Judgment

Ruma Pal, J.—The primary question involved in this appeal is whether the amount received by the respondent-assessee on surrender of tenancy rights is liable to capital gains tax under Section 45 of the Income tax Act, 1961. The assessment year in question is 1987-88. The lease agreement was entered in 1959 for 50 years under which an annual rent was paid by the lessee to the lessor. The lease would have continued till 2009. During the relevant previous year, in March 1986, the respondent surrendered its tenancy right to its lessor prematurely. In consideration for such premature termination, the lessor paid the lessee a sum of Rs. 35 lakhs.

2. In the assessee’s return the sum of Rs. 35 lakhs had been credited to its reserve and surplus account. This was disallowed by the Assessing Officer who held that the amount of Rs. 35 lakhs was taxable as “income from other sources” under Section 10(3) read with Section 56. The assessee appealed to the Commissioner of Income Tax (Appeals) who came to the conclusion that the assessee was liable to pay capital gains on the amount of Rs. 35 lakh after deducting an amount of Rs. 7 lakhs as the cost of acquisition. The Commission had determi