SAROJ SALES ORGANIZATION,MUMBAI vs. ITO 16(1)(4), MUMBAI

Per Sanjay Garg, Judicial Member:

1. The learned Commissioner of Income-tax (Appeals) erred in computing the indexed cost at Nil as against the indexed cost of premises computed at Rs.75,57,516/- in respect of office premises in the return of income and assessing the capital gains at Rs.70,00,000/- as against capital loss of Rs.5,57,516/ -.

2. The learned Commissioner of Income-tax (Appeals), erred in not following the ratio of Special Bench Judgment of Ahmedabad Tribunal in Vijaysinh R. Rathod v. ITO (2007) 106 ITD 153, where in tribunal has held that benefit of cost of index cost is available to occupation rights, as the order of Assessing Officer and Commissioner (Appeals) is contrary to law laid down by special Bench, the Assessing Officer may be directed to adopt the cost of 2 M/s. Saroj Sales Organisation indexation shown by the assessee and loss may be allowed to be carried forward. 3. The appellant craves leave to amend alter or delete any of the above Grounds of appeal.”

3. The brief facts of the case are that the assessee is a partnership firm carrying on the business of printing press. During the year under consideration, the assessee surrendered tenancy rights of a premises for a consideration of Rs.70 lakhs and computed the long term capital loss at Rs.5,57,516/- by way of adopting the cost of acquisition of the said tenancy rights as on 01.04.81 at Rs.13,51,600/- and by claiming indexation thereupon. The Assessing Officer (hereinafter referred to as the AO) during the assessment proceedings took the cost of acquisition of tenancy rights at nil and accordingly taxed the entire receipt of Rs.70 lakhs as long term capital gains. The assessee contested the appeal before the Ld. CIT(A) but remained unsuccessfully.

3 M/s. Saroj Sales Organisation of Rs.70 lakhs, had taken the market value of the said premises/tenancy rights as on 01.04.81 at Rs.13,71,600/- and after claiming indexation, claimed the capital loss as narrated above. The Ld. A.R. has submitted that the rights of the assessee were the occupancy rights and that the assessee had got valued the said occupancy rights of the property from the government valuer and has adopted the fair market value of the said property as on 01.04.81. The Ld. A.R. has stressed that since the property has been held by the assessee since 1979 as deemed tenant and the assessee otherwise was in occupation by the property since 01.02.73, hence the assessee has rightly taken the fair market value of the said rights as on 01.04.81 and has claimed indexation thereupon. The Ld. A.R. in this respect has relied upon the decision in the case of “Mrs. Tauqeer Fatema Rizvi vs. ITO” in ITA No.8862/M/2011 dated 02.05.11. The Ld. A.R. has further submitted that even otherwise provisions of section 55(2)(a) could not be applied to the case of assessee as the assessee had not surrendered tenancy rights but the occupancy rights. While submitting so, he has contended that deemed tenancy is not the tenancy rights. The Ld. A.R. has further contended that by virtue of explanation 3 to section 32(1)(ii), the commercial or business rights which are similar to a ‘license’ or ‘franchise’ are treated as ineligible assets. He has submitted that in this case, the assessee was having deemed tenancy rights akin to a license to hold the property which was to be treated as intangible asset as defined under section 32 of the Act and hence the assessee has rightly claimed the fair market value of the same as on 01.04.81 and has accordingly claimed the indexation thereupon. Without prejudice to the above, the Ld. A.R. has further submitted that the assessee had got the rights in the property by way of adverse possession and therefore there was no cost of acquisition, hence the consideration received is not liable for capital gain taxed. He, in this respect, has relied upon the decision of the Hon’ble Bombay High Court in the case of “CIT vs. Star Chemicals (Bom.) (P.) Ltd.” (2007)

The Ld. D.R., on the other hand, has relied upon the findings of the lower authorities.

