A monthly tenancy under landlords is a capital asset and its transfer is taxable as capital gains under the Income-tax Act, 1961.

( 1 ) WE are concerned with the following questions in this reference under Section 256 (1) of the Income-tax Act, 1961 :" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee's right of tenancy under the landlords constituted a capital asset within the meaning of Section 2 (14) of the Income-tax Act ? (2) If the answer to question No. (1) is in the affirmative, whether on the facts and in the circumstances of the case, the Tribunal was right in holding that there was a transfer of the assessee's right of tenancy under the landlords within the meaning of Section 2 (47) of the said Act ? (3) If the answer to question No. (2) is in the affirmative, whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 1,83,201 represented capital gains assessable under Section 45 (1) of the said Act for the assessment year 1967-68 ?"

( 2 ) THE assessment year is 1967-68 for which the previous year ended on 31st March, 1967. The assessee is an individual and derived income practically from all sources including income from sub-letting premises No. 240e, Acharya Jagadish Bose Road, Calcutta (hereinafter referred to as the said "property" ).

( 3 ) IN the course of the relevant assessment proceeding the ITO noticed in Part IV of the return of income reference to a sum of Rs. 2,25,000 received by the assessee from M/s. Associated Battery Makers (Eastern) Ltd. (here- inafter called "associated Batteries" ). On enquiry, he learnt that the assessee was a monthly tenant since 1940 of the said property under Kumar Biswanath Roy and others (hereinafter referred to as "the landlords" ). He also found that the landlords entered into an agreement for lease dated March 27, 1967, with the Associated Batteries permitting them to construct a building on the said premises and the assessee was also a party to the said agreement.

( 4 ) THE assessee contended before the ITO that the sum of Rs. 2,25,000 received by him was partly for the damages to be caused to the said property occupied by him and partly on an ad hoc basis and, therefore, the said receipt was in the nature of a solatium or windfall and not taxable under the head "capital gains". The ITO held that the assessee relinquished his said tenancy under the landlords and became a monthly tenant on 15th March, 1967, under the Associated Batteries on a rent of Rs. 350 per month so long as the new building was not constructed and thereafter at a rent of Rs. 700 per month. The ITO also held that out of the total consideration amount of Rs. 4,50,000, the assessee received Rs. 2,25,000 from the Associated Batteries on that date and the balance amount on May 25, 1967. The ITO also held that the assessee's tenancy right was a capital asset under Section 2 (14) of the I. T. Act, 1961, He further held that the assessee received the aforesaid amount for the extinguishment of his rights in the said capital assets and, therefore, under Section 45 (1) read with Section 2 (47) of the I. T. Act, 1961, Rs. 2,25,000 out of Rs. 4,45,000 being received by the assessee in the accounting year was taxable and after allowing certain deductions, included a sum of Rs. 1,83,201 as the net amount of capital gains arising out of the transactions and included the same in the total income of the assessee.

( 5 ) THE assessee went up in appeal and argued before the AAC that the landlords felt some difficulties in transferring the premises by way of lease in favour of the Associated Batteries, because the properties were encumbered by monthly tenancy held by the assessee and sub-tenancy created fey him. It was further submitted that in order to remove this handicap the Associated Batteries after negotiation with the assessee agreed to pay Rs. 4,50,000 to him and, thereafter, the assesee allowed the Associated Batteries to proceed with the construction work. It was further, contended that no c