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PETITIONER: A.R. KRISHNAMURTHY & ANR.

       Vs.

RESPONDENT: C.I.T. MADRAS

DATE OF JUDGMENT10/02/1989

BENCH: KULDIP SINGH (J) BENCH: KULDIP SINGH (J) PATHAK, R.S. (CJ) VENKATACHALLIAH, M.N. (J)

CITATION:  1989 AIR 1055            1989 SCR  (1) 596  1989 SCC  (1) 754        JT 1989 (1)   243  1989 SCALE  (1)345

ACT:     Income  Tax  Act, 1961: Sections 2(14),  2(47),  45  and 261--Capital  gains--Taxability of--Piece of Land  purchased by  assessee-Mining  lease to excavate clay  from  the  land granted--Amounts to transfer of   ’capital  asset’---Capital gains  arise--Cost of acquisition of right to  grant  mining lease is computable--Nexus between ’cost of acquisition’ and ’grant of lease’ exists--Best valuation possible to be  made on basis of evidence.

HEADNOTE:     The appellant-assessee, a body of individuals, purchased two  pieces of land in the year 1966. In 1970 it  granted  a mining  lease  to a private company (an allied  concern)  to extract clay for a period of ten years at a premium of Rs. 5 lakhs in addition to payment of royalty.     The  Income-tax  Officer  construed the  lease  deed  as transferring a lease-hold interest in the land in favour  of the company and came to the conclusion that the transfer was assessable to capital gains tax. For the purpose of  comput- ing  the  extent of tax, the Income-tax Officer  valued  the lease-hold interest at 5/8th of the sale price of the entire land,  computed  the cost at acquisition of  the  lease-hold interest  say Rs. 17,040, and after deducting this sum  from the  sale consideration of Rs.5 lakhs, determined a  sum  of Rs.4,82,960 as long term capital gains.     Being aggrieved by the aforesaid order of the Income-tax Officer  the assessee preferred an appeal to  the  Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the assessment but allowed deduction on the entire price  of the land on the ground that the cost for the  pur- pose  of ascertaining the capital gains would be  the  total price of the land paid by assessee.     Not being satisfied, the assessee preferred an appeal to the Income-tax Appellate Tribunal which confirmed the  order of the Appellate Commissioner and dismissed the appeal. The High Court on a reference held that the right  conferred on 597 the lessee under the lease deed was also a capital asset  in

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the  hands  of  the assessee-lessor, and that  there  was  a transfer of capital asset for a consideration of Rs.5 lakhs. The  High Court accordingly answered the  reference  against the  assessee, .but granted a certificate under section  261 of the Act to appeal to this Court.     On  behalf of the assessee-appellant it  was  contended: (1)  that  conceptually there is no  ’cost  of  acquisition’ which  is  attributable to the right  of  limited  enjoyment transferred  by the grant of the lease, and (2)  relying  on the  decision  of  this Court in C.I. T.  v.  B.C.  Srinivas Sherry,  [1981] 128 ITR 294 SC it was submitted  that  since the cost of acquisition of the right granted under the lease cannot  be determined the computation provisions  under  the Act  cannot apply at all, and as such section 45 of the  Act is not attracted.     On the question: whether the grant of a mining lease for a  period  of ten years by the assessee can give rise  to  a capital gain taxable under section 45 of the Income-tax Act, 1961. Dismissing the appeal, the Court,     HELD:  1(a) Section 2(14) of the Income Tax Act  defines "capital  asset" as "property of any kind held by an  asses- see."  What  is parted with in the instant case,  under  the terms  of the deed is the right to exploit the land  by  ex- tracting clay which right directly flows from the  ownership of  the  land. The said right evaluated in  terms  of  money forms part of the cost of acquiring the land. [601C-D]     1(b). If a transfer of a capital asset in section 45  of the  Act  includes grant of a mining lease for  any  period, then obviously, the "cost of acquisition" of the land  would include the "cost of acquisition" of the mining right  under the  lease.  The  grant of a lease being a  transfer  of  an asset, there is no escape from the conclusion that there  is a  live nexus between the "cost of acquisition" of the  land and the right granted under the lease. [601G-H; 602A]     In the instant case, the amount of Rs.27,260 paid by the assessee  was  not only the cost of acquiring the  land  but also acquiring a bundle of rights in the said land including the right to grant lease. [602A]    1(c)  The apportionment of the cost of acquisition  is  a question of fact to be determined by the Income-tax  Officer in each case on the basis of evidence. The determination  of the cost of the right to excavate 598 clay  in the land in terms of money may be difficult but  is nonetheless of a money value and the best valuation possible must  be made. In the instant came, the  Income-tax  Officer worked  out the cost of the lease held interest by  adopting the 5/8th ratio, though the Appellate Assistant Commissioner gave  the benefit to the assessee -of the full price of  the land paid by him. [602B-D]     1(d)  Once  the cost of lease hold right  is  determined than there is no difficulty in making apportionment. [602E]     Gold Coast Selection Trust. Ltd. v. Inspector of  Taxes, 17  ITR 19 (supp); Traders and Mining Ltd. v.C.I.T., 27  ITR 341;  R.K.  Palshikar (HUF) v. Commissioner of  Income  Tax, M.P. Nagpur, [1988] 3 SCC 594, referred to.     2(a)  The  value  of lease hold rights in  the  cost  of acquisition  of  land  being  determinable  the  computation provision under the Act are applicable, and section 45 would he attracted. [602E-F]     2(b) The date of acquisition of the right to grant lease has  to be the same as the date of acquiring  the  free-hold rights. [603B] C.I.T. v. B.C. Srinivas Shetty, 128 ITR 294 distinguished.