5 M/s. Saroj Sales Organisation 6. Now coming to the question as to whether the fair market value of the tenancy rights as on 01.04.81 are to be taken for computation of capital gains is concerned, we find that the Ld. A.R. has relied, in this respect, on the decision of the co-ordinate bench of the Tribunal in the case of “Mrs. Tauqeer Fatema Rizvi” (supra). We find that the facts of the case in case of “Mrs. Tauqeer Fatema Rizvi” (supra) are quite distinguishable. In the said case, the assessee had surrendered her tenancy rights to the builder and had got the possession of a flat. The assessee had to pay certain additional charges in addition to the cost of acquisition of the said flat apart from surrendering of tenancy rights. The assessee had become the owner of the said flat which was subsequently sold while computing the capital gains. The Tribunal held that the fair market value of the said flat is to be considered for the purpose of computation of capital gains and indexation thereupon and the relevant date should be the date on which the assessee was put in possession of the flat after its completion. Hence, in the circumstances, it was the cost of acquisition of the flat which was disputed in the said decision and not the cost of acquisition of the tenancy rights. The next decision relied upon by the Ld. A.R. is in the case of “Vijaysinh R. Rathod vs. ITO” (2007) 106 ITD 153 (Ahd.) wherein it has been held that the benefit of cost of indexation is available to occupancy rights. We find that the said decision is not applicable to the case in hand. The assessee was not having any occupancy rights in the building. Occupancy rights are generally granted by the government to certain class of people to hold the property for a particular purpose and with the passage of time the occupant got a right to hold the property claiming the occupancy rights. In the case of “Vijaysinh R. Rathod” (supra) the ancestors of the assessee were allotted lands for cultivation by Portuguese administration under Organizac agraia. Thereafter all the assessees had been granted land under the new Land Reforms Regulations, 1971 in recognition of their occupancy rights in the said

6 M/s. Saroj Sales Organisation property. It was under such circumstances, the Tribunal while analyzing the provisions of Dadra & Nagar Haveli Land Reforms Regulations, 1971 has held that the assessees were in fact treated as owners of the property and hence the cost of acquisition was clearly ascertainable which was to be substituted by fair market value as on 01.04.81. The facts of the case in hand are entirely different. The assessee was not having any occupancy rights in the property in question. The assessee originally was a licensee in the said property for which the assessee had paid license fee for occupation of the property. However, by way of subsequent consent terms filed in the court, the assessee was admitted as deemed tenant of the property under the Bombay Rent Act. The rent was agreed at the rate of Rs.670/- per month commencing from 01.04.77 which was duly paid by the assessee. The assessee did not pay any consideration for getting/purchasing the said tenancy rights in the property. As per the provisions of section 55(2) of the Act, it has been specifically provided that the cost of acquisition for the purpose of sections 48 & 49 of the Act in respect of tenancy rights will be the amount of the purchase price paid by the assessee from a previous owner and in any other case the same shall be taken to be ‘nil’. Admittedly, in this case the assessee had not purchased the tenancy rights for any consideration. Hence, as per the specific provisions of section 55(2), the cost of acquisition of tenancy rights is to be treated as nil for the sake of computation of capital gains. The other contention of the Ld. counsel for the assessee has been that the rights of the assessee were the rights by way of adverse possession. We find that the said contention of the Ld. A.R. is also not tenable so far as the facts of the present case are concerned. The adverse possession is a possession in which a person remains in the possession of the property claiming himself to be the owner adverse to the rights of actual owner of the property. However, in this case, the assessee had admitted the Shah Silk Mills as the landlord to the property and had agreed to pay the rent and even his suit was decreed in terms of the consent agreement wherein he

7 M/s. Saroj Sales Organisation admitted himself to be a tenant at the rate of Rs.670/- per month. Under such circumstances, the assessee never claimed any ownership rights adverse to that of the original landlord/owner. The case law in the case of “CIT vs. Star Chemicals (Bom.) (P.) Ltd.” (supra) does not apply to the facts of the case of the assessee.

Order pronounced in the open court on 11.12.2015.