A.R. KRISHNAMURTHY & ANR vs. C.L.T. MADRAS

CIVIL APPEAL No. 2717/1985Supreme Court[1989] 1 S.C.R. 59610 February 1989Bench: 3 JudgesAuthor: R.S. PATHAK, M.N. VENKATACHALIAH, KULDIP SINGH8 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the grant of a mining lease constitutes a transfer of a capital asset. The right to excavate clay, which flows from the ownership of the land, is a capital asset. The cost of acquiring the land includes the cost of acquiring the mining right. Therefore, there is a nexus between the cost of acquisition of the land and the rights granted under the lease. The Court rejected the assessee's contention that there is no 'cost of acquisition' attributable to the leasehold right. Regarding the computation, the Court held that the value of leasehold rights in the cost of acquisition of land is determinable, making the computation provisions under the Act applicable and Section 45 attracted. The Court distinguished the case of C.I.T. v. B.C. Srinivas Shetty, stating that unlike self-generated goodwill, the cost of acquisition of leasehold rights and the date of acquisition are determinable. The apportionment of the cost of acquisition is a question of fact to be determined by the Income-Tax Officer based on evidence, and the best valuation possible must be made. The appeal was dismissed.

What were the facts?

The assessee, a body of individuals, purchased two pieces of land in 1966. In 1970, they granted a mining lease to an allied company for ten years to excavate clay, receiving a premium of Rs. 5 lakhs and royalties. The Income-Tax Officer (ITO) treated this as a transfer of a leasehold interest, assessable to capital gains tax. The ITO calculated the cost of acquisition of the leasehold interest at Rs. 17,040 (5/8th of the land's acquisition cost) and determined long-term capital gains of Rs. 4,82,960. The Appellate Assistant Commissioner (AAC) confirmed the assessment but allowed the entire land price as the cost of acquisition. The Income-Tax Appellate Tribunal (ITAT) upheld the AAC's order. The High Court, on reference, held the leasehold right to be a capital asset and the transaction a transfer for consideration, answering the reference against the assessee but granting a certificate for appeal to the Supreme Court.

What were the issues?

1. Whether the grant of a mining lease for a period of ten years by the assessee constitutes a transfer of a capital asset giving rise to capital gains taxable under Section 45 of the Income-tax Act, 1961, and if so, whether the cost of acquisition of the right to grant the lease is computable. Assessee's contentions: (i) Conceptually, there is no 'cost of acquisition' attributable to the right of limited enjoyment transferred by the grant of the lease. (ii) Relying on C.I.T. v. B.C. Srinivas Shetty, [1981] 128 ITR 294 SC, since the cost of acquisition of the right granted under the lease cannot be determined, the computation provisions under the Act cannot apply, and Section 45 is not attracted. Revenue's contentions: (i) The grant of a mining lease is a transfer of a capital asset. (ii) The cost of acquisition of the leasehold right is determinable and Section 45 is attracted.

Which sections of the Income-tax Act were involved?

Section 45,Section 2(14),Section 2(47),Section 261

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A ii- A.R. KRISHNAMURTHY & ANR. v. C.l.T. MADRAS FEBRUARY 10, 1989 [R.S. PATHAK, CJ, M.N. VENKATACHALIAH AND KULDIP SINGH, JJ.] Income Tax Act, 1961: Sections 2(14), 2(47), 45 and 261- Capital gains-Taxability of-Piece of Land purchased by assessee- M ining lease to excavate clay from the land granted-Amounts to trans- C fer of 'capital asset'-Capital gains arise-Cost of acquisition of right to grant mining lease is computable-Nexus between 'cost of acquisition' and 'grant of lease'' exists-Best valuation possible to be made on basis of evidence. · The appellant-assessee, a body of individuals, purchased two D pieces of land in the year 1966. In 1970 it granted a mining lease to a private company (an allied concern) to extract clay for a period of ten years at a premium of Rs. 5 Iakhs in addition to payment of royalty.

The Income-tax Officer construed the lease deed as transferring a \.- lease-hold interest in the land in favour of the company and came to the E conclusion that the transfer was assessable to capital gains tax. For the purpose of computing the extent of tax, the Income-tax Officer valued the lease-hold interest at 5/8th of the sale price of the en

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