Important pointIf cost of acquisition of tenancy right can not be determined, consideration received by reason of surrender of such tenancy right could not be subjected to capital gains.

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 determined the cost of acquisition at Rs. 7 lakhs on the basis of the market value of the property as on 1.4.1974. Both the Department and the assessee challenged the decision of the Commissioner before the Tribunal.

3. The Tribunal relied upon the decision of this Court in Commissioner of Income Tax V. Srinivasa Setty 128 ITR 294 = (1981) 2 SCC 460 as well as the amendment to Section 55(2) of the Act in 1995 and held that the assessee did not incur any cost to acquire the leasehold rights and that if at all any cost had been incurred it was incapable of being ascertained. It was therefore held that since the capital gains could not be computed as envisaged in Section 48 of the Income Tax Act, therefore capital gains earned by the assessee if any was not exigible to tax.

4. The Department preferred an appeal before the High Court. The High Court dismissed the appeal. Being aggrieved by the decision of the High Court, this further appeal has been preferred by the Department.

5. The Department has contended that the surrender value of the tenancy rights was chargeable to capital gains under Section 45 of the Act. If not, it was liable to be taxed as ‘income from other sources’ under Section 10(3) read with Section 56 of the Act.

6. Section 2(24)(vi) defines ‘income’ as including “any capital gains chargeable under Section 45”. Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year is chargeable to income tax under the head ‘capital gains’ and is deemed to be the income of the previous year in which the transfer took place, subject to certain exceptions which are not material in this case. Section 48 provides for the mode of computation of income chargeable under the head ‘capital gains’. The method of computation prescribed is by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, certain prescribed amounts including the cost of aquisition of the assets and the cost of any improvement thereto.

7. That the tenancy right is a capital asset, the surrender of the tenancy right is a “transfer” and the consideration received therefore a capital receipt within the meaning of Section 45 has not been questioned before us and must in any event be taken to be concluded by the decision of this Court in A. Gasper v. Commissioner of Income Tax1. Normally the consideration would therefore be subjected to capital gains under Section 45.

8. In 1981 this Court in Commissioner of Income Tax V. B.C. Srinivasa Setty2 held that all transactions encompassed by Section 45 must fall within the computation provisions of Section 48. If the computation as provided under Section 48 could not be applied to a particular transaction, it must be regarded as “never