2005 (3) TMI 387 - AT - Income Tax

Summary

Issues:
Deduction for cost of construction of first floor in leased premises obtained from compensation received in surrender of tenancy rights.

Analysis:
The appeal concerned the deduction in relation to the cost of construction of the first floor in premises obtained on lease from the compensation received in surrender of tenancy rights. The assessee had taken the premises on lease in 1976 and later extended the lease for fifty years, with the permission to construct the first floor at their own cost. The dispute arose when the property owner proposed to sell the premises, triggering the clause in the lease agreement giving the lessee the first offer to buy at 60% of the fair market value. The assessee declared long-term capital gain after receiving compensation for surrendering the tenancy rights. The Assessing Officer (AO) held that the amount received was not for acquiring any leasehold right, thus not allowing the deduction. The CIT(A) upheld the AO's decision, stating that the compensation was for surrendering tenancy rights only. The assessee contended that the amount spent on construction should be allowed as a cost of acquisition of leasehold rights.

The argument presented by the assessee was that the construction cost should be deductible as it was incurred after acquiring wide leasehold rights. The Departmental Representative, on the other hand, supported the lower authorities' decision, emphasizing that the compensation received was for surrendering tenancy rights, not for acquiring any new rights. The Tribunal analyzed the lease agreements and observed that the construction was carried out solely for the convenience of running the nursing home, not to acquire any new leasehold rights. The memorandum of understanding between the parties further clarified that no compensation was payable for improvements made on the property. The Tribunal concluded that the amount received was for surrendering tenancy rights, and since the construction was done after the new lease agreement, it did not create any fresh rights in the leased premises. Therefore, the Tribunal held that the assessee was not entitled to deduct the cost of construction in the nursing home.

In its final decision, the Tribunal dismissed the appeal, stating that no other grounds were pressed before them. The judgment emphasized that the amount received was solely for surrendering tenancy rights, and the construction costs incurred did not entitle the assessee to a deduction.