2011 (5) TMI 659 - AT - Income Tax

Taxation of intangible asset having no cost - a public company had trespassed assessee s property by using a private road to reach their land located behind assessee s property - Assesse gave right of easement to reach their property. under a agreement, and permitted the use of the private road and in turn, the said party paid a sum of Rs. 25 lakhs - assessee treated the said sum as capital receipt and Revenue contended it as capital gain - assessee filed his reply stating that there was no transfer of property and computation provisions as prescribed u/s 48 could not be applied since there was no cost of acquisition in respect of the transfer of the rights - Held that it should come under the head income from other sources being rent received from this land - the ownership of that property would always remain with the assessee - Thus held that receipt cannot be treated as rent , because for receiving a rent, there has to be a relationship of landlord and tenant - it being intangible asset having no cost, cannot be taxed - it does not even come under residue clause provided in section 56(1) Keeping in view the case CIT v. Sandu Bros. Chembur (P.) Ltd. 2005 -TMI - 6153 - SUPREME Court - Appeal of revenue dismissed.

Summary

Issues:
1. Treatment of receipt as capital gain or income from other sources.
2. Taxability of receipt under different heads.
3. Interpretation of legal provisions regarding capital receipts.

Analysis:
1. The appeal was against the order for Assessment Year 2007-08 where the assessee received Rs. 24,82,500 from a company for granting easement right over a portion of land. The Assessing Officer proposed to treat it as capital gains, but the assessee argued it was a capital receipt and not taxable. The Commissioner of Income-tax [Appeals] agreed with the assessee, stating that the receipt cannot be taxed under any provision of law.

2. The tribunal analyzed the nature of the receipt and the legal implications. It was noted that the company encroached on the assessee's land, leading to a civil suit and a compromise granting the company an easement right. The ownership of the property remained with the assessee, but the company had the right to use a portion of the land. The tribunal agreed with the assessee that this receipt could not be treated as rent, as there was no landlord-tenant relationship. Since it was a capital receipt related to a capital asset, it could only be taxed under the head 'capital gain', if at all. However, due to the intangible nature of the asset and the absence of a cost basis, it could not be taxed as per legal precedents.

3. The tribunal referred to relevant legal decisions, including the case of B.C. Srinivasa Setty, to support its conclusion that the receipt in question, being an intangible asset with no cost, could not be taxed. It highlighted the importance of interpreting tax laws in line with legal principles and precedents. The tribunal also cited the decision of the Hon'ble Supreme Court in CIT v. Sandu Bros. Chembur (P.) Ltd., emphasizing that income that is not chargeable to capital gains cannot be taxed under other provisions. The tribunal found no merit in the department's appeal and upheld the decision of the Commissioner of Income-tax [Appeals], dismissing the appeal filed by the department.