Self-generated tenancy rights without cost fall outside capital gains tax when computation under section 48 cannot operate.

Tenancy rights are capital assets, and their surrender ordinarily amounts to a transfer because extinguishment of rights is included within the definition of transfer. However, capital gains under section 45 can arise only where the cost of acquisition can be ascertained and the computation mechanism under section 48 can operate as an integrated code. Where tenancy rights were self-generated and acquired without cost, the computation provisions fail and the receipt falls outside capital gains taxation. The option under section 55(2)(i) to adopt fair market value was treated as inapplicable because computation was otherwise impossible.

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Issues: Whether capital gains arose on the surrender of tenancy rights for consideration when the tenancy rights had been acquired without any cost to the assessee.

Analysis: Tenancy rights constitute property and therefore a capital asset. Their surrender amounts to transfer because extinguishment of rights is included within the definition of transfer. However, the charge under section 45 and the computation mechanism under section 48 operate as an integrated code. The scheme contemplates an asset in the acquisition of which a cost can be envisaged and computed. Where the asset is self-generated and no cost of acquisition can be identified, the computation provisions fail to operate. In such a case, the transfer cannot be brought within the charge to capital gains, because taxation would then fall on the capital value of the asset and not on any profit or gain. The option under section 55(2)(i) to take fair market value as on 1 January 1954 presupposes that the assessee is called upon to exercise it in a case where computation is otherwise possible, which was not done here.

Conclusion: No capital gains arose on the surrender of the tenancy rights, and the receipt was not assessable under section 45 of the Income-tax Act, 1961.

Ratio Decidendi: A transfer of a capital asset is chargeable to capital gains only where the cost of acquisition can be ascertained and the computation provisions can be applied; a self-generated asset acquired without cost, and incapable of computation under section 48, falls outside the charging provision.

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