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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
Per N.V. Vasudevan, Judicial Member
This is an appeal by the Assessee against the order dated 29-3- 2014 of CIT(A)-Belgaum, relating to assessment year 2006-07.
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The Assessee is an individual. For AY 2006-07, he filed a return of income declaring loss from business at Rs.1,25,611/-, Income from House
property at Rs.1,51,637/- and Income under the head “Long Term Capital Gain” of Rs.49,825. The total income declared in the return of income was
Rs.31,605/-. The dispute in this appeal is with regard to the income
declared by the Assessee under the head “Long Term Capital Gain”.
Property being vacant land measuring 1 Acre and 10 Guntas in
R.S.No.87 and 1 Acre and 14 Guntas in R.S.No.93 respectively in Mariyan Timmasagar Village, Taluka Hubli, District Dharwad, hereinafter referred to
as “the Property”, belonged to Gurappa Channabasappa Belagavi, and
Sanna Irapava, who were the joint owners of the property. By a registered lease deed dated 1.3.1905 they granted on lease for a period of 99 years
the property to one Anant Parasuramasa Goankar. The lessees had a right to continue the lease on the same terms and conditions. The lease deed
also provided that the lessee can alienate the leasehold rights. By a
registered sale deed dated 7.12.1907, Anant Parasuramasa Goankar sold the leasehold rights over the property to one Ramdas S/o. Vittaldas Darbar
for a sum of Rs.8,500/-. It is not in dispute that the Assessee herein succeeded to the property and was the sole owner of the leasehold rights
over the property.
A ginning factory was constructed by the Assessee over the property and business of ginning was carried on by the Assessee therein. Smt.
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Madhukanta Laxmidas Darbar was the wife of the Assessee. The Assessee and his wife had differences and decided to live apart. By an
agreement to live apart dated 4.11.1972 the Assessee and his wife agreed that the leasehold right over the property and the business of ginning
together with the factory building will be given to the Assessee’s wife. Thus
the ginning business, leasehold rights over the property belonged to the Assessee’s wife.
In the year 1986, the successors in interest of lessor of the property filed a petition for eviction of the Assessee and the Assessee’s wife from
the property under the Karnataka Rent Control Act, 1961. The Hon’ble
Supreme Court in Civil Appeal No.2031 of 2000 by its judgment dated 27.8.2001 held that the fixed term lease will not stand obliterated because
of the provisions of the Karnataka Rent Control Act, 1961 and therefore the petition for eviction was liable to be dismissed.
The Assessee and his wife filed a suit bearing O.S.No.45/2004 in
the Court of the II Additional Civil Judge, Junior Division, Hubli, seeking direction for renewal of the lease for a further period of 99 years against the
successors in interest of lessor of the property. The parties ultimately entered into a compromise and a decree in terms of the compromise dated
27.6.2005 was passed. The main terms of the compromise was that the
Assessee was granted permanent lease in respect of an area of 42 Guntas of the property together with buildings measuring about 11,000 Sq.ft. The
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Assessee was to pay a sum of Rs.165.50 Ps., as annual rent payable on or before 31st March of every year. The Assessee and his wife delivered possession of the remaining extent of the property and gave up their right over the said area of the property. Clause-11 of the compromise memo provided that the building constructed over the area over which the lessees gave up their rights in favour of the lessor shall be removed by the lessee at his cost. Clause-14 of the compromise memo provided that a common wall demarcating the portion of the property allotted to the lessor and lessee shall be constructed. The cost of construction of the common wall was to be borne by the parties equally.
The lessors also paid a sum of Rs.33,00,000 to the Assessee and his wife on 27.6.2005. The receipt cum acknowledgement given by the Assessee and his wife dated 27.6.2005 acknowledges the compromise memo between the parties. It further acknowledges that the Assessee and his wife would bear expenses of registration of the compromise decree and expenses of dismantling and removing the structures standing the area surrendered to the lessors.
