CIT v. Amal Generators Ltd. - Taxpublishers.in

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The Tax Publishers2013 TaxPub(DT) 1117 (Mad-HC) : (2013) 084 DTR 0045 INCOME TAX ACT, 1961 --Capital gains--Cost of acquisition Law applicable --The assessee was a company. The assessee was the lessee of the premises known as D since 1950 on a monthly lease. It had, however, sub-leased it in 1950 itself to its 100% subsidiary company by name M/s. Sri RVS Ltd. The owners were receiving the lease rent from the subsidiary company itself. Admittedly, after 1974, there was no renewal of the lease in favour of the assessee. In 1978, the assessee company and the owners of the property agreed for execution of the lease deed directly in favour of the 100% subsidiary company M/s. SRVS Ltd. and accordingly, the deed was entered into on 28-7-1978 between the owner of the property and M/s. SRVS Ltd. In 1979, the property in question was sold by owners. On 25-2-1994, the four co-owners on the one hand and the assessee and M/s. Sri RVS Ltd. as second and third party, entered into a Memorandum of Understanding, as per which, the assessee and M/s. SRVS Ltd. were stated to have surrendered their tenancy rights in favour of the four co-owners and in lieu of the surrender of the tenancy rights, the assessee and M/s. SRVS Ltd. received compensation. The tenancy was terminated on 25-2-1994. The receipt of compensation on the surrender of tenancy rights was not offered as income by the assessee. In the assessment finalised, the Assessing Authority accepted the contention of the assessee that the tenancy rights, being capital in nature, the receipt of compensation for the surrender of the tenancy rights could not be assessed. The Commissioner observed that section 55(2) was amended with effect from 1-4-1995. The Commissioner passed order under section 263 revising the order of assessing authority on the ground that assessee was not having any right to transfer its interest in tenancy and as such compensation received had to be considered as income of the assessee which was to be assessed as capital gains. On appeal, the Tribunal set aside the order of commissioner. *Held:* Section 55(2) was amended with effect from 1-4-1995, which has no relevance to the assessment year under consideration, namely, 1994-95. In the circumstances, the capital receipt at the hands of the assessee could not be assessed as capital gains, as there was no cost of acquisition. The revenue went on a diametrically different factual plane to contend that the assessee could not be treated as a tenant, by reason of the document dated 28-8-1978 entered into between the assessee's subsidiary company and the vendor. Standing Counsel pointed out that there is no reference at all in the said document as to the assessee being considered as a tenant under (sic - of) the owner. If the Revenue's contention on facts has to be accepted, court is afraid, the very basis of section 263 order fails, in which event, the entire order of the Commissioner has to be set aside. Whatever might have been the terms of understanding under the document dated 28-8-1978, as far as the present case is concerned, the right to receive compensation is traceable to the document dated 25-2-1994. Consequently, it is not open to the Revenue to contend that the order of the Commissioner could be sustained on a different fact situation, a position which is not open to the revenue to contend so. [Para 11] The amendment of section 55(2) took effect from 1-4-1995. Till the amendment of law was there, if the cost of acquisition could not, in fact, be determined, the transfer of capital assets could not attract capital gains. [Para 15] Tenancy right is a capital asset, the surrender of tenancy right is a transfer and the consideration received therefor is a capital receipt within the meaning of section 45, had not been questioned before the Supreme Court and that in any event, the said proposition was taken to have been concluded by the decision of the Apex Court in A. Gasper v. CIT (1991) 192 ITR 382 (SC). Thus, the consideration on tenancy rights, normally, would be subjected to capital gains under section 45. [Para 16] However, having regard to the unworkability of the provisions and that section 55 itself was introduced relevant only to the subsequent assessment year, namely, 1995-96, the Apex Court held that till the amendment in 1995, the compensation received on surrendering the tenancy rights could not be assessed to capital gains. Thus, on the fact position as found by the Tribunal and which form (sic - formed) the very basis of the order under section 263 that the assessee was treated as tenants as per the document dated 25-2-1994, the genuineness of which was never questioned by the revenue, there is no hesitation in confirming the order of the Tribunal. [Para 17] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1117 (Mad-HC) : (2013) 084 DTR 0045

