2005 (1) TMI 13 - SC - Income Tax

Surrender of tenancy right is a capital asset; proceeds taxable under Section 45 (and possibly item E of Section 14)

Commissioner of Income-Tax Versus DP Sandu Bros. Chembur P. Ltd. and UNION OF INDIA AND ANOTHER Versus CADELL WEAVING MILL CO. P. LTD AND ANOTHER

SC held that surrender of a tenancy right is a capital asset and the amount received is a capital receipt taxable only under the capital gains provision ... Liability to capital gains tax under section 45 - surrender of tenancy rights prematurely - cost of acquisition - Assessing Officer disallowed this amount in the assessee's return, holding it taxable as 'Income from other sources.' - held that:- There is no dispute that a tenancy right is a capital asset the surrender of which would attract section 45 so that the value received would be a capital receipt and assessable if at all only under item E of section 14. That being so, it cannot be treated as a casual or non-recurring receipt under section 10(3) and be subjected to tax under section 56. The argument of the appellant that even if the income cannot be chargeable under section 45, because of the inapplicability of the computation provided under section 48, it could still impose tax under the residuary head is thus unacceptable. If the income cannot be taxed under section 45, it cannot be taxed at all. Furthermore, it would be illogical and against the language of section 56 to hold that everything that is exempted from capital gains by the statute could be taxed as a casual or non-recurring receipt under section 10(3) read with section 56. We are fortified in our view by a similar argument being rejected in Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966 (5) TMI 13 - SUPREME COURT]. Appeal is accordingly dismisse Issues:1. Whether the amount received by the respondent on surrender of tenancy rights is liable to capital gains tax under section 45 of the Income-tax Act, 1961.Analysis:The primary issue in this appeal was whether the amount received by the respondent on surrender of tenancy rights is subject to capital gains tax under section 45 of the Income-tax Act, 1961. The respondent had surrendered its tenancy right prematurely, and the lessor paid a sum of Rs. 35 lakhs in consideration. The Assessing Officer disallowed this amount in the assessee's return, holding it taxable as 'Income from other sources.' The Commissioner of Income-tax (Appeals) determined that the assessee was liable to pay capital gains tax on the amount after deducting the cost of acquisition. The Tribunal, relying on previous court decisions and an amendment to the Act, held that since the cost of acquisition could not be ascertained, the capital gains were not taxable.The Department contended that the surrender value of the tenancy rights should be taxed as capital gains under section 45 or as 'Income from other sources.' The court examined the relevant sections of the Income-tax Act, including the definition of 'income,' provisions for capital gains under section 45, and the mode of computation under section 48. It was established that the surrender of tenancy rights constitutes a transfer of a capital asset and the consideration received is a capital receipt subject to capital gains tax.The court referred to previous judgments, including the case of CIT v. B.C. Srinivasa Setty, which emphasized that for a transaction to fall under section 45, it must be computable under section 48. The court also highlighted the amendment to section 55(2) to address the issue of determining the cost of acquisition for certain assets. The Department argued that the cost of acquisition of a tenancy right could be determined, but the court upheld the decision of the High Court that the cost was incapable of being ascertained in this case.The court further clarified that if a transaction cannot be taxed under section 45 due to the inability to compute the cost of acquisition, it cannot be taxed under any other section. The principles of classification of income under different heads and the exclusivity of those heads were emphasized. The court dismissed the appeal, stating that if income cannot be taxed under section 45, it cannot be taxed at all, rejecting the argument to tax it under the residuary provisions of the Act.In conclusion, the court upheld the decision of the High Court, emphasizing the classification of income under specific heads and the inapplicability of taxing income under a different head if it falls under a specific one. The appeal was dismissed without any order as to costs.