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JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 2717  of 1985.     From  the  Judgment and Order dated 2.12.  1980  of  the Madras High Court in T.C. No. 573 of 1976.     Harish  N.  Salve, A.S. Chandrashekaran, K.J.  John  and Sanjay Grover for the Appellants.     Dr.  V. Gauri Shankar, Ms. A. Subhashini and  M.K.  Sha- shidharan for the Respondent. The-Judgment of the Court was delivered by     KULDIP SINGH, J. The question in this appeal is  whether the grant of a mining lease for a period of ten years by the assessee  can  give  rise to a capital  gain  taxable  under section 45 of Income-tax Act, 1961. 599     The  assessee,  a  body of  individuals,  purchased  two pieces  of land in the year 1966 measuring 14.55 acres at  a price  of Rs.27,260. By an instrument  of  lease-cum-licence dated  10th September, 1970 they granted a mining  lease  in favour  of  M/s. Sri Krishna Tiles  and  Potteries  (Madras) Private  Limited  (hereinafter  called  the  ’Company’),  an allied  concern of the assessee. The lease was for a  period of 10 years and the lessee had to pay a premium or salami of Rs.5  lakhs in addition to the payment of royalty of Rs.  12 per hundred cubic ft. of clay extracted subject to a minimum of Rs.60,000 per year.     The  Income-tax  Officer  construed the  lease  deed  as transferring a lease-hold interest in the land in favour  of the company and came to the conclusion that the transfer was assessable to capital gains tax. For the purpose of  comput- ing  the extent of tax the Income-tax Officer  assessed  the market  value  of the entire land at Rs.8 lakhs.  Since  the lease-hold interest was transferred for a sum of Rs.5 lakhs, he valued the lease-hold interest at 5/8th of the sale price of  the  entire land. On that basis the  Income-tax  Officer computed the cost of acquisition of the lease-hold  interest at Rs. 17,040, being 5/8th of Rs.271,260. Thereafter deduct- ing Rs. 17,040 from the sale consideration of Rs.5 lakhs, he treated the sum of Rs.4,82,960 as long-term capital gains.     The  assessee preferred an appeal to the  Appellate  As- sistant  Commissioner. The Appellate Commissioner held  that the  value  of the right to excavate the land  in  terms  of money is included in the purchase price paid by the assessee for the land. He rejected the argument of the assessee  that the  cost  of acquisition of the said assets  could  not  be determined. He then proceeded to consider the cost of acqui- sition  of  such  right and differing with  the  Income  Tax Officer held that on the facts of the case the cost for  the purpose of ascertaining the capital gains would be the total price of the land paid by the assessee, that is,  Rs.27,260. On  all other points he upheld the order of  the  Income-tax Officer.     The  assessee preferred an appeal to the  Tribunal.  The Tribunal observed that the entire ownership of the  property means  the  ownership of a bundle of rights  and  a  limited interest which can be severed and disposed off for a  speci- fied period in the form of lease or mortgage or the like  is part of that bundle. According to the Tribunal the  purchase price  paid by the assessee for the land includes therein  a component of purchase price attributable to various kinds of interests embedded in the said land. The Tribunal  confirmed the  order of the Appellate Commissioner and  dismissed  the

