2025 (3) TMI 1262 - AT - Income Tax

Addition under the head capital gain - Gain earned by the appellant on surrender of tendency right - Whether the amount received by the appellant constituted a transfer of a capital asset under section 2(47)? - HELD THAT - As we are of the view that the assets in the form of tenancy right was acquired by the assessee way back on 29/01/1954 by paying non-refundable deposit and consequently right of the assessee was created in the said property and therefore the assessee remained in possession of the said property till the date of this agreement. Since the assessee continue enjoying the right over the property hence question of refund of security deposit does not arises. Therefore the said deposit can very well be taken as cost of acquisition to the assessee as the same remain unpaid. A perusal of the provisions of sections 49 and 55 reveals that if the capital asset as mentioned u/s 55(2)(a) which includes tenancy rights is acquired by purchase from previous owner then in that eventuality the purchase price will be the cost of acquisition. In any other case if it does not fall under the sub-clauses (i) to (iv) of sub-clause(1) of section 49 then the cost of acquisition will be treated as nil. In this case it is an undisputed fact that the assessee had acquired tenancy right by paying a security deposit of Rs. 1080/- in 1954 which is still outstanding in its books therefore this represents cost attached to the said tenancy right. Though cost is not defined in Section 2 or Section 55 the Income Tax Act however it is being defined in section 43 for the purpose of Section 28 to 41 of the Act which says the expression actual cost means the actual cost of the assets to the assessee reduced by that portion of the cost thereof if any as has been met directly or indirectly by Government or by any public or local authority. In ascertaining the actual cost what has to be considered is the actual cost of the assets of the assessee. In this case the deposit paid by the assessee to acquire the tenancy right in 1954 is actual outflow from the pockets of the assessee hence this can very well be taken as cost in its hand. Therefore in these set of facts the provisions of section 55(2)(a)(i) is applicable and not 55(2)(a)(ii) as invoked by AO and Ld CIT(A). There is substance in the contention of the appellant that since the asset was acquired before 1stApril 2001 hence the assessee has been allowed with an option of either to take the fair market value of the asset as on 1 April 2001 or the actual cost of the asset as cost of acquisition and the said cost will further indexed as per the provisions of section 48 of the Act to calculate capital gain. As per working submitted by the assessee in AY 2021-22 wherein after considering valuation of the tenancy right as on 1.4.2001 as certified by M/s. Kishore Karamsey Co. Government Registered Valuer there is net capital loss. It is important to mentioned here that the said return of income has already been accepted by the revenue. Since the income has already been offered in later years on sale of the tenancy right and in this year also once valuation as on 01/04/2001 is considered as cost of acquisition then the transaction resulted in to net loss hence the addition made by AO deserve to be deleted. Therefore these grounds raised by the assessee are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this case were:

• Whether the addition of Rs. 1,48,94,138 under the head of capital gains by the Assessing Officer (AO) was justified.
• Whether the amount received by the appellant constituted a transfer of a capital asset under section 2(47) of the Income Tax Act.
• Whether the cost of acquisition of the tenancy rights should be considered as nil or should include the non-refundable deposit paid in 1954.
• Whether the capital gains should be computed based on the fair market value as on 1 April 2001 with indexation benefits.
• Whether the transfer of tenancy rights occurred in the relevant assessment year (AY 2018-19) or an earlier year.

ISSUE-WISE DETAILED ANALYSIS

1. Addition under Capital Gains

The AO added Rs. 1,48,94,138 as long-term capital gain, treating the surrender of tenancy rights as a transfer of a capital asset. The appellant challenged this on the grounds that the transaction did not constitute a transfer as per section 2(47) and that the cost of acquisition was not considered.

2. Transfer of Capital Asset

The appellant argued that there was no transfer of a capital asset as defined under section 2(47) because the transaction was essentially an exchange of tenancy rights for Permanent Alternate Accommodation (PAA), which was in line with the rules of MHADA and the Maharashtra Rent Control Act. The Court referred to the consent terms agreed upon in 2010, which indicated that the transfer, if any, occurred in AY 2011-12, not AY 2018-19.

3. Cost of Acquisition

The AO considered the cost of acquisition as nil under section 55(2)(a)(ii). The appellant contended that the non-refundable deposit of Rs. 1,080 paid in 1954 should be considered as the cost of acquisition under section 55(2)(a)(i). The Court agreed with the appellant, noting that the deposit represented an actual cost incurred to acquire the tenancy rights.

4. Fair Market Value and Indexation

The appellant argued for the computation of capital gains using the fair market value as of 1 April 2001, with indexation benefits. The Court noted that the valuation report from M/s. Kishore Karamsey & Co. supported the appellant's claim, and the indexed cost of acquisition exceeded the sale consideration, resulting in a capital loss rather than a gain.

5. Timing of the Transfer

The appellant maintained that the transfer, if any, occurred in AY 2011-12 when the consent decree was executed, not in AY 2018-19. The Court found merit in this argument, referencing the decision in ITO v. Mrs. Hajra I. Memon, which held that capital gains should be taxed in the year the consent decree was executed.

SIGNIFICANT HOLDINGS

The Court concluded that:

• The non-refundable deposit paid in 1954 should be considered as the cost of acquisition, applying section 55(2)(a)(i) rather than 55(2)(a)(ii).
• The fair market value as of 1 April 2001, with indexation benefits, should be used for computing capital gains, resulting in a long-term capital loss.
• The transfer of tenancy rights, if any, occurred in AY 2011-12, not AY 2018-19.
• The addition of Rs. 1,48,94,138 by the AO was unjustified and should be deleted.

The Court allowed the appeal, emphasizing that the transaction resulted in a net loss when considering the indexed cost of acquisition. The decision underscored the importance of accurately determining the timing and cost basis of a transaction for capital gains computation.