COMMISSIONER OF INCOME-TAX VS NEBA RAM HANSRAJ, 1998 PTD-PATNA-HIGH-COURT-INDIA 3218 (1996)

(a) Income-tax---

----Capital or revenue receipt---Business of assessee under process of winding up---Sum received by assessee from landlord for surrender of leasehold rights---Is not a revenue receipt---Indian Income Tax Act, 1961, S.28.

(b) Income-tax---

----Capital gains---Cost of acquisition---Sum received for surrender of leasehold rights---Cost of acquisition of leasehold rights riot capable of valuation---Sum cannot be taxed as capital gain---Indian Income Tax Act, 1961, S.45.

The assessee-firm dealt in retail sale and purchase of cloth. In the year preceding the assessment year 1985-86, the business of the assessee was in the process of winding up and the assessee was, therefore, engaged only in the sale of the left over stock. The Assessing Officer noticed that the capital account of the two partners showed an addition of a sum of Rs.95,000 in cash which was described as "Salami". The sum was received by the assessee as consideration for relinquishing its tenancy rights and for handing over to the landlord vacant possession of the premises tenanted by it. The question was whether the sum in question was a revenue receipt or a capital gain liable to tax:

Held, (i) that the sum received for surrender of tenancy rights was not a revenue receipt;

CIT v. Joy Ice Creams (Bangalore) (Pvt.) Ltd. (1993) 201 ITR 894 (Kar.) fol.

(ii) that the cost of acquisition of the leasehold right was incapable of valuation and consequently tax could not be imposed on the sum in question as a capital gain.

Krishnamurthy (A.R.) v. CIT (1989) 176 ITR 417 (SC) distinguished.

CIT v. Joy Ice Creams (Bangalore) (Pvt.) Ltd. (1993) 201 ITR 894 (Kar.) fol.

Bawa Shiv Charan Singh v. CIT (1984) 149 ITR 29 (Delhi); CIT v. Manna Ramji & Co. (1972) 86 ITR 29 (SC); CIT v. Ram Saran Chopra (1986) 158 ITR 1 (Pat.); CIT/CEPT v. Shamsher Printing Press (1960) 39 ITR 90 (SC) and CIT v. Srinivasa Setty (BC) (1981) 128 ITR 294 (SC) ref.

S.K. Sharati for the Commissioner.

L.N. Rastogi, Senior Advocate for the Assessee.

JUDGMENT

The following questions of law arising from the assessment year 1985-86, have come to this Court at the instance of the Revenue on a reference under section 256(2) of the Income Tax Act, 1961:

"(i) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal having held that a decision of the Supreme Court CIT/CEPT v. Shamsher Printing Press (1960) 39 ITR 90 supports the Revenue's case, was justified in law in not following the decision of the Supreme Court in CIT/CEPT v. Shamsher Printing Press (1960) 39 ITR 90?

(ii)Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal having held that tenancy right is not goodwill was justified in following the decision of the Delhi High Court in Bawa Shiv Charan Singh v. CIT (1984) 149 ITR 29?

(iii)Whether, on the facts and in the circumstances of the case, the amount received for surrender of tenancy right is a revenue receipt liable to tax?

(iv) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the cost of leasehold right is incapable of valuation and consequently tax cannot be imposed on the amount in view of the decision of the Supreme Court in the case of A.R. Krishnamurthy v. CIT (1989) 176 ITR 417?"

On a close examination of the facts and circumstances of the case, however, we find that the real questions of law to which this Court is required to address itself are formulated at Serial Nos.3 and 4 above. What are posed as questions of aw at Serial Nos. l and 2 are actually not questions of law which may be required to be examined by this Court and those in fact related to the manner in which the Appellate Tribunal has expressed itself in its judgment and order.

