TaxTMI 
TaxTMI 
2026 (9) TMI 1443
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....ho filed his return of income for the Assessment Year 2020-21 on 07.01.2021 declaring total income of Rs. 42,96,950/-. The return was processed under section 143(1) on 05.04.2021. Subsequently, the case was selected for limited scrutiny through CASS, inter alia, to examine the issue of large deduction/exemption claimed. Notice under section 143(2) dated 29.06.2021 and notices under section 142(1) issued from time to time were duly served upon the assessee. The assessee participated in the assessment proceedings, furnished details and explanations, and also responded to the show cause notice dated 09.09.2022, including through video conference. 3. During the course of assessment proceedings, it was noticed that during the Financial Year 2019-20, the assessee had transferred tenancy rights in respect of a property situated in Shyam Kunj building vide Transfer of Tenancy Agreement dated 15.04.2019 for a consideration of Rs. 7,00,00,000/-. In the return of income, the assessee computed long-term capital gains by adopting the fair market value as on 01.04.2001 as cost of acquisition and claimed exemption under section 54 amounting to Rs. 4,91,50,715/-. 4. The assessee explained be....
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....nd added to the income of the assessee. The total income was determined at Rs. 4,98,20,343/-. Penalty proceedings under section 270A were also initiated. The assessment was completed under section 143(3) read with section 144B of the Act vide order dated 26.09.2022 8. The assessee preferred an appeal before the CIT(A) against the assessment order passed under section 143(3) read with section 144B of the Act, wherein the Assessing Officer had determined long-term capital gains at Rs. 7,00,00,000/- on transfer of tenancy rights and denied the claim of exemption under section 54/54F. 9. The CIT(A), while adjudicating the appeal, recorded that the assessee had inherited tenancy rights in a residential premises situated at Shyam Kunj building from his predecessor. During the relevant previous year, the assessee entered into a Transfer of Tenancy Agreement dated 15.04.2019, whereby such tenancy rights were relinquished/transferred in favour of an incoming tenant for a total consideration of Rs. 7,00,00,000/-. The CIT(A) noted that the transaction involved multiple parties, namely the landlord, outgoing tenant, outgoing sub-tenant (assessee), and incoming tenant, and the agreement s....
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....r claiming exemption under section 54F. 15. The CIT(A), thus, upheld the action of the Assessing Officer in treating the entire consideration of Rs. 7,00,00,000/- as long-term capital gains without allowing any deduction towards cost of acquisition or exemption under section 54/54F. The addition made by the Assessing Officer was accordingly confirmed. 16. Being aggrieved, the assessee is in further appeal before us raising following grounds of appeal: 1 : 0 Re.: Taxability of the capital gains arising on the transfer of tenancy rights in respect of the flat located in Shyam Kunj building: 1 : 1 The NFAC/CIT(A) erred in confirming the Order passed by the Assessing Officer vis-à-vis computation of capital gains arising on the transfer of tenancy rights in respect of the flat located in Shyam Kunj building. 1 : 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, transfer of tenancy rights in respect of the flat located in Shyam Kunj building is not chargeable to tax and the NFAC / CIT(A) ought to have held as such. Without prejudice to the foregoing: 2 : 0 Re.:....
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....eduction u/s. 54F of the Act and to re-compute the total income and tax thereon accordingly. 4 : 0 Re.: General: 4 : 1 The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever modify all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 17. During the course of hearing, the learned Authorised Representative (AR) of the assessee submitted that the issue under consideration pertains to taxability of capital gains arising on transfer of tenancy rights which were originally acquired by the assessee under a will from his father and subsequently transferred during the year under consideration. The learned AR invited our attention to the observations recorded by the Assessing Officer in the assessment order and submitted that the Assessing Officer has proceeded on an erroneous understanding of facts as well as law. 18. It was submitted that the Assessing Officer has observed that the assessee became owner of tenancy rights w.e.f. 05.11.1987 pursuant to the will of his father, however, the cost of acquisition in the hands of the previous owner was not furnished. It was further observed by the ....
