Doctrine of merger in leasehold purchases bars tenancy rights from forming separate cost of acquisition for later capital gains.

When a lessee purchases the leased property, the lease is extinguished by merger because the same person cannot remain both landlord and tenant. The tenancy or occupancy right therefore has no separate continuing existence after the purchase and cannot be treated independently as part of the cost of acquisition for later capital gains computation. On a subsequent sale of the property, the gain is computed only with reference to the owned flat acquired on purchase. The earlier tenancy right does not survive as a separate capital asset, and the resulting surplus is treated as short-term capital gain.

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Issues: Whether, for computing capital gains on sale of a flat purchased by a former tenant, the value of the earlier tenancy or occupancy right could be treated as part of the cost of acquisition after the leasehold interest had merged into the ownership interest.

Analysis: On purchase of the leased property by the lessee, the lease stood extinguished because the same person could not simultaneously remain landlord and tenant. The doctrine of merger applied, resulting in the lesser interest sinking into the superior interest and bringing the tenancy to an end. The statutory rule recognising determination of lease on such merger was reflected in section 111(d) of the Transfer of Property Act, 1882. Once the flat was purchased, the only subsisting asset was the owned flat with all rights and interests therein, and the prior tenancy had no independent existence for capital gains computation. Since the flat was sold within a few months of purchase, the gain arose from transfer of the purchased ownership asset and not from a continuing composite of tenancy and ownership rights.

Conclusion: The earlier tenancy right could not be separately treated as part of the cost of acquisition, and the surplus was rightly assessed as short-term capital gain.

Ratio Decidendi: Where a lessee purchases the leased property, the lease is extinguished by merger and the tenancy cannot survive as a separate capital asset for computing capital gains on a later sale of the property.

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