1987 (1) TMI 75 - HC - Income Tax

Summary

Issues Involved:
1. Whether capital gains arise on acquisition by the Government of lands in which the assessee had the right of protected tenancy.

Summary:

Issue 1: Capital Gains on Protected Tenancy
The Income-tax Appellate Tribunal referred the question of whether capital gains arise on the acquisition by the Government of lands in which the assessee had the right of protected tenancy. The assessee, a protected tenant of lands in Hyderabad, received compensation upon acquisition by the State Government. The Income-tax Officer levied capital gains on this amount, which was confirmed by the Commissioner of Income-tax (Appeals). However, the Appellate Tribunal held that the right of protected tenancy is akin to goodwill, a statutory right conferred without any cost of acquisition, and thus, the levy of capital gains was not justified.

Legal Arguments:
The Revenue contended that protected tenancy is a right in property and a capital asset, arguing that the cost of acquisition could be related to the rent paid by the tenant. The assessee's counsel argued that no cost of acquisition is involved as protected tenancy is a statutory right conferred for land reforms, and rent payments cannot be considered as consideration for protected tenancy.

Relevant Sections:
- Section 45: Profits or gains from the transfer of a capital asset are chargeable to income-tax under the head 'Capital gains'.
- Section 48: Mode of computation of capital gains by deducting the cost of acquisition and improvement from the full value of consideration received.

Judicial Precedents:
- CIT v. B. C. Srinivasa Setty: Goodwill of a new business cannot be charged to capital gains tax as it lacks a cost of acquisition.
- Sunil Siddharthbhai v. CIT: No income or gain arises when a personal asset is introduced into a partnership firm as capital.

Court's Analysis:
The court emphasized that the levy of capital gains tax is intertwined with the mode of computation under section 48, which requires a cost of acquisition. In the absence of such cost, the levy of capital gains is not applicable. The court noted that protected tenancy is a statutory right without any cost of acquisition, similar to the goodwill discussed in CIT v. B. C. Srinivasa Setty.

Conclusion:
The court concluded that the compensation received for protected tenancy does not attract capital gains tax as there is no cost of acquisition. The reference was answered in the affirmative, in favor of the assessee, and against the Revenue.

Separate Judgment by Jeevan Reddy J.:
Jeevan Reddy J. agreed with the decision but expressed reluctance, noting that the principle should ideally be confined to intangible rights like goodwill. He highlighted the need for possible legislative redress for assets that do not admit a cost of acquisition but are transferred for significant sums.

Final Decision:
The reference was answered in favor of the assessee, confirming that no capital gains tax is applicable on the compensation received for protected tenancy rights.