In the return of income filed by the Assessee for AY 2006-07, the receipt of Rs.33 lacs was declared by the Assessee as Income under the head “Long Term Capital Gain” (LTCG) on surrender of tenancy rights. The computation of LTCG as given by the Assessee was as follows:-
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Amount received as per Receipt-cum-Acknowledgement Dt 27/06/2005 33,00,000
Less: Dismantling expenses of structure on leasehold property 5,81,090 --------------- 27,18,910 Less: Registration expenses towards Compromise Decree Stamp Duty 7,58,500 Regn. charges 85,475 Commission charges 1,139 Misc Exp. 4,525 ----------- 8,49,639 --------------- Income subject to LTCG 18,69,271
Less: Cost of Acquisition As tenancy right hence value as on Nil 1981 as compensation received including residential structure constructed by lessee during tenure of lease, the lessee is absolute owner and hence valuation of structure as on 1981 (as per Valuation Report) Rs.205120
Hence inflation cost as per index 2005/06 497
205120 X 497 1019446 100 ------------ 10,19,446 -------------- 8,49,825 Less: Amount deposited in capital gain A/c in Bank of Baroda, Hubli On 14/12/2005 (for construction of Residential house) 8,00,000 -------------- LONG TERM CAPITAL GAIN 49,825 --------------
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In a note filed along with the return of income the Assessee explained the litigation in respect of the property and claimed that the
receipt in question was on surrender of leasehold rights which was a capital asset and therefore the income from such transfer of capital asset is liable
to taxed under the head “Capital Gains”. The note also refers to the fact
that the Assessee’s wife Smt. Madhukanta Darbar was joint lessee of the property by virtue of the Agreement to live apart dated 4.11.1972 whereby
the Assessee and his wife agreed that the leasehold right over the property and the business of ginning together with the factory building will be given
to the Assessee’s wife. The note further refers to the provisions of Sec.64(1) of the Income Tax Act, 1961 (‘the Act’) and states that it is the
Assessee who is required to be assessed to tax on the entire capital gain.
We need not in this appeal deal much with the applicability of Sec.64(1) of the Act because even the revenue has proceeded to tax the Assessee in
respect of the entire capital gain.
The Assessing officer did not allow the claim of the Assessee for deduction a sum of Rs.5,81,090 which was claimed by the Assessee to be
expenditure in demolition of structures over the property surrendered to the lessors. The Assessing Officer also did not allow the claim of the Assessee
for deduction on account of cost of acquisition of the building and indexation on such cost. The claim of the Assessee for deduction on this
account which was disallowed by the AO was a sum of Rs.10,19,446.
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As far as the claim of the assessee for deduction of a sum of Rs.15,81,090 towards dismantling expenses of structure of leasehold property is concerned, the AO was of the view that the aforesaid expenditure does not fall within the permissible deduction u/s. 48 of the Act. According to the AO, only cost of improvement can be allowed as a deduction. The AO was also of the view that the structure in question was not constructed either by the assessee or his wife and that Darbar Ginning Factory, Hubli had incurred the expenses. The AO also referred to the statement of the assessee recorded u/s. 131 on 12.11.2008 wherein the assessee admitted that the dismantling expenses were incurred by his wife. For the above reasons, the AO disallowed the claim of the assessee for deduction of Rs.5,81,090.
As far as deduction of Rs.10,19,446 which was the indexed cost of acquisition of the structure claimed as deduction by the assessee in the computation of capital gain, the AO noticed that value of the structure claimed by the assessee as on 1.4.1981 was Rs.2,05,120. The valuation report in support of the claim of the assessee had also been filed. According to the AO, there was no documentary proof available with the assessee to prove that construction was made by the assessee in his capacity as lessee. There was no asset shown in the balance sheet of the assessee in the earlier years. The AO also referred to the statement of the assessee recorded u/s. 131 of the Act on 12.11.2008, wherein he admitted that investment of Rs.2,05,120 on construction was made by his wife and
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that a sum of Rs.1,63,555 was spent by the assessee’s wife since the year 1972 and reflected in the balance sheet of the assessee’s wife’s business of ginning. The AO also notice that even in the F.Y. 2006-07, value of the factory building was appearing in the balance sheet of assessee’s ginning factory.
