TMI Blog2001 (2) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... way of Income-tax Reference No. 123 of 1996. The above question is also raised in conjoint matters. Hence, by this common judgment, all the above matters are disposed of. Facts : The assessee, Cadell Weaving Mill Co. P. Ltd., is engaged in the business of weaving and dyeing of cloth. The assessee filed its return of income for the assessment year 1990-91 declaring its income as rupees nil. The Assessing Officer noted that the assessee had receipts from sale of cloth, processing charges and compensation on surrender of tenancy rights. The Assessing Officer found that the assessee had entered into four separate lease agreements on September 26, 1963, with Elphinston Dye Works Private Limited. Under the said agreements, the assessee became tenants/lessees of Elphinston Dye Works Private Ltd. The leases were for 15 years. They were monthly leases. They expired on October 25, 1978. They were not renewed. The assessee continued to occupy the premises. In the mean time, Elphinston Dye Works Private Limited sold the property to Prabhadevi Trading Company Private Limited with the assessee still remaining in possession of the property. Prabhadevi Trading Company moved the Small Causes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment, the Tribunal came to the conclusion that where the right to sublet was given to the lessee under the lease or where the landlord gave permission to the lessee to sub-lease the premises then in such cases compensation received by the tenant to surrender such rights would constitute a capital receipt in the hands of the tenant even though the lessee is a statutory tenant under the Bombay Rent Act. This conclusion was not accepted by the Department. Hence, the Department moved a reference application which was rejected by the Tribunal, vide order dated December 8, 1997. However, against the order of rejection of Reference Application No. 503 of 1997, filed by the Department, this court was not moved within the limitation prescribed. Therefore, by an order dated December 8, 1997, the Tribunal dismissed the reference application filed by the Department as beyond limitation. Hence, the Department filed the present Writ Petition No. 1416 of 1998, in which, inter alia, they have raised the above two questions quoted hereinabove. Since important questions of law are involved, Mr. Trivedi, learned senior counsel appearing for the assessee, fairly stated that the matter may be decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Act. Therefore, gifts of a personal nature will not be chargeable to income-tax except when they can be regarded as additions to salary of when they arise from the exercise of profession. It was, accordingly, submitted that every receipt is not income. It was contended that receipt of money by such tenant was a capital receipt. Hence, it was not taxable. That, the Tribunal erred in bringing to tax such capital receipt by applying section 10(3). That, if the view of the Tribunal is accepted then it would apply to all capital receipts. It was contended that the receipt which is not income cannot be charged to capital gains otherwise gift of personal effects would also become taxable under section 10(3) of the Act. That, the above circular shows that in order to tax receipts as casual income, such receipts should constitute income and if such receipts are capital receipts they are not income and, therefore, they cannot fall in section 10(3) of the Act. That, ₹ 1.40 crores was only a capital receipt. That, it was not income. That, it accrued on transfer of tenancy which was a capital asset. That, payment of compensation was directly linked to the transfer of the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital assets. That, capital gains not chargeable under section 45 was not taxable under the Act because the capital receipt is not an income. It was contended that, in the present matter, the proviso to section 10(3) is not applicable because the proviso applies only to capital gains chargeable under section 45 and if the cost of acquisition cannot be computed before April 1, 1995, then there was no chargeability of capital gains under section 45 and in the absence of such chargeability, what remains is the plain capital receipt which is not taxable under any provisions of the Income-tax Act. It was contended that if the cost of acquisition cannot be computed, capital gains are not charge able to tax under section 45 but that does not mean that, automatically, the receipt would become a casual and non-recurring receipt under section 10(3) of the Act. It was contended that section 10(3) deals with certain types of income. It does not deal with capital receipts which are not other wise taxable under section 45 of the Act. In support of the said argument, various authorities were cited. Hence, it was contended that neither section 10(3) nor the proviso thereto were applicable to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneous. That, the Department has failed to prove that the receipt was income as defined under section 2(24). He contended that before the enactment of section 45, capital gains did not constitute income. He contended that the effect of the proviso to section 10(3) was very limited, viz., that the exemption under section 10(3) was not available. He contended that charging provisions under the Income-tax Act were section 4 and section 5 read with section 