Commissioner Of Income-Tax v. Joy Ice-Creams (Bang.) P. Ltd.

K. Shivashankar Bhat, J.:— The following questions have been referred under section 256(1) of the Income-tax Act, 1961 (“the Act” for short):

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was not right in holding that the receipt of Rs. 45 lakhs was a capital receipt?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was not right in holding that the sum of Rs. 45 lakhs was not chargeable to capital gains since the cost of acquisition of leasehold rights was nil?”

2. The assessee-company had its business premises at Bombay in a rented premises. On December 10, 1982, it entered into an agreement with one Indage Engineering Company (P) Ltd., agreeing to surrender the premises for a consideration of Rs. 45 lakhs; the promisee was the purchaser of the premises who had earlier agreed to provide the assessee with an alternative accommodation, in lieu of the premises under the occupation of the assessee; since the purchaser could not find any alternative accommodation, the agreement provided for the said payment of Rs. 45 lakhs to the assessee. This amount was stated as “lump sum damages for loss which he suffered and/or incurred by the tenants on account of such shifting and incidental thereto and surrender their tenancy rights…”. In pursuance of this agreement, the assessee received the sum of Rs. 45 lakhs and vacated the premises. The Revenue contended that this receipt was a capital gain and a revenue receipt, taxable during the assessment year in question. The Appellate Tribunal pointed out that there was no cost of acquisition involved in the hands of the assessee and, therefore, the question of capital gains accruing would not arise. The oft-posed question as to the nature of the receipt is thus before us.

3. The finding of the Appellate Tribunal that the sum of Rs. 45 lakhs received by the assessee “was a recompense for relinquishing all the rights the assessee had in the tenanted property” cannot be assailed having regard to the terms of the agreement.

4. The receipt was a consideration received towards the relinquishment or surrender of the tenancy rights and, consequently, prima facie, it partakes of the character of a capital receipt. Here the tenant had not paid any sum to acquire the tenancy right, except the rent paid as and when it was due; thus cost of acquisition of the assets was nil. A tenancy right is created immediately on the creation of a lease under which the tenant takes or continues in possession of the property. The value of the said right depends on several factors. On the very day of the commencement of the lease, it may not have any value. After some time, the real rental value may go up as against the actual rent payable by the tenant; in such a situation, the difference between the fair rent and the actual rent payable would result in making the tenancy-interest “valuable”. Under certain circumstances, the tenanted premises may contribute to the goodwill of the business carried on in it by the tenant; but in many cases, the premises may not have a particular value due to the goodwill gained by the tenant, in his business. The transfer of interest by the tenant to a third party may be prohibited by law, as in the case of sections 21(1)(f) and 23 Of the Karnataka Rent Control Act, 1961; however, there may not be a bar against surrendering the said interest to the landlord; in the case of surrender to the landlord, the value of the interest surrendered cannot be compared to the value it would have fetched in case a general transfer is permitted. In the absence of a specific statutory provision providing for measuring the profit or gain accruing to an erstwhile tenant, occasioned by the receipt of a consideration for surrendering to the landlord of the tenant's interest, it is not possible to compute the alleged “capital gain” that results to the tenant from such a surrender. But for the several provisions in the Income-tax Act, “. capital gain” could not have been roped in for taxation as “income”. In reality, “capital gain” is not “income” in its strict sense; the deeming provisions of section 45 of the Act, read with the other provisions governing its computation, made it possible to tax the capital gain as “income”. Therefore, if a particular receipt is incapable of being computed as a capital gain, the said receipt cannot be charged to tax as a “capital gain”.

