COMMISSIONER OF INCOME-TAX VS OCTAVIOUS STEEL & CO. LTD.
1998 P T D 2201
[221 I T R 810]
[Calcutta High Court (India)]
Before K. C. Agarwal, C. J. and Mukul Gopal Mukherji, J
COMMISSIONER OF INCOME-TAX
versus,
OCTAVIOUS STEEL & CO. LTD.
Income-tax Reference No. 161 of 1991, decided on 28/04/1995.
Income-tax------
----Capital gains---Computation of capital gains---Meaning of "cost of acquisition" ---Tenancy---Assessee becoming a tenant in 1952 and continuing as such till 1983---No payment of premium at the time of becoming a tenant---Sub-lease executed in 1980---Expenditure for executing sub-lease would not constitute cost of acquisition of tenancy rights---Amount received on transfer of tenancy right in 1983---Not assessable as capital gains-- Income Tax Act, 1961, Ss.45 & 55(2).
The cost of acquisition of an asset, be it a capital asset or any other asset, must be understood in its common sense, that is, it must represent the expenditure incurred in acquiring the asset.
The assessee-company, O, had been a monthly tenant of B since 1952. The tenancy was acquired on the basis of an oral agreement and the respondent did not pay premium, Pagri or any other sum at the time of taking possession of the premises when it became the monthly tenant. The landlord subsequently leased out the premises to G for 99 years in June, 1973. The assessee continued to be in possession of the premises as tenant in spite of the above lease. Subsequently, on July 8, 1980, G wanted the continued possession of the assessee as monthly tenant to be reduced to writing and, accordingly, a sub-lease deed was executed and the cost incurred for execution 'of the sub-lease deed amounted to Rs.1,071. As per the terms of the sub-lease deed, the assessee acquired the sub-lease right at a rent of Rs.700 per month for a period of nine years with option to renew the lease for a further period of nine years. Even at the time of execution of this lease deed no premium or Salami or Pagri was paid by the assessee to G or to any other party. On August 28, 1981, G transferred his residuary leasehold rights to T. In June, 1982, T purchased the reversionary rights of B in the premises for a consideration of Rs.8 lakhs which transaction did not affect [lie tenancy or the rights of possession of the assessee. T by a deed of conveyance transferred its reversionary rights to the Syndicate Bank for a consideration of Rs.10 lakhs. Soon after this the said Bank and the assessee entered into an agreement as a result of which the leasehold/tenancy and the possessory rights of the assessee in the premises were transferred and assigned to the Bank for a consideration of Rs.40 lakhs under a deed of assignment, dated July 11, 1983. In the Income-tax assessment for the assessment year 1984-85, it was the assessee's case before the Assessing Officer that as the acquisition of the tenancy/leasehold rights in the premises subsequently transferred to the Syndicate Bank Ltd. for a sum of Rs.40 lakhs did not cost anything to it the sum of Rs.40 lakhs did not contain any element of capital gains. The Assessing Officer, however, did not accept this contention and deducting the sum of Rs.1.071 which represented tile cost of stamp paper, registration charges and legal expenses incurred by the assessee at the time of the execution of the sub-lease deed with G as the cost of acquisition of the tenancy/leasehold rights from the consideration of Rs.40 lakhs, added a sum of Rs.39,98,323 as capital gains in the hands of the assessee. The Commissioner of Income-tax (Appeals) and the Tribunal held that no capital gains were chargeable. On a reference:
Held, that the asset in question being a tenancy right, the value of such a right is unascertainable whatever expenditure might have been incurred on stamps and registration. There is no means by which the cost of the tenancy right itself, which was increasing in value over time, could ever be ascertained nor could the cost of improvement in such asset be determined. The tenancy right was acquired by the assessee without any expenditure incurred by it. The so-called sub-lease right that the assessee acquired in view of the agreement executed in 1980 did not change the essential character of the right of possession that the assessee had in the premises in view of its continuous possession of the premises as a monthly tenant, since 1952. Any expenditure made almost 28 years after it became the monthly tenant in order merely to observe certain formality could not be construed as the cost of acquisition of the tenancy right.
