2022 (3) TMI 38 - HC - Income Tax

Correct head of income - Treating the receipts of compensation for vacating tenancy to be assessable as Capital Gains instead of income under the head Profit and Gains of Business or Profession - HELD THAT - In the decision of CIT Vs. D.P. Sandu Bros. Chembur (P) Ltd. 2005 (1) TMI 13 - SUPREME COURT it was held that the tenancy right was a capital asset, surrender of tenancy right was a transfer and the consideration received thereof was a capital receipt within the meaning of Section 45. The Court noted the decision in the case of CIT Vs. B.C. Srinivasa Setty 1981 (2) TMI 1 - SUPREME COURT which was followed by several High Courts and held that if the cost of acquisition of tenancy right cannot be determined, the consideration received by reason of surrender of such tenancy right could not be subjected to capital gains tax - The Court took note of the circular issued by the CBDT being Circular No. 684 dated 10th June, 1994, which was issued to meet the situation created by the decision in B. C. Srinivasa Setty (supra). By Finance Act, 1994, Section 55(2) was amended to provide the cost of acquisition, inter alia, the tenancy right could be taken as nil. By this amendment the judicial interpretation put on capital assets for the purposes of the provisions relating to capital gains was met. - Decided in favour of assessee.

Summary

Issues:
1. Whether the compensation received for vacating tenancy should be treated as "Capital Gains" or income under the head "Profit and Gains of Business or Profession"?

Analysis:
The case involved an appeal filed by the revenue challenging the order passed by the Income Tax Appellate Tribunal regarding the treatment of compensation received for vacating tenancy as either "Capital Gains" or income under the head "Profit and Gains of Business or Profession." The appellant raised a substantial question of law regarding the treatment of the receipts of compensation amounting to ?10,00,00,000 for vacating tenancy. The assessing officer initially rejected the claim of the assessee, stating that the amount paid should be treated as compensation for vacating the tenancy, as the assessee failed to provide evidence of rental payment and details of interest income related to a construction loan.

The Principal Commissioner of Income Tax (PCIT) noted that the assessee had surrendered the tenancy rights for ?10,00,00,000 and treated this income as Capital Gains. The PCIT reviewed the agreement details, including the payment made for acquiring tenancy rights and the subsequent transfer of these rights. After analyzing the terms and conditions of the agreement, the PCIT concluded that the consideration received for surrendering the tenancy right should be assessed as capital gain, overturning the assessing officer's decision.

The Tribunal re-examined the conditions of the agreement and concluded that the payment made for acquiring tenancy rights was a valid cost of acquisition in the computation of capital gain. It referred to legal precedents and held that the tenancy right was a capital asset, and the consideration received for surrendering it should be assessed as capital gains. The Tribunal dismissed the revenue's appeal, citing relevant case law and circulars issued by the Central Board of Direct Taxes (CBDT).

In the final judgment, the High Court upheld the Tribunal's decision, stating that the Tribunal correctly dismissed the revenue's appeal, finding no grounds to interfere. Therefore, the appeal filed by the revenue was dismissed, and the substantial question of law was answered against the revenue. The stay application related to the appeal was also closed following the dismissal of the appeal.