Income Tax Appellate Tribunal - Madras
Beardsell Ltd. vs Joint Commissioner Of Income-Tax on 26 June, 2001
Equivalent citations: [2002]80ITD224(MAD)
ORDER
A. Kalyanasundharam, Senior Vice-President
1. The appeal has been filed by the assessee, a limited company, and it has been so instituted against the order of the Commissioner of Income-tax dated 12-2-1999 that was passed with reference to the provisions of Section 263 of the Income-tax Act, 1961 (hereinafter referred to as "the Act").
2. The grievance of the assessee is with reference to the direction of the CIT contained in his order to treat Rs. 99 lakhs that was received by the assessee as income of the assessee. The claim of the assessee in the present appeal as per grounds of appeal raised is that the amount of Rs. 99 lakhs received by it was on account of surrender of tenancy rights and that it is in the nature of capital receipt not liable to be taxed within the provisions of the Act.
3. Rival contentions in regard to the above issue have been very carefully considered. Before we venture into the contentions as raised by the parties, it is necessary to bring in briefly the facts relating to the receipt of Rs. 99 lakhs. The assessee was provided a lease of godown measuring 4945 sq.ft. that was located in Sunmill Compound, Lower Parel, Bombay. The lease was so given by Mr. Francis Theodore D'Souza and Mr. Mahadeo Soma Tamboskar, who were partners in M/s. Crema Industries. The lessors in the instant case were lessees of the owner of the property, New Sunmill Co. Pvt. Ltd. The lessees of the owner of the property by means of an agreement dated 24th September, 1971 had leased out as a second lease in favour of the assessee. The lessees Mr. Francis Theodore D'Souza and Mahadeo Soma Tamboskar got their lease renewed for a period of 99 years on 27-1-1988. The second lessee, apparently the assessee, requested permission of the first lessee by means of letter dated 22nd January, 1993 to permit them to sublet a portion of the godown to the third lessee in the series. The first lessee accordingly on 29th January agreed to subletting by the second lessee, i.e. the assessee. The assessee accordingly entered into a sub-lease with M/s. Turel Sales Corporation on 18th June, 1993 giving 3000 sq.ft. of the godown area for their use.
4. On 1st of December, 1993 the first lessee wrote to the assessee requesting for surrendering of the premises and indicated provision of alternative accommodation. This was followed by a memo of understanding between the first lessee and the assessee on 4th of January, 1994, in which it was provided that the first lessee would provide to the assessee alternative accommodation within a period of six weeks failing which he shall pay Rs. 99 lakhs to the assessee in lieu thereof. It further states that the rights of Turel Sales Corporation who occupied 3000 sq.ft. of the godown, who were third lessees in the series, their right will not be affected in any way and that they would continue to pay the godown charges to the first lessee and further the amount of deposit that was placed by the third lessee with the assessee would be given over by the assessee to the first lessee. This was followed by letter dated 7th of March, 1994 from the first lessee stating that the assessee may accept Rs. 99 lakhs in lieu of alternative accommodation. He further stated that he has instructed the third lessee to pay Rs. 90 lakhs to the assessee on behalf of the first lessee and that the balance of Rs. 9 lakhs would be paid when the premises is given over to the first lessee. This is followed by a letter by the first lessee dated 28-3-1994 to the third lessee requesting payment of Rs. 40 lakhs to the assessee. This is followed by a letter from the assessee dated 31-3-1994 addressed to the first lessee indicating receipt of Rs. 90 lakhs calling for the payment of balance of Rs. 9 lakhs and indicating that they are arranging to surrender the premises on that day itself. This is followed by one letter dated 31-3-1994 stating that the premises is surrendered that the assessee no longer has any right, title or interest in the said premises. Information about the amounts that were paid to the assessee is given hereunder :
Doc. Date Cheque/ Date Party Amount Bom. CA
No. DD No. Rs.
HO/91 30-3-94 DD922629 28-3-94 Zaran Trading 50,00,000 -
4688 Agencies
BOM/92 31-3-94 597657 31-3-94 Turel Garments 20,00,000 92/0250
4709 31-3-94
597658 31-3-94 Turel Garments 20,00,000
BBC/02 6-7-94 DAO22853 6-7-94 Turel Sales 5,00,000
17 Corpn.
BBC/02 6-7-94 DDO83363 6-7-94 Turel Sales 4,00,000
19 Corpn. 99,00,000
On 6th January, 1997 the first lessee called himself as the assignor, the assessee as the confirming party and third tenant in the series calling assignee. This has reference to the arrangement between the first tenant and the assessee dated 4th January, 1994 for the purpose of payment of compensation of Rs. 99 lakhs in lieu of alternative accommodation, the third tenant being allowed to continue as a tenant and paying rent to the first lessee. Clause (i) of the said agreement reads as under :
By an agreement dated 19th July, 1994 the Assignor agreed to assign to the Assignee whatever his rights, title and interest in the said land hereditaments and premises together with the building thereon free from all encumbrances but subject to the tenancy and occupancy rights of M/s. Turel Corporation at or for the price of Rs. 1,65,00,000 (Rupees one crore sixty five lacs only) upon the terms and conditions therein mentioned, out of which the Assignees to pay Rs. 99,00,000 (Rupees Ninety-nine lakhs only) to the Confirming Party and the balance of Rs. 66,00,000 (Rupees sixty-six lakhs only) to the Assignor.
