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TMI Blog2012 (9) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicable to the facts of the present case? [3] Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in equating the purchase of land, as in the case before the Supreme Court, with that of acquisition of tenancy rights as per Agreement dated 01.07.1978, and not appreciating that the rights under a purchase agreement could not be equivalent to the rights available under a lease agreement and that the ownership in the latter case was not full and absolute as in the case of the former transaction? [4] Whether, on the facts and in the circumstances of the case, the order of the Tribunal can be said to be correct in law and sustainable from the material on record it having failed to appreciate that the lease rent paid by the assessee was for the use of the premises in question and that advancing of loans at a chapter rate of interest did not amount to parting with the funds irrevocably, and as such neither the rent nor the loan could amount to consideration for the transfer of tenancy rights in question? [5] Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in not following the binding decision of the Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pay said monthly rent, also agreed to advance a sum of Rs.6 lakhs to the landlord on interest at the rate of 6% per annum. 2.3 It has come on record that though the assessee had agreed to advance a sum of Rs.6 lakhs to the landlord, since the landlord could not complete the construction of the remaining floors from such amount, the assessee gave further advance of Rs.2.50 lakhs at the same rate of interest to the landlord. It has also come on record that upon completion of the construction, the assessee sublet the properties to Bank of Baroda and had also taken a loan of Rs.8.50 lakhs at 15% interest per annum. 2.4 From the record, it emerges that such advance of Rs.8.50 lakhs was returned by the landlord after three years. In the meantime, the tenancy of the assessee continued. Nearly seven years after the date of the agreement, the assessee relinquished the tenancy rights for which it had received a sum of Rs.15 lakhs from the landlord. To relinquish the tenancy rights, the assessee company passed a resolution on 10.6.1984. Pursuant to such a resolution, the company relinquished tenancy rights in the year 1985, as against which it received a sum of Rs.15 lakhs in the accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in (1989) 176 ITR 417. Against such decision, the assessee sought a reference to the High Court. Initially, the Tribunal declined to make a reference. Ultimately, under an order dated 03.08.2000 passed by the Apex Court, such reference was directed to be made. While doing so, the Supreme Court also observed that it will be open to the High Court to concise the seven questions into one or two. 3. Having, thus, heard the learned counsel for the parties, we find that reference to all seven questions would not be necessary and would only be a duplication of various facets of the same controversy. We, therefore, re-frame the question for our consideration as under : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the differential interest borne by the assessee on the advances made to the landlord represented the cost of acquisition of the tenancy rights to the assessee and accordingly, the revenue could collect long term capital gain on the difference of the amount received by the assessee on surrendering the tenancy rights and the cost of acquisition of such tenancy?" 4. Learned counsel Shri R. K. Patel for the petitioner, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not liable to pay capital gain tax on sale of such property. [c] Our attention was drawn to the decision of the Supreme Court in case of A. R. Krishnamurthy and another v. Commissioner of Income Tax, Madras, reported in (1989) 176 ITR 417, to contend that the facts of the present case are different and the ratio of the decision would not apply since in the said case, the Court found that the cost of acquisition of the tenancy rights was ascertainable. [d] In case of Commissioner of Income Tax v. D. P. Sandu Bros. Chembur P. Ltd., reported in (2005) 273 ITR 1, wherein the Apex Court finding that if it is not possible to recompute the cost of acquisition of the tenancy rights, there would be no question of charging transfer of capital gain on such assets. [e] Reference was made to the decision of the Apex Court in case of Guffic Chem P. Ltd. v. Commissioner of Income Tax, reported in (2011) 332 ITR 602 wherein the question involved was of taxing receipt of an assessee on noncompetition agreement. The Apex Court held that it was only vide Finance Act, 2002 with effect from 1.4.2003 that such receipt was made taxable. Till then, such compensation received by the assessee under n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. (1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of - (i) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) Riot or civil disturbance; or (iii) Accidental fire or explosion; or (iv) Action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a cooperative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. (5) Notwithstanding anything contained in sub-section (1), where the capital gain arises from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law, or a transfer the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, and the compensation or the consideration for such transfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusively in connection with such transfer; (ii) The cost of acquisition of the asset and the cost of any improvement thereto : Provided that in the case of an assessee, who is a nonresident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilized in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company : Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1964, at the option of the assessee; [ii] where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of January, 1964, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of January, 1964, at the option of the assessee;" 6.5 At this stage, we may also notice that with effect from 1.4.1995, section 55 of the Act and in particular, sub-section (2) thereof, came to be amended. In the amended form, relevant portion of section 55(2) reads as under : "(2) For the purposes of sections 48 and 49, "cost of acquisition", - (a) In relation to a capital asset, being goodwill of a business, or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, - (i) In the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and (ii) In any other case [not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me as the date of acquisition of the freehold rights. The amount paid by the assessee to purchase the land was for acquiring a bundle of rights in the land including the right to grant a lease. The cost of acquisition had to be apportioned in each case on the basis of evidence. 8.2 Subsequent to the decision in case of A. R. Krishnamurthy and another (supra), the Apex Court delivered yet another judgement in case of Sandu Bros. Chembur P. Ltd. (supra). Such decision was concerning the question of charging capital gain on surrender of tenancy rights. In the said case, the Department had contended that the assessee on surrender of tenancy, had received such amount which was chargeable as capital gain under section 45 of the Act. It was contended that an asset which is capable of acquisition at a cost would be subject to capital gains as opposed to the assets in the acquisition of which no cost at all can be conceived as in the case of goodwill as held by the Apex Court in case of B. C. Srinivasa Setty (supra). 9. The Supreme Court referring to the decision in case of A. R. Krishnamurthy and another (supra), observed that in a given case, it is possible that tenancy right may be acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 42 ITR 49 that if the income from a source falls within a specific head, the fact that it may indirectly be covered by an another head will not make the income taxable under the latter head. (See also: Commissioner of Income Tax Vs. Chugandas and Co. (1964) 55 ITR 17). 16. 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. Vs. Commissioner of Income Tax, Calcutta (1972) 83 ITR 700)." 10. What emerges from the above three decisions of the Supreme Court is that as per the statutory provisions applicable at the relevant time, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement of advancement of loan at a reduced interest, granting property on rent to the assessee and the fixation of the rent also. It is impossible to distinguish any part of the differential interest which can be attributed to the cost of acquisition of the tenancy rights. As noted, the agreement is a composite agreement under which, besides other terms and conditions, the landlord and tenant agreed that the property would be rented out at a certain monthly rental. It is not possible to segregate a portion of the advance going towards the cost of acquisition of the tenancy rights and a portion going towards reduced rent, if any. 13. One significant feature is that there was no fixed period for holding such advance by the landlord. Against the tenancy which continued nearly for a period of seven years, the advances were held by the landlord for only three years. The cost of acquisition of property is a payment made or deferred by the purchaser at the time of acquiring such property. Such price cannot be a fluctuating price depending on the period for which the advance is made or held by the landlord. In the present case, the landlord held the advances for a period of three years ..... X X X X Extracts X X X X X X X X Extracts X X X X
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