As regards the first question all that the Appellate Tribunal meant to say was, that although the Supreme Court's decision in CIT/CEPT v. Shamsher Printing Press (1960) 39 ITR 90, at first appeared to support the Revenue's contention, on a deeper consideration of the facts and circumstances it transpired that that decision had no application to the facts and circumstances of this case. Similarly, as regards the second question, what the Tribunal actually said was that though the tenancy right was not quite akin to goodwill, applying the same principles that it was not possible to apply the computation section for quantifying the profits and gains on the transfer of leasehold rights, any amount received for the surrender of the tenancy right must also be held to be exempt from payment of tax. Thus, we are of the view that in so far as the first two questions are concerned, all that can be said is that perhaps the Tribunal could have expressed itself with greater clarity. Those, however, do not involve any questions of law and hence there is nothing for this Court to answer in so far as those two questions are concerned.

Now, in order to examine questions Nos.3 and 4, it would be apposite to briefly narrate the material facts from which these questions arise. The assessee used to deal with the retail sale and purchase of cloth. In the year preceding the assessment year in question (1985-86), the business was in the process of winding up and the assessee was, therefore, engaged only in the sale of the left over stock. The Assessing Officer noticed that the capital account of the two partners showed an addition of a sum of Rs.95,000 in cash which was described as "Salami". According to the assessee, the amount was received from the landlord as consideration for handing over vacant possession of the premises tenanted by the assessee-firm. A sum of Rs.70,000 was received in cash and Rs.25,000 was received through a bank draft on June 14, 1994.

In the absence of any confirmation from the landlord, the Assessing Officer treated the entire amount of Rs.95,000 as unexplained and added it to the income of the assessee under section 68 of the Act. In appeal before the Assistant Commissioner (Appeals), the assessee reiterated its stand that the sum was received as consideration for the surrender of the tenancy rights and it was also stated that an affidavit to this effect had been filed before the Assessing Officer. Before the appellate authority it was contended on behalf of the assessee that the amount in question was not taxable in the light of the decision of the Delhi High Court in Bawa Shiv Charan Singh v. CIT (1984) 149 ITR 29 and the decision of the Patna High Court in CIT v. Ram Saran Chopra (1986) 158 ITR 1. The Assistant Commissioner (Appeals) accepted the assessee's statement that the payment was made for the surrender of the tenancy rights and deleted the amount of Rs.95,000 from the assessee's income.

A second appeal was filed by the Revenue before the Appellate Tribunal. The Tribunal on an appraisal of the facts of the case accepted the assessee's plea that the source of the amount in question was very well explained and, therefore, it could not be said that it was an income from undisclosed source. It was then contended on behalf of the Revenue that this receipt, in view of the Supreme Court decision in CIT/CEPT v. Shamsher Printing Press (1960) 39 ITR 90 should be held to be a revenue receipt in the hands of the assessee and, therefore, liable to be added to its income for imposition of tax. The Tribunal did not accept this contention either and declined to interfere in the matter. It also rejected an application under section 256(1) of the Act filed on behalf of the Revenue for making a statement of the case and referring the questions of law proposed therein to this Court. Finally, on an application made by the Revenue under section 256(2) of the Act, this Court directed the Tribunal to make a statement of case and refer the questions enumerated above for the opinion of' this Court.

At this stage it may be noted that both the Assistant Commissioner (Appeals) and the Appellate, Tribunal have recorded a finding of fact that the sum of Rs.95,000 was received by the assessee as consideration for relinquishing its tenancy rights and for handing over to the landlord vacant possession of the premises tenanted by it. This finding cannot be assailed in this reference before us.

Before the Appellate Tribunal it was argued that the receipt was in the nature of a revenue receipt in the hands of the assessee and in this regard reliance was placed on a Supreme Court decision in CIT/CEPT v. Shamsher Printing Press (1960) 39 ITR 90. Before us, Mr. S.K. Sharan, counsel appearing on behalf of the Revenue, slightly shifting his stand, submitted that the payment of consideration for the surrender of tenancy rights amounted to capital gain and could be taxed as such. In support of his submission, he relied upon a decision of the Supreme Court in A.R. Krishnamurthy v. CIT (1989) 176 ITR 417. In that case the appellant, a body of individuals, had given a parcel of land on a mining lease for a fixed period of ten years at a premium of Rs.5 lakhs in addition to payment or royalty. It was, in those facts and circumstances that it was held that the grant of a mining lease at a premium amounted to transfer of capital assets thereby giving rise to capital gain. The facts of the case relied upon by Mr. Sharan are quite different and the Supreme Court's decision in that case, therefore, has no application to the facts of the present case.