Bawa Shiv Charan Singh v. CIT (1984) 149 ITR 29 (Delhi); Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167(SC) and CIT v. Srinivasa Setty (B.C.) (1981) 128 ITR 294 (SC) ref.
S.K. Mitra and Md. Nizzamuddin for the Commissioner.
Sukumar Bhattacharjee and R.N. Saha for the Assessee.
JUDGMENT
K.C. AGARWAL, C.J.---This is a reference made at the instance of the Commissioner of Income-tax (Central-II), Calcutta, referring the following two questions of the Income-tax Appellate Tribunal, dated December 3, 1990:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that amount paid in excess of maximum calculated under the provision of section 36(1)(ii) of the Income-tax Act, 1961, on the ground that the amount would be treated as customary bonus and deductible under section 37(1) of the Income Tax Act, 1961?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the cost of stamp paper, registration expense and legal expenses totalling Rs.1,071 incurred by the assessee as per agreement of lease deed in acquiring the sub lease right from Sri Mohan Lal Goenka in the Property at 11, Dover Park, Calcutta, which was subsequently transferred in favour of the Syndicate Bank for a consideration of Rs.40 lakhs cannot be considered as the cost of acquisition of the sub-lease right?" The brief facts of this case are that the respondent, Messrs: Octavious Steel & Co. Ltd., which is an Indian resident company had been a monthly tenant in the premises No. 11, Dover Park, Calcutta, since 1952. The property belonged to. Sri Binoy Kr. Paul. The above tenancy was acquired on the basis of an oral agreement and the respondent did not pay premium, pagri or any other sum at the time of taking possession of the premises when it became the monthly tenant. The landlord subsequently leased out the premises to one Sri Mohan Lal Goenka for 99 years on June 20, 1973, for a monthly rent of Rs.600 with effect from July 1,1973, till June 30, 2072. The respondent-company continued to be in possession of the premises as tenant in spite of the above lease. Subsequently, on July 8, 1980, Sri Goenka wanted the continued possession of the respondent as monthly tenant to be reduced in writing and, accordingly, a sub-lease deed was executed and the cost incurred for execution of the sub-lease deed were as follows:
| | | Rs. |
| (1) | Cost of stamp paper | 516 |
| (2) | Registration charges | 229 |
| (3) | Legal expenses | 326 |
| | | 1071 |
As per the terms of the sub-lease deed, the respondent acquired the sub-lease right at a rent of Rs.700 per month for a period of nine years with option to renew the lease for a further period of nine years. Even at the time of execution of this lease deed, no premium or salami or pagri was paid by the respondent to Sri Goenka or to any other party. On August 28, 1981, Sri Goenka transferred his residuary leasehold rights to Tinnevelly Tuticarin Tea and Investment Co. Ltd. for a consideration of Rs.40,000 subject to the leasehold rights of the respondent. On June 22, 1982, Tinnevelly Tuticorin Tea and Investment Co. Ltd., purchased the reversionary rights of Sri Benoy Kr. Paul in the premises for a consideration of Rs.8 lakhs which transaction did not affect the tenancy of the rights of possession of the respondent. That company by a deed of conveyance again transferred its reversionary rights to the Syndicate Bank for a consideration of Rs.10 lakhs. Soon after this the said bank and the respondent-company entered into an agreement as a result of which the leasehold/tenancy and the possessory rights of the respondent company in the premises were transferred and assigned to the bank for a consideration of Rs.40 lakhs as per a deed of assignment, dated July 11, 1983.
