Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Markapakula Agamma on 20 January, 1987
Equivalent citations: [1987]165ITR386(AP)
Author: B.P. Jeevan Reddy
Bench: B.P. Jeevan Reddy
JUDGMENT Rama Rao, J.
1. The Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961, referred the following question of law :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that capital gains does not arise on acquisition by the Government of the lands in which the assessee had right of protected tenancy ?"
The assessee was a protected tenant in respect of lands measuring Acs. 44-19 guntas situated in Yusufgude, within the limits of Hyderabad Municipality. Pursuant to the acquisition proceedings by the State Government for the purpose of the Housing Board, the lands vested in the Government on May 18, 1972. A total compensation of Rs. 10,66,472 was awarded for the lands and the assessee being a protected tenant, she was held to be entitled to 60% of the same and awarded Rs. 6,39,883. The Income-tax Officer levied capital gains on the said amount after giving usual statutory deductions. On appeal, the Commissioner of Income-tax (Appeals) confirmed the order of the Income-tax Officer. On further appeal, the Appellate Tribunal held that the right of protected tenancy stands on the same footing as that of goodwill and the assessee did not pay anything for the protected tenancy and it is a statutory right conferred on the assessee and as such the levy of capital gains is not justified.
The learned standing counsel for the Revenue contends that protected tenancy is a right in the property and, therefore, it is a capital asset and the analogy of goodwill is not applicable as it should be confined to incorporeal rights, and the protected tenancy is conferred in lieu of periodical payment of rent to the landlord over a six year period and the cost of acquisition can be related to the rent paid by the tenant. Learned counsel for the assessee, Sri A. Satyanarayana, seeking to sustain the order of the Appellate Tribunal contended that even assuming that protected tenancy is considered as a right in the property, no cost of acquisition is involved and the periodical payment of rent cannot be considered as consideration for protected tenancy as the protected tenancy has been conferred by the status in furtherance of land reforms.
The charging section 45 relating to capital gains to the extent is as follows :
"45. Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53,54,54B, 54D, 54E and 54F, be chargeable to income-tax under the head 'Capital-gains', and shall be deemed to be the income of the previous year in which the transfer took place."
Section 48 pertaining to the model computation is as follows :
"48. The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely : -
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto."
Stripped to its essence, the capital gains tax is a levy on the amount representing the difference between the sale consideration of the capital asset and the cost of acquiring the same. The tax is levied on escalation in the cost of asset. In the absence of escalation or gain in the absence of the cost of acquisition save the circumstances enunciated in section 49 the levy of capital gains is not attracted. Section 48 supplements the charging section by prescription of the mode of computat ion of gain on transfer.
In CIT v. B. C. Srinivasa Setty , on a dissolution of the firm, the goodwill of the firm was valued at Rs. 1,50,000, and on the transfer of the goodwill to the new firm along with other assets, the value of the goodwill was assessed to capital gains. Having held that goodwill is an asset of the business, the issue considered was whether the levy of capital gains under section 45 of the Income-tax Act was justified and, in the context of considering this aspect, Pathak J., held as follows [p. 299) :
"And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.
The point to consider then is whether if the expression 'asset' in section 45 is construed as including the goodwill of a new business, it is possible to apply the computation sections for quantifying the profits and gains on its transfer.
The mode of computation and deduction set forth in section 48 provide the principal basis for quantifying the income chargeable under the head 'Capital gains'. The section provides that the income chargeable under that head shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset :
'(ii) the cost of acquisition of the capital asset........' What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may, on the facts of certain case, be acquired without the payment of money. That kind of case is covered by section 49 and its cost, for the purpose of section 48, is determined in accordance with those provisions. There are other provisions which indicate that section 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is sub-section (2) of section 55. None of the provisions pertaining to the head 'Capital gain' suggests that they include an asset in the acquisition of which no cost at all can be conceived of. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain".
In Sunil Siddharthbhai v. CIT , while considering the exigibility to levy of capital gains on contribution of capital asset as share capital in a partnership firm, Pathak J., held as follows (p. 522) :
"What is the profit or gain which can be said to accrue or arise to the assessee when he makes over his personal asset to the partnership firm as his contribution to its capita ? The consideration, as we have observed, is right of a partner during the subsistence of the partnership to get his share of profits from time to time and after the dissolution of the partnership or with his retirement from the partnership, to receive the value of the share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. When his personal asset merges into the capital of the partnership firm, a corresponding credit entry is made in the partner's capital account in the books of the partnership firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or the partner retires. It evidences no debt due by the firm to the partner. Indeed, the capital represented by the notional entry to the credit of the partner's account may be completely wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital account is credited. Having regard to the nature and quality of the consideration which the partner may be said to acquire an introducing his personal asset into the partnership firm as his contribution to its capital, it cannot be said that any income or gains arises or accrues to the assessee in the true commercial sense which a businessman would understand as real income or gain."
