in his occupation by way of a sub-lease to another person, it amounts to extinguishing his rights in the property and since his leasehold rights had created an interest in the land, i.e., enjoyment and possession and therefore it would definitely come within the definition of capital asset as defined u/s 2(14) of the Income-tax Act. Whether the owner himself transfers by way of a lease or a lessee transfers by way of sub-lease, the principle remains the same, namely, in either action, there is extinguishment of rights.

Summary

Issues:
Whether the transaction of lease and sub-lease constitutes a transfer falling within the definition under section 2(47) of the Income-tax Act, 1961, leading to short-term capital gains assessment.

Analysis:
The case involved a dispute regarding the transfer of leasehold rights by the assessee to a sub-lessee and the tax implications of such a transaction. The Revenue contended that the sub-lease amounted to a transfer of a capital asset, attracting capital gains tax. The Assessing Officer initially held in favor of the Revenue, but the Commissioner of Income-tax and the Income-tax Appellate Tribunal ruled against the Revenue. The key question was whether the sub-lease constituted a transfer falling under the definition of section 2(47) of the Income-tax Act.

The Revenue argued that the leasehold interest of the assessee qualified as a capital asset, and any gains from the transfer should be taxable as capital gains. The definition of "transfer" under section 2(47) was highlighted, emphasizing the extinguishment of rights as a key element. The Revenue relied on various judicial precedents to support their position that the transfer of a lease equated to a transfer of a capital asset, attracting capital gains tax.

The High Court analyzed the case on its merits, noting that transferring an immovable property through a lease created an interest in the land, which fell within the definition of a "capital asset" as per section 2(14) of the Income-tax Act. Citing previous judgments, the court affirmed that a lease could be considered a transfer of a capital asset as it extinguished the transferor's rights in the property. The court emphasized that whether the owner or lessee transferred the lease, the principle of extinguishment of rights remained consistent, leading to the inclusion of such transactions under "capital gains."

Ultimately, the High Court disagreed with the decisions of the Income-tax Appellate Tribunal and the Commissioner of Income-tax, ruling in favor of the Revenue. The court held that the sub-lease constituted a transfer falling within the definition of a capital asset, warranting capital gains tax liability. The judgment favored the Revenue, answering the legal point raised in the appeal in their favor and against the assessee.