1983 (11) TMI 105 - AT - Income Tax

Summary

Issues Involved:
1. Computation of capital gains
2. Classification of capital assets
3. Apportionment of sale price
4. Determination of tenancy rights as capital assets
5. Merger of tenancy and ownership rights

Detailed Analysis:

1. Computation of Capital Gains:
The Income Tax Officer (ITO) computed the surplus from the sale of the flat by deducting the purchase price and legal expenses from the sale consideration, resulting in a short-term capital gain for the assessee. The assessee contested this, arguing that the sale comprised two separate capital assets: occupancy rights and ownership rights, acquired in different years. The Commissioner (Appeals) rejected this contention, maintaining that the sale involved a single asset acquired in the year of sale.

2. Classification of Capital Assets:
The Tribunal noted that the right of occupation as a tenant is a protected, heritable, and transferable right, thus qualifying as a 'capital asset' under section 2(14) of the Income-tax Act, 1961. The Tribunal referenced multiple Supreme Court and High Court decisions to support this view, including Ahmed G. H. Ariff v. CWT and Municipal Corpn. v. Lala Pancham, which confirmed that tenancy rights are a form of property and hence a capital asset.

3. Apportionment of Sale Price:
The Tribunal examined whether the sale consideration for the composite estate (the flat) could be apportioned between the tenancy rights and the ownership rights. It referred to Supreme Court decisions in cases like CIT v. Mugneeram Bangur & Co., which held that in cases of slump sales, the sale consideration could not be apportioned to individual assets. Consequently, the Tribunal concluded that the sale consideration in the present case could not be legally apportioned between the two rights.

4. Determination of Tenancy Rights as Capital Assets:
The Tribunal confirmed that the right of occupation as a tenant is a valuable right and a capital asset. This was supported by the Supreme Court's observations in Ramesh Himmatlal Shah v. Harsukh Jadhavji Joshi, which recognized the right to occupy a flat as a species of property. The Tribunal emphasized that this right, acquired in 1962-63, constituted a separate capital asset from the ownership rights acquired in January 1976.

5. Merger of Tenancy and Ownership Rights:
The Tribunal addressed the issue of whether the tenancy rights and ownership rights merged into a single asset upon the purchase of the flat. It referred to section 111 of the Transfer of Property Act, 1882, which provides for the determination of lease when the interests of the lessee and lessor merge. The Tribunal concluded that while the tenancy rights lost their independent existence upon merging with the ownership rights, the resultant composite estate was a new, distinct asset.

The Tribunal decided that the cost of the composite estate should include the market value of the tenancy rights at the time of acquiring the ownership rights. Since the ITO had not considered this, the Tribunal set aside the order of assessment and directed the ITO to recompute the surplus liable to short-term capital gain, taking into account the market value of the tenancy rights.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, instructing the ITO to reassess the capital gains by considering the value of the tenancy rights as part of the cost of the flat. This approach aligns with the Calcutta High Court decision in Mrs. A. Ghosh v. CIT, which supported the inclusion of the value of exchanged assets in the cost of acquisition.