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  • For the Appellant: S.A. Nagendran
Judges
  • Paripoornan
  • Varghese Kalliath, JJ.
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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • For the Appellant: S.A. Nagendran
Judges
  • Paripoornan
  • Varghese Kalliath, JJ.
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Smart Summary

Structured Summary of the Legal Opinion (Paripoornan, J.)

Factual and Procedural Background

At the instance of the Revenue, the Income-tax Appellate Tribunal (ITAT) referred two questions of law to this Court concerning an amount of Rs. 38,300 received by the assessee as consideration for vacating business premises.

The respondent-assessee is a private limited company. For the assessment year 1978-79, during the relevant previous year the assessee stopped its business and vacated premises which it had taken on rent in 1966. The assessee received Rs. 38,300 from the vendee of the landlord as consideration for vacating the premises. The Income-tax Officer treated the amount as a trading (revenue) receipt and brought it to tax. On appeal, the Commissioner of Income-tax (Appeals) (CIT(A)) held the receipt to be a capital receipt and remitted the assessment, noting that the decision in C.I.T. v. Srinivasa Setty (128 I.T.R. 294) should be borne in mind.

The Revenue appealed to the ITAT, contending that the CIT(A) erred in treating the amount as capital. The assessee also appealed against the CIT(A)'s order insofar as it restored the matter to the Income-tax Officer for assessment of possible capital gains. The ITAT, by a common order dated 24-11-1984, held that the premises were surrendered to the vendee (not the landlord), that the amount was not relatable to the assessee's business activity and was therefore a capital receipt, and — relying on the decision of the Delhi High Court in Bawa Shiv Charan Singh v. C.I.T. (149 I.T.R. 29) — held that no tax on capital gains could be levied because there was no cost of acquisition for the transfer of a tenancy right. At the Revenue's instance the ITAT referred the two questions of law to this Court.

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 38,300 received by the assessee as a consideration for vacating the business premises which was taken on rent by it, is not relatable to the business activity carried on by the assessee and not allowable as a revenue receipt?
  2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that no capital gains result and no tax on capital gains can be levied in the present case?

Arguments of the Parties

Revenue's Arguments

  • Mr. N.R.J.C. Nair, counsel for the Revenue, very vehemently contended that the ITAT was in error in holding that the decision of the Delhi High Court in Bawa Shiv Charan Singh v. C.I.T. (149 I.T.R. 29) is applicable to the present case and that, consequently, no tax on capital gains can be levied.
  • The Revenue challenged the CIT(A)'s finding that the amount was a capital receipt and the ITAT's endorsement of that view.

Assessee's Arguments

  • Counsel for the assessee submitted that the ratio of the Delhi High Court in Bawa Shiv Charan Singh v. C.I.T. (149 I.T.R. 29) is clearly applicable to the facts, and that the ITAT's decision that no capital gains tax is exigible in the instant case is justified.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
C.I.T. v. Srinivasa Setty (128 I.T.R. 294) Referenced as the Supreme Court decision bearing on the applicability of capital gains computation provisions (Ss. 45, 48 and 55(2)). The Court and lower authorities were directed to bear this decision in mind; the Delhi High Court's reasoning in Bawa was considered "in the light of" Srinivasa Setty. The Court accepted the ITAT's reliance on principles related to the computation of capital gains as informed by this decision.
Bawa Shiv Charan Singh v. C.I.T. (149 I.T.R. 29) Held that where tenancy rights acquired without cost produce a self-created, imperceptibly grown value, the computation provisions for capital gains cannot be applied and therefore capital gains tax cannot be levied on such transfers. The ITAT relied on Bawa to hold that no capital gains tax could be levied in the present case because the tenancy right had no ascertainable cost of acquisition. This Court fully concurred with the reasoning and conclusion of the Delhi High Court in Bawa and applied it to the facts, holding that no capital gains tax was exigible.
Raman Krishnan v. I.T.O. ((1982) 2 ITD 611) Earlier Tribunal decision dealing with transfer of land (capital asset) as opposed to a tenancy right. The ITAT distinguished Raman Krishnan on the ground that in that case the transfer was of land as such (a capital asset) and not merely a tenancy right; therefore Raman Krishnan did not control the present case.
Rajabali Nazarali and Sons v. C.I.T. (163 I.T.R. 7) Gujarat High Court cited the decision in Bawa with approval. The opinion notes that Rajabali Nazarali and Sons cited Bawa with approval, supporting the view that consideration for parting with tenancy rights may not be exigible to capital gains where no cost of acquisition can be predicated.
Syndicate Bank Ltd. v. Addl. C.I.T. (155 I.T.R. 681 — Karnataka) Referred to the decision in Bawa Shiv Charan Singh. Identified as one of several authorities that have referred to the Delhi High Court's decision in Bawa, reinforcing the accepted principle cited from Bawa.
B.G. Shah v. C.I.T. (162 I.T.R. 23 — Bombay) Referred to the decision in Bawa Shiv Charan Singh. Noted among authorities that have referred to Bawa, supporting its reasoning.
C.I.T. v. H.H. Maharaja Sahib Shri. Lokendra Singhji (162 I.T.R. 93 — M.P.) Referred to the decision in Bawa Shiv Charan Singh. Listed as another authority which has referred to the Delhi High Court's decision in Bawa.
C.I.T. v. Markapakula Agamma (165 I.T.R. 386 — A.P.) Referred to the decision in Bawa Shiv Charan Singh. Also identified as a case referring to the Bawa decision, consistent with the view that tenancy right transfers without cost do not attract capital gains tax.