Mr. Rastogi, learned counsel appearing on behalf of the assesse invited our attention to a Karnataka High Court decision in CIT v. Joy Ice Creams (Bangalore) (Pvt.) Ltd. (1993) 201 ITR 894. The facts of the Karnataka case were very similar to the facts of the case in hand and that decision appears to us to apply to this case with full force. In the Karnataka case, the Appellate Tribunal had found that a sum of Rs.45 lakhs received by the assessee "was a recompense for relinquishing all the rights the assessee and in the tenanted property". On this finding it was a contended that the receipt was a capital asset and, therefore, it was capital gain to be taxed in the hands of the assessee. This contention advanced on behalf of the Revenue was negatived on the ground that the assessee had not incurred any cost. to acquire the said capital asset and, therefore, the receipt could not be taxed as capital gain at all. In this regard reliance was placed upon the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty's case (1981) 128 ITR 294 upholding the view. The High Court further made the following observations (at page 897 of 201 ITR):

"The receipt was a consideration received towards the relinquishment or surrender of the tenancy rights and, consequently, prima facie, it partakes of the character of a capital receipt. Here the tenant had not paid any sum to acquire the tenancy right, except the rent paid as and when it was due; thus, cost of acquisition of the assets was nil. A tenancy right is created immediately on the creation of a lease under which the tenant takes or continues in possession of the property. The value of the said right depends on several factors. On the very day of the commencement of the lease, it may not have any value. After some time, the real rental value may go up as against the actual rent payable by the tenant; in such a situation, the difference between the fair rent and the actual rent payable would result in making the tenancy interest 'valuable'. Under certain circumstances, the tenanted premises may contribute to the goodwill of the business carried on in it by the tenant; but in many cases, the premises may not have a particular value due to the goodwill gained by the tenant, in his business. The transfer of interest by the tenant to a third party may be prohibited by law, as in the case of sections 21(1)(1) and 23 of the Karnataka Rent Control Act, 1961; however, there may not be a bar against surrendering the said interest to the landlord; in the case of surrender to the landlord, the value of the interest surrendered cannot be compared to the value it would have fetched in case a general transfer is permitted.

In the absence of a specific statutory provision providing for measuring the profit or gain accruing to an erstwhile tenant, occasioned by the receipt of a consideration for surrendering to the landlord of the tenant's interest, it is not possible to compute the alleged 'capital gain' that results to the tenant from such a surrender. But for the several provisions in the Income Tax Act, capital gain' could not have been roped in for taxation as 'income'. In- reality, 'capital gain' is not 'income' in its strict sense; the deeming provisions of section 45 of the Act, read with the other provisions governing its computation, made it possible to tax the capital gain as 'income'. Therefore, if a particular receipt is incapable of being computed as a capital gain, the said receipt cannot be charged to tax as a 'capital gain'."

As regards the other contention that the payment was in the nature of a revenue receipt taxable as a business income under section 28, the Karnatka decision rejected it by observing as follows (at page 900 of 201 ITR):

"The payment of Rs.45 lakhs to the assessee in the instant case is not towards the loss of any earnings or business. It is quite clear that the payment was made in lieu of alternative premises to be provided to the assessee by the purchaser of the premises. It is not the case of the Revenue nor of the assessee that the assessee had suffered any loss in business by stoppage of the business due to the shifting to another premises by the assessee. Therefore, the ratio of the Supreme Court decisions reported in CIT v. Manna Ramji & Co. (1972) 86 ITR 29 and CIT/CEPT v. Shamsher Printing Press (1960) 39 ITR 90 is not attracted."

We find ourselves in respectful agreement with the view taken in the Kanataka decision and following it we answer question No.3 in the negative and question No.4 in the affirmative; in other words, both the question is are answered in favour of the assessee and against the Revenue. Let a copy of this order be sent down to the Appellate Tribunal. There shall be no order as to costs.

M.B.A./1645/FCReference answered.