2012 (9) TMI 402 - HC - Income Tax

Cost of acquisition of tenancy rights - invoking section 45 - Whether the Tribunal was right in equating the purchase of land with that of acquisition of tenancy rights - Held that - As per the statutory provisions applicable at the relevant time, the capital asset in case of which it is not possible to conceive or ascertain the cost of acquisition, there would be no charge of capital gain. In case of tenancy rights, however, depending on facts of case, it has to be ascertained whether the cost of acquisition of tenancy right was possible to ascertain. Acquisition of tenancy right did not fall in the same category as the acquisition of goodwill of a business in which the cost of acquisition was not conceivable. As the assessee and the landlord entered into an agreement were the landlord agreed to rent out four existing floors to the assessee, and for three more under construction floors of the building, the assessee agreed to advance to the landlord a sum of Rs.6 lakhs on which the landlord would pay interest at the rate of 6% p.a. Both sides agreed to certain fixed monthly rent on such rental properties. The agreement did not provide for either termination of the tenancy rights or the period during which such advance made to the landlord would be returned to the assessee. From the record, it further emerges that such advance was made for the purpose of completing the remaining construction. Since the landlord could not complete the construction with the agreed amount, the assessee made further advance of Rs.2.50 lakhs at same interest rate. It has also come on record that the landlord returned the amount after a period of three years though the tenancy continued for several years thereafter. Thus it can be fairly concluded that the entire contract was a composite agreement of advancement of loan at a reduced interest, granting property on rent to the assessee and the fixation of the rent also. It is impossible to distinguish any part of the differential interest which can be attributed to the cost of acquisition of the tenancy rights. If the advance was not returned for a period of four, five or six years, the cost of acquisition would defer. This is an additional ground to convince that such differential rate in interest on the advance made, cannot be seen as a cost of acquisition of the property or at any rate, being inapportionable proportion -in favour of assessee.

Issues Involved:
1. Cost of acquisition of tenancy rights
2. Applicability of Supreme Court decisions
3. Equating purchase of land with acquisition of tenancy rights
4. Consideration for transfer of tenancy rights
5. Binding decision of Gujarat High Court in Rajabeli Nazarali and Sons v. CIT
6. Determination of cost of tenancy rights for capital gains
7. Reasonableness of Tribunal's findings

Issue-wise Detailed Analysis:

1. Cost of Acquisition of Tenancy Rights:
The Tribunal held that there was a cost of acquisition for the tenancy rights and that the computation provisions under the Act applied, thus attracting Section 45. The assessee argued that the Rs. 15 lakhs received for relinquishing tenancy rights was a capital receipt and not taxable as income, contending that no cost of acquisition could be ascertained. The Assessing Officer considered the advance of Rs. 6 lakhs at 6% interest as the cost of acquisition, while the CIT (Appeals) included the differential interest of 9% on Rs. 8.50 lakhs for three years. The High Court concluded that the differential interest borne by the assessee on advances did not represent the cost of acquisition, as the agreement was a composite one involving rent and loan terms, making it impossible to segregate the cost of acquisition of tenancy rights.

2. Applicability of Supreme Court Decisions:
The Tribunal relied on the Supreme Court decision in A. R. Krishnamurthy, which was deemed applicable. However, the assessee argued that the facts differed from B.C. Srinivasa Setty, where the cost of acquisition of goodwill was not ascertainable, and thus no capital gains tax could be levied. The High Court found that the decision in Sandu Bros. Chembur P. Ltd. was more relevant, as it dealt with the cost of acquisition of tenancy rights, concluding that if the cost could not be ascertained, no capital gains tax could be charged.

3. Equating Purchase of Land with Acquisition of Tenancy Rights:
The Tribunal equated the acquisition of tenancy rights to the purchase of land. The High Court disagreed, noting that the agreement between the assessee and the landlord was a composite one, involving both rental and loan terms, making it impossible to apportion the cost of acquisition of tenancy rights separately.

4. Consideration for Transfer of Tenancy Rights:
The Tribunal held that the lease rent and the advancing of loans contributed to the cost of tenancy rights for capital gains computation. The High Court disagreed, finding that the differential interest on the advances could not be considered the cost of acquisition, as the agreement was composite and the period for which the advance was held was not fixed.

5. Binding Decision of Gujarat High Court in Rajabeli Nazarali and Sons v. CIT:
The Tribunal did not follow the binding decision in Rajabeli Nazarali and Sons v. CIT, which dealt with whether compensation for parting with tenancy rights could be termed as revenue receipt. The High Court reaffirmed that tenancy rights were capital assets and their surrender attracted Section 45, but the inability to compute the cost of acquisition under Section 48 meant no capital gains tax could be levied.

6. Determination of Cost of Tenancy Rights for Capital Gains:
The Tribunal referred to the Delhi High Court decision in Bawa Shiv Charan Singh regarding the nature of tenancy rights. The High Court found that the cost of acquisition could not be computed from the differential interest on advances, as the agreement was composite and the period for which the advance was held was not fixed.

7. Reasonableness of Tribunal's Findings:
The High Court found that the Tribunal's findings were not reasonable, as the cost of acquisition of tenancy rights could not be ascertained from the differential interest on advances. The Tribunal's decision was based on improper rejection of material and relevant evidence.

Conclusion:
The High Court concluded that the Tribunal erred in confirming the CIT (Appeals) view, and held that the differential interest borne by the assessee did not represent the cost of acquisition of tenancy rights. The question was answered in favor of the assessee, and the matter was remanded to the Tribunal for further consequential steps.

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