For the above reasons, the AO disallowed the claim of assessee for deduction of Rs.10,19,446. The AO ultimately computed LTCG as follows:-
Long term capital gains
Amount received as declared Rs.33,00,000
(-) Regn. expenses as claimed 8,49,639
(-) Amount invested in capital Gains scheme & withdrawn as stated in para-5 above 8,00,000 ----------- Rs.16,49,639 ----------------- Net capital gains Rs.16,50,361 -----------------
Aggrieved by the action of the AO, assessee preferred appeal before the CIT(Appeals). Before the CIT(A), a contention was taken by the assessee that since the leasehold rights in the property and the ginning factory existing thereon was given by the assessee to his wife under an agreement to live apart dated 4.11.1972, compensation received for surrender of tenancy rights should be charged only in the hands of assessee’s wife. The assessee also pointed out that the assessee’s wife
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was assessed to tax independently in respect of income from ginning business and therefore provisions of section 64(1) of the Act could not have been invoked by the AO to assessee capital gain in question in the hands of the assessee. The provisions of Sec.64(1)(iv) which is relevant for the present case reads thus:
“Income of individual to include income of spouse, minor child, etc. 64. (1) In computing the total income of any individual, there shall be included all such income as arises directly or indirectly— (i) to (iii)……. (iv) subject to the provisions of clause (i) of section 27, to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart ;”
The assessee also further submitted that since the assessee’s wife got the leasehold rights and the ginning factory under an Agreement to live apart/family arrangement for her life and for her maintenance, there was no cost of acquisition of leasehold rights by her. Since there was no cost of acquisition of the leasehold rights which was the subject matter of transfer, it is not possible to compute capital gain on surrender of leasehold rights in the hands of the assessee’s wife. In view of the decision of the Hon’ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty (128 ITR 294 (SC), wherein it was held that where the cost of acquisition cannot be
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determined, the computation of capital gain u/s. 48 is not possible and therefore the charge to tax u/s. 45 of the Act should also fail.
The assessee thus pleaded that capital gain in question cannot be
brought to tax either in the hands of assessee or in the hands of his wife. The assessee also pleaded that mere declaration of income by the
assessee, when there was no liability or charge to tax, cannot be the basis to bring the receipt to tax, when it is in law not taxable.
Without prejudice to the above, the assessee also claimed that
computation of capital gain as given by the assessee should be accepted.
The CIT(Appeals), however, issued a notice of enhancement dated
30.1.2014 to the assessee. According to the CIT(A), the receipt of Rs.33
lakhs by the assessee was not part of the compromise decree filed before the court. The said sum was paid only for the purpose of dismantling the
structure. The CIT(A) was also of the view that there was no transfer of any capital asset by the assessee and therefore provisions of section 45 of
the Act did not come into play. According to him, the entire receipt of Rs.33 lakhs had to be assessed as ‘income from other sources’ in the hands of
assessee and no expenses whatsoever can be allowed against the said
receipt, because deduction claimed by the assessee did not fall within the category of expenses incurred for the purpose of earning the sum of Rs.33
lakhs.
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Apart from the above, the CIT(Appeals) was of the view that the assessee got absolute title to land measuring 42 guntas and building
measuring 11,100 sq.ft. The fair market value (FMV) of this property was reported by the AO at a sum of Rs.84,65,000. This value, according to the
CIT(A), had to be assessed as ‘income from other sources’. The CIT(A)
did not mention the section of the Act under which the aforesaid amount was to be brought to tax.
The assessee, in reply to enhancement notice, submitted that there was relinquishment of leasehold rights in favour of lessors, which resulted
in a transfer of capital asset giving rise to charge u/s. 45 of the Act and the
conclusions of the CIT(A) to the contrary were erroneous.
With regard to the FMV of the area of 42 guntas of land and building
received by the assessee, the assessee submitted that what was obtained
under the compromise decree was only leasehold right which the assessee already had and therefore the assessment as proposed by the CIT(A) in
the form of enhancement cannot be legally made.
