Tenancy by holding over treated as a long-term capital asset, making the related capital gain eligible for exemption.

Tenancy rights surrendered for consideration were treated as a long-term capital asset where the assessee remained in possession after expiry of the original lease and the landlord accepted rent, indicating tenancy by holding over under section 116 of the Transfer of Property Act. Such holding over was described as a continuation of the original tenancy, not a fresh monthly tenancy for section 2(42A) of the Income-tax Act, so the period of holding ran well beyond 36 months. On that footing, the gain was characterised as long-term capital gain and exemption under section 54EA was stated to be available.

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Issues: (i) Whether the assessee's tenancy right, surrendered for consideration, was a short-term capital asset or a long-term capital asset, and whether exemption under section 54EA was available.

Analysis: The assessee had remained in possession after expiry of the original lease and the landlord had accepted rent and treated it as tenant, attracting the concept of tenant holding over under section 116 of the Transfer of Property Act. A tenancy created by holding over continues until terminated or determined and cannot be treated as a fresh monthly tenancy commencing and ending every month for the purpose of section 2(42A) of the Income-tax Act, 1961. The periodical tenancy was held to be an accretion to the original tenancy, and the assessee's possession from 1973 to 1997 showed holding for well beyond 36 months. Once the capital gain was held to be long-term, denial of exemption under section 54EA could not stand.

Conclusion: The tenancy right was a long-term capital asset, the resultant gain was long-term capital gain, and exemption under section 54EA was allowable in favour of the assessee.

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