5. In Cit v. B.C Srinivasa Setty., [1981] 128 ITR 294 (SC), the question was whether transfer of goodwill to a reconstituted firm resulted in capital gain chargeable to tax under the Act. The Supreme Court pointed out that the definition of “capital asset” is subject to the context, and, therefore, the court has to enquire “whether, contextually, section 45, in which the expression ‘capital asset’ is used, excludes goodwill”. Having regard to the nature of the “goodwill”, its accrual and development, it was held as incapable of being valued under section 48. No cost element, in the creation or accrual of goodwill can be identified or envisaged; therefore, “in such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain”. In other words, sale of an asset acquisition of which is incapable of being valued cost-wise does not produce any profit or gain but results in the fructification of only a capital value. Capital gain, therefore, has to be the difference between the cost of acquisition and the capital value received on transfer. To avoid such a result in all cases, and to attract the levy, in certain cases (as in the case of a gift, where the donee does not incur any cost of acquisition), section 49 has been enacted. In Srinivasa Setty's case, [1981] 128 ITR 294 (SC), it was held, at page 299:

“Section 45 charges the profits or gains arising from the transfer of a capital asset to income-tax. The asset must be one which falls within the contemplation of the section. It must bear that quality which brings section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head ‘Capital gains’. Section 45 is a charging section. For the purpose of imposing the charge, Parliament has enacted detailed provisions in order to compute the profits or gains under that head. No existing principle or provision at variance with them can be applied for determining the chargeable profits and gains. All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the Income-tax Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Otherwise, one would be driven to conclude that while a certain income seems to fall within the charging section there is no scheme of computation for quantifying it. The legislative pattern discernible in the Act is against such a conclusion. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions pertaining to each head of income. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.”

6. It was further held (at page 300):

“What is contemplated is an asset in the acquisition of which it is possible to envisage a cost.”

7. In CIT/CEPT v. Shamsher Printing Press, [1960] 39 ITR 90 (SC), the assessee had to shift its business to another place because the premises in which the press was used were requisitioned by the Government. The Government paid certain sums to the assessee “on account of the compulsory vacation of the premises, disturbance and loss of business”. The assessee contended that this was a capital receipt while the Revenue contended that the payment received by the assessee was a revenue receipt. The Supreme Court held that the payment was towards the loss of business because the business would be stopped or disturbed for some time by the compulsory vacation of the premises. Thus the amount received by the assessee was held to be a compensation towards the business loss. Consequently, it was held to be a revenue receipt. There was no injury to the capital assets of the assessee.

8. In CIT v. Manna Ramji and Co., [1972] 86 ITR 29 (SC) certain premises were requisitioned under the Defence of India Act for which compensation was paid. This was found to be a compensation for loss of earnings and, therefore, a revenue receipt. The compensation paid was entirely co-related to the loss of earnings in the said case.

9. In the instant case before us, the Revenue contended that the receipt was a capital asset and, therefore, it was a capital gain to be taxed in the hands of the assessee. The Appellate Tribunal has agreed with the Commissioner (Appeals) and has given a finding that the assessee has not incurred any cost to acquire the said capital asset and, therefore, the receipt cannot be taxed as a capital gain at all. On that aspect, the decision of the Supreme Court in Srinivasa Setty's case, [1981] 128 ITR 294 justifies the conclusion reached by the Appellate Tribunal. It was also contended that it was a revenue receipt taxable as a business income under section 28. Mr. Raghavendra Rao laid great stress on the latter aspect of the case.

10. The payment of Rs. 45 lakhs to the assessee in the instant case is not towards the loss of any earnings or business. It is quite clear that the payment was made in lieu of alternative premises to be provided to the assessee by the purchaser of the premises. It is not the case of the Revenue nor of the assessee that the assessee had suffered any loss in business by stoppage of the business due to the shifting to another premises by the assessee. Therefore, the ratio of the Supreme Court decisions reported in CIT v. Manna Ramji and Co., [1972] 86 ITR. 29 and CIT/CEPT v. Shamsher Printing Press, [1960] 39 ITR 90 is not attracted.

11. In Senairam Doongarmall v. CIT, [1961] 42 ITR 392 (SC) certain premises of the assessee were requisitioned resulting in the stoppage of tea manufacture. The assessee contended that the amounts paid by the authorities were not a revenue receipt but the amounts were received on capital account. The finding was that though the assessee was maintaining the tea estate, it could not produce any tea and, therefore, there was a discontinuation of the business. The Supreme Court held that it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure that makes it fall within capital or revenue receipt. Therefore, the court is required to determine what was it that was paid for. Regarding the precedents on the question, the Supreme Court made the following observation which is quite apposite, at page 406:

“We have so far shown the true ratio of each case cited before us, and have tried to demonstrate that these cases do no more than stimulate the mind, but none can serve as a precedent, without advertence to its facts. The nature of the business, or the nature of the outlay or the nature of the receipt in each case was the decisive factor, or there was a combination of these factors. Each is thus an authority in the setting of its own facts.”