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appeal. 600     Arising  from  the said decision of  the  Tribunal.  the following two. questions were referred to the High Court for determination:                  (i)  Whether, on the facts and in the  cir-               cumstances  of  this case, the  instrument  of               lease  dated September 10, 1970  effected  the               transfer of a capital asset within the meaning               of section 45 of the Income-tax Act, 1961 and,               accordingly, liable to capital gains tax?                  (ii)  Whether,  on  the facts  and  in  the               circumstances  of  the case  the  Tribunal  is               right in law in holding that the cost of lease               hold  right  is capable of valuation  and,  as               such, capital gains can be computed?     The  High Court opined that the right conferred  on  the lessee under the lease deed was also a capital asset in  the hands of the assessee-lessor. By giving a liberal meaning to the  word  "transfer" in section 2(47) of the Act  the  High Court held that there was a transfer of capital asset for  a consideration of Rs. 5 lakhs under the instrument dated 10th September,  1970.  It was further held that  the  rights  of owner  of a land include a fight to grant the lease  to  ex- ploit the land. The High Court answered the two questions in the  affirmative  and against the assessee. The  High  Court granted a certificate under section 261 of the Act to appeal to this Court.     The  relevant provisions of sub-section 14 of section  2 which defines "capital asset" and section 45(1) of the  said Act  which provides for the levy of tax on capital gains  is as under:               "2(14)  "capital asset" means property of  any               kind  held  by  an assessee,  whether  or  not               connected with his business or profession, but               does not include--.               45(1)  Any profits or gains arising  from  the               transfer  of a capital asset effected  in  the               previous year shall, save as otherwise provid-               ed  in  section be  chargeable  to  income-tax               under  the head "Capital gains", and shall  be               deemed  to be the income of the previous  year               in which the transfer took place. "     Mr.  Harish  Salve, learned counsel  appearing  for  the appellant, without disputing that the grant of a lease would constitute a transfer of an ,asset, has raised the following two contentions: 601                 (i)  That conceptually there is no "cost  of               acquisition"  which  is  attributable  to  the               right of limited enjoyment transferred by  the               grant of the lease. There is no nexus  between               the  "cost  of acquisition" of  the  free-hold               land  and the right granted under  the  lease.               For the same reason it is contended that there               is no question of apportionment of such  "cost               of acquisition".                 (ii)  That since the cost of acquisition  of               the  right granted under the lease  cannot  be               determined  the computation  provisions  under               the  Act cannot apply at all and as such  sec-               tion 45 of the Act is not attracted.  Reliance               for this contention is placed on the  judgment               of this Court in C.I.T.v.B.C. Srinivas Shetty,               128 ITR 294.

