M/S. STP LIMITED,KOLKATA vs. DCIT, CIRCLE-10, KOLKATA, KOLKATA

आदेश / O R D E R

Per Dr. A. L. Saini, AM: The captioned appeal filed by the assessee, pertaining to Assessment Year 2011-12, is directed against the order passed by ld. Principal Commissioner of Income Tax (Appeals)-18, Kolkata, in appeal No.414/CIT(A)-18/16-17, dated 21.12.2016 which in turn arises out of an assessment order passed by Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) dated 25.03.2014.

“1.That, on the facts and circumstances of the case, Ld. CIT Appeals-18, Kolkata (hereinafter referred to as "CIT (A)") has erred in making an addition under the head Long Term Capital Gains of Rs.3,56,63,433/- by treating arrear rent of Kolkata Port Trust (hereinafter referred to as "KPT"), paid by or on behalf of the Appellant, as consideration for alleged transfer of leasehold rights. 2. That the Ld. CIT (A) was erred in law as well as in facts in upholding the addition of the Ld. DCIT of Rs. 10,00,000 out of the addition made of Rs.14,66,500/- as alleged undisclosed income from license fee, without appreciating the fact that Rs. 10,00,000 has been directly paid by the Appellant to KPT in terms of the agreement between the Appellant and its sub-lessee in view of commercial expediency.”

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i) Assessee and M/s. ARA Enterprises Pvt. Ltd. resolved their disputes regarding amount payable to Kolkata Port Trust through agreement dated 07.02.2008

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ii) Assessee acted as a mere post office between Kolkata Port Trust and M/s. ARA Enterprises Pvt. Ltd. for discharge of rent liabilities.

iii) Assessee has not acknowledged for the past liability nor has it ever claimed these in any of the preceding year.

iv) Without prejudice to its stand, if amount received from M/s. ARA Enterprises Pvt. Ltd. is taxed in the hands of the assessee, then the payment made to Kolkata Port Trust should be adjusted and only the net amount can be taxed in the hands of the assessee. In this regard assessee has relied on the judgment of the Delhi High Court in Exxon Mobil Lubricants [2010] 327 ITR 17.

v) It is further submitted that crystallization of liability of payment to Kolkata Port Trust had occurred in assessment year 2008-09 and not in assessment year 2011-12. In this regard reliance was placed on the following judgments decisions:

a) Non such Tea Estate Ltd. 1975 98 ITR 175 SC. Even an assessee following the mercantile system of accountings is not entitled to claim a deduction until liability for the sum for which deduction is claimed has accrued. The reasons given by the High Court overlooked the plain terms of sec. 326 of the Companies Act, 1956. Sec. 326 prohibits the appointment or reappointment of a managing agent unless the Central Government approved such appointment or reappointment. The Central Government would not accord its approval unless the requirements specified in clauses (a),(b) &(c) of sub-section (2) of the section have been fulfilled. Therefore, it cannot be assumed that the Central Government will approve every proposed appointment or reappointment of a managing agent. Thus, in the instant case it was only when the Central Government conveyed its approval to the appointment of managing agents by its letter dated 02.09. 1957, that the appointment became effective and the company's liability to pay the remuneration of the managing agents accrued.

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b) Saurashtra Cement & Chemical Industries Ltd. 213 ITR 523/80 Taxman 61 (Guj]

c) Addl. Comm -vs- farasol Ltd. 19871 163 ITR 364 [1985] 22 Taxman 418 [Raj]

d) Exxon Mobil Lubricants (P) Ltd. [Delhi [2010] 328 ITR 17. Hon’ble High Court was of the view that liability of the assessee under the agreement had arisen and accrued in August, 2002, when the agreement was executed and, therefore, the liability of the assessee to pay for period January, 2002 to March 2002 arose and crystallized in August, 2002.