The CIT(Appeals), however, was of the view that :-
(1) receipt of Rs.33 lakhs was not part of compromise decree of court
and therefore was not a payment in connection with transfer of capital asset which can give rise to application of provisions of
section 45 of the Act; The said receipt was to be assessed under the
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head “Income from other sources”. None of the items of deduction could be allowed because the deductions claimed were not
permissible while computing income under the head “Income from other sources”.
(2) FMV of the land allotted to the assessee had to be assessed under
the head ‘income from other sources’; and
(3) with regard to assessment of income in the hands of assessee’s
wife, it was held that both the assessee and his wife were living in
the same premises and therefore provisions of section 64 of the Act were attracted and hence assessment of income in the hands of
assessee was proper.
Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. The main grievance projected by
the assessee in the grounds of appeal may be summed up in the form of following issues:-
(i) Whether the CIT(Appeals) was right in coming to the conclusion that
there was no transfer of leasehold rights by the assessee in favour of the lessors?
(ii) Whether receipt of Rs.33 lakhs by the assessee cannot be attributed
to such transfer (relinquishment) of leasehold rights in favour of lessors?
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(iii) Whether the action of the CIT(Appeals) in bringing to tax the FMV of 42 guntas of land & building obtained by the assessee under
compromise decree in the form of perpetual leasehold right under the head ‘income from other sources’ can be sustained?
(iv) Whether the claim of assessee for computation of capital gains tax
as made in the return of income should be accepted?
(v) Whether the assessee is not liable to tax on the capital gain in
question by reason of the family arrangement dated 4.11.1972 and
therefore the income in question was rightly assessable to tax only in the hands of the assessee’s wife?
(vi) Whether the claim of the assessee that in the event of assessee not
being allowed deduction of a sum of Rs.10,19,446, which was the indexed cost of acquisition of the structure, then whether assessee
is entitled to a deduction on account of cost of acquisition of the leasehold rights as indexed while computing capital gain, especially
in the light of provisions of section 48 of the Act?
We have heard the ld. counsel for the assessee and the ld. DR on the above issues that arise for consideration. The learned DR relied on the
order of the CIT(A). The learned counsel for the Assessee reiterated submissions that were made before CIT(A).
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With a view to give coitus to the entire litigation, in our view, it would be appropriate to uphold the assessment in the hands of the assessee and
also examine the question as to :-
(1) Whether the assessment of FMV of 42 guntas of land together with building as ‘income from other sources’ in the hands of assessee
was justified?
(2) Whether the assessee would be rightly entitled to claim of demolition
expenses of Rs.5,91,090?
(3) Whether the assessee should be allowed deduction on account of cost of acquisition of leasehold rights? and
(4) Whether the sum of Rs.33 lakhs received by the assessee was to be
assessed under the head ‘income from other sources’ or ‘capital gain’?
A suggestion was put to the ld. counsel for the assessee on the
examination of the aforesaid questions, to which the ld. counsel for the assessee did not object. We now proceed to examine the above issues.
Firstly we take up the question as to whether the sum of Rs.33 lakhs
was received by the assessee was assessable under the head ‘income from other sources’ or ‘capital gain’.
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Under section 45 of the Act, any profit or gain arising from the transfer of a capital asset shall be chargeable to income tax under the head
capital gains. U/s. 48 of the Act, the mode of computing the capital gains has been prescribed. It is laid down therein that capital gain shall be
computed by deducting from the full value of the consideration received as
result of transfer of capital asset, expenditure incurred in connection with such transfer and the cost of acquisition of the asset and the cost of
improvement thereto. Capital asset has been defined in Sec.2(14) of the Act to mean property of any kind held by an assessee, whether or not
connected with his business or profession. In CIT V/s. Tata Services Limited 122 ITR 594 (Bom.) it was held that the word property u/s.2(14) is
of widest amplitude and includes any right which can be included in
definition of Capital Asset. In Ponds (India) Ltd. V/s. DCIT 64 ITD 33 (Mum) the ITAT had to decide a case in which by an agreement dated
18.04.81, the assessee agreed to purchase immovable property from ‘K’ and took the possession. By another agreement dated 03.01.1991, the
assessee gave up his rights acquired for certain consideration. It was held
that the compensation received on giving up right to purchase was treated as long Term Capital Gain. In J.K. Kashyap V/s. ACIT 302 ITR 255 (Delhi)
the question before the Hon’ble Delhi High Court was as to what was relinquishment of right in capital asset u/s.2(14) of the Act. The assessee
made payment for acquisition of property by an agreement in 1990. The transaction did not materialize. He relinquished his right in favour of new
ITA No. 731/Bang/2014 Page 16 of 22
vendee in 1995. The consideration received for relinquishment of interest in property was held to be liable to long term capital gain. In CIT v/s. Vijay
Flexible Containers 186 ITR 693(Bom), it was held that giving up of the right to obtain conveyance of immovable property amounts to transfer of a
capital asset. Similar ruling was also rendered in the case of CIT V/s.
