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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 ..... y rent on such rental properties. The agreement did not provide for either termination of the tenancy rights or the period during which such advance made to the landlord would be returned to the assessee. From the record, it further emerges that such advance was made for the purpose of completing the remaining construction. Since the landlord could not complete the construction with the agreed amount, the assessee made further advance of Rs.2.50 lakhs at same interest rate. It has also come on record that the landlord returned the amount after a period of three years though the tenancy continued for several years thereafter. Thus it can be fairly concluded that the entire contract was a composite 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. If the advance was not returned for a period of four, five or six years, the cost of acquisition would defer. This is an additional ground to convince that such differential rate in interest on the advance made, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rat High Court in the case of Rajabeli Nazarali and Sons v. CIT which directly dealt with the controversy as to whether the amount of compensation received for parting with the capital asset i.e. tenancy rights could be termed as a revenue receipt liable to be taxed under any provisions of the Act? [6] Whether, on the facts and in the circumstances of the case, the Tribunal after having referred to the Delhi High Court decision in the case of Bawa Shiv Charan Singh v. CIT regarding nature of tenancy rights and the varieties of elements which contributed to making the value of same, was it open to the Tribunal to state that the payment of lease rent and the advancing of loan would go to make the cost of tenancy rights for the purposes of computation of capital gains under section 45 of the Act? [7] Whether, on the facts and in the circumstances of the case, the finding of the Tribunal is one which can be said to have been arrived at as a reasonable person after taking into consideration all relevant material and without being colored by any irrelevant consideration or matters of prejudice and basing its finding on suspicious, conjectures or surmises, or acting on improper re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accounting year relevant to the assessment year 1986-87. 2.5 Before the Assessing Officer, the assessee contended that the sum of Rs.15 lakhs represented a capital receipt and therefore, was not liable to be taxed as income. It was further contended that the assessee also cannot be charged capital gain tax as there was no cost of acquisition of the tenancy rights in the hands of the assessee. 2.6 The Assessing Officer, however, was of the opinion that under the agreement dated 1.7.1978, the assessee had paid an advance of Rs.6 lakhs to the landlord on which it received interest at the rate of 6% per annum. Further adding Rs.10/- for the stamp paper on which the agreement was executed, the Assessing Officer treated a sum of Rs.6,00,010/- as the cost of acquisition of tenancy rights. The difference i.e. Rs.8,99,990/- (Rs.15,00,000 Rs.6,00,010), according to the Assessing Officer, represented long term capital gain of the assessee to be taxed at an appropriate rate. 2.7 The assessee approached the Commissioner against such decision of the Assessing Officer. The Commissioner noted that total amount advanced by the assessee to the landlord was not Rs.6 lakhs, but Rs.8.50 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the petitioner, drawing our attention to the statutory provisions applicable, as they stood at the relevant time, submitted that in case of acquisition of tenancy rights, unless the costs thereof can be ascertained, there would be no question of charging capital gain. He submitted that in the present case, the assessee had made advances to the landlord. Even if such advances were made at an interest rate lower than what the assessee had paid to the bank for borrowing such amount, the difference in the interest rate would not represent the cost of acquisition of the tenancy rights. 4.1 Counsel submitted that there is nothing in the agreement to suggest that the advance was made at a reduced rate of interest in lieu of the landlord putting the assessee in possession as a tenant. 4.2 Counsel submitted that section 55(2) of the Income Tax Act, 1961 ( the Act for short) was amended with effect from 1.4.1995 to include the transfer of tenancy rights besides others for the deeming fiction of ascertaining the cost of acquisition when such costs were otherwise not ascertainable. It was submitted that such amendment is not retrospective and therefore, cannot be applied to the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensation received by the assessee under non-competition agreement was a capital receipt not chargeable to tax under Income Tax Act, 1961. This decision was cited to contend that amendment in section 55(2) with effect from 1.4.1995 is only prospective in nature. 5. On the other hand, learned counsel Shri Parikh for the Department opposed the appeal. He submitted that the assessee had made advances at reduced rate of interest. Such funds were raised through borrowings from the bank on which the assessee had paid much higher interest. Differential rate of interest should, therefore, be regarded as the assessee's cost of acquisition of the tenancy rights. 