2024 (2) TMI 1438 - AT - Income Tax

LTCG - Addition u/s 50C - sale of tenancy rights in Premises - assessing the difference between the agreement value and the market value as determined by the stamp duty authorities as income by way of long-term capital gains - CIT(A), came to conclusion that the Appellate prepared tenancy agreement which was a colourable device for lower incidence of stamp duty as well as to get away with the violation of section 50C but enjoy all the benefits of ownership - contention of the assessee is that the assessee has not transferred the capital asset but only the tenancy rights therein and therefore provisions of section 50C is not applicable. HELD THAT - Clauses of the agreement it is clear that the assessee has transferred only the tenancy rights in the property owned by the assessee and the tenant has acquired only the right to use the property on payment of monthly rental subject to the conditions stated in the agreement. We further observed that though the agreement does not specify any end date it cannot be said to be a perpetual agreement since clause-8 contains terms by which the assessee has reserved the right to evict the tenant if the terms and conditions are breached. Therefore we tend to agree with the submission that there is no transfer of property in the given case but only the tenancy rights therein. Section 50C of the Act is invoked when there is a transfer of capital asset being land or building or both. In assessee's case, however, the transfer is not of a capital asset but the tenancy rights of the property. Therefore, we see merit in the contention of the ld. AR that the AO is not correct in invoking the provisions of section 50C of the Act. As relying on Ashwin Vardhichand Shah 2024 (2) TMI 688 - ITAT MUMBAI we hold that the AO is not correct in making the addition u/s 50C of the Act. Accordingly, the addition is hereby deleted. Appeal of the assessee is allowed.

Summary

Issues Involved:

1. Applicability of Section 50C of the Income Tax Act on the sale of tenancy rights.
2. Interpretation of the tenancy agreement and its clauses.
3. Validity of the service of order to unauthorized personnel.

Issue-wise Detailed Analysis:

1. Applicability of Section 50C of the Income Tax Act on the Sale of Tenancy Rights:

The primary issue revolves around whether the provisions of Section 50C of the Income Tax Act apply to the transfer of tenancy rights. The assessee argued that the sale involved only tenancy rights, not the immovable property itself, and thus Section 50C, which pertains to the transfer of capital assets like land or buildings, should not apply. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] contended that the transaction was essentially a sale of property disguised as a tenancy agreement to evade higher stamp duty and capital gains tax. The Tribunal examined the clauses of the agreement and concluded that the assessee had transferred only the tenancy rights and not the property itself. The Tribunal referenced Section 50C, noting that it applies specifically to transfers of land or buildings, not to tenancy rights. Therefore, the Tribunal ruled that the AO was incorrect in invoking Section 50C, and the addition of Rs. 41,00,000/- was deleted.

2. Interpretation of the Tenancy Agreement and its Clauses:

The CIT(A) had interpreted the tenancy agreement as a colorable device designed to reduce stamp duty and avoid capital gains tax under Section 50C. The agreement did not specify an end date, leading the CIT(A) to believe it was perpetual and essentially a transfer of ownership. However, the Tribunal noted that the agreement included clauses allowing the landlord to evict the tenant for non-compliance with the terms, indicating that it was not a perpetual agreement. The Tribunal found that the agreement was indeed for transferring tenancy rights, not ownership, and therefore, the provisions of Section 50C were not applicable. The Tribunal supported its decision by referencing similar cases where tenancy agreements were not considered transfers of capital assets under Section 50C.

3. Validity of the Service of Order to Unauthorized Personnel:

The assessee argued that the service of the order on December 31, 2016, to security personnel who were not authorized to receive it was invalid. The Tribunal did not specifically address this issue in the detailed judgment, as the primary focus was on the applicability of Section 50C and the interpretation of the tenancy agreement. However, given the Tribunal's ruling in favor of the assessee on the primary issues, the question of service validity became moot.

Conclusion:

The Tribunal ruled in favor of the assessee, concluding that the transfer involved only tenancy rights and not the property itself, thereby making Section 50C inapplicable. The addition of Rs. 41,00,000/- was deleted, and the appeal was allowed. The Tribunal's decision was based on a detailed examination of the tenancy agreement's clauses and relevant legal precedents.