2013 (2) TMI 556 - AT - Income Tax

Income from transfer of tenancy rights - taxable as capital gain or income from other sources - held that - the consideration paid by the new tenant is consent of the landlord for the transfer of tenancy rights between the new and old tenants. Thus, in our opinion, the amount of Rs 7.26 lakhs is the consideration for consent . Generally, in matters of the tenancy rights disputes, it is the tenant who gets the financial benefit and the same flows from the pockets of the Landlord in lieu of the surrender of the said tenancy rights by the tenant and certainly the land lords does not receive, which is the case in the instant appeal. Therefore the taxation principles relating to the tenancy rights should not apply in this case. It cannot be inferred that the new tenant received merely rental rights and there is no transfer of any capital rights to the new tenant by the land lord. Therefore Rs 7.26 lakhs is neither a capital receipt nor a rental receipt. In that sense, the argument of the Ld Counsel that some of the capital rights, out of the bundle of rights relating to the immovable property, are transferred to the new tenant does not hold water. There is no time gap between the vacation of the property by the old tenant and grant of rental rights to the new tenant. - there is no evidence to infer that the house is in vacant possession of the assessee even after the alleged end of the tenancy - Therefore, the views of the AO as well as the CIT(A) on this issue require to be sustained as the amount of Rs 7.26 lakhs, the consideration for consent, does not involve any transfer of capital rights attached to the property on the facts of this case and the amount constitutes a windfall gain to the assessee. Amount is taxable as Income from other sources - decided against the assessee.

Summary

Issues Involved:
1. Classification of the amount received for consenting to transfer of tenancy rights.
2. Determination of whether the amount is a capital receipt or income from other sources.
3. Applicability of exemption under Section 54EC of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Classification of the Amount Received for Consenting to Transfer of Tenancy Rights:
The assessee received Rs. 7,26,000/- from new tenants for consenting to the transfer of tenancy rights. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] classified this receipt as "income from other sources" rather than a capital receipt. The AO argued that the amount was received for consenting to the transfer of tenancy rights, not for the surrender of tenancy rights, and thus did not constitute a capital receipt. The CIT(A) upheld this view, stating that the assessee merely gave consent for the transfer and did not surrender any tenancy rights.

2. Determination of Whether the Amount is a Capital Receipt or Income from Other Sources:
The assessee contended that the amount received should be considered a capital receipt taxable under "capital gains" as it was derived from the transfer of rights in a capital asset. The assessee relied on judgments such as CIT vs. D.P. Sandu Bros. Chembur (P) Ltd. and Cadell Weaving Mill Co. P. Ltd. vs. CIT to support this claim. However, the AO and CIT(A) distinguished these cases, noting that the amount received was not for the surrender of tenancy rights but for consenting to the transfer. The Tribunal agreed with the AO and CIT(A), emphasizing that the amount received was a windfall gain and did not involve the transfer of any capital asset.

3. Applicability of Exemption under Section 54EC of the Income Tax Act:
The assessee claimed exemption under Section 54EC, arguing that the amount received was invested in NABARD Bonds. The AO rejected this claim, stating that the receipt was not a capital receipt and thus did not qualify for exemption under Section 54EC. The Tribunal upheld this view, concluding that the amount received did not involve the transfer of capital rights and was therefore not eligible for the exemption.

Conclusion:
The Tribunal dismissed the appeal, agreeing with the AO and CIT(A) that the amount of Rs. 7,26,000/- received by the assessee was income from other sources and not a capital receipt. The Tribunal found that the amount was a windfall gain for consenting to the transfer of tenancy rights and did not involve the transfer of any capital asset. Consequently, the exemption under Section 54EC was not applicable.