Statutory tenancy rights and capital gains tax: no tax where the right had no ascertainable cost of acquisition.

Capital gains tax was inapplicable to compensation attributable to protected tenancy rights because the right was conferred by statute without any ascertainable cost of acquisition. The court applied the sections 45 and 48 computation scheme, holding that where no cost of acquisition can be conceived, the charging provision fails because the taxable surplus cannot be computed. Periodical rent paid by the tenant was not treated as consideration for acquiring the tenancy right, and section 55 could not create a notional cost where none existed.

---

---

Issues: Whether compensation received on acquisition of land attributable to protected tenancy rights was chargeable to capital gains tax when the tenancy right had been conferred by statute without any cost of acquisition.

Analysis: The charging provision for capital gains operates in conjunction with the computation machinery. Under the scheme of sections 45 and 48 of the Income-tax Act, 1961, the taxable surplus is determined by deducting the cost of acquisition and cost of improvement from the consideration received on transfer. The Court applied the principle that where an asset is one in respect of which no cost of acquisition can be envisaged, the computation machinery fails and capital gains cannot be charged. Protected tenancy under the Andhra Pradesh (Telangana Area) Tenancy and Agricultural Lands Act was held to be a creature of statute, conferred without any bargain, payment, or contractual acquisition cost. The periodical rent paid by the tenant was not treated as consideration for acquiring the tenancy right, and section 55 could not be used to supply a notional cost where none existed.

Conclusion: The compensation attributable to protected tenancy rights was not liable to capital gains tax, and the answer was in favour of the assessee.

Final Conclusion: Capital gains tax was held inapplicable where the relevant right was statutorily conferred without any ascertainable cost of acquisition.

Ratio Decidendi: Capital gains cannot be levied unless the transferred asset is one for which a cost of acquisition can be conceived and computed under the Act.

---