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As  regards the first contention, section 2(14) of  the  Act defines "capital asset" as "property of any kind held by  an assessee".  What  is  parted with under  the  terms  of  the lease-deed  is the right to exploit the land  by  extracting clay  which fight directly flows from the ownership  of  the land. The said right evaluated in terms of money forms  part of  the  cost of acquiring the land. In Traders  and  Mining Ltd.  v. C.I.T., 27 ITR 341, a Division Bench of  the  Patna High  Court,  interpreting  the expression  "transfer  of  a capital asset" held as under:               "We  think that the expression  "transfer"  in               the  section  includes not  only  a  permanent               transfer  but  also a  temporary  transfer  of               title to the property in question and lease of               mines  for  any period would fall  within  the               ambit  of section 12B of the Act. It was  also               contended by Mr. Dutt that a transaction of  a               lease  was not tantamount to a transfer  of  a               title  but that a mere contractual  right  was               created. We do not think that this argument is               correct. A lease of land is transfer of inter-               est  in the land and creates a right  in  rem:               and there is a transfer of title in favour  of               the  lessee  though the lessor  has  right  of               reversion after the period of the lease termi-               nates." This  decision  has been referred to with approval  by  this Court  in  R.K. Palshikar (HUF) v. Commissioner  of  Income. Tax,  M.P. Nagpur, [1988] 3 SCC 549. If transfer of  capital asset  in  section 45 of the Act includes  grant  of  Mining Lease  for any period .then obviously the "cost of  acquisi- tion" of the land would include the "cost of acquisition" Of the Mining right under the lease. Undisputedly the grant  of alease being a transfer of an asset there is no escape  from the conclusion that 602 there  is a live nexus between the "cost of acquisition"  of the land and the rights granted under the lease. The  amount of  Rs.27,260 paid by the Assessee was not only the cost  of acquiring the land but also of acquiring bundle of fights in the said land including the right to grant lease. There  is, thus no force in the contention of the learned counsel  that conceptually  there  is no "cost of  acquisition"  which  is attributable  to the fight of limited enjoyment  transferred by  the grant of the lease. So far as the  apportionment  of the  cost  of acquisition is concerned it is a  question  of fact to be determined by the Income-Tax Officer in each case on  the basis of evidence. The determination of the cost  of the right to excavate clay in the land in terms of money may be  difficult but is none-the-less of a money value and  the best valuation possible must be made. Viscount Simon in Gold Coast Selection Trust Ltd. v. Inspector of Taxes, 17 ITR  19 (supp)  observed "valuation is not an exact science.  Mathe- matical  certainty is not demanded, nor indeed is it  possi- ble."  The  Income-tax Officer in this case worked  out  the cost  of  lease hold interest by adopting the  5/8th  ratio, though  the Appellate Commissioner gave the benefit  to  the Assessee  of  the  Full Price of the land paid  by  him.  In Traders  and  Mines  Ltd.  v.  Commissioner  of  Income-tax, (supra) the Income-tax Officer had also determined the  cost of  the lease hold fights on proportionate basis.  Once  the cost of the lease-hold fights is determined then there is no difficulty  in making apportionment. We, therefore,  do  not find  any  force in the first contention of  Mr.  Salve  and reject the same.

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   In  view  of  our finding on the  first  contention  the second contention does not survive. The value of lease  hold fights in the cost of acquisition of land being determinable the computation provisions under the Act are applicable  and section 45 would be attracted. In Shetty’s case the question was  whether  the transfer of the goodwill of a  newly  com- menced  business  can give rise to a  capital  gain  taxable under  section 45 of the Act. This Court answered the  ques- tion in the negative. Referring to the charging section  and the  computation  provisions under the Act this  Court  held that  none of those provisions suggest the inclusion  of  an asset  under the Head "Capital Gain," in the acquisition  of which  no cost at all can be conceived. Good will  generated in an individual’s business was held to be an asset in which no cost element can be identified or envisaged. It was  also held that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining  to capital gains and in the case of self-generated good will it is not possible to determine the same. The third reason  for holding  that the good will generated in a  newly  commenced business cannot be described as an ’asset’ within the  terms of section 45 of the 603 Act  was  that  it is impossible to determine  its  cost  of acquisition.  None of the three reasons given by this  Court in Shetty’s case are applicable in the present case. We have held  that the cost of acquisition of lease hold rights  can be determined. The date of acquisition of the right to grant lease  has to be the same as the date of acquiring the  free hold rights. The ratio of Shetty’s case is thus not attract- ed to the question involved in the present case. We,  there- fore, do not find any force in the second contention also. Accordingly the appeal is dismissed with costs. N.V.K.                                         Appeal   dis- missed. 604