TMI Blog2015 (9) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 ₹ 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 ₹ 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 ₹ 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. 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’ - Held that:- As far as the assessment of FMV of 42 guntas of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred 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 ₹ 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. - Decided partly in favour of assessee. - ITA No.731/Bang/2014 - - - Dated:- 26-8-2015 - SHRI N.V. VASUDEVAN AND SHRI ABRAHAM P. GEORGE, JJ. For The Appellant : Shri S. Parthasarathi, Advocate For The Respondent : Shri Sunil Kumar Agarwala, Jt. CIT(DR) ORDER 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. 2. The Assessee is an individual. For AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion was liable to be dismissed. 6. 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 Assessee was to pay a sum of ₹ 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /12/2005 (for construction of Residential house) 8,00,000 LONG TERM CAPITAL GAIN 49,825 9. 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even in the F.Y. 2006-07, value of the factory building was appearing in the balance sheet of assessee s ginning factory. 13. For the above reasons, the AO disallowed the claim of assessee for deduction of ₹ 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 14. 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, compensa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the receipt of ₹ 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 ₹ 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 ₹ 33 lakhs. 19. 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 ₹ 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. 20. The assessee, in reply to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital 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 ₹ 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? 24. 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). 25. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade payment for acquisition of property by an agreement in 1990. The transaction did not materialize. He relinquished his right in favour of new 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 Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee after incurring expenses for registration of compromise decree and expenses of demolition of structures. The sum of ₹ 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 ₹ 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 ₹ 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 ₹ 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. 31. As far as the assessment of FMV of 42 guntas of land building which was given on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 34. As far as deduction of ₹ 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 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. 35. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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