2012 (9) TMI 37 - HC - Income Tax

Receipt on account of surrender of tenancy rights - Tribunal held that the receipt is a capital receipt but refusing to look at the question of taxing the same as capital gains - Held that - On reading of the Commissioner s order shows the admitted fact that as per the memorandum of understanding executed on 25.02.1994 the assessee s status as a tenant was not disputed and the genuineness of the document remained unassailed by the Revenue. Hence, the admitted fact position is that the assessee was a tenant. The only ground on which the order of the Assessing Officer was sought to be revised was the character of the receipt alone and the CIT (A) held that it was to be assessed as income under Section 10(3) - whatever might have been the terms of understanding under the lease deeds dated 28.08.1978, as far as the present case is concerned, the right to receive compensation is traceable to the document dated 25.02.1994. Consequently, it is not open to the Revenue to contend that the order of the Commissioner could be sustained on a different fact situation, a position which is not open to the Revenue to contend so. Having regard to the unworkability of the provisions of section 45 and that Section 55 itself was introduced relevant only to the subsequent assessment year, namely, 1995-96, the Apex Court held that till the amendment in 1995, the compensation received on surrendering the tenancy rights could not be assessed to capital gains. Thus, on the fact position as found by the Tribunal and which form the very basis of the order under Section 263 that the assessee was treated as tenants as per the document dated 25.02.1994, the genuineness of which was never questioned by the Revenue no hesitation in confirming the order of the Tribunal.

Issues Involved:
1. Taxation of receipt from surrender of tenancy rights as capital gains.
2. Determination of tenancy status of the assessee at the relevant time.
3. Applicability of the amendment to Section 55(2) of the Income Tax Act.
4. Classification of the receipt as capital receipt or income from other sources.
5. Admissibility of fresh grounds and evidence by the Appellate Tribunal.
6. Recognition of tenancy rights by the new owners in 1994.
7. Assessment of compensation received as income or capital receipt.

Detailed Analysis:

1. Taxation of Receipt from Surrender of Tenancy Rights as Capital Gains:
The Tribunal held that the question of whether the receipt from the surrender of tenancy rights could be taxed as capital gains could not be considered by them. The Tribunal's decision was based on the premise that the receipt was capital in nature, and the compensation received for surrendering tenancy rights could not be assessed as income. The Tribunal also referenced the decision of the Bombay High Court, which overruled the Special Bench's view and confirmed that such receipts are capital in nature.

2. Determination of Tenancy Status of the Assessee at the Relevant Time:
The Tribunal found that the assessee had tenancy rights over the premises based on the lease deed dated 06.12.1969, which allowed the assessee to sub-lease the property. The Tribunal concluded that the assessee was recognized as a tenant in the Memorandum of Understanding (MoU) dated 25.02.1994, despite the lease deed dated 28.08.1978, which did not mention the assessee. The Tribunal rejected the Revenue's contention that the assessee was not a tenant after 1978, emphasizing the admitted fact that the assessee was treated as a tenant in the MoU.

3. Applicability of the Amendment to Section 55(2) of the Income Tax Act:
The Tribunal and the Supreme Court confirmed that the amendment to Section 55(2) took effect from 1st April 1995, and was not applicable to the assessment year 1994-95. The Supreme Court held that until the amendment, the compensation received for surrendering tenancy rights could not be assessed as capital gains due to the unworkability of the provisions.

4. Classification of the Receipt as Capital Receipt or Income from Other Sources:
The Tribunal held that the receipt on account of tenancy rights was a capital receipt. The Tribunal rejected the Revenue's argument that the compensation received should be taxed as "income from other sources." The Tribunal emphasized that the compensation was for the surrender of tenancy rights, which is a capital asset, and thus, the receipt was capital in nature.

5. Admissibility of Fresh Grounds and Evidence by the Appellate Tribunal:
The Tribunal overruled the Revenue's objection to the admissibility of fresh evidence, including the lease deeds from 1969 and 1978. The Tribunal stated that in a revisional proceeding under Section 263, there was no opportunity for the assessee to furnish fresh documents before the Assessing Authority. The Tribunal held that the documents were necessary to decide the issue on hand and accepted them as evidence.

6. Recognition of Tenancy Rights by the New Owners in 1994:
The Tribunal found that the new owners recognized the tenancy rights of the assessee and its subsidiary in the MoU dated 25.02.1994. The Tribunal noted that the compensation was paid to the assessee for surrendering these tenancy rights, and the genuineness of the MoU was not questioned by the Revenue.

7. Assessment of Compensation Received as Income or Capital Receipt:
The Tribunal and the Supreme Court confirmed that the compensation received for the surrender of tenancy rights was a capital receipt and could not be assessed as income. The Tribunal held that the compensation was not assessable under Section 10(3) of the Income Tax Act as casual income, following the Supreme Court's decision that such receipts are capital in nature.

Conclusion:
The Tribunal's decision to treat the receipt from the surrender of tenancy rights as a capital receipt and not as income was upheld. The Tribunal's acceptance of fresh evidence and rejection of the Revenue's new grounds were also confirmed. The amendment to Section 55(2) was deemed inapplicable to the assessment year in question, and the compensation received was not assessable as capital gains. The Tax Case Appeal was dismissed, and no costs were awarded.

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