In the Income-tax assessment for the assessment year 1984-85, it was the respondent's case before the Assessing Officer that as the acquisition of the tenancy/leasehold rights in the premises subsequently transferred to the Syndicate Bank Ltd. for a sum of Rs.40 lakhs did not cost anything to it the sum of Rs.40 lakhs did not contain any element of capital gains. The Assessing Officer, however, did not accept this contention and construed the sum of Rs.1,071 which represented the cost of stamp paper, registration charges and legal expenses incurred by the respondent at the time of the execution of the sub-lease deed with Sri Goenka as the cost of acquisition of the tenancy/leasehold right and, accordingly, deducting the same amount from the consideration of Rs.40 lakhs added a sure of Rs.39,98,323 as capital gains in the hands of the respondent.
The respondent challenged the above decision of the Assessing Officer before the Commissioner of Income-tax (Appeals) who agreed with its contention and held that no capital gains were chargeable in the hands of the respondent as arising from the transfer of the tenancy/leasehold rights to the Syndicate Bank. On a further appeal by the Income-tax Department, the Income-tax Appellate Tribunal also came to the same view and dismissed the Departmental appeal. The Tribunal, in coming to the above decision, relied on the principle laid down in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) and also held that the decision of the Delhi High Court in the case of Bawa Shiv Charan Singh v. CIT (1984) 149 ITR which followed the above decision of the Supreme Court fully applied to the respondent's case.
From the above stated facts it is clear that the main issue in the present case is whether the sum of Rs.1,071 which represented the cost of stamp paper, registration expenses and legal expense incurred by a respondent on July 8,1980, can be construed as the cost of acquisition of the tenancy/leasehold rights which were subsequently transferred by the respondent to the Syndicate Bank. It is to be noted that although the said lease deed is executed in 1980 the respondent had been in continued possession of the premises as the monthly tenant right from 1952 and would have continued to remain so even without the lease deed. It is not exactly clear as to why it was considered necessary to enter into the sub-lease agreement inasmuch as there is no evidence to show that Sri Goenka wanted to evict the respondent from the premises or that he was intending to restrict in any manner the legal rights of the respondent as a monthly tenant, of the premises. Under the provisions of the West Bengal Premises Tenancy Act, 1956, the respondent could with impunity continue to remain a monthly tenant in the said premises in spite of the leasehold right acquired by Sri Goenka. Be that as it may, it would be stretching one's imagination to an impossible extent to suggest that the sum of Rs.1,071 expended in 1980 could be the cost of acquisition of the tenancy right of the respondent. In fact, the asset in question being a tenancy right, the value of such a right is unascertainable whatever expenditure might have been incurred on stamps and registration. The fact remains that there is no means by which the cost of the tenancy right itself, which was increasing in value over the time, could ever be ascertained nor could the cost of improvement in such asset be determined. As already stated above the tenancy right was acquired by the respondent without any expenditure incurred by it. The so-called sub-lease right that the respondent acquired in view of the agreement executed in 1980 did not change the essential character of the right of possession that the respondent had in the premises in view of its continuous possession of the premises as a monthly tenant, since 1952. Any expenditure made almost 28 years after it became the monthly tenant in order merely to observe certain formality cannot be construed as the cost of acquisition of the tenancy right. It is worth noticing that although Sri Goenka became the lessee of the property in 1973 he did not consider that the respondent did not have any right to continue to possess the property as the monthly tenant. It was only to 1980, i.e., almost seven years after Sri Goenka acquired the leasehold right that it was considered that the respondent's right of possession should be reduced in writing and registered in the form of a sub-lease agreement. The expenditure was nothing but an incidental expenditure which did not form any part of the cost of acquisition of the possessory rights of the respondent. It may be that the sub-lease agreement was executed in order to properly define the mutual rights of Sri Goenka and the respondent. But one can certainly say that the execution of the lease agreement did not bring into existence the tenancy right of the respondent which he acquired as early as in 1952. It was held in the case of Bawa Shiv Charan Singh (1984) 149 ITR 29 (Delhi) that when rent was paid by the tenancy periodically in terms of money for the use and occupation of the premises, it could not be construed as a part of the cost of acquisition. Thus, even though non-payment of rent on the scheduled dates may deprive the tenant of his tenancy right, it