2007 (6) TMI 26 - HC - Income Tax

Surrender of Leasehold Rights: Consideration as Capital Gains vs. Income

COMMISSIONER OF INCOME-TAX Versus MN ENTERPRISES

COMMISSIONER OF INCOME-TAX Versus MN ENTERPRISES - [2007] 293 ITR 35 (Karn) Issues Involved:1. Whether the consideration received on account of surrender of leasehold rights is a business receipt or capital gains.2. Whether the capital receipt, if not taxable under 'capital gains', is assessable under 'Other sources'.Issue-wise Detailed Analysis:1. Nature of Consideration Received:The primary issue was whether the consideration received from the surrender of leasehold rights in carrying on hotel business, which was sub-leased and not carried on by the assessee itself, constitutes a business receipt or capital gains. The assessee had acquired leasehold rights and carried on the hotel business for a brief period before sub-leasing it. Later, the assessee transferred its interest in the business and leasehold rights for a consideration, which was claimed as a capital receipt in the return filed for the assessment year 1987-88. The Assessing Officer initially treated this income as 'Business income,' but the first appellate Commissioner and the Tribunal categorized it under 'Capital gains,' stating that the cost of acquisition was indeterminable and thus not taxable under section 45 of the Act.The court examined the facts and noted that the assessee had acquired leasehold rights and transferred them later. The Tribunal's reliance on the judgment in CIT v. Joy Ice-creams (Bang) P. Ltd. was discussed, where it was held that income derived from surrendering tenancy rights is a capital gain but not taxable if no cost of acquisition was involved.2. Determination of Cost of Acquisition:The second issue was whether, if the capital receipt is not taxable under 'capital gains,' it should be assessed under 'Other sources' as per the inclusive definition of income in section 2 and section 10(3). The Revenue argued, citing A. R. Krishnamurthy v. CIT, that the cost of acquisition of leasehold rights is ascertainable and should be determined by the Income-tax Officer based on evidence. The court concurred, stating that the first appellate authority should have determined the cost of acquisition or remanded the matter to the Assessing Officer for determination.The court also addressed the argument that amendments to section 55, which provide for a deeming provision to determine the cost of acquisition, are prospective and not applicable to the assessment year in question. The court held that the amendment has no relevance to the present case, as the law before the amendment required the determination of the cost of acquisition if it could be done based on evidence.3. Applicability of Previous Judgments:The court examined the applicability of previous judgments, including CIT v. B.C. Srinivasa Setty, which held that the cost of acquisition of self-generated goodwill cannot be determined, and thus capital gains cannot be taxed. The court found this inapplicable to the present case, as the assessee had acquired leasehold rights from another party and not self-generated goodwill. The court also reviewed the judgment in CIT v. A. S. Wardekar, which supported the view that income cannot be charged under section 45 if the cost of acquisition cannot be ascertained.4. Final Determination and Remand:The court concluded that the authorities below had failed to determine the cost of acquisition of leasehold rights. Therefore, the matter was remanded to the Assessing Officer to determine the cost of acquisition based on the facts and evidence. The court answered the first question affirmatively, stating that the transfer of leasehold rights is a capital gain and the cost of acquisition must be determined. For the second question, the court held that the income from the transfer of leasehold rights falls under 'Capital gains' and not 'Income from other sources,' unless otherwise provided in the Act.Conclusion:The reference was disposed of with directions to the Assessing Officer to determine the cost of acquisition of leasehold rights by providing an opportunity of being heard to the assessee. The court's order emphasized the need for a factual determination of the cost of acquisition in each case to apply the appropriate tax provisions.