1969 (5) TMI 15 - HC - Income Tax

Transfer of Leasehold Interests Not Taxable as Capital Asset under Indian Income-tax Act

The High Court held that the transfer of leasehold interests did not amount to a transfer of a capital asset under the Indian Income-tax Act. As the land ... Agricultural land given on lease - profit on sale of lessee's right - income derived was agricultural income and there was no transfer or sale or relinquishment of any capital asset as per section 2(4A) of Indian Income-tax Act, 1922 - profits are not taxable as capital gains u/s 12B Issues:1. Taxability of profits from land transfer under section 12B of the Indian Income-tax Act, 1922.2. Interpretation of 'capital asset' under section 2(4A) of the Indian Income-tax Act, 1922.3. Determination of whether the transfer of leasehold rights constitutes a transfer of land for tax purposes.Analysis:The case involved assessments for the years 1959-60 and 1960-61 related to a limited company owning agricultural lands transferred under a lease. The company was allowed to cultivate the lands with its resources to increase agricultural production. The lands were partly acquired by the government or transferred to private parties during the relevant years, resulting in surplus amounts. The Income-tax Officer treated these amounts as taxable capital gains under section 12B of the Income-tax Act, 1922, arguing that the company held a lessee's interest, not ownership, in the land.The Appellate Assistant Commissioner upheld the tax treatment, considering the lands as leased and the company's interest as leasehold rights. However, the Tribunal disagreed, stating that the amounts from the transfers were not assessable under section 12B. The central issue was whether the transfer of the company's interest under the lease constituted a transfer of land, affecting its taxability under the Act.The High Court analyzed the definition of 'capital asset' under section 2(4A) of the Act, which excludes land yielding agricultural income. The Court noted that the lease had transferred certain rights in perpetuity to the company without any re-entry right for the lessor. As the land yielded agricultural income only, it fell under the exclusion from the definition of a capital asset. Therefore, the transfer of the company's interests under the lease did not amount to a transfer of a capital asset for tax purposes, making the amounts realized from the transfers not taxable under section 12B.In conclusion, the Court answered the referred question in the affirmative, stating that the transfer of leasehold interests did not constitute a transfer of a capital asset under the Act. The Commissioner of Income-tax was directed to bear the costs of the reference. Justice SANKAR PRASAD MITRA agreed with the judgment.