Immediately after the said Clause (i), the said agreement reads as under :
AND WHEREAS the Assignees requested the Assignor to execute these presents and assign and transfer whatever rights, title and interest the Assignor has in the said land hereditaments and premises as hereinafter appearing to which the Assignor agreed to upon the Confirming Party joining in and executing these presents as hereinafter appearing.
NOW THIS INDENTURE WITNESSETH that in pursuance of the hereinbefore recited Agreement dated 19th July, 1994, and in consideration of the sum of Rs. 99,00,000 (Rupees Ninety-Nine Lakhs only) paid by the Assignee to the Confirming Party (the payment and receipt whereof the Confirming Party doth hereby admit and acknowledge and further acquit, release and discharge the Assignee for ever) and in consideration of the further sum of Rs. 66,00,000 (Rupees sixty-six lakhs only) also paid by the Assignee to the Assignor (the payment and receipt whereof the Assignor doth hereby admit and acknowledge and further acquit, release and discharge the Assignees for ever) aggregating to Rs. 1,65,00,000 (Rupees One Crore Sixty-Five lakhs only) being the full consideration amount agreed under the hereinbefore recited agreement dated 19th July, 1994, he, the Assignor doth hereby assign and transfer and he, the Confirming Party doth hereby confirm unto the Assignee whatever rights, title and interest the Assignor and Confirming Party respectively has in the said land. All that piece or parcel of land along with godown bearing C.S. Nos. 160 and 163 (part) Sun Mill Road, Lower Parel, Division Bombay and more particularly described in the Schedule hereunder written TOGETHER WITH the messuege or dwelling house built thereon AND TOGETHER WITH ALL houses, out-houses, edifices, buildings, yards, compounds, sewers, fences, trees, drains, ways, paths, passages, commons, gullies, wells, waters, water-course, lights, liberties privileges easements and appurtenances whatsoever to the said premises or any part thereof belonging or in anywise appertaining or usually held or occupied therewith or reputed to belong or be appurtenant thereto and all the estate, right, title, interest property, claim and demand whatsoever at law and in equity of them the assignor and Confirming Party of in and to the said premises or any part thereof to hold the said land hereditaments and premises hereby assigned unto the Assignees in perpetuity subject to the payment of ground rent of Rs. 500 reserved by the said Indenture of Lease dated the 27th January, 1988 and to the performance and observance of the covenants and stipulations therein contained and on the Lessee's part to be observed and performed and henceforth on the part of the Assignees ought to be observed and performed and also subject to the tenancy and occupancy rights of Turel Sales Corporation and also subject to the payment of rates, taxes, water charges, cess and other outgoings in respect of the said land, hereditaments and premises more particularly described in the schedule hereunder written and the said lease is now a valid and subsisting of the said premises hereinbefore expressed to be hereby assigned and is in no wise, void or voidable.
5. On the above mentioned facts we would now consider the arguments advanced by the parties. At the outset the facts as above go to indicate that the entire arrangement was between the first lessee, the assessee and the third lessee who are the sub-tenant of the assessee. The third tenant in the series, who was sub-tenant of the assessee, wanted to be substituted in place of the first tenant which also required the assessee to move out. Clause (i) that is reproduced earlier shows that the third tenant Turel Sales Corporation had agreed to pay Rs. 165 lakhs to get off the right, title, interest that the assignor had in the property and because the first lessee had given on sub-lease to the assessee and had required vacation of both the lessee and the assessee, he had split up the total consideration of Rs. 165 lakhs into two portions. The first portion of Rs. 66 lakhs was given to the first lessee from whom the assessee had received the sub-lease. The second part of the consideration of Rs. 99 lakhs was received by the assessee.
