Leasehold rights transfer and capital gains: cost of acquisition must be determined on evidence, not shifted to residuary income

Transfer of leasehold rights was treated as a capital receipt falling within the capital gains regime, and the authorities were said to have erred in assuming that the cost of acquisition could not be determined. The assessing authority must determine that cost on the evidence in each case, and a remand may be necessary for that purpose. The residuary head of income could not be invoked merely because the capital gains computation was disputed. On the facts stated, the receipt was assessable as capital gains, with the cost of acquisition to be determined by the Assessing Officer after hearing the assessee.

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Issues: (i) Whether the consideration received on transfer of leasehold rights was assessable as capital gains and whether the cost of acquisition had to be determined; (ii) Whether the amount, if not taxable as capital gains, could be assessed under the head "Income from other sources".

Issue (i): Whether the consideration received on transfer of leasehold rights was assessable as capital gains and whether the cost of acquisition had to be determined.

Analysis: The transfer of leasehold rights was held to be a capital receipt falling within the capital gains regime. The authorities below had erred in concluding that the cost of acquisition of the leasehold rights could not be determined. The governing principle was that the assessing authority must determine the cost of acquisition on the basis of evidence in each case, and where necessary the matter may be remanded for that purpose. The decisions relating to self-generated goodwill and cases where no cost of acquisition exists were held inapplicable on the facts, because the asset here was leasehold rights acquired by transfer and not an asset whose acquisition cost was inherently indeterminate.

Conclusion: The receipt was taxable as capital gains, and the cost of acquisition of the leasehold rights had to be determined by the Assessing Officer.

Issue (ii): Whether the amount, if not taxable as capital gains, could be assessed under the head "Income from other sources".

Analysis: Once the receipt was held to arise from transfer of leasehold rights and to fall within capital gains, it could not be shifted to the residuary head merely because the capital gains computation was in dispute. The Court treated the residue head as unavailable in these facts unless the Act otherwise specifically provided.

Conclusion: The amount fell under the head "Capital gains" and not under the head "Income from other sources".

Final Conclusion: The reference was answered by holding that the transfer of leasehold rights attracted capital gains tax, but the matter had to go back to the Assessing Officer for determination of the cost of acquisition after giving the assessee an opportunity of hearing.

Ratio Decidendi: Where leasehold rights are transferred, the receipt is chargeable as capital gains if the cost of acquisition is capable of determination on the basis of evidence, and the residuary head cannot be invoked to tax the same receipt merely because computation under capital gains is in issue.

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