1984 (1) TMI 37 - HC - Income Tax

Capital gains not taxable on surrender of tenancy rights acquired without payment; cost under s.48 unascertainable, s.45 cannot tax value

DELHI HC held for the assessee, ruling that capital gains could not be taxed on surrender of tenancy rights acquired without payment because cost of ... Capital Gains - Tenancy Rights - Whether, on correct interpretation of the provisions of section 2(14), section 45 and section 48 of the I.T. Act, 1961, the Tribunal was justified in holding that capital gains had arisen on the receipt on surrendering of tenancy right of the first floor of premises 710, Ballimaran Chandni Chowk, Delhi ? - HELD THAT:- The fact remains that the capital asset has been acquired by the a without the payment of any money. It is, therefore, not possible to ascertain in this case when the assessee did not pay any amount in the acquisition of the tenancy rights, as to what is the ' cost of acquisition ' or cost of improvement ' for the purpose of computation of ' capital gains under s. 48. If the whole of the value of the capital asset transferred is brought to tax, then what would be charged is the capital value of the asset and not any profit or gain as contemplated in s. 45. It is not possible to apply the computation sections for quantifying the profits and gains on the transfer of leasehold rights which were acquired by the assessee without any cost. The mode of computation and deduction set forth in s. 45 provided the principal basis for quantifying the income chargeable under the head 'Capital gains.' What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. In the case of self-created value of a tenancy right, it is not possible to determine the date of acquisition of the asset. A subsidiary point may also be noticed in which the Tribunal had directed the determination of the value of tenancy right as on January 1, 1954, and to deduct the amount from Rs. 30,000 which the assessee received. It opined that the balance would represent capital gains subject to statutory exemption. The authorities under the Act have no jurisdiction or power to direct the ascertainment of the cost of acquisition in relation to a capital asset. The option is given to the assessee whether to adopt the cost of acquisition of the asset to the assessee or the fair market value of asset on the 1st day of January, 1954. The assessee has not exercised the option, nay, he has not even been called upon to do so. There is, therefore, no basis for directing the determination of the value of the tenancy rights as on January 1, 1954. The question is, therefore, answered in the favour of the assessee and against the Revenue with no order as to costs. Issues Involved:1. Whether tenancy rights constitute a capital asset.2. Whether the surrender of tenancy rights results in capital gains.3. Applicability of computation provisions for capital gains in the absence of acquisition cost.Summary:1. Tenancy Rights as Capital Asset:The Tribunal held that tenancy rights represent a capital asset as defined u/s 2(14) of the I.T. Act, 1961, which includes property of any kind held by an assessee. The leasehold rights do not fall under any exclusions of this definition. The term 'property' is of the widest import, signifying every possible interest which a person can acquire, hold, and enjoy. The right of a lessee is an estate or interest in the premises and is transferable property, thus constituting a capital asset.2. Surrender of Tenancy Rights and Capital Gains:The Tribunal concluded that the surrender of tenancy rights for Rs. 30,000 resulted in capital gains. The term 'transfer' u/s 2(47) includes the relinquishment of the asset or the extinguishment of any rights therein. The assessee's receipt of Rs. 30,000 for surrendering the tenancy rights was considered a transfer of a capital asset, thereby attracting capital gains tax u/s 45 of the Act.3. Computation Provisions and Cost of Acquisition:The Tribunal directed the AAC to determine the value of the tenancy rights as on January 1, 1954, and deduct it from Rs. 30,000 to compute the capital gains. However, the High Court observed that the computation provisions u/s 48 require the deduction of the cost of acquisition and any improvement costs from the full value of the consideration. Since the tenancy rights did not cost the assessee anything, it was impossible to ascertain the 'cost of acquisition' or 'cost of improvement.' The Supreme Court's decision in CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 was cited, which held that if the computation provisions cannot apply, the case does not fall within the charging section. Thus, the High Court concluded that the transfer of tenancy rights without an ascertainable cost of acquisition does not result in taxable capital gains.Conclusion:The High Court answered the question in favor of the assessee, holding that the surrender of tenancy rights did not result in taxable capital gains due to the inability to apply the computation provisions. The Tribunal's direction to determine the value of tenancy rights as on January 1, 1954, was also deemed without basis, as the assessee had not exercised the option to adopt the fair market value. The judgment was delivered with no order as to costs.