6. The issue is, is it a case of surrender of tenancy or is it a case of transfer of tenancy. The agreement as was entered into between Mr. Francis Theodore D'Souza with Turel Sales Corporation in which the assessee had become confirming party used the words "assignor, assign and confirming party". Cambridge International Dictionary of English at page 72 gives meaning to the word "assign" as "to choose or decide on (the person who should do a job), or to give (a particular job or responsibility to someone)." It also means legally "to give property, money or right using legal process". The first lessee who had tenancy rights over the property with permission to sublet the property has assigned his right, title and interest in the land, hereditaments and premises together with building thereon free from all encumbrances to the third tenant. The word "assign" we have already referred to. It means using a legal process to give property, money or rights. The first lessee who had to assign his interest in favour of the third tenant had to necessarily seek the co-operation of the assessee who was the second tenant and it is only then that the first lessee would be in a position to assign his rights etc. in favour of the third tenant. The assessee who agreed to co-operate for allowing the transfer of rights etc. by the first lessee to the third tenant was compensated for such agreement for which the consideration amount is Rs. 99 lakhs. The assessee, as observed above, co-operated with the first lessee and it is on that basis the assessee was made confirming party so that there could be smooth transition in the assignment of the right, title, etc. in the said land in favour of the third tenant. The issue, therefore, is one of assignment of interest in favour of another, though it has been stated as surrender of tenancy rights. As observed earlier, in order to enable the first lessee to assign his interest in favour of the third tenant, the third tenant had to necessarily compensate the assessee to the extent of his interest in the tenancy and further compensate the first lessee for assigning his remaining interest. It is, therefore, one of assignment of right, title, interest, etc., in the property in favour of the third tenant. The word "assignment" we referred to earlier means to give and when such action of giving is with reference to a consideration, then obviously it results in a transfer. It is well known that any right or interest in a property is as much a property. Because this property had been held under lease from 1971, it would be a capital asset within the meaning of Section 2(14) of the Act. The term "transfer" is defined in Section 2(47) of the Act as relating to capital asset and it includes sale, exchange, or relinquishment of the asset or extinguishment of any rights therein. The right, title etc. in the instant case was assigned in favour of the third tenant for a consideration and, therefore, it involved exchange. Consequent to such assignment in favour of the third tenant, the assessee gave away its right, title etc. in favour of the third tenant resulting in extinguishment of any right therein. Therefore, the transaction as could be seen from our discussion above is a case of transfer of a capital asset. Because the capital asset was held by the assessee for a long period of more than 36 months, gains from such transfer would result in long-term capital gain.
7. The claim of the assessee that it was surrender of tenancy rights, because there was an agreement between the assessee and the first lessee, cannot be accepted merely because of the existence of such an agreement. The substance and the nature of the transaction is what is the deciding factor and not the terms that are used in the agreement between the two parties. No doubt that because the third tenant wanted to prefect the title as the first tenant, he had to necessarily acquire the right of the second tenant, the assessee and the first tenant, it is a case of assignment by the assessee and the first tenant in favour of the third tenant. Surrender of tenancy invariably results with the owner of the property as is observed earlier so stated by Section 111(e) of the Transfer of Property Act. In the instant case the first tenant agreed to give over his right of tenancy to the third tenant, and for this the consent of the assessee was required. Because it was a case of the tenancy rights being given over by the assessee to the third tenant though it is given the colour of surrender of tenancy in favour of the first tenant. The facts as they go clearly indicate that the transaction of assignment of interest by tenants in favour of last tenant so that he becomes the first tenant for all purposes, could not be anything but a transfer of rights of tenancy in favour of another. The surrender of tenancy invariably has to be with the owner. That is not the case in the present appeal. The various case laws that had been cited before us and the decision of the Bombay High Court in Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 265 : 116 Taxman 77 would not have any relevance whatsoever because all those cases were with reference to surrender of tenancy rights. In the instant case it was a case of assignment of tenancy right in favour of one other tenant who got substituted in place of the second and the third tenant.
8. No doubt the CIT has proceeded by placing reliance on the decision of the Special Bench of the Tribunal in Cadell Wvg. Mill Co. (P.) Ltd. v. Asstt CIT [1996] 217 ITR 51 (Bom.) which on a reference to the Bombay High Court got reversed. The CIT by placing reliance on the said decision of the Special Bench has directed to assess Rs. 99 lakhs as income of the assessee. A Special Bench of the Tribunal had held that the surrender of tenancy rights could be brought to tax as a casual or non-recurring income. This the Bombay High Court has reversed.
9. As observed earlier, notwithstanding the observation of the Commissioner to the decision of the Special Bench, the fact remains that the issue in the instant case is one of assignment of interest of tenancy etc. in favour of another tenant who perfected his title to the tenancy. The Tribunal under Section 254(1) of the Act is required to pass such orders as it think fit, meaning thereby if an item of receipt is taxable as income and the authorities have held it as taxable under a particular section, the Tribunal when finding that the receipt is taxable, it could hold so though the section that was referred to by the authorities may not be applicable. In the instant case it is not a case of surrender of tenancy right is our finding. The finding is that it is a case of assignment of rights in tenancy in favour of the third tenant for which the assessee was compensated. Therefore, the amounts are taxable on the basis that it results in transfer of capital asset.
The order of the Assessing Officer, which did not bring to tax this amount, is clearly erroneous and prejudicial to the interests of revenue. We accordingly modify the order of the CIT to the extent observed above and that the amount so received would be brought to tax as long-term capital gains and the provisions concerning Sections 45 to 55 would apply to the facts of the case.
10. The appeal of the assessee is dismissed.