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CASE NO.: Appeal (civil)  2335 of 2003

PETITIONER: Commissioner of Income Tax, Mumbai                 

RESPONDENT: D.P. Sandu Bros. Chembur (P) Ltd.               

DATE OF JUDGMENT: 31/01/2005

BENCH: Ruma Pal,Arijit Pasayat & C.K. Thakker

JUDGMENT: J U D G M E N T

RUMA PAL, J.

       The primary question involved in this appeal is whether  the amount received by the respondent-assessee on surrender  of tenancy rights is liable to capital gains tax under Section 45  of the Income tax Act, 1961.  The assessment year in question  is 1987-88.  The lease agreement was entered in 1959 for 50  years under which an annual rent was paid by the lessee to the  lessor.  The lease would have continued till 2009. During the  relevant previous year, in March 1986, the respondent  surrendered its tenancy right to its lessor prematurely.  In  consideration for such premature termination, the lessor paid  the lessee a sum of Rs. 35 lakhs.         In the assessee’s return the sum of Rs.35 lakhs had been  credited to its reserve and surplus account. This was disallowed  by the Assessing Officer who held that the amount of           Rs.35 lakhs was taxable as "income from other sources"  under  Section 10(3) read with Section 56. The assessee appealed to  the Commissioner of Income Tax (Appeals) who came to the  conclusion that the assessee was liable to pay capital gains on  the amount of Rs. 35 lakh after deducting an amount of Rs.7  lakhs as the cost of acquisition. The Commissioner had  determined the cost of acquisition at Rs. 7 lakhs on the basis of  the market value of the property as on 1.4.1974. Both the  Department and the assessee challenged the decision of the  Commissioner before the Tribunal.           The Tribunal relied upon the decision of this Court in  Commissioner of Income Tax V. Srinivasa Setty 128 ITR   294 = (1981) 2 SCC 460 as well as the amendment to Section  55(2) of the Act in 1995 and held that the assessee did not  incur any cost to acquire the leasehold rights and that if at all  any cost had been incurred it was incapable of being  ascertained.   It was therefore held that since the capital gains  could not be computed as envisaged in Section 48 of the  Income Tax Act, therefore capital gains earned by the assessee  if any was not exigible to tax.           The Department preferred an appeal before the High  Court.  The High Court dismissed the appeal.  Being aggrieved  by the decision of the High Court, this further appeal has been  preferred by the Department.   The Department has contended that the surrender value  of the tenancy rights was chargeable to capital gains under  Section 45 of the Act.  If not, it was liable to be taxed as  ’income from other sources’ under Section 10(3) read with  Section 56 of the Act.           Section 2(24)(vi) defines ’income’ as including "any   capital gains chargeable under Section 45".  Section 45

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provides that any profits or gains arising from the transfer of a  capital asset effected in the previous year is chargeable to  income tax under the head ’capital gains’ and is deemed to be  the income of the previous year in which the transfer took  place, subject to certain exceptions which are not material in  this case. Section 48 provides for the mode of computation of  income chargeable under the head ’capital gains’.  The method  of computation prescribed is by deducting from the full value of  the consideration received or accruing as a result of the transfer  of the capital asset, certain prescribed amounts including the  cost of acquisition of the assets and the cost of any  improvement thereto. That the tenancy right is a capital asset, the surrender of  the tenancy right is a "transfer" and the consideration received  therefore a capital receipt within the meaning of Section 45 has  not been questioned before us and must in any event be taken  to be concluded by the decision of this Court in A. Gasper v.  Commissioner of Income Tax . Normally the consideration  would therefore be subjected to capital gains under Section 45.          In 1981 this Court in Commissioner of Income Tax V.  B.C. Srinivasa Setty  held that all transactions encompassed  by Section 45 must fall within the computation provisions of  Section 48.  If the computation as provided under Section 48  could not be applied to a particular transaction,  it must be  regarded as "never intended by Section 45 to be the subject of  the charge".  In that case, the Court was considering whether a  firm was liable to pay capital gains on the sale of its goodwill to  another firm.  The Court found that the consideration received  for the sale of goodwill could not be subjected to capital gains  because the cost of its acquisition was inherently incapable of  being determined. Pathak J. as his Lordship then was,  speaking for the Court said: "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."    

       In other words, an asset which is capable of acquisition at  a cost would be included within the provisions pertaining to the  head ’capital gains’ as opposed to assets in the acquisition of  which no cost at all can be conceived. The principle  propounded in Srinivasa Setty has been followed by several  High Courts with reference to the consideration received on  surrender of tenancy rights. [See: Among others  Bawa Shiv  Charan Singh Vs. Commissioner of Income Tax, Delhi (1984)  149 ITR.29; The Commissioner of Income Tax Vs. Mangtu Ram  Jaipuria (1991) 192 ITR 533(Cal.); Commissioner of Income  Tax Vs. Joy Ice Cream (Bang) Pvt. Ltd. (1993) 2001 ITR  895(Kar.) Commissioner of Income Tax Vs. Markapakula  Agamma (1987) 165 ITR 386 (A.P.); Commissioner of Income  Tax Vs. Merchandisers (P) Ltd. (1990) 182 ITR 107) (Ker.)] . In  all these decisions the several High Courts held that if the cost  of acquisition of tenancy rights cannot be determined, the  consideration received by reason of surrender of such tenancy  rights could not be subjected to capital gains.     According to a Circular issued by the Central Board of  Direct Taxes  it was to meet the situation created by the  decision in Srinivasa Setty and the subsequent decisions of

