The transfer of a leasehold interest in land by way of a lease-cum-licence agreement constitutes a transfer of a capital asset and the cost of acquisition is the price paid for the grant of the lease.

V. RAMASWAMI, J.

The assessee, a body of individuals, filed a return for the assessment year 1971-72, admitting a total income of Rs. 43, 953 from business and other sources. During the curse of the assessment proceedings, the ITO noticed that the assessee had purchased an extent of 11.23 acres of land for Rs. 12, 700 on October 17, 1966, and another extent of 3.32 acres on May 31, 1966, for a sum of Rs. 14, 562 and thus they owned an extent of 14.55 acres costing about Rs. 27, 260. He further noticed that by what is styled an instrument of lease-cum-licence, dated 10th September, 1970, they granted a mining lease in favour of M/s. Sri Krishna Tiles & Potteries (Madras) Private Ltd. (hereinafter called "the company"), an allied concern of the assessee. Under the document, the lessee had to pay a premium or salami of Rs. 5 lakhs in addition to the payment of a royalty calculated at Rs. 12 per 100 cubic feet of clay extracted by the lessee, subject to a minimum royalty of Rs. 60, 000 per year. The lease was for a period of ten years from 10th September, 1970, with a clause for renewal at the expiry of the term of the lease on such terms as may be mutually agreed upon. Before the ITO, the assessee contended that though a grant of the lease of the land may constitute "transfer" within the meaning of s. 45 of the I.T. ACt, in view of the decision in CIT v. K. Rathnam Nadar no capital gains would arise for taxation. The ITO overruled this objection in the view that the entire rights of which the leasehold right in one were in part acquired by the assessee for a consideration of Rs. 27, 260 and that the cost of the leasehold right imbedded in such cost does not mean that there is no cost in this regard. The ITO then proceeded to work out the cost of such leasehold interest. He found that if the entire property was to be sold, the fair market value would amount to Rs. 8 lakhs. The leasehold interest was transferred for Rs. 5 lakhs. He, therefore, came to the conclusion that 5/8ths of the total cost of acquisition would represent the leasehold value. Accordingly, he worked out the cost of acquisition of the leasehold right at 5/8ths of Rs. 27, 260, namely, Rs. 17, 040 and after reducing this cost from Rs. 5 lakhs, brought the balance of Rs. 4, 82, 960 as long-term capital gains.The assessee preferred an appeal to the AAC. Before the AAC, in addition to contending that the rights transferred under the document cannot be considered to be a capital asset, it was also contended that there was no transfer of any capital asset. The AAC held that the term "property" would include, in the case of land, the right to enjoy such land and there was a transfer for a consideration of Rs. 5 lakhs of such right of enjoyment in the land and that, therefore, it is a case of transfer of a capital asset. He then proceeded to consider the cost of acquisition of such right and held that, on the facts of the case, the cost for the purpose of ascertaining the capital gains would be the sum of Rs. 27, 260 and did not approve of the manner of ascertaining the cost of leasehold right as found by the ITO in the assessment order.

The assessee preferred an appeal to the Tribunal. The Tribunal treated the case as if there was a transfer of a leasehold interest, that the term "capital assets" in s. 2(14) would include a leasehold interest as held in Traders and Miners Ltd. v. CIT 19 5527 ITR 341 (Pat), and that, therefore, s. 45 was attracted. On the further finding that the sum of Rs. 5 lakhs was paid as consideration for the transfer of such leasehold interest in favour of the company and that the principle in CIT v. Rathnam Nadar will not be applicable to the facts of the case, the Tribunal confirmed the order of the AAC and dismissed the appeal.

At the instance of the assessee, the following two questions have been referred by the Tribunal under s. 256(1) of the Act :

"1. Whether, on the facts and in the circumstances of this case, the instrument of lease