The levy of tax on capital gains under section 45 of the Income-tax Act is intertwined with the mode of computation envisaged under section 48 of the Act. The mode of computation provided under section 48 comprises a two-fold dimension, namely, the expenditure incurred in connection with transfer and cost of acquisition of the asset added by the cost of improvement. The profits or gains contemplated under section 45 as a sequel to transfer the surplus amount realised over and above the cost of acquiring the asset. In the event of the absence of cost of acquisition, the question of accrual of gain does not arise and the levy of tax professing to be capital gain levy is in essence a levy on a capital ass et. The charging section under section 45 loses its vitality in the absence of cost of acquisition of asset as the cost of acquiring the asset constitutes the bed-rock for exigibility to levy of capital gains. This approach as to the presence of cost of acquisition controlling the charging section is concretised by section 49. It is obvious that section 49 takes care of arriving at the cost of acquisition by insertion of deeming provision for the assets in respect of which the assessee did not incur any expenditure or pay consideration in terms of money. For the assets enumerated in section 49, there would not have been any cost of acquisition but for the deeming provision whereby the cost of acquisition of an asset is considered to be the cost for which the previous owner acquired it. Thus, section 49 by implication furnishes a clue to the interpretation to section 48 . The deemed cost of acquisition is confined to the assets particularised in section 49 only and in all other assets, the actual cost of acquisition is the substratum for the levy of capital gains. If there is no cost of acquisition, there is no gain and consequently there is no capital gains tax. Thus, the charging section takes colour from the computation as both the provisions are integrated and seek to levy tax regarding "an asset in the acquisition of which it is possible to envisage a cost."
The consideration in this reference is, whether on acquisition of land, compensation payable to the protected tenant is liable to levy of capital gains and the focus is upon the cost of acquisition of such protected tenancy. The genesis of protected tenancy is conferment of protection to a tenant, who has been clinging to the land by carrying on agricultural operations or payment of usually annual rent to the landlord. Taking into consideration the period of lease and the attachment of the tenant to the land and the proxy connection of the landlord to the land in furtherance of land reforms, the rights of the tenant are protected by conferring sixty per cent of right in the land itself by section 40(4) of the A.P. (Telangana Area) Tenancy and Agricultural Lands Act. Admittedly there is no bargain or contractual nexus between the tenant and landlord or the tenant and the Government in relation to the protected tenancy and the tenant being in possession of land on annual lease could not have bargained for a sizeable chunk in the land. The protected tenancy is a creature of the statute and the tenant did not pay any amount to the landlord or anybody for getting the protected tenancy right. Therefore, the cost of acquisition is not present and the protected tenancy being a creature of statute is not capable of being acquired by payment of money.
Learned standing counsel for the Revenue contended that the periodical payments of rent constituted the base for giving protected tenancy and the aggregation of such payments should be considered as cost of acquisition. There is no foundation for this contention as the landlord who received the amounts did not give protected tenancy and, therefore the payments of rent cannot be considered as consideration for protected tenancy. Learned standing counsel for the Revenue invites us to the decision in Gasper v. CIT . The Calcutta High Court did not consider the levy of capital gains from the perspective of interaction of sections 45 and 48. Further, the consideration of monthly tenancy as capital asset is with reference to the provisions of the West Bengal Tenancy Act and this decision should be considered as confined to its facts and circumstances. On the other hand, learned counsel for the assessee contended that the periodical payments of rent as distinct from lump sum payment cannot be considered as a capital asset as they partake of the character of revenue expenditure. Learned counsel invited us to the decision in the Board of Agricultural Income-tax v. Sindhurani Chaudhurani [1957] 32 ITR 169 (SC). While considering whether salami can be considered as a rent within the meaning of the definition of "agricultural income" in section 2(1)(a) of the Assam Agricultural Income-tax Act, 1939, the Supreme Court held that salami is in the form of a lump sum non recurring payment made by a prospective tenant to the landlord as a consideration for the settlement of agricultural land and parting with certain rights of the landlord in the land in favour of the prospective tenant, and is paid anterior to the constitution of relationship of landlord and tenant, that it is not "rent" within the meaning of the word used in the definition of "agricultural income", that it has all the characteristics of a capital payment and it is not revenue. In CIT v. Panbari Tea Co. Ltd. , the company leased out two tea estates along with the machinery and buildings for a period of ten years in consideration of a sum of Rs. 2,25,000 as and by way of premium and an annual rent of Rs. 54,000. The Supreme Court held that when an interest of the lessor is parted with for a price, the price paid is premium or salami but the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of the rent, and the former is a capital receipt and the latter are revenue receipts. In Bawa Shiv Charan Singh v. CIT , the assessee has taken the premises on rent and he did not pay anything for the acquisition of tenancy right. During the relevant accounting year, the assessee surrendered the tenancy rights of the first floor of the said premises, and received a sum of Rs. 30,000. In the context of considering the levy of capital gains, the Delhi High Court held that the leasehold right is a capital asset and on surrender of the right, the right is extinguished and thus there is a transfer of capital asset. While holding that the periodical payments by way of rent cannot be considered as payments for acquisition of a capital asset, namely, leasehold right, it was held as follows (p. 38) :
