The main legal point established is that the compensated amount received by the assessee for surrendering tenancy rights is not subject to capital gains under the Income-tax Act, based on the interpretation of relevant sections and Supreme Court judgments.

P.P.S. Janarthana Raja, J.

This appeal is filed under Section 260A of the Income Tax Act, 1961 by the assessee, against the order of the Income Tax Appellate Tribunal, Madras Bench C in I.T.A. No.433 (Mds)/99 dated 26.06.2001. On 23.02.2004, this Court admitted the appeal and formulated the following substantial question of law.

"Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in law in holding that the sum agreed to be paid to the appellant as sub-lessee by the lessee of the premises for the failure to provide alternate accommodation is taxable under the head Capital Gains, which is prior to the amendment by the Finance Act, 1995?"

2. The facts leading to the above substantial question of law are as under:

The assessee is engaged in the manufacture of expanded polythene insulation material, marketing of chemicals, motors, engineering products and also in export business. The relevant assessment year is 1994-95 and the corresponding accounting year ended on 31.03.1994. The assessee is a company incorporated under the Companies Act. The assessee filed Return of income for the assessment year showing total loss at Rs.11,23,596/-. The case was processed under Section 143(1) of the Income-tax Act ("Act" in short) on 12.01.1995 accepting the returned loss. Later, notice under Section 143(2) of the Act was served and the assessment was completed on 30.08.1996 under Section 143(3) of the Act, determining the net loss at Rs.7,61,580/-. During the course of assessment proceedings, it was noticed that an amount of Rs.99,00,000/-was credited in the Profit and Loss Account, under the head "Commission, Fees and Miscellaneous". It was explained by the assessee that the said amount had been received by way of surrender of tenancy rights and also claimed that this receipt was not taxable being in the nature of a capital receipt. The contention of the assessee was accepted by the Assessing Officer and hence the said amount of Rs.99,00,000/-was not included in the computation of income. The Commissioner of Income-tax was of the view that the said assessment order passed by the Assessing Officer was erroneous and prejudicial to the interest of the Revenue and hence proceedings were initiated under Section 263 of the Act. Show Cause Notice was also issued on 12.08.1998 calling for the assessees objections if any, to the proposed revision under Section 263 of the Act. The Commissioner of Income-tax was of the view that the order is wrong in view of the decision of the ITAT, Spl. Bench, Mumbai in the case of Cadell Weaving Mill Co. P. Ltd. (217 ITA (AT) 51). In that decision, it was held that the amount received by the assessee on surrender of tenancy right, should be considered as casual income and therefore the same is taxable under Section 10(3) of the Act. In view of the same, the Commissioner of Income-tax held as follows:-

"10. On the other hand, the receipt in question is to be considered as income as the said receipt arose out of an agreement which was arrived at between the assessee, Beardsell Ltd. and the lessee, M/s.Francis Theodore DSouza and Mahadeo Soma Tamboskar. The Spl. Bench, Mumbai in the decision cited in 217 ITR ITAT Reports P.51, had held that the assessee i.e., Cadell Weaving Mill Pvt. Ltd. was only a statutory tenant who did not have any right to further transfer its tenancy right under the terms of the original tenancy agreement and therefore had no transferable right nor any asset which it can transfer. It had only a mere personal right which cannot be transferred to another person. Thus the receipt obtained by the assessee towards surrender of his tenancy rights cannot be considered as a capital receipt or capital gain, but can be considered merely as receipts which are synonymous with income. While arriving at this conclusion, the Spl. Bench, ITAT relied on the cases reported in CIT v. Gulab Chand (192 ITR 495 - A11) and the decision of the Supreme Court in A.Gasper v