Statutory tenants. - Income Tax - 5257/1995

INSTRUCTION NO. 5257/1995 Dated: October 27, 1995 Section(s) Referred: 22 Statute: Income - Tax Act, 1961 A special bench of the Bombay ITAT has ordered that statutory tenants who receive money from owners to surrender tenancy rights will have to pay tax. The bench said tenants who could not sublet premises during the pendency of the contract between them and landlords, cannot get such a right when they are statutory tenants under the Bombay Rent Act. In these circumstances, any money secured by tenants cannot be considered to be a capital receipt. The amount is a casual and non recurring Income receipt under the I.T. Act and tax has to be paid on it, the bench said. On the basis of this interpretation of law, it directed the tax authorities to consider the nearly Rs. 1.4 crore got by Cadell Weaving Mill Co. Pvt. Ltd for the owners of a property on Cadell Road, Prabhadevi, as an Income and to tax the tenant accordingly. Senior Income-tax officers feel that the order will have a far reaching impact on revenue inflow in the state and Bombay in particular. They feel that the order will help them dispose off hundreds of similar cases. "Around Rs. 500 to 600 crores of revenue can possibly be netted following the judgment of the special bench. The Bombay ITAT special bench order is applicable to all tribunals," the official clarified. About 300 cases on this subject are pending, reliable sources said. But advocate Y.P. Trivedi appearing for Cadell Weaving Mill Co. said, "I am yet to receive the order. It has been passed after seven to eight months. I would recommend to my client Cadell Weaving Mill Co. that it move the High Court for a reconsideration of the judgment." Cadell Mill received a sum of Rs. 1.40 crore for surrendering tenancy rights of the Cadell Road premises. As per the terms of the lease agreement arrived at between it and the landlord, the assessee had to pay a monthly rent of Rs. 575. As the contract between the parties was not extended, the assessee continued to remain in possession of the premises u/s.12 of the Bombay Rent Act. Subsequently, the assessee received Rs. 1.40 crore from the landlord to vacate the place and seek alternate accommodation. However, the amount shown in the profit and loss account of Cadell Mill was not declared nor offered for taxation. The tenant argued before the assessing officer that a tenancy right is a capital asset and transfer of a capital asset cannot be considered to be income. Since there is no purchase value for acquisition of tenancy rights, the amount cannot be taxed under capital gains(as per a decision of the Supreme Court). It was further argued that the same amount cannot be taxed under any other head. Specifically, assessee Cadell Mill argued that the amount could not be considered as a casual and non-recurring receipt. The special bench observed that a statutory tenant under the Bombay Rent Act could be said be have transfer rights only when such rights were granted in the contract itself, signed between tenant and landlord. In this case, there was no such provision in the agreement. The order notes, "When a tenant has no interest and his right is only personal and cannot be transferred, what can he surrender to his landlord ? The order further states, "When he does not possess any Interest, where is the question of any transfer of such interest and where is the question of such transfer being a transfer of a capital asset u/s.45 of the Act.?" While rejecting the contention of the assessee that the transfer amounted to a capital transfer, the special bench argued that the receipt was an Income which could be taxed. In deciding this point, the bench relied on the judgment in the Gulab Chand case, which was decided by the Allahabad court. An advocate for the assessee who sought anonymity said, "we will file a miscellaneous application before the tribunal and may also file a writ petition as the tribunal has not followed the Bombay High court ruling in the Shrinbal Pandole case and a Supreme court judgment in the case of A. Gasper, both of which were relevance to the present case." F.No. 311/25/95-OT