“4.4(c) I have carefully considered the facts of the case and the submission of the assessee. Following issues are to be decided to arrive at the conclusion:- i) Whether any asset within the meaning of section 2(14) of the 1.T.Act has been transferred. ii) If yes, then what is the year of transfer? iii) What is the consideration received for transfer of the asset and working of capital gains. Before we go into further analysis, first we will take a look at section 2(14), which defines Capital Asset' and section 2(47) which defines Transfer'. Section 2(14) reads as under: "Capital asset "means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include- (i) any stock-in-trade, other than the securities referred to in sub-clause (b), consumable stores or raw materials held for the purposes of his business or profession; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes:

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(a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art.

Explanations: For the purposes of this sub-clause, "jewellery" includes:

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.

Agricultural land in India, not being land situate –

(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last proceeding census of which the relevant figures have been published before the first day of the previous year; or (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item(a) as the central Government may, having regard to the extent of and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the official Gazette;

(iv) 6% per cent Gold Bonds, 1977, or 7 per cent Gold Bond:, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

(v) Special Bearer Bonds, 1991, issued by the Central Government;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government

Section 2(47) reads as under:

Transfer in relation to a capital asset includes

(i) the sale, exchange or relinquishment of the asset, or (ii) the extinguishment of any rights therein: or (iii) the compulsory acquisition thereof under any law; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as stock-in-trade of a business carried on by him, such conversion or treatment; or (iva) the maturity or redemption of a zero coupon bond; or

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(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or

(vi) any transaction (whether by way of becoming a member of, acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of, any immovable property.

Explanation - for the purposes of sub-clauses (v) & (vi) immovable property shall have the same meaning as in clause (d) of section 269UA]

It is apparent that section 2(14) refers to any rights. Now let us look at some of the judicial pronouncements on similar issues. Hon'ble Madras High Court in the case of CIT, Madurai -vs- Sujatha Jewellers [2007] 290 ITR 631 has looked into section 2(47) read with section 2(14). In this case assessee had taken on lease an immovable property under a lease agreement, under which it had to pay Rs. 10 lakhs to the lessor as interest- free advance. The lease was to be for a period of 22 years. Rent for the first 15 years was fixed at Rs. 20,350 per month and for the remaining 7 years, the monthly rent payable was Rs. 84,428. There was a renewal clause. The assessee had sub-leased the property by a lease deed in favour of another company for a period of 20 years. Under that sub- lease agreement the sub-lessee had to pay Rs. 10 lakhs as interest-free advance to the assessee, the rent payable for the first 15 years was Rs. 77,500 per month and for the remaining period, the rent payable was Rs.92,500 per month. Assessing Officer held that transfer of lease by the assessee in favour of sub-lessee would amount to transfer of a capital asset and the consideration received by the assessee under that transaction would partake the character of capital gains and, therefore, liable to tax. Hon'ble Madras High Court held that transferring an immovable property by was of a lease creates an interest in the land. According to section 2(14), the word 'capital asset' means, property of any kind held by an assessee'. Therefore, it does not necessarily mean that the property, which the assessee holds, must be his own. Any kind of property held by an assessee would come within the definition of 'capital asset'. From the decisions of the Supreme Court in A.Gasper v. CIT [1991] 192 ITR 382 and the Madras High Court in A.R.Krishnamurthy & A.R. Rajagopalan v. CIT[1982] 133 ITR 922/[1981] 6 Taxman 289, it is clear that transfer by way of lease is treated as transfer of a capital asset, on the principle that the lease creates an interest in the land and, therefore, to that extent, it extinguishes the right of the transferor. Therefore, when the assessee transfers his leasehold rights in the land in his occupation, by way of a sub-lease to another person, it amounts to extinguishing his rights in the property and since his leasehold rights had created an interest in the land, i.e., enjoyment and possession and, therefore, it would definitely come within the definition of 'capital asset', as defined under section 2(14). Whether the owner himself transfers by way of a lease or a lessee transfers by way of sub-lease, the principle remains the same, namely, in either action there is extinguishment of rights.

