Facts

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/assessee to  the lessor. The lease would have continued till 2009. During the relevant previous year, in March 1986, the assessee surrendered its tenancy right to its lessor prematurely. In consideration for such premature termination, the lessor paid the assessee/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 of the ‘Act’.  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 CIT v. Srinivasa Setty (1981)  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’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.

Issue

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.

Views

In 1981 the Court in CIT v.  B. C. Srinivasa Setty (1981) 128 ITR 294/(1981) 2   SCC 460 held that the 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 ofcertain case, be acquired without the payment of money.”

Held

Dismissing the revenue’s appeal, the court held that, the tenancy rights is a capital asset, the surrender of the tenancy rights is a “transfer” and the consideration received therefore is 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.  CIT (1991)  192 ITR 382 (SC). Normally the consideration would therefore be subjected to capital gains under Section

45. Futher court held that, 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. Then the court considered the Circular issued by the Central Board of Direct Taxes Circular No.684 dated 10th June 1994 wherefrom it was observed by the court that, to meet the situation created by the decision in Srinivasa Setty and  the subsequent decisions of 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. Inother words the cost of acquisition would be taken as determinable   but the rate would be nil. Further the court considered the aspect of effective period of stated amendment by Finance Act, 1994 to which court noted that, 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 therefore covering the Assessment Year in question, the law as perceived  by the Department was that if the cost of acquisitionof a capital asset could not

in fact be determined, the transfer of such capital asset would not attract capital gains. Next the court considered the aspect of possibility of taxability under any other provision like section 56 of the Act, to which it held that, once applicable 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. That is after considering various heads of taxation specified under section 14 of the ‘Act’,  it  held that, if the income is included under any one of the heads, it cannot be brought to tax under the residuary provisions of Section 56. In other words it  held that, 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 of the ‘Act’. (AY. 1987-88) (CA No. 2335 of 2003 dt. 31-1-2005)

Editorial : Cadell Weaving Mill Co. (P) Ltd. v. CIT (2001) 249 ITR 670 (Bom.) approved. Decision of Special Bench in Cadel Wvg. Mills Co Pvt Ltd v. ACIT (1995) 55 ITD 137/(1996) 217 ITR 51 (SB)(Mum) (Trib.) was reversed.

Above decision has been applied by Delhi high court in Girish Bansal v. UOI (2016) 384 ITR 161 (Delhi) (HC) in context of non taxable capital receipt argument of assessee for amount received on account of cancellation of sale certificate/deed which was accepted and it was held that said amount can not be taxed as casual and non recurring receipt under section 10(3) read with section     56 of the ‘Act’. Bombay High Court in the case of CIT v. Sambhaji Nagar Co-op. Hsg. Society Ltd [2015] 370 ITR 325 (Bom) (HC) held that the asset i.e. Floor Space Index (FSI)/Transferable Development Rights (TDR). is generated by change  in the development control regulations. A specific insertion would therefore be necessary so as to ascertain its cost for computing the capital gains. The Court, referring to the decision of the Apex Court in CIT v.  D. P.  Sandu Bros Chembur     P Ltd [2005] 273 ITR I (SC), held that all 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. Thus, the Bombay High Court held that since the cost of acquisition of the rights being transferred cannot be determined, the amount is not liable to capital gains tax. To the same effect is Mumbai bench ITAT decision in case of Anil Gulab  Shah in ITA 5134/Mum/2017 order dated 09/08/2019 held that “there could not be  any transfer of a “right to sue” under Indian Law and any capital receipt arising from a right to sue cannot thus be considered capital gains under Section 45. Additionally, the cost of the said right being indeterminable, the charging Section would failas per the cited decision of Hon’ble Supreme Court rendered in CIT

1. B. C. Srinivasa Shetty [supra]. Therefore, no infirmity could be found on the

issue in adjudication done by learned CIT(A). The same is further fortified by

the decision of this Tribunal rendered in Sushmita Sen v.  ACIT [2019] 174 ITD     8  (Mum) (Trib)  wherein it has been held that compensation received for loss    of reputation and not to initiate civil or criminal proceedings would be capital       in nature. Similar is the decision in ACIT v. Jackie Shroff [2018] 172 ITD 425 (Mum) (Trib) wherein it has been held that compensation/damages received for withdrawal of criminal complaint would be capital receipt and could not be treated as income u/s 2(24). This decision places reliance on the decision of Hon’ble Bombay High Court rendered in CIT v. Amar Dye Chem Ltd. (1994)74 Taxman 254 (Bom) (HC)

“Earth provides enough to satisfy every man’s needs, but not every man’s greed.”

– Mahatma Gandhi