cannot be held that the payment of rent has anything to do with the acquisition of the tenancy right. The same remarks would apply to the case of incidental expenses incurred by the respondent. Expenses incurred in connection with the so-called lease deed cannot by any means be equated with the cost of acquisition of the tenancy. It was held by the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 that interest paid before the commencement of production on amounts borrowed by an assessee, for the acquisition and installation of plant and machinery formed a part of the actual cost of the assets and the assessee would be entitled to depreciation allowance on the amount of such interest. In coming to this decision, the Supreme Court relied on the Statement on Auditing Practices issued by the Institute of Chartered Accountants of India stated that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition and the said rule of accountancy should be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary. The Supreme Court quoted in particular the instruction of the Institute of Chartered Accountants to the effect that (page 175):" .... interest on moneys which are specifically borrowed for the purchase of a fixed asset may be capitalised prior to the asset coming into production, i.e., during the erection stage. However, once production starts, no interest on borrowings for the purchase of machinery .... should be capitalised." The above quotation on which the Supreme Court relied would definitely show that it was merely the accounting practice which the Supreme Court advocated to be adopted as a working principle. The Supreme Court did not deal with the fundamental issue whether any part of the interest before or after the erection of the plant or machinery really represented a part of the cost of the relevant asset. If the interest was to represent the cost of the asset there was no reason why the capitalising of the interest should stop with the completion of the erection. This sufficiently indicates that the interest paid does not in reality form a part of the cost of the asset but that it is only for accounting purposes a portion of the interest is treated so. Then again, the addition was to the cost of the plant and machinery, if there were no plant and machinery, the question would not arise at all. It was an addition to the cost and not the cost of the plant and machinery as such.
The cost of acquisition of an asset, be it a capital asset or any other asset must be understood in its common sense that is, it must represent the expenditure incurred in acquiring the asset. In the case of the respondent no expenditure had to be made by it when it became the tenant of the premises in 1952. There was also no understanding that any payment was required to be made in future by the respondent against the acquisition of the said tenancy. That being so certain expenditure made later on cannot take the place of the cost of acquisition of the tenancy, particularly when the cost so incurred did not give any extra right with regard to the tenancy of the respondent. If one is allowed to draw any parallel, reference may be made to section 43-A of the Income Tax Act, wherein a special provision had been introduced to redetermine the cost of acquisition of an asset acquired out of moneys borrowed from any person in foreign currency or a debt in foreign currency was incurred in acquiring the asset and a change in the rate of exchange had taken place after the acquisition of the asset. But for the said provision the cost of acquisition of the asset would not have undergone any change in view of such change in the rate of exchange taking place subsequently. Thus, the cost of acquisition of an asset would have been fixed once and for all, i.e., when the same was acquired, irrespective of the fact that further expenditure had to be made in terms of Indian currency in respect of the said asset. But for this special provision contained in section 43-A, the extra expenditure incurred by the assessee for the acquisition of the asset would not have changed the cost of acquisition. In the instant case, the cost at the time of the acquisition of the tenancy rights had been nil and even though the respondent had to incur certain expenditure in connection with the said tenancy agreeme4t such expenditure cannot take the place of cost of acquisition of the tenancy rights. It may be stated in this connection that having regard to the facts of the case, there was no essential difference between the tenancy rights and rights arising from the so-called sub-lease agreement. There had been unbroken continuity, right from 1952 till the tenancy was surrendered by the respondent in favour of the Syndicate Bank in so far as the respondent's occupation as a statutory tenant was concerned. Although in the question referred to the High Court, the term "sub-lease right" has been used, the said right cannot be construed as a new right separate from -the right as of a statutory tenant which the respondent continued to have since the beginning.
For the reasons given above, we answer the question in favour of assessee and against the Department.
The reference is dismissed without cost.
MUKUL GOPAL MUKHERJI, J. ---I agree.
M.B.A./1331/FCOrder accordingly.