2014 (9) TMI 394 - HC - Income Tax

Transfer of tenancy right - long term asset or short term asset - AO treated the same as short term - The logic behind the finding of the Assessing Officer was that the tenancy after the initial period of 3 years by of a written instrument, was month-to-month. Thus, tenancy rights extinguished on the last day of each month and a fresh or new tenancy was created. - tribunal held the same as long term capital asset Held that - Assessee came into possession of the premises under a written agreement on 15th March, 1973 - The tenancy period specified was till 14th March, 1976 - assessee continued to use and occupy the premises as a tenant - The rent for the premises was paid and accepted by the landlord - Long-term asset has been defined in Section 2(29b) of the Act as an asset which is not a short-term capital asset and the expression short-term capital asset has been defined in Section 2(42A) of the Act to mean the capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer - The expression held by the assessee means the date from when the assessee acquired the right, got hold of and started enjoying the said asset - the assessee had acquired tenancy rights on 15th March, 1973 and since then they had held the said tenancy rights till the surrender was made on 18th February, 1997 - The transfer of tenancy had taken place on 18th February, 1977 and not before - The period of holding was from 15th March, 1973 till 18th February, 1997 - No third person, who had come into possession of the property during the period and it is not a case of the Revenue that respondent-assessee did not hold the property during the entire period of over 14 years. Relying upon CIT versus Ved Prakash & Sons (HUF) 1993 (7) TMI 45 - PUNJAB AND HARYANA High Court - conversion of leasehold right into freehold by way of improving the title over the property would not affect the taxability of the gain from property, which is relatable to the period over which the property is held - Thus the asset, i.e. the tenancy rights were held for nearly 14 years and consideration received on surrender has been rightly treated as a long term capital gain Decided against revenue.

Summary

Issues:
1. Determination of whether the transferred capital asset was a long-term capital asset.

Analysis:
The case involved a dispute regarding the classification of capital gains arising from the surrender of tenancy rights by a company for the assessment year 1997-98. The respondent-assessee declared long-term capital gains amounting to Rs. 6.78 crores from the surrender of tenancy rights acquired in 1972-73. The Assessing Officer initially classified the gains as short-term, reasoning that the tenancy rights were month-to-month after the initial 3-year period. The Commissioner of Income Tax (Appeals) upheld this decision, stating that a new tenancy was created monthly. However, the Tribunal overturned this decision, emphasizing that a month-to-month tenancy does not automatically end and requires specific actions for termination, citing relevant legal provisions.

The High Court examined the facts, noting that the respondent had possessed the premises since 1973 under a written agreement. The court highlighted the legal framework under Section 107 of the Transfer of Property Act, which governs the creation and termination of leases. The court discussed the implications of Section 116 of the Act, which addresses the continuation of tenancy after the lease term ends, emphasizing the need for notice of termination under Section 106. The court clarified that the period of holding the tenancy rights extended from the initial acquisition in 1973 until the surrender in 1997, supporting the treatment of gains as long-term capital gains.

Further, the court delved into the interpretation of the term "held by the assessee" under the Income Tax Act. It analyzed the broader meaning of "held" beyond ownership, encompassing rights like leasehold rights. Drawing from legal precedents and dictionary definitions, the court emphasized that possession and beneficial interest in the property are crucial for determining the period of holding and tax treatment of gains. Citing relevant case law from various High Courts, the court affirmed that the nearly 14-year holding of the tenancy rights justified treating the gains as long-term capital gains.

In conclusion, the court ruled in favor of the assessee, holding that the consideration received from surrendering the tenancy rights qualified as long-term capital gains. The judgment underscored the importance of possession, beneficial interest, and the period of holding in determining the tax treatment of such gains, aligning with established legal principles and precedents.