TMI Blog1998 (9) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... f the cost of the flat even though this right has merged in the bigger estate at the time of the purchase of the remaining rights over the flat for the purpose of computing the surplus liable to capital gains tax?" This reference pertains to the assessment year 1977-78. The assessee jointly with his mother held a flat in Shanti Kutir, Bombay, admeasuring about 1,800 sq. ft. The said flat was originally taken on lease in the year 1962-63 by the father of the assessee for residential purposes on a monthly rent of Rs. 175. Since then it was in occupation of the assessee's father as a tenant and after his death on March 26, 1974, in the occupation of the assessee and his mother. In May, 1974, the existing tenants of the building Shanti Kutir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and his mother in January, 1976. The assessee, therefore, claimed that the consideration for the sale of the flat should be apportioned as consideration for transfer of occupancy right and for transfer of ownership right and the capital gains from the transfer of ownership right so arrived at should only be treated as short-term capital gains. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner (Appeals) did not agree with the contentions of the assessee and dismissed the appeal. While doing so, the Commissioner (Appeals) held that the fact that the assessee was in occupation of the flat in question as a tenant before it was purchased was irrelevant for the purpose of determining his liability to capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e smaller estate but in that case, the period will have to be reckoned from the date of the acquisition of the smaller estate for the purpose of considering whether the surplus would be liable to long-term or short-term capital gain. On the other hand, if the bigger estate, i.e., the remaining interest of the landlord over the flat including the title, was taken as the main estate, the market value of the smaller estate as on the date of the acquisition of the bigger estate would have to be taken into account and the material date for the purpose of considering the surplus as long-term or short-term capital gain, in such a case, would be the date of acquisition of the bigger estate. The Tribunal, therefore, held that the cost of the composi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel for the Revenue. We find force in the same. The Tribunal, in our view, was wrong in holding that even after the purchase of the flat by the lessee, the leasehold right subsisted in the lessee. Because, once the lessee purchases the leased property from the owner, the lease is extinguished as the same person cannot at the same time be both landlord and tenant. The doctrine of merger applies resulting in the "drowning" and "sinking" of the inferior right into the superior right. There is a complete union of the interest of the lessor in the lessee in such a case and the tenancy comes to an end. This principle has been statutorily recognised in section 111(d) of the Transfer of Property Act, 1882, which specifically provides for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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