1980 (12) TMI 33 - HC - Income Tax

Lease deemed capital asset under Income-tax Act; Lessee's right valued for capital gains. Revenue awarded costs.

The court held that the lease transaction constituted a transfer of a capital asset under the Income-tax Act, attracting capital gains tax. It was ... Transfer of a capital asset - leasehold interest as capital asset - salami / premium as capital receipt - cost of acquisition for capital gains - inclusive definition of 'transfer' in s. 2(47)Transfer of a capital asset - lease as transfer - inclusive definition of 'transfer' in s. 2(47) - The instrument of lease dated 10th September, 1970 effected a transfer of a capital asset within the meaning of s. 45 of the Income-tax Act, 1961, and is liable to capital gains tax. - HELD THAT: - The Court held that a lease is a transfer of a right to enjoy property and that the owner's right to possession and enjoyment constitutes a distinct capital asset. Authorities treating salami or premium paid for grant of a lease as capital receipt were followed, and the inclusive definition of 'transfer' in s. 2(47) cannot be given a restricted meaning. Decisions recognising leasehold interests and the right of enjoyment as transferable capital assets were applied to conclude that the lease-cum-licence for consideration of Rs. 5 lakhs amounted to a transfer of a capital asset chargeable under s. 45.Answered in the affirmative; the lease effected a transfer of a capital asset and is chargeable to capital gains.Cost of acquisition for capital gains - salami / premium as capital receipt - The cost of the leasehold right is capable of valuation and capital gains can be computed; the cost attributable to the right of enjoyment forms part of the assessee's cost of acquisition of the land. - HELD THAT: - The Court rejected the contention that no monetary cost could be attributed to the right to possession and enjoyment. The right to exploit the land (including excavation of clay) formed part of the price paid by the assessee when acquiring the land, and therefore its value must be regarded as having been paid for and is capable of valuation for computing capital gains. Earlier decisions holding that a premium/salami is capital in nature and that the value of rights inherent in the land may be included in cost were applied to sustain the AAC's approach allowing the cost for computation of gains.Answered in the affirmative; the cost of the leasehold right is capable of valuation and may be included in computing capital gains.Final Conclusion: Both questions referred under s. 256(1) are answered in the affirmative; the lease-cum-licence amounted to a transfer of a capital asset and the cost of the leasehold right is assessable for computing capital gains. Revenue entitled to costs. Issues Involved:1. Whether the instrument of lease dated September 10, 1970, effected the transfer of a capital asset within the meaning of s. 45 of the Income-tax Act, 1961, and accordingly, liable to capital gains taxRs.2. Whether the cost of leasehold right is capable of valuation and, as such, capital gains can be computedRs.Summary:Issue 1: Transfer of Capital AssetThe assessee, a body of individuals, filed a return for the assessment year 1971-72. During the assessment, the ITO noticed the assessee had granted a mining lease to M/s. Sri Krishna Tiles & Potteries (Madras) Private Ltd. for Rs. 5 lakhs, in addition to a royalty. The ITO considered this as a transfer of a capital asset u/s 45 of the I.T. Act. The AAC and the Tribunal upheld this view, stating that the leasehold interest is a capital asset as defined in s. 2(14) and that the transaction attracted capital gains tax. The court held that the right conferred on the lessee under the lease deed was a capital asset in the hands of the assessee-lessor. The court also clarified that the definition of 'transfer' in s. 2(47) is inclusive and not exhaustive, thus covering the lease transaction.Issue 2: Valuation of Leasehold RightThe ITO worked out the cost of the leasehold interest by apportioning the total cost of the land. The AAC, however, held that the entire sum of Rs. 27,260 should be considered as the cost of acquisition for determining capital gains. The court agreed with the AAC, stating that the right to exploit the land by extracting clay formed part of the cost of acquiring the land. The court concluded that there was a cost for the value of the right to excavate the land in terms of money, and thus, capital gains could be computed.Conclusion:The court answered both questions in the affirmative, confirming that the lease transaction constituted a transfer of a capital asset liable to capital gains tax and that the cost of the leasehold right is capable of valuation. The revenue was entitled to its costs, with counsel's fee set at Rs. 500.