2011 (11) TMI 83 - HC - Income Tax

Capital receipt versus casual and non-recurring income - Whether the Tribunal was right in holding that Section 10(3) of the Income Tax Act, 1961 was not applicable and that the amount received for surrender of tenancy right was not assessable to tax under the Income-Tax Act, 1961 - Held that - tenancy rights are a capital asset and consideration received for surrender of the tenancy right is capital in nature. Further, once it is held that the income received was of capital nature, it cannot be brought in tax under Section 10(3) as casual income of non-recurring nature. - A similar situation had had arisen in the case of D.P. Sandu Bros. Chembur (P) Ltd. (2005 -TMI - 6153 - SUPREME Court) and the Supreme Court had refused to examine and go into the said question, in view of the stand taken by the Revenue that it was not possible to compute the cost of acquisition of the tenancy rights when they were acquired. - Decided in favor of assessee.

Summary

Issues Involved:
1. Whether the amount received for surrender of tenancy rights is taxable under Section 10(3) of the Income Tax Act, 1961.
2. Whether the respondent was a tenant and if the amount received was a capital receipt or casual and non-recurring income.

Detailed Analysis:

1. Taxability under Section 10(3) of the Income Tax Act, 1961
The primary issue was whether the amount received for surrender of tenancy rights is assessable to tax under Section 10(3) of the Income Tax Act, 1961. The Assessing Officer had treated the Rs. 1 crore received by the respondent as taxable income under Section 10(3), considering it a casual and non-recurring income. However, the CIT(A) and the Tribunal disagreed, holding that the amount received was a capital receipt for surrender of tenancy rights and not taxable under Section 10(3).

The court referred to the Supreme Court's decision in Commissioner of Income Tax versus D.P. Sandu Bros. Chembur (P) Ltd., which clarified that tenancy rights are a capital asset and the consideration received for their surrender is capital in nature. The court reiterated that if the income is of capital nature, it cannot be taxed under Section 10(3) as casual income. The Supreme Court had also held that if the cost of acquisition of the tenancy rights cannot be computed, the income cannot be taxed under Section 45, and thus, it cannot be taxed under any other section.

2. Tenancy Status and Nature of Receipt
The second issue was whether the respondent was a tenant and whether the amount received was a capital receipt or casual and non-recurring income. The Assessing Officer had argued that the respondent was not a tenant and that the amount received was not a capital receipt but casual income. However, the CIT(A) and the Tribunal found that the respondent was indeed a tenant, inheriting the tenancy rights from Ram Krishan Dalmia, and the amount received was for the surrender of these tenancy rights.

The court examined the history of the tenancy, noting that Ram Krishan Dalmia had been in occupation of the property since January 1953, and even after the lease expired in 1964, he continued to occupy the property. Upon his death, the tenancy rights were inherited by his children. The court emphasized that tenancy rights are heritable unless prohibited by statute or contract. The court also referred to the Supreme Court's decision in Gian Devi Anand, which clarified that both contractual and statutory tenancies create heritable rights.

The court found no evidence that the tenancy was terminated, and the agreement dated 17th November 1992 indicated a month-to-month tenancy was in place. The court noted that the Assessing Officer had not specified the nature of the right surrendered if it was not tenancy rights. Thus, the court concluded that the amount received was indeed for the surrender of tenancy rights and was a capital receipt.

Conclusion:
The court answered the substantial question of law against the appellant and in favor of the respondent, holding that the amount received for surrender of tenancy rights was not taxable under Section 10(3) of the Income Tax Act, 1961. The appeal was accordingly disposed of.