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TMI Blog1987 (1) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... fter giving usual statutory deductions. On appeal, the Commissioner of Income-tax (Appeals) confirmed the order of the Income-tax Officer. On further appeal, the Appellate Tribunal held that the right of protected tenancy stands on the same footing as that of goodwill and the assessee did not pay anything for the protected tenancy and it is a statutory right conferred on the assessee and as such the levy of capital gains is not justified. The learned standing counsel for the Revenue contends that protected tenancy is a right in the property and, therefore, it is a capital asset and the analogy of goodwill is not applicable as it should be confined to incorporeal rights, and the protected tenancy is conferred in lieu of periodical payment of rent to the landlord over a six year period and the cost of acquisition can be related to the rent paid by the tenant. Learned counsel for the assessee, Sri A. Satyanarayana, seeking to sustain the order of the Appellate Tribunal contended that even assuming that protected tenancy is considered as a right in the property, no cost of acquisition is involved and the periodical payment of rent cannot be considered as consideration for protected t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory scheme provided for each head. The point to consider then is whether if the expression 'asset' in section 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying the profits and gains on its transfer. The mode of computation and deductions set forth in section 48 provide the principal basis for quantifying the income chargeable under the head 'Capital gains'. The section provides that the income chargeable under that head shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset : ' (ii) the cost of acquisition of the capital asset .......' What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consideration which the partner may be said to acquire on introducing his personal asset into the partnership firm as his contribution to its capital, it cannot be said that any income or gain arises or accrues to the assessee in the true commercial sense which a businessman would understand as real income or gain." The levy of tax on capital gains under section 45 of the Income-tax Act is intertwined with the mode of computation envisaged under section 48 of the Act. The mode of computation provided under section 48 comprises a two-fold dimension, namely, the expenditure incurred in connection with transfer and cost of acquisition of the asset added by the cost of improvement. The profits or gains contemplated under section 45 as a sequel to transfer is the surplus amount realised over and above the cost of acquiring the asset. In the event of the absence of cost of acquisition, the question of accrual of gain does not arise and the levy of tax professing to be capital gain levy is in essence a levy on a capital asset. The charging section under section 45 loses its vitality in the absence of cost of acquisition of asset as the cost of acquiring the asset constitutes the bed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the protected tenancy right. Therefore, the cost of acquisition is not present and the protected tenancy being creature of statute is not capable of being acquired by payment of money. Learned standing counsel for the Revenue contended that the periodical payments of rent constituted the base for giving protected tenancy and the aggregation of such payments should be considered as cost of acquisition. There is no foundation for this contention as the landlord who received the amounts did not give protected tenancy and, therefore, the payments of rent cannot be considered as consideration for protected tenancy. Learned standing counsel for the Revenue invites us to the decision in Gasper v. CIT [1979] 117 ITR 581 (Cal). The Calcutta High Court did not consider the levy of capital gains from the perspective of interaction of sections 45 and 48. Further, the consideration of monthly tenancy as capital asset is with reference to the provisions of the West Bengal Tenancy Act and this decision should be considered as confined to its facts and circumstances. On the other hand, learned counsel for the assessee contended that the periodical payments of rent as distinct from lump sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of leasehold rights which were acquired by the assessee without any cost. The mode of computation and deduction set forth in section 45 provided the principal basis for quantifying the income chargeable under the head 'Capital gains'. What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. In the case of self-created value of a tenancy right, it is not possible to determine the date of acquisition of the asset. A subsidiary point may also be noticed in which the Tribunal had directed the determination of the value of tenancy right as on January 1, 1954, and to deduct the amount from Rs. 30,000 which the assessee received. It opined that the balance would represent capital gains subject to statutory exemption. The authorities under the Act have no jurisdiction or power to direct the ascertainment of the cost of acquisition in relation to a capital asset. The option is given to the assessee whether to adopt the cost of acquisition of the asset to the assessee or the fair market value of the asset on the I St day of January, 1954. The assessee has not exercised the option, nay, he has not even been called upon to do so. There is, therefore, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of section 55 is an elucidation and extension of sections 48 and 49 providing for the valuation being pegged down to the date specified therein, namely January 1, 1964, at the option of the assessee. Having in view the galloping increase in prices and abnormal low costs in the earlier years, the assessee is facilitated to opt for the date, i.e., January 1, 1964, for ascertaining the cost of acquisition. This provision presupposes the cost of acquisition but this mode of ascertaining the cost of acquisition is prescribed by shifting the date of ascertainment to January 1, 1964, from the actual date of acquisition. The effect of this section is that whatever be the cost during the period preceding January 1, 1964, the assessee may exercise the option of having the value ascertained as on January 1, 1964. This provision cannot be pressed into service where there is no cost of acquisition at all. Learned counsel for the assessee referred to the decision in CIT v. H. H. Maharaja Sahib Shri Lokendra Singhji [1986] 162 ITR 93, wherein the Madhya Pradesh High Court held that the liability to tax on capital gains does not arise when the element of cost or such cost as is capable of bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rea) Tenancy and Agricultural Lands Act (which came into force in 1950) conferred the status of a " protected tenant " upon him. A protected tenant is a tenant but possesses much larger rights than an ordinary tenant. Indeed, section 40(4) declares that " the interest of a protected tenant in the land held by him as a protected tenant shall form sixty per cent. of the market value of all the interests in the land and that of the landholder and of persons claiming under him shall be limited to the remaining forty per cent." It is because of this provision that when the land was acquired, the compensation was apportioned in the said proportion-60% to the assessee (as the protected tenant) and 40% to the landlord. (It goes without saying that the landlord is liable to pay capital gains tax on the said amount). Now, the argument on behalf of the assessee is that inasmuch as the protected tenancy was conferred upon him, i.e., acquired by him, without any cost to him, no capital gains tax can be levied upon him in view of the decision of the Supreme Court aforesaid. The said decision deals with the case of goodwill of a business and not with corporeal property. In my opinion, the princip ..... 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