1989 (2) TMI 2 - SC - Income Tax

Ten-year mining lease is a transfer under Section 45; leasehold cost is determinable and capital gains apply

SC held that the grant of a ten-year mining lease by the assessee constituted a transfer attracting capital gains tax under section 45, because leasehold ... Transfer of a capital asset - Capital Gains - Determination Of Cost Of Acquisition - whether the grant of a mining lease for a period of ten years by the assessee can give rise to capital gain taxable u/s 45 - Held That:- The value of leasehold rights in the cost of acquisition of land being determinable, the computation provisions under the Act are applicable and section 45 would be attracted. In B. C. Srinivasa Setty's case [1981 (2) TMI 1 - SUPREME COURT], the question was whether the transfer of the goodwill of a newly commenced business can give rise to a capital gain taxable under section 45 of the Act. This court answered the question in the negative. Referring to the charging section and the computation provisions under the Act, this court held that none of those provisions suggest the inclusion of an asset under the head 'Capital gain', in the acquisition of which no cost at all can be conceived. Goodwill generated in an individual's business was held to be an asset in which no cost element can be identified or envisaged. It was also held that the date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains and in the case of self-generated goodwill, it is not possible to determine the same. The third reason for holding that the goodwill generated in a newly commenced business cannot be described as an ' asset' within the terms of section 45 of the Act was that it is impossible to determine its cost of acquisition. None of the three reasons given by this court in B. C. Srinivasa Setty's case are applicable in the present case. We have held that the cost of acquisition of leasehold rights can be determined. The date of acquisition of the right to grant lease has to be the same as the date of acquiring the freehold rights. The ratio of B. C. Srinivasa Setty's case is thus not attracted to the question involved in the present case. We, therefore, do not find any force in the second contention also. Accordingly, the appeal is dismissed with costs. Issues:1. Whether the grant of a mining lease can give rise to capital gain taxable under section 45 of the Income-tax Act, 1961Rs.2. Whether the cost of acquisition of the leasehold right is capable of valuation for computing capital gainsRs.Analysis:The case involved a dispute regarding the taxability of capital gains arising from the grant of a mining lease for ten years by the assessee. The Income-tax Officer assessed the market value of the land and calculated the capital gains based on the transfer of leasehold interest. The Appellate Assistant Commissioner determined the cost of acquisition differently, considering the total price paid for the land. The Tribunal affirmed this decision, emphasizing that the purchase price included various interests in the land. The High Court held that the lease deed constituted a transfer of a capital asset and confirmed the tax liability. The Supreme Court was approached with two questions for determination.The first contention raised by the appellant was that there was no identifiable 'cost of acquisition' for the right granted under the lease, thus challenging the applicability of section 45 of the Act. The Court rejected this argument, emphasizing that the cost of acquisition of the land inherently included the cost of acquiring the mining right under the lease. Reference was made to previous judgments supporting the view that a lease constitutes a transfer of interest in the land.Regarding the second contention, the Court held that since the value of the leasehold rights could be determined, the computation provisions under the Act were applicable, and section 45 was triggered. A comparison was drawn with a previous case involving goodwill, where the Court concluded that goodwill lacking a determinable cost element could not give rise to capital gains. In contrast, the Court found that the cost of acquisition of leasehold rights in this case was ascertainable, thus dismissing the appellant's argument.Ultimately, the Court dismissed the appeal, upholding the tax liability on the capital gains arising from the grant of the mining lease. The judgment clarified the nexus between the cost of acquiring the land and the rights granted under the lease, emphasizing the determinability of the cost of leasehold rights for tax computation purposes.