1980 (12) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Whether the instrument of lease dated September 10, 1970, effected the transfer of a capital asset within the meaning of s. 45 of the Income-tax Act, 1961, and accordingly, liable to capital gains tax?
2. Whether the cost of leasehold right is capable of valuation and, as such, capital gains can be computed?

Summary:

Issue 1: Transfer of Capital Asset
The assessee, a body of individuals, filed a return for the assessment year 1971-72. During the assessment, the ITO noticed the assessee had granted a mining lease to M/s. Sri Krishna Tiles & Potteries (Madras) Private Ltd. for Rs. 5 lakhs, in addition to a royalty. The ITO considered this as a transfer of a capital asset u/s 45 of the I.T. Act. The AAC and the Tribunal upheld this view, stating that the leasehold interest is a capital asset as defined in s. 2(14) and that the transaction attracted capital gains tax. The court held that the right conferred on the lessee under the lease deed was a capital asset in the hands of the assessee-lessor. The court also clarified that the definition of "transfer" in s. 2(47) is inclusive and not exhaustive, thus covering the lease transaction.

Issue 2: Valuation of Leasehold Right
The ITO worked out the cost of the leasehold interest by apportioning the total cost of the land. The AAC, however, held that the entire sum of Rs. 27,260 should be considered as the cost of acquisition for determining capital gains. The court agreed with the AAC, stating that the right to exploit the land by extracting clay formed part of the cost of acquiring the land. The court concluded that there was a cost for the value of the right to excavate the land in terms of money, and thus, capital gains could be computed.

Conclusion:
The court answered both questions in the affirmative, confirming that the lease transaction constituted a transfer of a capital asset liable to capital gains tax and that the cost of the leasehold right is capable of valuation. The revenue was entitled to its costs, with counsel's fee set at Rs. 500.