2011 (11) TMI 395 - HC - Income Tax

Assessbility of amount received for surrender of tenancy right A.O. taxed it under head Income from other sources on the ground that income cannot be charged under the head of Capital Gains - A.Y. 1993-94 Held that - It is not in dispute that tenancy right is a capital asset and amount received on its surrender was a capital receipt. However in present case, Department s stand before the High Court was that the cost of acquisition of the tenancy was incapable of being ascertained. Due to inability to compute the cost of acquisition u/s 48, Section 45 cannot be applied. Since, the said exercise of computation of cost of acquisition was not undertaken by A.O. in the assessment order hence, Court is not required to determine, decide and compute income from capital gains u/s 45 of the Act. Once Section 45 cannot be applied, it is not open to the Department to impose tax on such capital receipt by the assessee under any other section. See Commissioner of Income Tax versus D.P. Sandu Bros. Chembur (P) Ltd. (2005 - TMI - 6153 - SUPREME Court) Decided against the Revenue.

Issues Involved:
1. Applicability of Section 10(3) of the Income-tax Act, 1961.
2. Taxability of the amount received for the surrender of tenancy rights.
3. Determination of tenancy rights and their heritability.
4. Classification of income as capital receipt or income from other sources.
5. Computation of the cost of acquisition of tenancy rights.

Issue-wise Detailed Analysis:

1. Applicability of Section 10(3) of the Income-tax Act, 1961:
The core issue was whether the amount received for the surrender of tenancy rights was taxable under Section 10(3) of the Income-tax Act, 1961. The Tribunal held that Section 10(3) was not applicable, and the amount received was not assessable to tax under the Income-tax Act. The Supreme Court in Commissioner of Income Tax versus D.P. Sandu Bros. Chembur (P) Ltd. held that a tenancy right is a capital asset, and the surrender of such a right is a "transfer," making the consideration received a capital receipt. Therefore, it cannot be treated as a casual or non-recurring receipt under Section 10(3).

2. Taxability of the Amount Received for Surrender of Tenancy Rights:
The amount of Rs.1 crore received by the assessee for surrendering tenancy rights was initially taxed by the Assessing Officer as income from other sources. However, it was later held by the CIT (Appeals) and affirmed by the Tribunal that the amount was a capital receipt and not taxable as capital gains due to the inability to compute the cost of acquisition. The Supreme Court's decision in D.P. Sandu Bros. Chembur (P) Ltd. further supported that if the income cannot be taxed under Section 45 due to computation issues, it cannot be taxed under any other section.

3. Determination of Tenancy Rights and Their Heritability:
The property in question was originally leased to Ram Krishan Dalmia, who continued to occupy it even after the lease period ended. The Additional Commissioner of Income Tax argued that the four children of Ram Krishan Dalmia were not tenants, thus the amount received was not a capital receipt. However, the CIT (Appeals) and Tribunal held that the tenancy rights were inheritable, and the respondent assessee was indeed a tenant. The judgment referenced the Supreme Court's decision in Gian Devi Anand, which elucidated that both contractual and statutory tenancies are heritable.

4. Classification of Income as Capital Receipt or Income from Other Sources:
The Assessing Officer classified the amount received as income from other sources, but this was overturned by the CIT (Appeals) and Tribunal, which classified it as a capital receipt. The Supreme Court in D.P. Sandu Bros. Chembur (P) Ltd. confirmed that tenancy rights are capital assets, and the amount received on surrender is a capital receipt. As such, it cannot be taxed under the head "Income from other sources."

5. Computation of the Cost of Acquisition of Tenancy Rights:
For the income from the surrender of tenancy rights to be taxed as capital gains, the cost of acquisition must be computed. The Assessing Officer did not undertake this computation. The Supreme Court in D.P. Sandu Bros. Chembur (P) Ltd. held that if the cost of acquisition cannot be computed, the income cannot be taxed under Section 45. Consequently, in the present case, since the cost of acquisition was not computed, the income from the surrender of tenancy rights could not be taxed as capital gains.

Conclusion:
The High Court upheld the Tribunal's decision that the amount received for the surrender of tenancy rights was a capital receipt and not taxable under Section 10(3) of the Income-tax Act. The appeal was disposed of, answering the question of law in favor of the assessee and against the appellant.

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