Tenancy rights as capital asset: merged estate sale required inclusion of tenancy value in acquisition cost, not blanket short-term gain treatment.

A tenant's right of occupation was treated as property and therefore a capital asset under the Income-tax Act. When the assessee later acquired the landlord's remaining interest, the tenancy right merged with the reversion to form a composite estate, and the sale price of that merged interest could not be legally apportioned between the two estates. However, the value of the tenancy right still had to be recognised in computing the cost of acquisition of the composite flat. The assessment based on treating the entire surplus as short-term capital gain without such recomputation was set aside for fresh computation of the taxable surplus.

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Issues: Whether the right of occupation as a tenant was a capital asset, whether its value could be separately recognised in computing capital gains on the later sale of the composite flat, and whether the assessment required recomputation on the footing that the tenancy right formed part of the cost of acquisition.

Analysis: The right of occupation as a tenant was treated as property and therefore a capital asset within the meaning of section 2(14) of the Income-tax Act, 1961. When the assessee later acquired the landlord's remaining interest, the tenancy right and the reversion merged and resulted in a composite or full estate. The sale consideration of that composite estate was not held capable of legal apportionment between the smaller and bigger estates. Nevertheless, the value of the tenancy right had to be taken into account while computing the cost of the composite asset, and the revenue authorities had proceeded on an incorrect basis by treating the whole surplus as short-term capital gain without such recomputation.

Conclusion: The tenancy right was a capital asset and its value had to be reckoned in the cost of the composite flat. The assessment was therefore set aside for fresh computation of the taxable surplus.

Ratio Decidendi: Where a tenant first acquires tenancy rights and later acquires the landlord's interest, the later sale of the merged composite estate requires the tenancy right to be recognised as part of the cost of acquisition even though separate apportionment of the sale price is not legally permissible.

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