Hon'ble Andhra Pradesh High Court in the case of Mrs. G.Seetha Kamraj -vs- CIT, 2006, 284 ITR 54 has also looked into this issue. In this the assessee took on lease for 99 years a building from her husband case and as per the terms of the deed, the lease was to start from June 1, 1986. The assessee paid a sum of Rs. 5,000 as premium for

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obtaining the lease and was to pay a monthly rent of Rs. 300. The lessee then created a sub-lease in favour of a third party. The assessee received a lump sum of Rs.4,30,000 as consideration. It was stated to be adjustable against monthly rent of Rs. 367.83. The Income-tax Officer assessed tax and was of the view that an amount of Rs. 3,87,500 was capital gain and an amount of Rs.42,500 was the cost of acquisition. This was upheld by the Commissioner (Appeals) and the Tribunal. Hon'ble Andhra Pradesh High Court held, that on the facts and in the circumstances of the case the Tribunal was correct in construing the sub-lease agreement and holding that the deposit of Rs.4,30,000 received by the assessee was a consideration for granting sub-lease of the assessee's rights and not a payment of monthly rent in advance and as such was liable to tax as short term capital gains.

While deciding this case Hon'ble Andhra Pradesh High Court heavily relied on the judgment of Hon'ble Supreme Court in the case of R. K. Palshikar [1988] 172 ITR 311. Besides Hon'ble High Court also referred to the following judgments:

a) AR Krishnamurti -vs- CIT, 1989 176 ITR 417 (SC] b) Traders & Minors Ltd. [1955] 27 ITR 341 [Patna High Court] c) A. Gaspcr-vs-CIT 192 ITR 382 [SC] d) A. Gasper-vs-CIT [1979] 117 ITR 581 [Calcutta HC e) CIT-vs-Panbari Tea Co. Ltd. [1965] 57 ITR 422

Thus it is evident that creation of sub lease rights would also amount to transfer of Leasehold Rights, under certain conditions. Whether the lessor continues getting rent even after the date of transfer is not relevant in deciding whether transfer has taken place. Perusal of the two agreements with M/s. ARA Enterprises Pvt. Ltd shows that agreement dated 21.01.1999 was in the nature of leave and license agreement for a limited period. M/s. ARA Enterprises Pvt. Ltd. was to occupy the premises only for a limited period. No other rights were conferred on the lessee through this agreement. Refundable deposits were taken, which were equivalent to three months of rent and six months of rent was taken in advance to be adjusted against the monthly rent @ 50% of the rent. Assessee continued to have effective control over the premises and its Leasehold Rights were not affected in any manner. However, agreement dated 07.02.2008 was like transfer of Leasehold Rights. Assessee got lump sum payments equivalent to arrears of rent. Besides it was also entitled for monthly rental from the lessee. However, henceforth assessee did not have the power to terminate the agreement and evict M/s.ARA Enterprises Pvt. Ltd., so long as they continued to pay timely rent and complied with other conditions of the premises for their own use in future. They remained only a name lender in the records of KPT but effective control passed on to M/s.ARA Enterprises Pvt. Ltd. Thus enjoyment and possession of land passed on to M/s.ARA Enterprises Pvt. Ltd. In the first agreement M/s.ARA Enterprises Pvt. Ltd. were not required to discharge prior liabilities of the appellant whereas through the second agreement they agreed to pay the arrears of rent along with interest to save the Leasehold Rights. Thus it is apparent that assessee parted with their exclusive Leasehold Rights and control over the two plots of land to M/s.ARA Enterprises Pvt. Ltd. for ever, on receipt of a lump sum amount and some monthly rent. This amounts to transfer of rights of the assessee within the meaning of section 2(14) read with 2(47) and this issue is covered by the above judgements in the case of Sujatha Jewellers [supra] and Mrs. G. Seetha Kamraj [supra].

