2007 (6) TMI 179 - HC - Income Tax

Summary

Issues Involved:
1. Classification of consideration received on surrender of leasehold rights.
2. Obligation to assess capital receipt under "Other sources" if not taxable under "Capital gains".

Summary:

Issue 1: Classification of Consideration Received on Surrender of Leasehold Rights
The Tribunal held that the consideration received from the surrender of leasehold rights in carrying on hotel business, which was sub-leased and not carried on by the assessee itself, is not a business receipt but capital gains, and not taxable as no costs were involved. The first appellate Commissioner and the Tribunal agreed with the assessee's claim that the cost of acquisition of leasehold rights does not admit of determination and cannot be charged u/s 45 of the Act. However, the Supreme Court in A. R. Krishnamurthy v. CIT [1989] 176 ITR 417 held that the cost of acquisition of leasehold rights is capable of ascertainment and must be determined by the Income-tax Officer based on evidence. Therefore, the first appellate authority had a duty to determine the cost of acquisition or remand the matter to the Assessing Officer for determination. The court concluded that the authorities below failed to determine the cost of acquisition of leasehold rights, necessitating a remand to the Assessing Officer for this purpose.

Issue 2: Obligation to Assess Capital Receipt Under "Other Sources"
The Tribunal, as the final fact-finding body, was questioned whether it was obliged to hold that if a capital receipt is not taxable under the head "Capital gains," it should be assessable under the head "Other sources" in view of the inclusive definition of income in section 2 and section 10(3). The court, following the decision in Traders and Miners Ltd. v. CIT [1955] 27 ITR 341 and the Supreme Court's decision in CIT v. D. P. Sandu Bros. Chembur P. Ltd. [2005] 273 ITR 1, held that the income from the transfer of leasehold rights falls under the head "Capital gains" and not under the head "Income from other sources," unless otherwise provided in the Act. The Assessing Officer is directed to determine the cost of acquisition by affording an opportunity of being heard to the assessee.

The reference stands disposed of accordingly, and a copy of this order shall be sent to the Tribunal as required u/s 260(1) of the Act.