2008 (11) TMI 175 - HC - Income Tax

Tribunal Rules Tenancy Rights as Capital Asset: Impact on Capital Gains

COMMISSIONER OF INCOME-TAX Versus HITASHI ESTATES LTD.

The Tribunal determined that the surrender of tenancy rights should be assessed under 'Capital gains,' considering the tenancy right as a capital asset ... Surrender of Tenancy Right – Capital Gains – Property was taken on rent by the assessee. Assessee made improvements in the said rented premises and retained the same for more than five years. The said property was shown as inventory in its balance-sheets for several years. Later the assessee surrendered the tenancy rights in the said property to the owner for a consideration. In the year in question, the assessee showed the said property as a capital asset and the loss incurred on surrender of the tenancy rights in the said property was claimed at Rs. 14,10,737 after claiming the benefit of indexation. The Assessing Officer did not allow this claim. CIT(A) confirmed the stand of AO but tribunal upheld the claim of assessee – HC upheld the order of Tribunal on various grounds and reasonings Issues:1. Interpretation of whether surrender of tenancy rights should be assessed under 'Capital gains' as claimed by the assessee.2. Determination of whether the tenancy right constitutes a capital asset or stock-in-trade based on accounting treatment.3. Consideration of the Supreme Court decision in CIT v. D. P. Sandu Brothers Chembur P. Ltd. [2005] 273 ITR 1 regarding the classification of 'tenancy right' as a capital asset.Analysis:1. The Revenue contested the order of the Income-tax Appellate Tribunal directing the Assessing Officer to assess the profit/loss from the surrender of tenancy rights under 'Capital gains.' The assessee surrendered the tenancy rights in a property after retaining and improving it for over five years, claiming a loss. The Assessing Officer and the CIT(A) initially disallowed this claim.2. The assessee argued that the tenancy right should be considered a capital asset, citing the Supreme Court decision in CIT v. D. P. Sandu Brothers Chembur P. Ltd. The assessee claimed that the cost of acquisition was nil, but substantial improvements were made over the years. The Revenue contended that the property had been treated as stock-in-trade in previous years, challenging the capital loss claim.3. The Tribunal found that the tenancy right was not the assessee's stock-in-trade based on a solitary surrender transaction and the nature of the assessee's business, which primarily involved owning and selling properties. The Tribunal noted the incorrect accounting treatment of the tenancy right as stock-in-trade in previous years but concluded that it was a capital asset. The Tribunal set aside the CIT(A)'s order, directing assessment under 'Capital gains.'4. The Supreme Court precedent established that a 'tenancy right' is a capital asset, irrespective of the accounting treatment. The Revenue's argument that the incorrect stock-in-trade treatment precludes capital asset classification was rejected. The Tribunal's reasoning was upheld, dismissing the appeal without identifying any perversity in its findings. The Assessing Officer was permitted to withdraw the cost of improvement if treated as business expenditure in prior years.