Court's Reasoning and Analysis

The Court accepted the ITAT's factual finding that the assessee was not in the business of taking premises on lease and surrendering them; rather, the premises had been taken on lease for the assessee's business and subsequently surrendered to the vendee who purchased the building from the landlord. Given that the surrender was to the vendee (not to the landlord), the Court found it "self-evident" that the amount received when the assessee vacated the premises was not relatable to the business activity of the assessee and therefore constituted a capital receipt. The Court held that the ITAT was justified in that characterisation.

The Court then examined whether capital gains tax could be levied on the transfer. The ITAT distinguished an earlier Tribunal decision (Raman Krishnan) because that case involved transfer of land as such (a capital asset), whereas the present case involved only a tenancy right. The Tribunal posed the determinative question: whether capital gains can be assessed where the transferred asset is a tenancy right for which no cost of acquisition can be predicated.

In addressing that question, the Court reviewed and relied on the reasoning of the Delhi High Court in Bawa Shiv Charan Singh v. C.I.T. The Bawa decision explained that tenancy rights are intangible and their value (often called "pagri", "premium" or "salami") is composed of many unpredictable elements (locality, use, business success, demand and supply of comparable premises, etc.), that the value may fluctuate and is often self-created without any monetary contribution by the tenant, and that in many cases no premium existed at the time the tenancy was taken. Accordingly, where the tenancy rights were acquired without payment, it is impossible to determine a "cost of acquisition" or "cost of improvement" for the purposes of computing capital gains under S.48. If the entire value were taxed, the tax would operate on the capital value rather than on "profit or gain" as contemplated by S.45. Therefore, the computation provisions cannot be applied to quantify profit on transfer of such tenancy rights.

The Court endorsed the ITAT's reliance on Bawa (and its consistency with the Supreme Court's decision in Srinivasa Setty) and concluded that, in the circumstances of the present case where the asset transferred was a tenancy right without an ascertainable cost of acquisition, no capital gains tax could be levied.

Holding and Implications

Holding — Question No. 1: The Court answered question No. 1 in the affirmative — against the Revenue and in favour of the assessee. The ITAT was justified in holding that the amount of Rs. 38,300 received by the assessee on vacating the leased premises was not relatable to the business activity and was not allowable as a revenue receipt (i.e., it was a capital receipt).

Holding — Question No. 2: The Court answered question No. 2 in the affirmative — in favour of the assessee and against the Revenue. The Court held that no tax on capital gains could be levied in the present case because the tenancy right transferred had no ascertainable cost of acquisition for the purposes of computing capital gains.

Implications:

  • The direct effect is that the assessee's receipt of Rs. 38,300 is treated as a capital receipt and not as a revenue (trading) receipt, and no capital gains tax is exigible on that receipt in the circumstances of this case.
  • The Court endorsed the applicability of the reasoning in Bawa Shiv Charan Singh v. C.I.T. (149 I.T.R. 29) (as interpreted in light of C.I.T. v. Srinivasa Setty (128 I.T.R. 294)) to situations where tenancy rights acquired without cost are transferred; in such cases, the computation provisions for capital gains cannot be applied because cost of acquisition cannot be ascertained.
  • No broader or additional implications beyond the direct outcome for the parties were elaborated in the opinion; the references were answered accordingly and the Court directed that a copy of the judgment be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

Procedural postscript: The Court directed that a certified copy of the judgment be sent to the Income-tax Appellate Tribunal, Cochin Bench (as noted in the opinion).

Show full summary ...