12. Thereafter, it was found that the requisition of the factories of, the assessee resulted in the stoppage of the business though the source of the raw material was intact. The assessee was not compensated for loss or destruction of or injury to a capital asset; the entire structure of the business was affected and no business was left or was done in two years. This was due to compulsory requisition. Since the assessee did not carry on business at all, section 10 of the Indian Income-tax Act, 1922, could not be applied because it roped in “profits and gains of a business” in respect of a business carried on by a person. Consequently, it was held that the amount received by the assessee there cannot be treated as partaking of the character of profits.

13. In A. Gasper v. Commissioner Of Income Tax, Calcutta, [1991] 192 ITR 382 (SC), a lump sum was received by the assessee who was a tenant, in consideration of permitting a new tenant to put up a certain structure. The assessee also transferred his tenancy right to the new lessee and thereafter became a licensee under the new tenant. The amount received by the assessee was held to be a capital asset but, unfortunately for the assessee, he did not raise the appropriate plea before the authorities regarding the inapplicability of section 45. The Supreme Court pointed out that in view of the decision in B.C Srinivasa Setty's case, [1981] 128 ITR 294, the assessee would be entitled to succeed; however, the plea was not raised at an appropriate stage and, therefore, observed that the assessee may seek relief by applying to the Central Board of Direct Taxes. This decision will have to be read along with the decision of the Supreme Court in B.C Srinivasa Setty's case, [1981] 128 ITR 294, which we have already referred to.

14. In CIT v. Maheshwari Devi Jute Mills Ltd., [1965] 57 ITR 36, 40; AIR 1965 SC 1974, it was pointed out at page 1976, para 6:

“Distinction between revenue and capital in the law of income-tax is fundamental. Tax is ordinarily not levied on capital profits: it is levied on income. It is well-settled that sale of stock-in-trade or circulating capital or rendering service in the course of trading results in a trading receipt: sale of assets which the assessee uses as fixed capital to enable him to carry on his business results in capital receipt.”

15. Dr. Krishna, learned counsel for the assessee, pointed out that leasehold right is not stock-in-trade or circulating capital and, therefore, the consideration received in surrendering such a right would not be a revenue receipt. We find considerable force in this contention.

16. The decision of the Delhi High Court in Bawa Shiv Charan Singh v. CIT, [1984] 149 ITR 29 supports the proposition that the tenancy right is in the nature of a capital asset. This decision is on par with other decisions where an existing lessee transfers his right to a third person for a consideration which has been held to be a capital receipt.

17. The ratio of the decision of the Gujarat High Court in Rajabali Nazarali and Sons v. CIT, [1987] 163 ITR 7 also is to the same effect. The payment received by a tenant for parting with his interest was held to be a capital receipt.

18. Similar is the view expressed by the Kerala High Court in CIT v. Merchandisers (P.) Ltd., [1990] 182 ITR 107. Dr. Krishna also cited a decision of the Bombay High Court in Commissioner Of Income-Tax, Bombay v. Mrs. Shirinbai P. Pundole, [1981] 129 ITR 448, wherein the right of the tenant to surrender his interest in favour of the landlord was recognised and the consideration received by the tenant for such surrendering of right was held to be not liable to capital gains tax.

19. Having regard to the above, we have no hesitation in holding that the payment received by the assessee in the instant case as a consideration for surrendering his tenancy interest in the premises and vacating the same cannot be treated as a revenue receipt. It is in the nature of a capital receipt; however, it is not chargeable to tax under section 45 of the Act. We answer the questions referred to us in the affirmative and against the Revenue by holding that the Tribunal was right in treating the receipt as a capital receipt but not liable to be taxed as a capital gain.

20. References are answered accordingly.