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....he learned AR submitted that the tenancy rights in the impugned property were acquired by the assessee under a will and not by way of purchase. It was contended that the provisions of section 55(2)(a) as applicable to the year under consideration do not provide any mechanism for determining the cost of acquisition in respect of tenancy rights acquired through modes specified under section 49(1), including acquisition by way of inheritance or will. It was thus submitted that in the absence of any determinable cost of acquisition, the computation mechanism provided under section 48 fails. The learned AR further submitted that the Assessing Officer has wrongly invoked the amended provisions of section 55(2)(a)(ii) brought in by the Finance Act, 2021 w.e.f. 01.04.2021, whereas the assessment year under consideration being A.Y. 2020-21, the pre-amended provisions as applicable as on 01.04.2020 are required to be applied. Referring to the comparative statutory provisions, it was contended that prior to the amendment, section 55(2)(a) did not contemplate or prescribe any cost of acquisition for tenancy rights acquired under a will, and therefore the action of the Assessing Officer in adop....
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....harging provision under section 45 cannot be invoked. 26. The learned AR further placed reliance on the decision of the Hon'ble Bombay High Court in the case of Evans Fraser & Co. Ltd. (137 ITR 493), and specifically drew attention to para 16 thereof, wherein it has been observed as under: "Mr. Joshi is, therefore, right when he has submitted that in the present case both the moment of acquisition of goodwill as also the cost of acquisition of goodwill have been pinpointed. 16. Does this, however, make any difference? As we have seen earlier, goodwill is a fluctuating thing. It increases and it decreases, but such increase or decrease is not like the periodic waxing and waning of the moon nor is it like the tide which regularly ebbs and flows twice in twenty-four hours. Goodwill built up over the years can be destroyed in a matter of days, if not much less. Goodwill is never constant. Proteus-like it changes constantly, and as goodwill changes from time to time so does its value. It is possible to ascertain the value of goodwill at a particular point of time, and the modes of calculating such value can easily be found in any standard book on accountancy." 27....
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....he charging provision under section 45 and the computation provisions under section 48 form an integrated code, and unless both can be applied in a workable manner, no tax can be levied under the head "Capital Gains". 31. Applying the above legal position to the facts of the present case, it was submitted that the tenancy rights having been acquired under a will, and there being no statutory provision applicable for the year under consideration prescribing the cost of acquisition in such a case, the computation provisions fail. It was thus contended that the impugned addition made by the Assessing Officer under the head "Capital Gains" is unsustainable in law and liable to be deleted. 32. The learned AR, adverting specifically to para 3.5 of the assessment order, submitted that the reasoning adopted by the Assessing Officer is legally untenable and proceeds on a fundamental misappreciation of the statutory scheme governing taxation of capital gains. It was submitted that the Assessing Officer has proceeded on the premise that in the absence of details regarding the cost of acquisition in the hands of the previous owner, the entire consideration is liable to be taxed as long t....
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....that merely because the underlying property is a residential unit, the character of the asset transferred does not change, and the Assessing Officer has misdirected himself in drawing adverse inference on this aspect. 37. The learned AR further submitted that the Assessing Officer has erred in concluding that section 55(2)(a) provides for cost of acquisition in the present case. It was contended that as per the statutory provisions applicable for the year under consideration, cases falling under section 49(1) stood excluded from the ambit of section 55(2)(a)(ii), and therefore the cost could not have been determined either as "Nil" or as the cost in the hands of the previous owner by invoking the amended provisions. 38. It was also submitted that the Assessing Officer has misapplied the judicial precedents relied upon by the assessee. In this regard, the learned AR submitted that the ratio laid down by the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty squarely applies to the facts of the present case, inasmuch as the asset under consideration is one in respect of which no cost of acquisition can be envisaged. 39. The learned AR submitted that the conclusion dra....
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....at the learned CIT(A) has erred in holding that the assessee cannot compel the Assessing Officer to refer the matter to the DVO. It was contended that while the reference under section 55A may be discretionary, such discretion is required to be exercised judiciously, particularly when the assessee has raised a specific claim regarding determination of fair market value. The rejection of such request solely on the ground of time constraint, as also noted by the Assessing Officer, vitiates the assessment proceedings. 44. The learned AR further submitted that the learned CIT(A) has failed to deal with the core legal contention of the assessee that in the absence of determinable cost of acquisition, the computation provisions under section 48 fail and consequently no capital gains can be brought to tax under section 45. It was contended that instead of adjudicating this jurisdictional issue, the learned CIT(A) has merely affirmed the findings of the Assessing Officer on factual grounds, which is not sustainable in law. 45. Advancing Ground No. 3, the learned AR invited our attention to the findings recorded by the learned CIT(A) in paras 10.1 to 10.4 of the appellate order and su....