    Commissioner Of Income Tax v. Merchandisers (P) Ltd.

    Paripoornan, J.:— At the instance of the Revenue, the Incometax appellate Tribunal has referred the following two questions of law for the decision of this Court:

    “1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the amount of Rs. 38300/- received by the assessee as a consideration for vacating the business premises which was taken on rent by it, is not relatabie to the business activity carried on by the assessee and not allowable as revenue receipt?

    2. Whether, on the facts and in the circumstances of ihe case, the Tribunal is justified in holding that no capital gains result and no tax on capital gains can be levied in the present case?”

    2. The respondent-assessee is a private limited company. We are concerned with the assessment year 1978-79. During the relevant previous year, the assessee stopped its business and vacated the business premises which it had taken on rent in 1966. It received a sum of Rs. 38,300/- from the vendee of the landlord as consideration for vacating the premises. The Income Tax Officer brought the said amount to tax as a trading receipt. In appeal, the Commissioner of Income-tax (Appeals) held the receipt to be a capital one and ordered a remit. He also observed that in making the assessment the Incometax Officer shall bear in mind the decision of the Supreme Court in C.I.T v. Srinivasa Setty (128 I.T.R 294). The Revenue took up the matter in appeal before the Incometax Appellate Tribunal and contended that the CIT (A) was in error in holding that the amount received by the assessee was a capital receipt.

    3. The assessee also filed an appeal from the order, of the CIT (A) questioning the correctness of the restoration of the matter to the Incometax Officer for making the assessment of possible capital gains. These two appeals were considered together and a common order was passed by the Incometax Appellate Tribunal dated 24-11-1984. The Tribunal held that the premises taken on lease for the business by the assessee was surrendered to the vendee of the landlord and not to the landlord and so the amount received is not relatabie to the business activity carried on by the assessee. The finding of CIT (A) that the amount received constituted a capital receipt was upheld. Following the decision of the Delhi High Court in Bawa Shiv Charan Singh v. C.I.T (149 I.T.R 29), the Appellate Tribunal held that no tax on capital gains can be levied, since there was no cost of acquisition for the transfer of a tenancy right in the instant case. It is, thereafter, at the instance of the Revenue, the Incometax Appellate Tribunal has referred the questions of law, formu lated herein above, for the decision of this Court.

    4. We heard counsel Mr. N.R.J.C Nair, cousel for the Revenue, very vehemently contended that the Tribunal was in error in holding that the decision of the Delhi High Court in Bawa Shiv Charan Singh v. C.I.T (149 I.T.R 29) is applicable and so no tax on capital gains can be levied in the present case. Counsel for the assessee submitted that the ratio of the decision of the Delhi High Court in the said case is clearly applicable and that the decision of the Appellate Tribunal holding, that no capital gains tax is exigible in the instant case, is justified.

    5. We considered the rival contentions put forward before us. The Appellate Tribunal has categorically found that it is not the business of the assessee-company to take on lease premises and surrender the same. The premises was taken on lease for its business and surrendered later. What is more, the surrender was, in the instant case, to the vendee, who purchased the building from the landlord. On these premises, it is self evident that the amount received by the assessee, when it vacated the premises, is not relatabie to the business activity carried on by it. The receipt of the amount constituted only a capital receipt. The Appellate Tribunal was justified in holding so.

    6. Next, the Tribunal adverted to the decision of the Supreme Court in C.I.T v. Srinivasa Setty (128 I.T.R 294). An earlier decision of the Tribunal in Raman Krishnan v. I.T.O, (1982) 2 ITD 611) which was brought to its notice, was distinguished. It was stated that in Raman Krishnan's case what was transferred by the assessee was the land as such and not any particular right. The transfer therein was one of a capital asset in respect of which capital gains tax is exigible. Holding that in the instant case the capital asset involved is only a tenancy right, the Tribunal posed the question whether any capital gains could be assessed to tax in the case of a transfer of a tenancy right, for which there was no cost of acquisition. In considering the said matter, reliance was placed on thedecision of the Delhi High Court in Bawa Shiv Charan Singh v. C.I.T (149 I.T.R 29). Referring to the tenancy right and the imponderables involved in evaluating the value of such right, it was pointed out by the Delhi High Court that there was no premium when the premises were taken on lease, that it was not possible to predicate as to the exact moment of its birth and the rate or period of its growth, that the process of the growth in value was imperceptible, that it was self-created without any contribution by the assessee, monetarily or otherwise and so it was not possible to ascertain as to what was the cost of acquisition or cost of improvement for the purpose of computation of capital gains. So stating, and in the light of the decision of the Supreme Court in Srinivasa Setty's case (128 I.T.R 294), the Delhi High Court held that no tax on capital gains could be levied in respect of the transfer of the tenancy right. The said decision was held to be fully applicable to the facts of the present case and the Appellate Tribunal held that no tax on capital gains can be levied. We fully concur with the reasoning and conclusion of the Appellate Tribunal.