6. Before dealing with the rival contentions, we may peruse the applicable statutory provisions obtaining at the relevant time. Section 2(14) of the Act defined the term capital asset as to mean property of any kind held by an assessee, whether or not connected with his business or profession, excluding certain specified properties with which we are not concerned. 6.1 Section 2(47) contained definition of transfer which read as under : 2(47) Transfer in relation to a capital asset, includes - (i) the sale, exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the consideration received or accruing as a result of the transfer of such capital asset. Explanation. - For the purposes of this sub-section, the expression "insurer" shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938). (2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as, stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. (2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer is enhanced or further enhanced by any court, Tribunal or other authority, the capital gain shall be dealt with in the following manner, namely :- (a) The capital gain computed with reference to the compensation awarded in the first instance or, as the case may be, the consideration determined or approved in the first instance by the Central Government or the Reserve Bank of India shall be chargeable as income under the head "Capital gains" of the previous year in which such compensation or part thereof, or such consideration or part thereof, was first received; and (b) The amount by which the compensation or consideration is enhanced or further enhanced by the court, tribunal or other authority shall be deemed to be income chargeable under the head "Capital gains" of the previous year in which such amount is received by the assessee. Explanation : For the purposes of this sub-section, - (i) In relation to the amount referred to in clause (b), the cost of acquisition and the cost of improvement shall be taken to be nil; (ii) The provisions of this sub-section shall apply also in a case where the transfer took place prior to the 1st day of April, 1988; (iii) Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted. Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government. Explanation : For the purposes of this section, - (i) "Foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973); (ii) The conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf; (iii) "Indexed cost of acquisition" means an amount which bears to the cost of acquisition the same propor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 being a case falling under subclauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil; 7. The fact that the tenancy right represented capital asset in the hands of the assessee, there is no dispute. In terms of section 2(14) of the Act, it is clear that such tenancy rights represented capital assets. Further, that by virtue of section 2(47) of the Act which provides for a definition of the term tenancy for the purpose of income-tax, surrender of such tenancy rights amounted to transfer of the capital assets, is also not disputed. So much is also clearly held by the Apex Court in the case of Sandu Bros. Chembur P. Ltd. (supra), wherein it was observed as under : That the tenancy right is a capital asset, the surrender of the tenancy right is a "transfer" and the consideration received therefore a capital receipt within the meaning of Section 45 has not been questioned before us and must in any event be taken to be concluded by the decision of this Court in A. Gasper v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sa 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 acquired at a cost. Ultimately, it would be a question of fact. The Apex Court further observed that but for the inability to compute cost of acquisition under section 48, a monthly tenancy or leasehold right is a capital asset and that the amount of receipt on its surrender was a capital receipt. In the facts of the case, the Apex Court found that capital gain could not be charged since it was not possible to compute the cost of acquisition of the tenancy rights. Observations of the Supreme Court relevant for our purpose, read as under : 12. We agree. A tenancy right is acquired with reference to a particular date. It is also possible that it may be acquired at a cost. It is ultimately a question of fact. In A.R. Krishnamurthy and Ors. v. Commissioner of Income Tax, Madras (1989) 176 ITR 417 this Court held that it cannot be said conceptually that there is no cost of acquisition of the grant of the lease. It held that the cost of acquisition of leasehold rights can be determined. In the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 capital asset in case of which it is not possible to conceive or ascertain the cost of acquisition, there would be no charge of capital gain. In case of tenancy rights, however, depending on facts of case, it has to be ascertained whether the cost of acquisition of tenancy right was possible to ascertain. Acquisition of tenancy right did not fall in the same category as the acquisition of goodwill of a business in which the cost of acquisition was not conceivable. Before going further, however, we may recall that section 55(2) of the Act came to be substantially amended with effect from 1.4.1995. The legislature has since then provided for the deeming fiction under which cost of acquisition of tenancy rights besides others specified capital assets could be worked out. It is not in dispute that such provision had no retrospective application. It was not even seriously argued before us by the revenue that such amended provision could be made applicable to the case on hand. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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