The main legal point established in the judgment is that a payment received for surrendering tenancy rights and vacating premises is to be treated as a capital receipt and not liable to be taxed as a capital gain under the Income Tax Act, 1961.

K. Shivashankar Bhat, J.—The following questions have been referred under section 256(1) of the Income Tax Act, 1961 ("the Act" for short) :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was not right in holding that the receipt of Rs. 45 lakhs was a capital receipt ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was not right in holding that the sum of Rs. 45 lakhs was not chargeable to capital gains since the cost of acquisition of leasehold rights was nil ?"

2. The assesses company had its business premises at Bombay in a rented premises. On December 10, 1982, it entered an agreement with one Indage Engineering Company (P) Ltd., agreeing to surrender the premises for a consideration of Rs. 45 lakhs; the promise was the purchaser of the premises who had earlier agreed to provide the assessee with an alternative accommodation, in lieu of the premises under the occupation of the assessee; since the purchaser could not find any alternative accommodation, the agreement provided for the said payment of Rs. 45 lakhs to the assessee. This amount was stated as "lump sum damages for loss which he suffered and/or incurred by the tenants on account of such shifting and incident talk thereto and surrender their tenancy right....". In pursuance of this agreement, the assessee received the sum of Rs. 45 lakhs and vacated the premises. The Revenue contended that this receipt was a capital gain and a revenue receipt, taxable during the assessment year in question. The Appellate Tribunal pointed our that there was no cost of acquisition involved in the hands of the assessee and, therefore, the question of capital gains accruing would not arise.

3. The oft-posed question as to the nature of the receipt is thus before us.

4. The finding of the Appellate Tribunal that the sum of Rs. 45 lakhs received by the assessee "was a recompense for relinquishing all the rights the assessee had in the tenanted property" cannot be assailed having regard to the terms of the agreement.

5. The receipt was a consideration received towards the relinquishment or surrender of the tenancy rights and, consequently, prima facie, it partakes of the character of a capital receipt. Here the tenant had not paid any sum to acquire the tenancy right, except the rent paid as and when it was due; thus cost of acquisition of the assets was nil. A tenancy right is created immediately on the creation of a lease under which the tenant takes or continues in possession of the property. The value of the said right depends on several factors. On the very day of the commencement of the lease, it may not have any value. After some time, the real rental value may go up as against the actual rent payable by the tenant; in such a situation, the difference between the fair rent and actual rent payable would result in making the tenancy interest "valuable". Under certain circumstances, the tenanted premises may contribute to the good will of the business carried on in it by the tenant; but in many cases, the premises may not have a particular value due to the goodwill gained by the tenant, in his business. The transfer of interest by the tenant to a third party may be prohibited by law, as in the case of sections 21(1)(f) and 23 of the Karnataka Rent Control Act, 1961; however, there may not be a bar against surrendering the said interest to the landlord; in the case of surrender to the landlord, the value of the interest surrendered cannot be compared to the value it would have fetched in case a general transfer is permitted.

6. In the absence of a specific statutory provision providing for measuring the profit or gain accruing to an erstwhile tenant, occasioned by receipt of a consideration for surrendering to the landlord of the tenant's interest, it is not possible to compute the alleged "capital gain" that results to the tenant from such a surrender. But for the several provisions in the Income Tax Act, "capital gain