2(24). That if the income is business income or salary income or capital gains chargeable under section 45 of the Act, then section 10(3) will not come into That, section 10(3) will only apply if the receipt constituted income. That, section 10(3) will only apply if the receipt is of a casual nature. He contended that, in the present matter, the Department has accepted that the tenancy is a capital asset. That, although it is a capital asset, the capital gains arising from the transfer of tenancy was not chargeable under section 45 because the cost of computation cannot be computed but from that it does not follow that the receipt could be treated as income for the purposes of section 10(3). Mr. Pardiwala further submitted that once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the landlord were valuable rights. They command a price. That, such rights constitute property. That, such rights constitute capital asset. He relied upon the judgment of the Supreme Court in the case of Gian Devi Anand v. Jeevan Kumar, AIR 1985 SC 796 ; [1985] 2 SCC 683. He con tended that all gains made on transfer could only be charged as capital gains provided the computation provisions could be applied. In this connection, he placed reliance on the judgment of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294. He contended that if for any reason the charge under the head Capital gains fails, then such receipts cannot be brought to tax under the residuary head, viz., Income from other sources . In support of his contention, Mr. Inamdar placed reliance on the judgment of the Supreme Court in the case of Nalinikant Amblal Mody v. S. A. L. Narayan Row, CIT [1966] 61 ITR 428. Mr. Inamdar next contended that section 10(3) cannot apply to capital receipts as they are not of income nature. That, section 10(3) is not a charging section. That, the receipt must first fall under one of the six heads of income before applying section 10(3). That, the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in the conjoint writ petition, adopted the arguments of learned counsel for the various assessees. He, however, added that even under the Finance Act, 1994, the object of declaring the cost of acquisition as nil after April 1, 1995, was to bring to tax such gains accrued on transfer of an asset. That, the object was not to give any concession. In this connection, he placed reliance on the Central Board of Direct Taxes circular which clarified that in order to overcome the judicial interpretation the Finance Act, 1987, had provided in section 55(2)(a) that cost of acquisition in the case of goodwill will be taken as nil. He contended that the circular specifically provides that for the purposes of bringing the capital gains arising from the transfer of tenancy rights in the acquisition of which the assessee has not incurred any expenditure, the Finance Act has amended to provide that the cost of acquisition of the tenancy rights should be taken at nil. This amendment came into force from April 1, 1995. He further relied upon the judgment of the Division bench of the Bombay High Court in CIT v. J. V. Kolte [1999] 235 ITR 239, in which the Division Bench of the High Court has l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the Supreme Court in the case of B. C. Srinivasa Setty [1981] 128 ITR 294. Learned counsel submitted that an asset without any cost of acquisition was not a capital asset under section 45. He, therefore, contended that the tenancy right was not a capital asset. He accordingly contended that the amount received on surrender of tenancy rights cannot be a capital asset. For this purpose, he has placed reliance on the judgment of the Supreme Court in the case of B. C. Srinivasa Setty [1981] 128 ITR 294. He contended that there is no judgment of the Supreme Court which lays down that the capital gains, not chargeable under section 45, are not taxable at all. He contended that even if capital gains are not chargeable under section 45, they can still be taxed under section 56 as income from other sources . He contended that under the Act, consideration received by the tenant on surrender, if not chargeable to tax as capital gains under section 45, was still liable to be taxed as income from other sources in section 56 because section 56 clearly states that income not chargeable to tax under section 14, item-E, was chargeable to tax under section 56. Mr. Desai placed reliance on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is no capital gains and that the entire amount is a capital receipt. It is further contended that to say that the amount received on surrender of tenancy rights does not have the character of income is farfetched because if the cost of acquisition is Re. 1 then, in the present case, the capital gain is ₹ 1.40 crores chargeable under section 45 and if the cost of acquisition is nil then entire receipt is capital receipt and it does not have the character of income under section 56. It is submitted that the abovementioned second instance is not correct. Findings : The short point which arises for determination is : whether the surrender value of a tenancy right, if not chargeable to tax as capital gains under section 45, is liable to be taxed as income from other sources under section 56 of the Act ? As stated above, while delivering the impugned judgment, the Tribunal has followed the ratio of the Supreme Court in the case of Anand Nivas Private Limited. v. Anandji Kalyanji's