The main legal principle established in the judgment is that the transfer of leasehold rights through sub-lease constitutes a transfer falling within the definition of 'capital asset' under the Income Tax Act, attracting capital gains tax.

(Prayer: Appeal against the order of the Income Tax Appellate Tribunal, Madras Bench “A” dated 22.10.1999 in ITA.No.4462/MDS/1989.)

R. Balasubramanian, J.

Revenue is the appellant in this appeal, which stands admitted on the following question of law:

“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that the transaction of lease and sub-lease involved herein is not a transfer falling within the definition under section 2(47) of the Income Tax Act, 1961 and in deleting the addition of Rs.8,26,876/- assessed as short term capital gains?”

2. The following facts are not in dispute:

“The assessee has taken on lease an immovable property at No.123, Usman Road, Madras, under a lease agreement dated 06.09.1985. Under that agreement, the assessee has to pay a sum of Rs.10 lakhs to the lessor as interest free advance; the lease is to be for a period of 22 years; rent for the first 15 years is fixed at Rs.20,350/- per month and for the remaining seven years, the monthly rent payable is Rs.84,428/-; there is a renewal clause; the assessee has sub-leased the property by lease deed dated 10.09.1985 in favour of another company for a period of 20 years; under that sub-lease agreement, the sub-lessee has to pay a sum of Rs.10 lakhs as interest free advance to the assessee; the rent payable for the first 15 years is Rs.77,500/- per month and for the remaining period, the rent payable is Rs.92,500/- per month.”

3. On the above noted admitted facts, the question that was raised before the Deputy Commissioner of Income Tax was, whether transfer of leasehold rights in the land by the assessee in favour of the sub-lessee would amount to transfer of a capital asset at the hands of the assessee and if so, the consideration paid by the sub-lessee to the assessee would part-take the character of capital gains and assessable to tax as such? The Assessing Officer held that transfer of lease by the assessee would amount to transfer of a capital asset; the consideration received by the assessee under that transaction would part-take the character of capital gains and therefore liable to tax. The assessee went up in appeal before the Commissioner of Income Tax, who, by his order dated 25.09.1989 in I.T.A.No.43/1989-90, found that there was no transfer of capital asset by the assessee when he sub-leased the property in favour of a third party and therefore no capital gain is involved at the hands of the assessee in respect of the transfer effected by him as indicated earlier. Revenue went up in appeal before the Income Tax Appellate Tribunal in I.T.A.No.4462/MDS/1989 and the Appellate Tribunal agreed with the findings of the Commissioner of Income Tax. The assessment year concerned in this case is 1986-87.

4. Though the respondent has been served, they are neither appearing in person nor engaged any counsel. Heard the learned counsel appearing for the appellant. Learned counsel for the appellant, by taking us through the defenition of “capital asset” in section 2(14) of the Income Tax Act, would contend that the property of any kind in the hands of the asessee, except those provided in that section itself, would be a “capital asset”. Therefore the leasehold interest of the assessee is a capital asset. Then she took us through section 45 of the Income Tax Act. A reading of that section shows that “any profits or gains arising from the transfer of a capital asset effected in the previous year shall, .......... be chargeable to income tax under the head “capital gains” and shall be deemed to be the income of the previous year in which the transfer took place”. She also took us through section 2(47) of the Income Tax Act highlighting as to what “transfer” means. The expression “transfer” is defined in section 2(47) of the Income Tax Act, among other things, as hereunder:

“The extinguishment of any rights therein (sub-clause (ii) of sub-section 47 of section 2)”.

5. Therefore her submissio