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the High Court that  the Finance Act 1994 amended Section 55  (2) to provide that the cost of acquisition of inter-alia a tenancy  right would be taken as nil.  By this amendment, the judicial  interpretation put on capital assets for the purposes of the  provisions relating to capital gains was met. In other words the  cost of acquisition would be taken as determinable but the rate  would be nil. The amendment took effect from 1st April 1995 and  accordingly applied in relation to the assessment year 1995-96  and subsequent years.  But till that amendment in 1995, and  therefore covering the Assessment Year in question, the law as  perceived by the Department was that if the cost of acquisition  of a capital asset could not in fact be determined, the transfer of  such capital asset would not attract capital gains.  The  appellant now says that Srinivasa Setty’s case would have no  application  because a tenancy right cannot be equated with   goodwill.  As far as goodwill is concerned, it is impossible to  specify a date on which the acquisition may be said to have  taken place.  It is built up over a period of time.  Diverse factors  which cannot be quantified in monetary terms may go into the  building of the goodwill, some tangible some intangible.   It is  contended that a tenancy right is not a capital asset of such a  nature that the actual cost on acquisition could not be  ascertained as a natural legal corollary.   We agree.   A tenancy right is acquired with reference to  a particular date.  It is also possible that it may be  acquired at a  cost.  It is ultimately a question of fact.  In A.R. Krishnamurthy  and Ors. v. Commissioner of Income Tax, Madras (1989)  176 ITR 417   this Court held that it cannot be said conceptually  that there is no cost of acquisition of the grant of the lease. It  held that the cost of  acquisition of leasehold rights can be  determined.  In the present case however,  the Department’s  stand before the High Court was  that the cost of acquisition of  the tenancy was incapable of being ascertained. In view of the  stand taken by the Department before the High Court, we  uphold the decision of the High Court on this issue.         Were it not for the inability to compute the cost of  acquisition under Section 48,  there is, as we have said,  no  doubt that a monthly tenancy or leasehold right is a capital  asset and that the amount receipt on its surrender was a capital  receipt.  But because we have held that Section 45 cannot be  applied, it is not open to the Department to impose tax on such  capital receipt by the assessee  under any other Section. This  Court, as early as in 1957 had, in United Commercial Bank  Ltd. V. Commissioner of Income Tax Ltd., West Bengal  (1957) 32 ITR 688, held that the heads of income provided for  in the Sections of the Income Tax Act, 1922 are mutually  exclusive and where any item of income falls specifically under  one head, it has to be charged under that head and no other.   In other words, income derived from different sources falling  under a specific head has to be computed for the purposes of  taxation in the manner provided by the appropriate Section and  no other. It has been further held by this Court in East India  Housing and Land Development Trust Ltd. V.  Commissioner of Income Tax, West Bengal (1961) 42 ITR  49  that if the income from a source falls within a specific head,  the fact that it may indirectly be covered by an another  head  will not make the income taxable under the latter head. (See  also: Commissioner of Income Tax Vs. Chugandas and  Co.(1964) 55 ITR 17).          Section 14 of the Income Tax Act 1961 as it stood at the  relevant time similarly provided that "all income shall for the  purposes of charge of income tax and computation of total  income be classified under six heads of income," namely; (A)     Salaries;

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(B)     Interest on Securities; (C)     Income from house property; (D)     Profits and gains and business or profession; (E)     Capital gains; (F)     Income from other sources unless otherwise, provided in  the Act. Section 56 provides for the chargeability of income of  every kind which has not to be excluded from the total income  under the Act, only if it is not chargeable to income tax under  any of the heads specified in Section 14 items A to E.    Therefore, if the income is included under any one of the  heads, it cannot be brought to tax under the residuary  provisions of Section  56.           There is no dispute that a tenancy right is a capital asset  the surrender of which would attract Section 45 so that the  value received would be a capital receipt and assessable if at  all only under Item E of Section 14.   That being so, it cannot be  treated as a casual or non recurring receipt under Section 10(3)  and be subjected to tax under Section 56.  The argument of the  appellant  that even if the income cannot be chargeable under  Section 45, because of the inapplicability of the computation  provided under Section 48, it could still impose tax under the   residuary head is thus unacceptable.   If the income cannot be  taxed under Section 45, it cannot be taxed at all.  (See: S.G.  Mercantile Corporation (P) Ltd. Vs. Commissioner of Income  Tax, Calcutta (1972) 83 ITR 700). Furthermore, it would be illogical and  against the  language of Section 56 to hold that  everything that is exempted  from capital gains by statute could be taxed as a casual or non  recurring receipt under Section 10(3) read with Section 56. We  are fortified in our view by a similar argument being rejected in  Nalinikant Ambalal Mody  Vs. S.A.L. Narayan Row CIT  (1966) 61 ITR 428,432,435. The appeal is accordingly dismissed without any order as  to costs.