INCOME TAX ACT, 1961

--Capital gains--Cost of acquisition Law applicable --The assessee was a company. The assessee was the lessee of the premises known as D since 1950 on a monthly lease. It had, however, sub-leased it in 1950 itself to its 100% subsidiary company by name M/s. Sri RVS Ltd. The owners were receiving the lease rent from the subsidiary company itself. Admittedly, after 1974, there was no renewal of the lease in favour of the assessee. In 1978, the assessee company and the owners of the property agreed for execution of the lease deed directly in favour of the 100% subsidiary company M/s. SRVS Ltd. and accordingly, the deed was entered into on 28-7-1978 between the owner of the property and M/s. SRVS Ltd. In 1979, the property in question was sold by owners. On 25-2-1994, the four co-owners on the one hand and the assessee and M/s. Sri RVS Ltd. as second and third party, entered into a Memorandum of Understanding, as per which, the assessee and M/s. SRVS Ltd. were stated to have surrendered their tenancy rights in favour of the four co-owners and in lieu of the surrender of the tenancy rights, the assessee and M/s. SRVS Ltd. received compensation. The tenancy was terminated on 25-2-1994. The receipt of compensation on the surrender of tenancy rights was not offered as income by the assessee. In the assessment finalised, the Assessing Authority accepted the contention of the assessee that the tenancy rights, being capital in nature, the receipt of compensation for the surrender of the tenancy rights could not be assessed. The Commissioner observed that section 55(2) was amended with effect from 1-4-1995. The Commissioner passed order under section 263 revising the order of assessing authority on the ground that assessee was not having any right to transfer its interest in tenancy and as such compensation received had to be considered as income of the assessee which was to be assessed as capital gains. On appeal, the Tribunal set aside the order of commissioner. Held: Section 55(2) was amended with effect from 1-4-1995, which has no relevance to the assessment year under consideration, namely, 1994-95. In the circumstances, the capital receipt at the hands of the assessee could not be assessed as capital gains, as there was no cost of acquisition.

The revenue went on a diametrically different factual plane to contend that the assessee could not be treated as a tenant, by reason of the document dated 28-8-1978 entered into between the assessee's subsidiary company and the vendor. Standing Counsel pointed out that there is no reference at all in the said document as to the assessee being considered as a tenant under (sic - of) the owner. If the Revenue's contention on facts has to be accepted, court is afraid, the very basis of section 263 order fails, in which event, the entire order of the Commissioner has to be set aside. Whatever might have been the terms of understanding under the document dated 28-8-1978, as far as the present case is concerned, the right to receive compensation is traceable to the document dated 25-2-1994. Consequently, it is not open to the Revenue to contend that the order of the Commissioner could be sustained on a different fact situation, a position which is not open to the revenue to contend so. [Para 11] The amendment of section 55(2) took effect from 1-4-1995. Till the amendment of law was there, if the cost of acquisition could not, in fact, be determined, the transfer of capital assets could not attract capital gains. [Para 15] Tenancy right is a capital asset, the surrender of tenancy right is a transfer and the consideration received therefor is a capital receipt within the meaning of section 45, had not been questioned before the Supreme Court and that in any event, the said proposition was taken to have been concluded by the decision of the Apex Court in A. Gasper v. CIT (1991) 192 ITR 382 (SC). Thus, the consideration on tenancy rights, normally, would be subjected to capital gains under section 45. [Para 16] However, having regard to the unworkability of the provisions and that section 55 itself was introduced relevant only to the subsequent assessment year, namely, 1995-96, the Apex Court held that till the amendment in 1995, the compensation received on surrendering the tenancy rights could not be assessed to capital gains. Thus, on the fact position as found by the Tribunal and which form (sic - formed) the very basis of the order under section 263 that the assessee was treated as tenants as per the document dated 25-2-1994, the genuineness of which was never questioned by the revenue, there is no hesitation in confirming the order of the Tribunal. [Para 17]