    7. In examining the scope of the charging section relating to capital gains and the relevant statutory provisions dealing with the mode of computation and deductions and cost ofacquisition (Ss. 45, 48 and 55(2)), the Delhi High Court in Bawa Shiv Charan Singh v. C.I.T (149 I.T.R 29), at pages 35 and 36, stated as follows:

    “A cost to the assessee in the acquisition of the asset is thus clearly contemplated. The charging section and the computation provisions together constitute an integrated code for the purpose of ascertaining whether the transfer of the tenancy rights which is a capital asset gives rise to a capital gain for the purposes of the Act. If the computation provisions cannot apply at all to a given case, then such a case could not be intended by the legislature tofall within the charging section. The value of the tenancy rights may be called “pagri”, “premium” or “salami” etc., but it is an intangible property. Though intangible, it is materially valued. The assessee took the premises on rent in the year 1947-48. The tenancy rights had not cost the assessee anything and they were not purchased by him. On March 18, 1966, the assessee received an amount of Rs. 30,000, i.e, “pagri”, for relinquishment of the tenancy rights or surrender of the tenancy rights. A variety of elements contribute in the making of the value of the tenancy rights, but there can be no account in value of the factor producing it. It is a composite thing referable in part to its locality, in part to the use to which the premises are put, in part to the nature of the business carried if commercial premises, in part to the success of the business conducted, in part of the trend of the customers or litigants, in part to the likelihood of the competition and in part to several other unpredictable factors, like whims and eccentricities of the persons wanting to acquire the tenancy rights. Thevafue may fluctuate from one day to another day depending upon the uncertain demand and supply of comparable premises. It may increase or it may decrease, but such increase or decrease is not like the periodic waning and waxing of the moon. In the year 1947-48 there was no premium. It is not possible to predicate as to the exact moment of its birth and the rate or period of its growth. The process of the growth in value is imperceptible. It is self-created without any contribution by the assessee, monetarily or otherwise. The fact remains that the capital asset has been acquired by the assessee without the payment of any money. It is, therefore, not possible to ascertain in this case when the asessee did not pay any amount in the acquisition of the tenancy rights, as to what is the “cost of acquisition” or “cost of improvement” for the purpose of computation of “capital gains” under S. 48. If the whole of the value of the capital asset transferredis brought to tax, then what would be charged is the capital value of the asset and not any profit or gain as contemplated in S. 45”.

    8. Later, the Court concluded as follows:

    “It is not possible to apply the computation sections for quantifying the profits and gains on the transfer of leasehold rights which were acquired by the assessee without any cost. The mode of computation and deduction set forth in S. 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”

    9. The above decision was cited with approval by the Gujarat High Court in Rajabali Nazarali and Sons v. C.I.T (163 I.T.R 7). Wealso find that in Syndicate Bank Ltd. v. Addl. C.I.T (155 I.T.R 681-Kamataka); B.G Shah v. C.I.T (162 I.T.R 23-Bombay); C.I.T v. H.H Maharaja Sahib Shri. Lokendra Singhji (162 I.T.R 93-M.P.) and C.I.T v. Markapakula Agamma (165 I.T.R 386-A.P.) the decision of the Delhi High Court in Bawa Shiv Charan Singh's case (149 I.T.R 29) has been referred to. It cannot admit of any doubt that the consideration received by a tenant for parting with the tenancy right is not exigible to capital gains in cases where no cost of acquisition for the tenancy can be predicated. We fully concur with the reasoning and conclusion of the Delhi High Court stated in its decision in Bawa Shiv Charan Singh's case (149 I.T.R 29).

    10. In this view of the matter, the reasoning and conclusion of the Appellate Tribunal are justified in law. We, therefore, answer question No. 1 in the affirmative-against the Revenue and in favour of the assessee. We answer question No. 2 in the affirmative-in favour of the assessee and against the Revenue.

    11. The references are answered accordingly.

    12. A copy of this judgment, under the seal of this Court and the signature of the Registrar, shall be forwarded to the Incometax Appellate Tribunal, Cochin Bench.

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    Comments

    Commissioner Of Income Tax v. Merchandisers (P) Ltd.
    (Sep 25, 1989)