Tenancy rights surrender proceeds are capital receipts; where acquisition cost is nil, they cannot be taxed as casual income.

Consideration received on surrender of tenancy rights is treated as a capital receipt because tenancy rights are an interest in property and their surrender constitutes a transfer by extinguishment of possessory rights. The receipt is therefore, in principle, chargeable only under the capital gains head; however, where the cost of acquisition is nil and the computation mechanism fails, it cannot be brought to tax as capital gains. It also cannot be assessed as casual or non-recurring income merely because it is a one-time receipt, since section 10(3) applies only to receipts that already bear the character of income.

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Issues: Whether the consideration received on surrender of tenancy rights was exigible to tax, and if so whether it was taxable as capital gains or as casual and non-recurring income under the Act.

Analysis: The tenancy right was treated as an interest in property and therefore a capital asset. Surrender of the tenancy in favour of the landlord amounted to a transfer by extinguishment of possessory rights within the meaning of the Act. The receipt was thus of a capital nature and, in principle, chargeable only under the head of capital gains. However, because the cost of acquisition of the tenancy right was nil, the computation mechanism for capital gains failed, and the receipt could not be brought to tax on that footing. The receipt also could not be assessed under section 10(3) merely because it was a one-time receipt, since that provision applies only to amounts bearing the character of income and does not extend to capital receipts per se.

Conclusion: The amount received on surrender of tenancy rights was not exigible to tax and the issue was decided in favour of the assessee.

Ratio Decidendi: Consideration for surrender of a tenancy right is a capital receipt arising from transfer of a capital asset, and where the cost of acquisition is nil so that capital gains computation fails, the amount cannot be taxed as casual income under section 10(3).

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