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Now the next question arises as to in which year transfer of Leasehold Rights took place. Agreement with M/s.ARA Enterprises Pvt. Ltd. was signed in February, 2008, but this agreement was not implemented immediately. Besides at that time assessee was facing eviction proceedings from Kolkata Port Trust and under these circumstances, its Leasehold Rights was not secure. Under the circumstances, transfer of these rights could not have taken place. Besides for transfer to take effect, agreed consideration for the transfer had to change hands. Records show that this did not happen immediately. On 31.03.2010 M/s.ARA Enterprises Pvt. Ltd., through the assessee, paid Rs.2,24,00,000/- and the balance payment of arrear of Rs.1,32,63,433/- was made in the current year. Thus entire arrears of dues were cleared in the current year. Hence assessee's Leasehold Rights can be construed to have been restored during the current year. Hence any transfer of Leasehold Rights would take place only after the terms and conditions of the agreement are fully complied with and all the arrears are paid to KPT, until then lessor was not sure of his own lease rights. Continuation of Leasehold Rights over the plots was in the hands of KPT. And only after clearing the arrears of 'rent Kolkata Port Trust would restore the Leasehold Rights of the lessor, which has happened during the year. Under the circumstances it is logical that transfer of leasehold rights to M/s ARA Enterprises Pvt. Ltd. would take place only when the same was restored to the assessee. Hence year of transfer is the current year and capital gains the assessee during the current year. During appeal has accrued to proceedings assessee was asked to furnish documents regarding restoration of its Leasehold Rights by Kolkata Port Trust. However, assessee has not submitted any communication in this regard. However, it can be inferred that on full payment of arrear of rent during the year, eviction proceedings subsided and after that transfer of Leasehold Rights has taken place. Now the next issue is regarding the total consideration received for transfer of this Leasehold Rights. It is seen that M/s. ARA Enterprises Pvt. has paid Rs.2,24,00,000/- on 31.03.2010 and balance amount of Ltd. arrear of Rs.1,32,63,433/- has been paid during the year. These two amounts are basically the consideration for transfer of Leasehold Rights. Thus Rs.3,56,63,433/- is the consideration for restoration and subsequent transfer of Leasehold Rights. Besides during the current year, M/s. ARA Enterprises Pvt. Ltd. has also paid 50% of the rent payable to Kolkata port Trust. However, this is in the nature of revenue receipt and assessee would keep receiving such income in subsequent years. Assessee has not provided the details of amount, if any, which it might have paid for acquiring the Leasehold Rights. Amount paid if any, would not be much as it was acquired a long time back. Under the circumstances, it is presumed that the cost of acquiring Leasehold Rights is almost Nil. Hence entire amount of Rs. 3,56,63,433/- is taken to be Long Term Capital Gain of the assessee and income is enhanced by this amount. A.O. is accordingly directed to levy suitable tax on this amount.”

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under certain conditions. Whether the lessor continues getting rent even after the date of transfer is not relevant in deciding whether transfer has taken place. On 31.03.2010 M/s.ARA Enterprises Pvt. Ltd., through the assessee, paid Rs.2,24,00,000/- and the balance payment of arrear of Rs.1,32,63,433/- was made in the current year. Therefore Rs.3,56,63,433/- ( Rs.2,24,00,000 + Rs.1,32,63,433) was treated as sale consideration. These two amounts were taken by CIT(A) as the consideration for transfer of Leasehold Rights. Thus Rs.3,56,63,433/- was enhanced by ld CIT(A) treating it as long term capital gain.

Before we analyze the findings of the ld. CIT(A), let us go through the provision of section 2(47) of the Act which reads as follows: “2(47) "transfer", in relation to a capital asset, includes,— (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (iva) the maturity or redemption of a zero coupon bond; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation 1.—For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269UA. Explanation 2.—For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in

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India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;”