Pedhi, AIR 1965 SC 414, which laid down that the statutory tenant had no right in the property. Even according to the Tribunal, vide para. 54, if the surrender value was for prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot chargeable under section 45 for want of cost of acquisition. However, from that, one cannot bring such a receipt under section 10(3) because section 10(3) refers to types of income which do not form part of total income. In other words, a receipt has to be income before it comes within the purview of section 10(3). Section 10(3) does not apply to a capital receipt. We find merit in the submissions advanced on behalf of the assessee. Both the parties before us have proceeded on the basis that the tenancy right is a capital asset. This is clear from the submissions advanced on both sides. Even the Tribunal has proceeded on the basis that if the tenancy right is a property, then the consideration received for transfer thereof would not be chargeable as revenue receipt. It is well-settled that all receipts are not taxable under the Income-tax Act. Section 2(24) defines income . It is no doubt an inclusive definition. However, a capital receipt 'is not income under section 2(24) unless it is chargeable to tax as capital gains under section 45. It is for this reason that under section 2(24)(vi) that the Legislature has expressly stated, inter alia, that income shall include an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s failed to read section 2(24)(vi) in its entirety. Reading section 2(24)(vi) in its entirety, it is only capital gains which are chargeable under section 45 which are included in the definition of the word income . That, the capital gains not chargeable for any reason under section 45 cannot be brought to tax as income by applying the general connotation under section 2(24). It is for this reason that proviso (i) to section 10(3) also refers to capital gains chargeable under section 45. The said proviso uses the same phraseology as is used by section 2(24)(vi). In other words, capital gains chargeable under section 45 alone constitute income. Further, such capital gains are required to be charged and computed under the scheme of section 45 to section 55 and it is for this reason that such capital gains do not fall under section 10(3). In other words, business income, salary income, and capital gains charge-able under section 45 stand outside section 10(3) because salary income, business income and such capital gains are chargeable and computable under a different set of sections. Therefore, when the source of a receipt has a link with business income or salary income or capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,000 will have to be taxed. That, if a person receives ₹ 10,000 by way of legacy, the amount cannot be brought to tax on the ground that it is a casual and non-recurring receipt above ₹ 5,000. That, section 10 is not a charging section. That, section 10 merely excludes certain types of income from the ambit of the total income as defined under the Act. Hence, the Calcutta High Court dissented from the view taken by the Allahabad High Court in Gulab Chand's case [1991] 192 ITR 495. With respect, we are in agreement with the judgment of the Calcutta High Court in the case of B. K. Roy P. Ltd. v. CIT [1995] 211 ITR 500. Mr. Desai, learned counsel for the Revenue, however, emphasised the judgment of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294. He submitted that like goodwill, statutory tenancy denotes a benefit. He contended that statutory tenancy cannot be described as an asset if there is no cost of acquisition. Therefore, he relied upon the above judgment. In the case of B. C. Srinivasa Setty's case [1981] 128 ITR 294, the Supreme Court has held that goodwill generated in a newly commenced business cannot be described as an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded then one fails to understand why the Legislature should have opted for a lesser incidence of tax. If capital gains fell under section 56 as is contended by the Department then such receipt would be liable to tax at the rate of 35 per cent. whereas, by the above legislative change, the receipts are made taxable at 20 per cent. under section 45. In this connection, the circular issued by the Central Board of Direct Taxes as also indicates that the legislative change was brought about to overcome the judicial interpretation of section 55(2)(a) dealing with the cost of acquisition. That circular does not refer to capital gains under section 56 as is sought to be contended. The circular, clearly shows that the Income-tax Act defines income to include capital gains chargeable under section 45. That, the judicial interpretation clearly laid down that only if an asset did cost some thing to the assessee in terms of money that the provisions relating to levy of tax under section 45 read with section 48 would apply. It is for this reason that the Finance Bill proposed to amend the provisions relating to capital gains and provide that the cost of acquisition of the tenancy rights be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the tenancy rights constituted transfer. Section 48 provides that from the full value of consideration received or accruing as a result of the transfer of capital asset, the following amounts should be deducted to arrive at capital gains, viz., cost of acquisition ; expenditure on improvement ; expenditure wholly and exclusively