Whether extinguishment or transfer or surrender of tenancy / lease right is subject to Income Tax under the head Capital Gains

Earlier, the Calcutta High Court in A. Gasper Versus Commissioner Of Income-Tax, West Bengal [2009 TMI - 33754 - HC] has held that:

Transfer / extinguishment of leasehold / tenancy rights Section 45(1) of the Act is wholly silent as to the person from whom the consideration money for transferring a capital asset is to be received by the assessee. Moreover, it, inter alia, provides that any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head " Capital gains ". Transfering the right of the assessee in the monthly tenancy under the landlords or his leasehold interest was extinguished and, therefore, it does not matter in the least that the aforesaid amount was not received from the landlords for the extinguishment of his aforesaid rights in the aforesaid capital asset, for, as already stated, s. 45(1) of the Act does not say from whom the consideration money is to be received for transfer of a capital asset and, further, s. 2(47) of the Act says that the word "transfer", in relation to a capital asset, includes "the extinguishment of any rights therein"

There were several other High Court decisions in which contradictory views have been expressed about taxability of extinguishment tenancy / lease rights.

Now, honorable Supreme Court has resolved the controversy and upheld that the transfer of tenancy rights is not subject to Income Tax.

See: Commissioner of Income-Tax Versus D. P. Sandu Bros. Chembur P. Ltd. [2008 -TMI - 6153 - SUPREME Court]

The facts of the Case:

The primary question involved in this appeal is whether the amount received by the respondent-assessee on surrender of tenancy rights is liable to capital gains tax under section 45 of the Income-tax Act, 1961. The assessment year in question is 1987-88. The lease agreement was entered into in 1959 for 50 years under which an annual rent was paid by the lessee to the lessor. The lease would have continued till 2009. During the relevant previous year, in March 1986, the respondent surrendered its tenancy right to its lessor prematurely. In consideration for such premature termination, the lessor paid the lessee a sum of Rs. 35 lakhs.

The Tribunal relied upon the decision of this court in CIT v. B.C. Srinivasa Setty [2008 -TMI - 5845 - SUPREME Court] as well as the amendment to section 55(2) of the Act in 1995 and held that the assessee did not incur any cost to acquire the leasehold rights and that if at all any cost had been incurred it was incapable of being ascertained. It was, therefore, held that since the capital gains could not be computed as envisaged in section 48 of the Income-tax Act, therefore capital gains earned by the assessee, if any, was not exigible to tax.

The Department preferred an appeal before the High Court. The High Court dismissed the appeal. Being aggrieved by the decision of the High Court, this further appeal has been preferred by the Department.

Decision of the Supreme Court:

There is no dispute that a tenancy right is a capital asset the surrender of which would attract section 45 so that the value received would be a capital receipt and assessable if at all only under item E of section 14. That being so, it cannot be treated as a casual or non-recurring receipt under section 10(3) and be subjected to tax under section 56. The argument of the appellant that even if the income cannot be chargeable under section 45, because of the inapplicability of the computation provided under section 48, it could still impose tax under the residuary head is thus unacceptable. If the income cannot be taxed under section 45, it cannot be taxed at all. (See S.G. Mercantile Corporation P. Ltd. v. CIT [2008 -TMI - 6329 - SUPREME Court])

Furthermore, it would be illogical and against the language of section 56 to hold that everything that is exempted from capital gains by the statute could be taxed as a casual or non-recurring receipt under section 10(3) read with section 56.

The appeal is accordingly dismissed without any order as to costs.