1999 (10) TMI 741 - AT - Income Tax

Summary

Issues Involved:
1. Whether there was a surrender of tenancy rights by the assessee during the relevant previous year.
2. Whether the sum of Rs. 30 crores is taxable under the head "capital gains."
3. Whether the assessee is entitled to deductions in respect of payments to workers and sub-tenants while computing capital gains.
4. Whether the assessee is liable to pay interest under sections 234B and 234C.

Detailed Analysis:

1. Surrender of Tenancy Rights:
The primary issue was whether the assessee surrendered tenancy rights during the relevant previous year. The assessee, a partnership firm engaged in textile processing, was a tenant under a lease agreement dated 20th Dec., 1954. A tripartite agreement dated 15th Sept., 1994, was entered into between the trust (owner), the assessee, and Vihar Securities (P) Ltd. (purchaser) for the sale of the property for Rs. 45 crores. The assessee's role was to surrender tenancy rights for Rs. 30 crores. The AO contended that the entire sum of Rs. 30 crores was taxable as capital gains, asserting that the assessee had surrendered tenancy rights during the relevant previous year. However, the Tribunal found that the terms of the tripartite agreement did not indicate an actual surrender of tenancy rights during the relevant year. Essential prerequisites for surrender, such as vacating the premises and discontinuing rent payments, were not met. The assessee continued to occupy the property and pay rent, and the various steps outlined in the agreement for completing the sale and surrender of tenancy rights were not fulfilled within the relevant year.

2. Taxability under "Capital Gains":
The AO and CIT(A) concluded that the entire sum of Rs. 30 crores was taxable as capital gains. However, the Tribunal held that since there was no surrender of tenancy rights during the relevant year, the assessment of Rs. 30 crores as capital gains was invalid. The Tribunal emphasized that the agreement was executory, and the assessee retained possession of the property, continuing operations and paying rent. The Tribunal also noted that the doctrine of part performance under Section 53A of the Transfer of Property Act, incorporated in Section 2(47)(v) of the IT Act, was incorrectly applied, as the purchaser had not taken possession of the property.

3. Deductions for Payments to Workers and Sub-tenants:
The assessee claimed deductions for payments to workers and sub-tenants related to the transfer. Since the Tribunal held that the capital gains assessment itself was invalid, the issue of deductions became academic and was dismissed.

4. Liability to Pay Interest under Sections 234B and 234C:
The assessee argued against the levy of interest under Sections 234B and 234C, contending that without the capital gains, there would be no tax liability due to carried forward losses and losses for the year under appeal. The Tribunal reviewed the financial statements and confirmed significant losses, concluding that the assessee was not liable to pay advance tax. Consequently, the interest levied was canceled.

Conclusion:
The Tribunal allowed the appeal in part, holding that there was no surrender of tenancy rights during the relevant previous year, invalidating the capital gains assessment of Rs. 30 crores. The claim for deductions was dismissed as academic, and the interest levied under Sections 234B and 234C was canceled due to the absence of tax liability.