2015 (6) TMI 768 - HC - Income Tax

Compensation for surrender the tenancy right - Whether the assessee has not termed as tenant as per the Maharashtra rent control act? - whether amount received by assessee on account of transfer of capital assets occupied by assessee within the meaning of capital gain even otherwise the deed of surrender of tenancy stated that it is a compensation in connection with loss of business, profit and convenience and hardship due to shifting elsewhere? - Held that - It is an undisputed position that the Respondent Assessee is in occupation of the subject premises consequent to Agreement dated 13th June, 1972 i.e. prior to 1st February, 1973. The impugned order on the basis of the clear provisions found in Section 2(11) and 15A of the Rent Control Act concludes that the Respondent Assessee is a deemed tenant of the subject premises. In fact, Section 15A of the Rent Control Act, inter alia, provides that notwithstanding anything to the contrary in any contract, where a person is in occupation of the premises on 1st February, 1973, he shall be deemed to have become the tenant of the landlord in respect of the premises or part thereof, in his occupation. Thus, it follows that if the owner of the subject premises were to seek eviction of the Respondent Assessee on the basis of the contract, it would fail in view of the clear position in to Section 15A of the Rent Control Act. Thus, the Respondent Assessee is a deemed tenant of the subject premises. Consequently, such tenancy being property would be a capital asset and amounts received on surrender of it would be capital receipts chargeable to tax under the head Capital gains. The issue of tenancy being a capital asset is no longer res integra as the Apex Court in CIT v/s. D. P. Sandu Bros. Chembur 2005 (1) TMI 13 - SUPREME Court has upheld the view of this Court in Union of India v/s. Cadell Weaving Mill Co. 2001 (2) TMI 105 - BOMBAY High Court wherein it has been held that tenancy right was a capital asset and surrender of the same was a transfer of a capital asset. - Decided against revenue.

Summary

Issues:
Challenge to the order of the Income Tax Appellate Tribunal for the Assessment Year 2009-10 regarding surrender of tenancy rights and classification of compensation under the Income Tax Act, 1961.

Analysis:
1. Issue 1 - Surrender of Tenancy Rights:
The Appellant Revenue contested that the Respondent Assessee did not hold tenancy rights over the subject premises, thus the surrender of occupation did not involve capital assets. The Appellant argued that the agreement clearly specified limited rights to looms and machinery, with the use of premises being incidental and not a sublease. Therefore, the Rent Control Act's definitions of tenant were deemed irrelevant to the case. The Appellant claimed that the surrender should be classified as 'Income from other sources' and not as 'Capital gains.'

2. Issue 2 - Classification of Compensation:
The Respondent Assessee, having occupied the subject premises since June 1972, was deemed a tenant under the Rent Control Act. The Tribunal relied on Sections 5(11) and 15A of the Rent Control Act, concluding that the surrender of occupation constituted a surrender of tenancy, a capital asset. The Tribunal held that the amounts received were taxable under 'Capital gains' and not 'Income from other sources.' The Rent Control Act's provisions deemed the Respondent a tenant despite the contractual terms, establishing the surrender as a transfer of a capital asset.

3. Legal Precedents and Conclusion:
The High Court upheld the Tribunal's decision, emphasizing that the Respondent was a deemed tenant of the subject premises under the Rent Control Act. The Court cited Section 15A, which deems occupants as tenants as of February 1, 1973. The Court clarified that tenancy, being a property, qualified as a capital asset, and the amounts received upon surrender were capital receipts taxable under 'Capital gains.' Referring to established legal precedents, the Court dismissed the appeal, stating that no substantial question of law was raised. The judgment highlighted the settled legal position that tenancy rights are capital assets, and their surrender constitutes a transfer of a capital asset.

4. Final Decision:
The High Court dismissed the appeal, emphasizing the Respondent's deemed tenancy status and the classification of the surrender as 'Capital gains.' The Court found no substantial legal question for consideration, leading to the rejection of the appeal without costs.