Vimal Lalchand Mutha 187 ITR 613(Bom). In this case, the assessee had entered into an agreement for the sale of a flat in November, 1997 and had
executed a formal agreement in December, 1978. She transferred her right, title and interest in the flat by an agreement to ‘C’ in April, 1983. The
question before the Hon’ble High Court was as to whether the Tribunal was right in holding that the rights under the said two agreements of November,
1977 / December, 1978, had been held for more than 36 months and that
the gains arising from the transfer of her rights under the agreement in April, 1983, constituted long-term capital gain. The Hon’ble High Court
upheld the order of the Tribunal.
In CIT Vs. Sandhu Brothers 273 ITR 1 (SC), the Hon’ble Supreme Court observed that the tenancy right is a capital asset, the surrender of the
tenancy right is a "transfer" and the consideration received therefore a capital receipt within the meaning of Section 45 of the Act, has not been
questioned before us and must in any event be taken to be concluded by the decision of this Court in A. Gasper Vs. CIT 192 ITR 382 (SC).
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In the present case, the approach of the CIT(Appeals) appears to be that in the compromise decree, there is no reference to this sum of Rs.33
lakhs. However, on perusal of the receipt-cum-acknowledgement dated 27.6.2005, it becomes clear that sum of Rs.33 lakhs was given only for the
assessee and his wife, giving up their leasehold interest in respect of a
portion of property as described in the compromise memo. The receipt in question is therefore clearly attributable to surrender of leasehold rights.
The fact that the compromise decree of the Court does not make a reference to the sum of Rs.33 lacs cannot be the basis to conclude that the
said payment was not for surrender of leasehold rights of the Assessee over portion of the property. The compromise memo based on which the
Hon’ble Court passed the compromise decree and the receipt cum
acknowledgment for the Assessee having received a sum of Rs.33 lacs are both dated 27.6.2006. The receipt cum acknowledgement for having
received a sum of Rs.33 lacs given by the Assessee to the lessors recite that the said sum is given to meet the cost of registration of the
compromise decree and expenses for dismantling and removing the
structures standing on the area surrendered to the lessors. Admittedly, the compromise decree was registered and a sum of Rs.8,49,639 was incurred
as stamp duty and registration expenses in registering the compromise decree. A further sum of Rs.5,81,090 had also been incurred to demolish
the structure on the area surrendered to the lessors by the Assessee. It may be true that the compromise decree does not refer to the payment of
ITA No. 731/Bang/2014 Page 18 of 22
the sum of Rs.33 lacs as a payment for surrender of leasehold rights by the Assessee, but the circumstances of the case clearly show that the said
payment was towards surrender of leasehold rights. The only modification is that the said sum of Rs.33 lacs was to be taken by the Assessee after
incurring expenses for registration of compromise decree and expenses of
demolition of structures. The sum of Rs.33 lakhs is therefore rightly assessable to tax u/s. 45 of the Act and not under the head ‘income from
other sources. The fact that the compromise decree does not refer to the payment of Rs.33 lacs cannot be the basis to hold that the said sum is not
towards surrender of leasehold rights. There was no necessity for the lessors to pay the aforesaid sum but for the Assessee relinquishing
leasehold rights over part of the property in favour of the lessors. We
therefore hold that the sum of Rs.33 lacs was paid in lieu of the Assessee surrendering his leasehold rights in favour of the lessors subject to certain
directions for incurring of certain expenses by the Assessee and therefore the said receipt by the Assessee is attributable to release of leasehold
rights in favour of the lessors. Consequently the sum of Rs.33 lacs is
assessable to tax under the head “Capital Gains” subject to the computation provisions of Sec.48 of the Act. We hold accordingly.
