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TMI Blog1982 (3) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... essee on the sale of the premises on 14-3-1974 for Rs. 80,000. The case of the assessee before the ITO was that the value of the tenancy rights which it acquired because of long occupation could be valued at Rs. 60,000 which should be added to the sum of Rs. 21,806 paid to the landlord in cash, so that the total cost of the property to the assessee came to Rs. 81,806. As the property was sold for only Rs. 80,000 there was no capital gains. Alternatively, it was argued that the tenancy rights were acquired by the assessee much before 1-1-1954 and so it had the option to substitute the fair market value as on 1-1-1954 of the tenancy rights in place of its cost under section 55(2) of the Income-tax Act, 1961 ('the Act'). He got the value of the said tenancy rights as on 1-1-1954 valued at Rs. 41,680 by R.W. Gudal Associates, Architects, Engineers and Valuers. The claim of the assessee was that the fair market value of the tenancy rights as on 1-1-1954 valued at Rs. 41,680 should be added to the sum of Rs. 21,806 paid in cash to the landlord, so that the total cost of acquisition of the asset sold later, came to Rs. 63,486. Thus, the alternative case of the assessee before the ITO wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken as the cost of acquisition of the asset. He rejected the alternative contention of the assessee on the ground that the assessee was not the owner of the property as on 1-1-1954. Regarding the decision dated 1-11-1972 of the Tribunal relied on by the assessee, he observed that the facts therein were totally different and also no finality was reached therein because the matter was sent back to the ITO. 4. Shri N.R. Mulla, the learned representative for the assessee, urged before us that the revenue authorities erred in their decisions. At the outset, Shri Mulla referred to the decision of the Supreme Court in the case of Damadilal v. Parshram AIR 1976 SC 2279, for the proposition that the tenancy right acquired by the assessee by virtue of its occupation of the premises since 1945 was a valuable and independent right which was acquired prior to 1-1-1954. He stated that the tenancy right acquired by the assessee was an estate in itself. He also referred to the decision in the case of A. Gasper v. CIT [1979] 117 ITR 581 (Cal.) wherein it has been held that the monthly tenancy or leasehold right is a capital asset which was capable of being transferred for the purpose of capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held therein that on determination of the tenancy, the estate does not disappear (para 11 of the judgment). In the case of A. Gasper, it has been held by the Calcutta High Court that the tenancy or leasehold right of a tenant is a capital asset which can be transferred for the purpose of capital gains under section 45 of the Act. Similar is the view taken by the Tribunal in their order dated 7-1-1972 referred to above. Hence, in our opinion, there cannot be any doubt about the fact that the tenancy right in the premises, which was admittedly acquired by the assessee long before 1-1-1954, was a separate capital asset. That capital asset was different from the residuary rights of ownership which remained with the landlord. What the assessee got from the landlord on 16-2-1973 was the reversionary and the residuary rights of ownership which still belonged to the landlord. But the fact remains that the assessee had already acquired a capital asset in the shape of the tenancy rights in the premises long before 1-1-1954. 7. It is common ground before us that the cost of acquisition to the assessee for the tenancy rights was nil. The case of the revenue is that the cost of the acquisiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y its fair market value as on 1-1-1954 provided the asset was acquired by the assessee prior to 1-1-1954, The scheme of the provision is quite clear. It exempts the capital gains accrued up to 1-1-1954 from capital gains tax. There is nothing in law which suggests that the assessee can be debarred from exercising that option. Hence, the capital gains arising out of the transaction in this case, in our opinion, has to be calculated by bifurcating the sale proceeds into two components : one representing the sale proceeds of the tenancy rights and the other representing the sale proceeds of the residuary ownership rights. In the absence of any better criterion, the bifurcation of the sale proceeds into its two components can be made in the following manner: After the ITO determines the fair market value of the tenancy rights as on 1-1-1954, it will bear a certain proportion to the cost of the residuary rights of ownership, namely, Rs. 21,608. The sale proceeds of Rs. 80,000 can be split up in the same proportion and the capital gains should be calculated separately in respect of tenancy rights and the residuary rights. 9. The next step is to deduct the cost of acquisition from the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chased the said property from its landlord for a sum of Rs. 21,806. Later on, it sold this property on 14-3-1974 for Rs. 80,000. Thus, a capital gain of Rs. 59,204 arose to the assessee. In the course of the assessment proceedings for the assessment year 1975-76, the assessee-firm contended that since it was a statutory tenant, the landlord could not evict it and as such he sold the property to the assessee on 16-2-1973 at a low price of Rs. 21,806. The assessee claimed that the value of its tenancy rights was Rs. 60,000 and so the cost of the property should be taken at Rs. 81,806. In other words, according to the assessee, there was no capital gain. The alternative contention of the assessee was that since the property had been held by it, as a tenant, prior to 1-1-1954, the cost price of the property, as on 1-1-1954, should be taken at Rs 41,680. In support of its case, the assessee referred to the decision of the Appellate Tribunal in the case of Mrs. M.H. Dudha. The ITO rejected both the contentions of the assessee. He held (i) that when the assessee purchased the property on 16-2-1973 and became its owner, its tenancy rights came to an end, and (ii) that the actual expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, its tenancy right came to an end. Thereafter, the assessee could not be both a landlord and a tenant. After purchasing the property, the assessee could only let out the property on rent, but could not claim to be a tenant under itself. Thus, when the assessee sold the property on 14-3-1974, it did not possess any tenancy right under itself as landlord or any other landlord. In such a situation, what the assessee sold on 14-3-1974 was its ownership rights including his right to let out the property on rent to somebody else, but not the non-existent tenancy rights under itself, or any other landlord. Evidently, therefore, the capital asset which the assessee 'transferred' on 14-3-1974 within the meaning of section 45 was his ownership right in the property. Since he did not have any tenancy rights as such, at that time, the question of transfer of such tenancy rights could not arise. 6. The second question for consideration relates to the cost of the capital asset which was transferred by the assessee on 14-3-1974. On this point, there is no dispute that the assessee purchased the property on 16-2-1973 for Rs. 21,806, through a registered sale deed. There is no material on the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o help to the assessee. In that case, the landlord agreed to pay a sum of Rs. 55,000 to the tenant for purchasing a flat in lieu of surrendering his tenancy rights and it was held that such a transfer gave rise to transfer of capital asset. Evidently there is nothing common between the facts of that case and the facts of the present case. 9. Lastly, a reference may be made to an illustration given by my learned brother in para 7 of his order. This illustration is as follows: 'Suppose, a person had a carriage. Then he buys a horse. Later, he sells the carriage and the horse together. Can it be said that the assessee sold only the horse which he had bought and did not sell the carriage which he had not bought ? In our opinion, it cannot be so said.' With respect, the above illustration is not, in my opinion, applicable to the present case. The reason is that the person concerned had two separate distinct and tangible assets, i.e., a horse and a carriage, at the time of sale. He sold both these assets and as such the transfer involved two assets. The facts of the present case are different. Perhaps, the following illustration, though not exactly on all four, may approach nearer to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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