Having gone through the explanation 2 of section 2(47) of the Act, we note that the transfer includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or in directly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement. Therefore, it is quite clear that M/s STP Ltd. (assessee) has transferred its lease rights by way of an agreement in favour of M/s ARA Enterprises Pvt. Ltd. and from the transferee (M/s ARA Enterprises Pvt. Ltd.) the assessee got Rs. 2,24,00,000/- and payment of arrear of Rs. 1,32,63,433/-. Therefore, both the amounts put together comes to Rs. 3,56,63,433/-(2,24,00,000 + 1,32,63,433) and the same would be taxable as capital gain, as the assessee got this money by way of selling lease rights. This amount, the assessee M/s STP Limited is enjoying as capital receipt against the transfer of its rights in favour of M/s ARA Enterprises Pvt. Ltd. Although, the assessee M/s STP Limited is not real owner of the property but he has all the rights to use or sub lease the rights the property. Therefore, transfer of leasehold rights by the assessee in favour of M/s ARA Enterprises Pvt. Ltd. is a transfer of a lease rights which should be taxable in the hands of the assessee as capital gain. 8. At this juncture, it is also appropriate to quote the definition of capital asset which is mentioned in Section 2 (14) of the Act, which is reproduced below (to the extent applicable for our discussion): “(14) "capital asset" means— (a) property of any kind held by an assessee, whether or not connected with his business or profession…………………………………………………………………

Explanation.—For the removal of doubts, it is hereby clarified that "property" includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever;”

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Having gone through the definition of capital assets we note that capital asset is property of any kind held by the assessee. In this case of M/s STP Limited (assessee) is holding lease rights in the property and the assessee has transferred these lease rights in favour of M/s ARA Enterprises Pvt. Ltd. and received the lumpsum amount. Therefore, it falls in the definition of property of any kind held by an assessee and hence subject to capital gain tax.

We note that the explanation to Section 2(14) of the Act clearly says that the property includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. In the assessee’s case under consideration, the assessee transferred his lease hold rights in favour of M/s ARA Enterprises Pvt. Ltd and these lease rights fall in the category of ‘any other rights whatsoever’.

We note that M/s. ARA Enterprises Pvt. has paid Rs.2,24,00,000/- on 31.03.2010 and balance amount of Ltd. arrear of Rs.1,32,63,433/- has been paid during the year. These two amounts are basically the consideration for transfer of Leasehold Rights. Thus Rs.3,56,63,433/- is the consideration for restoration and subsequent transfer of Leasehold Rights. Besides during the current year, M/s. ARA Enterprises Pvt. Ltd. has also paid 50% of the rent payable to Kolkata port Trust. However, this is in the nature of revenue receipt and assessee would keep receiving such income in subsequent years. Assessee has not provided the details of amount, if any, which it might have paid for acquiring the Leasehold Rights. Amount paid if any, would not be much as it was acquired a long time back. Under the circumstances, it is presumed that the cost of acquiring Leasehold Rights is almost Nil. Hence entire amount of Rs. 3,56,63,433/- is taken to be Long Term Capital Gain of the assessee and income is enhanced by this amount by ld CIT(A) Therefore, having gone through the provision of Section 2(14) and Section 2(47) of the Act, it is evidently clear by reading of these sections, that the assessee has

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transferred lease hold rights in favour of M/s ARA Enterprises Pvt. Ltd. which is transfer as per Section 2(47) of the Act, therefore, the ld. CIT(A) has rightly computed the capital gain and hence, we confirm the order of the ld. CIT(A).

9.Regarding the second issue, we note that the ld. CIT(A) made addition of Rs. 10,00,000/- out of addition made by the Assessing Officer to the tune of Rs. 14,66,500/- as alleged undisclosed income from license fee, we note that it is not clear whether the said amount was paid in pursuance of the agreements between assessee and its sub-lessee in view of the commercial expediency. Since the assessee has failed to prove the commercial expediency therefore we confirm the order passed by the ld. CIT(A).

Order pronounced in the open court on this 05/02/2020.

Sd/- Sd/- (S. S. Godara) (A. L. Saini) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; Dated:05/02/2020 RS, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant- M/s STP Limited 2. ��यथ� / The Respondent.- DCIT, Circle-10, Kolkata 3. आयकर आयु त(अपील) / The CIT(A), 4. आयकर आयु त / CIT !वभागीय �$त$न%ध, आयकर अपील�य अ%धकरण, कोलकाता / DR, ITAT, Kolkata 5. 6. गाड( फाईल / Guard file.

//True Copy// By Order

Assistant Registrar, I.T.A.T, Kolkata Benches, Kolkata.

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