It is not possible to apply the computation sections for quantifying the profits and gains on the transfer of leasehold rights which were acquired by the assessee without any cost. The mode of computation and deduction set forth in section 45 provided the principal basis for quantifying the income chargeable under the head 'Capital gains'. What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. In the case of self-created value of a tenancy right, it is not possible to determine the date of acquisition of the asset. A subsidiary point may also be noticed in which the Tribunal had directed the determination of the value of tenancy right as on January 1, 1954, and to deduct the amount from Rs. 30,000 which the assessee received. It opined that the balance would represent capital gains subject to statutory exemption. The authorities under the Act have no jurisdiction or power to direct the ascertainment of the cost of acquisition in relation to a capital asset. The option is given to the assessee whether to adopt the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954. The assessee has not exercised the option, nay, he has not even been called upon to do so. There is, therefore, no basis for directing the determination of the value of the tenancy rights as on January 1, 1954."
In Ramakrishna & Co. v. CIT , the Madras High Court held that the amount of one lakh paid by way of consideration for obtaining a title deed under the two lease deeds in respect of a cinema theatre in addition to the payment of the monthly rents payable under the lease deeds, the installments paid for the consideration of one lakh constitutes capital expenditure but not revenue expenditure. In Addl. CIT v. Ganapathi Raju Jegi, Sanyasiraju , this court held that the route permits granted by the Regional Transport Authority are property and when such permits are transferred, the difference between the sale price and the cost of acquisition represents capital gain for the purpose of section 45 of the Income-tax Act. But, however, when no amount was paid by the operator for the purpose of acquiring the permit when the route permit was granted and over a number of years, the permit acquires some value, the value of the permit cannot be evaluated as on the date of acquisition, and where the cost of acquisition of a particular capital asset is nil, the case will be similar to that of a sale of goodwill by the assessee and the gain cannnot be brought within the net of capital gains. The situation in the instant case has close affinity to this decision. The protected tenancy is a creature of the statute and granted on fulfilment of certain conditions and analogous to the grant of permit by the Regional transport Authority on compliance with certain requirements under the Motor Vehicles Act. The conferment of protected tenancy by a statute in furtherance of land reforms cannot be bartered to the periodical annual payments made by the tenants. The grant of protected tenancy is not even remotely stringed to the payment of rent by the tenant to the landlord. As there is no cost of acquisition, the capital gains levy is not attracted.
Learned standing counsel for the Revenue contended that in any event, th e fair market value on the date of conferring protected tenancy can be considered as provided under section 55 of the Act. Learned counsel says that by this process the element of cost of acquisition can be taken as present. Considered from a proper perspective, section 55 does not yield to this line of approach. The relevant sub-section section 55 is an elucidation and extension of sections 48 and 49 providing for the valuation being pegged down to the date specified therein, namely January 1, 1964, at the option of the assessee. Having in view the galloping increase in prices and abnormal costs in the earlier years, the assessee is facilitated to opt for the date, i.e., January 1, 1964, for ascertaining the cost of acquisition. This provision presupposes the cost of acquisition but this mode of ascertaining the cost of acquisition is prescribed by shifting the date of ascertainment to January, 1964, from the actual date of acquisition. The effect of this section is that whatever be the cost during the period preceding January 1, 1964, the assessee may exercise the option of having the value ascertained as on January 1, 1964. This provision cannot be pressed into service where there is no cost of acquisition provision cannot be pressed into service where there is no cost of acquisition at all. Learned counsel for the assessee referred to the decision in CIT v. H. H. Maharaja Sahib Shri Lokendra Singhji , wherein the Madhya Pradesh High Court held that the liability to tax on capital gains does not arise when the element of cost of such cost as is capable of being reckoned, is not present and the fair market value cannot be taken into consideration under section 55 of the Income-tax Act, 1961, as the very basis of capital gains is that at some point to time, the person who initially acquired the property did so at some cost in terms of money. In this case, the Maharaja of Ratlam sold lands which were part of the property inherited by him from his forefathers to whom the property had been gifted by a Moghul emperor, and on the facts and circumstances of the case, it was held that no capital gains accrued to the assessee.
