2013 (11) TMI 832 - AT - Income Tax

Taxability of income from Surrender of tenancy rights - capital gains - exemption u/s 54 Held that - Surrender of tenancy rights;as contemplated in clause 16 of the impugned agreement;had not taken place during the year under consideration, that there was no taxable event giving rise to capital gains on account of the impugned agreement, that asssessee had not to pay any tax on alleged capital gains - Inspector of the AO had visited the place and from his on-the-spot-report it was proved, beyond doubt, that till he visited the premises alleged transaction had not fructified. Tax has to be paid by an assessee, if he earns some taxable income or some income accrues to him. An unexecuted agreement does not give rise to earning or accrual of income. Tax can be imposed on real income and not on hypothetical income. It is true that a tripartite agreement was entered into among the tenants, including the assessee, developer and the owner of the property. But it is also a fact the because of the orders of the BMC said agreement could not be implemented - Inspector proved that on that particular date property was occupied by the assessee as a tenant, that there was no change in his position vis- -vis the owner, that rent receipts, electricity and MTNL Bills, Passport proved that assessee was in possession of the tenanted premises Decided against the Revenue.

Summary

Issues:
1. Treatment of surrender of tenancy rights as capital assets for Long Term Capital Gain (LTCG).
2. Entitlement of exemption under section 54 of the Act for LTCG on transfer of tenancy rights.

Analysis:

Issue 1: Treatment of surrender of tenancy rights as capital assets for LTCG
The Assessing Officer (AO) determined the total income of the assessee, engaged in diamond polishing business, at Rs. 1,40,35,750, noting Nil income declared from LTCG on the transfer of tenancy rights. The AO found that the assessee, as a tenant, received three residential premises in exchange for tenancy rights, valuing the properties at Rs. 1.39 Crores. The AO considered the transfer of tenancy rights as a sale under section 2(47) of the Act, concluding that the assessee was not entitled to claim exemption under section 54. Consequently, the AO held the entire LTCG amount taxable at Rs. 1.39 Crores.

Issue 2: Entitlement of exemption under section 54 of the Act
The assessee appealed to the First Appellate Authority (FAA), who directed the AO to file a remand report. The FAA observed that the transaction involved the surrender of tenancy rights with the condition of receiving alternative accommodation, not constituting a sale or purchase of new property. The FAA emphasized that the agreements did not transfer any capital assets, and the alternate accommodation was yet to be provided, as confirmed by a field visit. The FAA concluded that no taxable event occurred, deleting the additions made by the AO.

In the subsequent hearing, the Departmental Representative (DR) supported the AO's order, while the Authorized Representative (AR) argued that the transaction did not materialize due to court proceedings, and no gain accrued to the assessee during the relevant year.

The tribunal upheld the FAA's decision, emphasizing that the surrender of tenancy rights did not occur during the relevant year, and no taxable event leading to capital gains transpired. The tribunal highlighted that tax liability arises only on actual income earned, not on hypothetical or unexecuted agreements. Considering the factual findings and the unimplemented agreement due to external factors, the tribunal dismissed the AO's appeal, affirming the FAA's order.

In conclusion, the tribunal dismissed the appeal filed by the AO, confirming the FAA's decision on the non-taxability of the alleged capital gains arising from the surrender of tenancy rights.