1982 (3) TMI 108 - AT - Income Tax

Issues Involved:
1. Whether the tenancy rights of the assessee-firm came to an end when it purchased the property on 16-2-1973.
2. Whether the cost of acquisition of the tenancy rights as on 1-1-1954 is to be deducted while computing the capital gains arising on the sale of the property on 14-3-1974.

Issue-wise Detailed Analysis:

1. Whether the tenancy rights of the assessee-firm came to an end when it purchased the property on 16-2-1973:

The assessee, a partnership firm engaged in the manufacture and sale of rubber balloons, was a tenant of a factory premises since 1945. On 16-2-1973, the assessee purchased the property for Rs. 21,806. The assessee sold the property on 14-3-1974 for Rs. 80,000. The primary contention was whether the tenancy rights, which existed prior to the purchase, ceased to exist upon the purchase of the property.

The Income Tax Officer (ITO) and the Commissioner (Appeals) both held that the tenancy rights merged with the ownership rights upon purchase, and thus, the tenancy rights ceased to exist. The ITO stated, "the assessee could not be regarded both as a tenant as well as an owner at the same time." The Commissioner (Appeals) concurred, noting, "the assessee was not the owner of the property as on 1-1-1954."

However, the Accountant Member argued that the tenancy rights were an independent capital asset acquired before 1-1-1954 and did not extinguish upon purchase. He stated, "the assessee had an independent capital asset in the form of the tenancy rights which it acquired without payment of cash prior to 1-1-1954."

The Judicial Member disagreed, asserting that the tenancy rights ended when the property was purchased. He emphasized, "when the assessee-firm purchased the property on 16-2-1973, its tenancy right came to an end."

The Third Member, agreeing with the Judicial Member, concluded, "the tenancy rights of the assessee-firm came to an end when it purchased the property on 16-2-1973."

2. Whether the cost of acquisition of the tenancy rights as on 1-1-1954 is to be deducted while computing the capital gains arising on the sale of the property on 14-3-1974:

The assessee argued that the cost of acquisition should include the value of tenancy rights as on 1-1-1954, estimated at Rs. 41,680. The ITO rejected this, stating that the tenancy rights merged with the ownership rights upon purchase, and thus, the cost of acquisition should only be Rs. 21,806. The ITO calculated the capital gains as Rs. 52,594 and treated it as short-term capital gains.

The Commissioner (Appeals) upheld the ITO's decision, stating, "only the sum of Rs. 21,608 could be taken as the cost of acquisition of the asset."

The Accountant Member proposed that the cost of acquisition should consider both the tenancy rights and the ownership rights. He suggested bifurcating the sale proceeds into two components: one for the tenancy rights and the other for the ownership rights. He stated, "the capital gains arising out of the transaction in this case... has to be calculated by bifurcating the sale proceeds."

The Judicial Member disagreed, asserting that the cost of acquisition should only be Rs. 21,806. He stated, "the cost of the property which was sold on 14-3-1974 amounts to Rs. 21,806 only and the capital gains tax has to be charged on this basis."

The Third Member, agreeing with the Judicial Member, concluded, "the cost of acquisition of the tenancy rights as on 1-1-1954 is to be deducted while computing the capital gains arising on the sale of the property on 14-3-1974."

Conclusion:

The majority view held that the tenancy rights of the assessee-firm ceased upon the purchase of the property on 16-2-1973, and the cost of acquisition for computing capital gains should be Rs. 21,806, without considering the value of tenancy rights as on 1-1-1954. The appeal was thus dismissed, confirming the orders of the lower authorities.

← Previous Next →