connected with transfer of the capital asset, such as stamp duty, registration charges, legal fees, brokerage, etc. Therefore, capital gains basically constitutes computation. According to the Department, the entire value of the capital asset transferred is taxable as the cost of acquisition in the case of tenancy cannot be ascertained. We do not find any merit in this argument. If the full value of the consideration received as a result of the transfer of tenancy is made taxable, then the tax is not levied on the capital gains, but, in substance, it is being levied on the capital value of the asset. This is not permissible under section 56. The full consideration minus the cost of acquisition results in capital gains. However, the Department seeks to tax the full consideration on the ground that cost of acquisition is not ascertainable. If this cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the Division Bench of this court laid down that in construing fiscal statutes and in determining the liability of a subject to tax, one must have regard to the strict letter of the law. That, the onus was on the Revenue to satisfy the court that, the case falls within the provisions of the law. That, if the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy. That, if a section in a taxing statute is of doubtful and ambiguous meaning, it is not possible to extract out of that ambiguity a new obligation not formerly cast upon the taxpayer. The observations of the above judgment applies to the facts of the present case. In the case of Withers v. Nethersole [1948] 1 All ER 400, the House of Lords held that in cases involving sale of property with a limited life by a person not engaged in trade or profession of dealing in such property, the proceeds of such a sale were in the nature of capital and, therefore, not taxable. The Department, in that matter, came to the conclusion that the taxpayer was assessable to income-tax in respect of her share in the proceeds of the assignment of the exclusive motion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia [2000] 243 ITR 143 has no application. By the Direct Tax Laws (Amendment) Act, 1989, clauses (iiia) and (iiib) were added to section 2(24) of the Income-tax Act. The Supreme Court held that, in view of the said amendment of the word income , any special allowance granted to the assessee to meet expenses exclusively for the purposes of the duties would form part of income. As stated hereinabove, under section 2(24)(vi), the Legislature has covered capital gains as income provided such gains were chargeable under section 45. Hence, the judgment of the Supreme Court in Karamchari Union's case [2000] 243 ITR 143 has no application. Summary of our findings : Whenever there is a receipt, one has to ascertain its source. If it is a business income or salary income or capital gains chargeable under section 45 and, if so, it is taxable under that head, then no further inquiry has to be made, viz., whether the receipt is casual and non-recurring. Since capital gains are brought within the tax net under section 45, they cannot fall in section 10(3). If any amount of capital gains is non-taxable for any reason as capital gains, that amount cannot be treated, automatically, as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the case and in law, was the Tribunal justified favour of the assessee and in holding that the compensation received by the against the Department statutory tenant towards the surrender of statutory tenancy rights/possessory rights was casual and non recurring within the meaning of section 10(3) of the Income-tax Act ? (c) Whether, on the facts and in the circumstances In the negative, i.e., in of the case and in law, was the Tribunal justified favour of the assessee and in holding that the surrender of the tenancy against the Department right/possessory rights by the statutory tenant to the landlord did not amount to transfer within the meaning of section 2(47) of the Income-tax Act ? (d) Whether, on the facts and in the circumstances In the negative, i.e., in of the case and in law, was the Tribunal justified favour of the assessee and in holding that the applicant, a statutory tenant against the Department had no right or interest, which could be considered as property for computing capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63 ITR 7 (Guj) ; (vii) CIT v. Merchandisers (P.) Ltd. [1990] 182 ITR 107 (Ker); (viii) CIT v. Markapakula Agamma [1987] 165 ITR 386 (AP); (ix) CIT v. Joy Ice-Creams (Bangalore) P. Ltd. [1993]201 ITR 894 (Kar); (x) ITO v. Associated Pharmaceutical Ind. (P.)Ltd. [1993] 47 ITD 656 (Mad). (i) Whether, on the facts and in the circumstances In the negative, i.e., in of the case and in law, was the Tribunal justified favour of the assessee and in holding that the receipt of ₹ 1,40,00,000 by against the Department the applicant on surrender of tenancy rights/possessory rights was not a capital receipt ? (j) Whether, on the facts and in the circumstances In the negative, i.e., in of the case and in law, was the Tribunal justified favour of the assessee and in holding that the receipt of ₹ 1,40,00,000 by against the Department the applicant on the surrender of the tenancy rights/ possessory rights is income within the meaning of section 2(24) of the Income-tax Act ? (k) Whether, on the facts and in the circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X
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