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....l Representative, on the other hand, relied upon the orders of the lower authorities. 48. On the issue relating to valuation, the learned Departmental Representative submitted that the matter requires proper verification and determination of fair market value. It was contended that the Assessing Officer did not have the benefit of an expert valuation and, therefore, in the interest of justice, the issue may be restored to the file of the Assessing Officer with a direction to obtain a valuation report from the Departmental Valuation Officer and decide the issue afresh in accordance with law. 49. The learned AR further placed on record the computation of capital gains as per the return of income, the assessment order and the order of the learned CIT(A), and explained the variation in the quantum of deduction and computation adopted at different stages. It was submitted that the Assessing Officer has computed the capital gains by denying the indexed cost of acquisition and allowing deduction under section 54 to the extent of Rs. 2,44,76,608/-, whereas the learned CIT(A), after detailed examination, has granted substantial relief by allowing deduction under section 54 at Rs. 4,89....
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....nt Technology(43 taxmann.com 426). 54. Having given our thoughtful consideration to the above submission, we are unable to accept the broad legal proposition canvassed on behalf of the assessee that the transfer in question falls wholly outside the ambit of charge under section 45 of the Act. In our considered view, the precedents cited for the assessee proceed on a materially different factual and legal footing and cannot be mechanically extended to the present case. 55. At the outset, it is necessary to notice that what stands transferred in the present case is not goodwill of a newly commenced business, nor a self-generated trade mark, nor a sovereign, ancestral or merger right of the nature considered in some of the cited authorities. What has been transferred is tenancy rights in respect of a specific immovable property, namely the flat situated in Shyam Kunj building. The transfer agreement itself clearly records the outgoing tenant, outgoing sub-tenant, incoming tenant and landlord, and separately specifies the lump sum consideration payable to the outgoing sub-tenant, namely the assessee, at Rs. 7,00,00,000/-. The document also evidences that the rights transferred we....
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....se, the problem is not that the asset is inherently incapable of valuation. On the contrary, the record itself demonstrates that valuation is possible. The real controversy here is only as to the correct statutory route for arriving at such cost or fair market value in the peculiar facts where the tenancy rights were acquired under a will. That is a dispute about quantification and application of the computation provisions, not a case of total failure of the computation machinery. 59. The same distinction applies to the Pune Bench decision in Institute for Micronutrient Technology. There the Co-ordinate Bench was concerned with self-generated trade marks and held that while section 55 deemed cost of acquisition to be nil, the "cost of improvement" of such self-generated trade mark was not statutorily ascertainable, thereby leading to failure of the computation provisions. In our considered view, that line of reasoning cannot be bodily imported into the present controversy. Tenancy rights in a specified immovable property do not stand on the same pedestal as self-generated trade marks or goodwill. Here, the valuation exercise is anchored to a tangible and identifiable underlying ....
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....tal gains are chargeable at all, but at the same time restoring the matter to the file of the Assessing Officer for the limited and specific purpose of examining the valuation report already placed on record and determining the fair market value as on 01.04.2001 in accordance with law. We say so for the following reasons. 64. First, the legal issue as to total non-chargeability, in our considered opinion, does not survive for acceptance, because the subject-matter transferred is tenancy rights in a specified immovable property, valuation thereof is demonstrably possible, and therefore this is not a case where the computation provisions fail altogether. 65. Second, the quantification issue, namely the correct cost/FMV to be adopted and the consequential indexed cost, is essentially a matter requiring factual examination and, if necessary, technical verification. Since the assessee has already produced a valuation report and has specifically prayed that the same be considered, fairness demands that the report should be examined on merits rather than ignored. 66. Third, the Assessing Officer himself declined to refer the matter to the DVO earlier on account of time limitation....