In the result, the reference is answered in the affirmative and in favour of the assessee and against the Revenue. No costs.
Jeevan Reddy, J.
2. I agree with the answer proposed by my learned brother, Rama Rao, J., in view of the decision of the Supreme Court in CIT v. B. C. Srinivasa Setty , but with great reluctance. I proceed to state my reasons.
Section 45 levies tax on capital gains. Section 48 prescribes the mode of computation of capital gain. It says that the capital gain shall be "computed by deducting from the full value of the consideration receive d or accruing as a result of the transfer of the capital asset.... the cost of acquisition of the capital asset........". The expression "cost of acquisition" is defined in sub-section (2) of section 55. It says, where the capital asset became the property of the assessee before January 1, 1964, the cost of acquisition means the cost of acquisition to the assessee or the fair market value of the asset as on January 1, 1964, as the option of the assessee. The underlying idea is that since the tax is on capital gain and not on capital, the cost of acquisition (as defined in the Act) should be deducted to arrive at the amount chargeable to capital gains t ax. The question is where the cost of acquisition of a capital asset "nil", why can't it be taken as "nil" and is there any prohibition in the Act from saying so ?
Take a case, where an assessee becomes the owner of a capital asset (land or building) by adverse possession. The cost of acquisition in such a case is "nil", so no capital gains tax can be levied upon him-according to the judgment of the Supreme Court-when that asset is sold by him or is acquired from him. Now take this very case. The assessee was a tenant of this land. The Andhra Pradesh (Telangana Area) Tenancy and Agricultural Lands Act (which came into force in 1950) conferred the status of a "protected tenant" upon him. A protected tenant is a tenant but possesses much larg er rights than an ordinary tenant. Indeed, section 40(4) declares that" the interest of a protected tenant in the land held by him as a protected tenant shall form sixty per cent. of the market value of all the intere sts in the land and that of the landholder and of persons claiming under him shall be limited to the remaining forty per cent". It is because of this provision that when the land was acquired, the compensation was apportioned in the said proportion - 60% to the assessee (as the protected tenant) and 40% to the landlord. (It goes without saying that the landlord is liable to pay capital gains tax on the said amount). Now, the argument on behalf of the assessee is that inasmuch as the protected tenancy was conferred ups him, i.e. acquired by him, without any cost to him, no capital gains tax can be levied upon him in view of the decision of the Supreme Court aforesaid. The said decision deals with the case of goodwill of a business and not with corporeal property. In my opinion, the principle of the decision ought to be confined to intangible rights like that of goodwill, but not to tangible assets. But, there are certain observations in the judgment-strongly relied upon by the counsel for assessee-which inhibit me from saying so, bound as I am by article 141. While recognising that "the operation of the charging provision cannot be affected by the constructi on of a particular computation provision", the Supreme Court was of the opinion that unless the asset is one which is capable of being acquired at a cost, section 49 cannot be applied and consequently, no capital ga ins tax can be levied. It says "what is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possess the inherent quality of being available on the expenditure of money to a person seeking to acquire it". Now, evidently, a protected tenancy cannot be acquired by spending money. It cannot be sold or purchased though it is heritable, exchangeable and can also be mortgaged for raising loans in certain situations - (See sections 39, 40 and 43 of the Andhra Pradesh (Telangana Area) Tenancy and Agricultural Lands Act). If so, applying the test evolved by the Supreme Court, it cannot be charged to capital gains tax. May be, it is possible by a process of reasoning to confine the said observations to incorporeal rights like goodwill, but that is better done by the Supreme Court itself.
(I must record that at no stage of these proceedings was it ever argued that since protected tenancy rights cannot be sold by him, the protected tenant is not entitled to any compensation on the acquisition-compulsory sale-of the land held by him).
There are many valuable assets which do not admit of a cost of acquisition as explained by the Supreme Court e.g. permits, licences, import entitlements, etc. -even contracts from Government or from others. Very often, they constitute capital assets and are transferred for huge sums. But there is no cost of acquisition in the sense explained by the Supreme Court.
Probably this is a deficiency, calling for redress.