As far as the assessment of FMV of 42 guntas of land & building which was given on a permanent lease to the assessee under the
compromise decree as income from other sources, we are of the view that
the assessee was already having leasehold interest over the said area of
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the land and the compromise decree only reaffirms the said position. The assessee has not acquired any right whatsoever over this property by
virtue of compromise decree. Therefore, conclusion of the CIT(Appeals) to tax the FMV of this property is without any basis. Even assuming that the
Assessee received the portion of the property without any consideration,
the FMV of the said property cannot be brought to tax as there is no provision under the Act, under which the sum in question can be brought to
tax. U/s. 56(2)(vii) which was inserted by the Finance Act, 2009 w.e.f. 1.10.2009, the FMV of immovable property which is transferred without
consideration, can be brought to tax in the hands of transferee. Even assuming that there was a transfer of leasehold rights in favour of the
assessee by virtue of compromise decree, the provisions of section
56(2)(vii) are not applicable for the assessment year 2006-07 and therefore assessment directed by the CIT(Appeals) cannot be sustained and the
same is hereby deleted.
As far as the claim of expenses of Rs.5,81,090 towards expenses on dismantling structures of leasehold property is concerned, there is no
dispute that these expenses were actually incurred for dismantling of structure, but the vouchers in support of incurring of these expenses
showed that Darbar Ginning Factory, Hubli had incurred these expenses. Sec.48 of the Act, lays down the mode of computation of Capital Gains and the relevant portion of the said section reads thus:-
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“Mode of computation. Sec. 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto:”
U/s. 48 of the Act, there is no requirement that expenditure incurred wholly and exclusively in connection with the transfer, has to be incurred only by the assessee. Since the factum of expenditure having been incurred is not disputed and since, admittedly, this was an expenditure incurred wholly and exclusively in connection with such transfer, the deduction claim, in our view, had to be allowed. We hold and direct accordingly. We also find merit in the contention of the learned counsel for the Assessee that since this expenditure was specifically required to be incurred by the Assessee under the receipt cum acknowledgement dated 27.6.2006, it constitutes a diversion of income at source and cannot be construed as income that accrued to the Assessee.
As far as deduction of Rs.10,19,446 being the indexed cost of acquisition of the structure is concerned, we are of the view that the said claim for deduction is unsustainable for the reason that the subject matter
ITA No. 731/Bang/2014 Page 21 of 22
of transfer by assessee in favour of the lessors did not include any structure and therefore the claim would fail to satisfy the test as laid down
in section 48(ii) of the Act. We hold and direct accordingly.
The last claim of the assessee is that it should be allowed cost of acquisition of leasehold rights. In this regard, it is seen that what was
surrendered pursuant to the compromise decree was leasehold right of the assessee over the portion of the property. The capital asset transferred
was a leasehold right. Evidence on record goes to show that leasehold rights have been acquired by the assessee’s predecessors in interest in the
year 1907 i.e., 07.12.1907 by paying a sum of Rs.8,500. The assessee
would therefore be entitled to claim deduction of cost of acquisition of leasehold interest as on 1.4.1981. The assessee will also be entitled to
benefit of indexation of this cost upto the date of transfer of the leasehold rights. The assessee has not quantified this sum and therefore, in our
view, it would be just and proper to direct the assessee to make a claim
before the AO in this regard. The AO is directed to examine such a claim and allow deduction in accordance with law.
The other issues raised do not require adjudication, as already stated.
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In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 26th day of August, 2015.
Sd/- Sd/-
( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member Bangalore, Dated, the 26th August, 2015.
/D S/
Copy to: 1. Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.