Income Tax Appellate Tribunal - Pune
Smt. Nargis A. Irani vs The Income Tax Officer on 2 September, 2005
Equivalent citations: [2006]102ITD297(PUNE), [2006]287ITR142(PUNE), (2006)105TTJ(PUNE)718
ORDER
K.G. Bansal, Accountant Member
1. This appeal of the assessee arises out of the order of CIT(A)-II, Pune, passed on 28.07.99. The corresponding order of assessment was made by the ITO, Ward-I(4), Pune(hereinafter called the AO), under the provisions of Section 143(3) read with Section 144A on 26.03.98. The assessee has taken up seven grounds of appeal. Ground No. 7 is residuary in nature, which does not require any decision from us. Ground Nos. 1 to 5 are against the taxation of capital gains of Rs. 40.00 lakh in respect of an amount of Rs. 60.00 lakh received by the assessee on relinquishing of her life interest in the immovable property situated at 42, Sasson road, Pune. It is, inter-alia, mentioned that the learned CIT(A) ought to have considered various documents and agreements which showed that the landlord of the property acknowledged her right to occupy the property in her life time. It is further mentioned that right of the assessee was not an easement right, as held by the learned CIT(A). In any case, there was no cost of acquisition of such easement right also. It is also mentioned that the assessee was not holding any capital asset, as defined Under Section 2(14) of the Act which could, be transferred as the life interest in the property was merely a license enjoyed by her. It is also mentioned that there is no evidence on record that the assessee was having any tenancy right in the property. Therefore, it was prayed that the impugned addition of Rs. 40.00 lakh may be deleted. Without prejudice to the aforesaid prayer, it was mentioned in ground No. 6 that the learned CIT(A) erred in holding that the assessee was not entitled to exemption Under Section 54F on the ground that the assessee owned another immovable property in Guruprasad Apartments, Bund Garden Road, Pune.
2.1. The facts of the case, as mentioned in the order of learned CIT(A), are that the assessee filed a return of income for this year on 18.09.97 declaring total income of Rs. 45,200/-. In the note accompanying the return, it was stated that an amount of Rs. 60.00 lakh received by her on surrendering life interest was not liable to be taxed. Before the AO, it was argued that the impugned amount was a capital receipt, not liable to income-tax at all. In the alternative, it was argued that since life interest was a self generated asset. for which there was no cost of acquisition, no capital gain could be brought to tax in the light of the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Shetty, 128 ITR 296. It was also argued that the amount was received as a consequence of family settlement and, therefore, there was no transfer of any asset as understood Under Section 2(47) of the IT Act. Coming to the facts, it was explained that the assessee had been keeping the aforesaid property for more than 40 years and such interest therein was given to her for life time by her brothers for looking after her parents and thereafter looking after herself. The brothers wanted to sell the property in her life time and she objected to the same. The matter was settled amicably between her and the brothers in terms of agreement, dated 15.10.96, under which she received compensation of Rs. 60.00 lakh in full and final settlement of all her claims in the property. The AO observed that in the agreement dated 15.10.96, the brothers were described as landlords and, therefore, they were entitled to receive rent from the assessee. Such rent was not being paid by the assessee. He further observed that in view of definitions under the Bombay Rent Act, the possession of the assessee was that of a caretaker for the property and thus, she had a right of the possession and management of the property. Therefore, the aforesaid agreement dated 15.10.96, was for relinquishment the assessee's right of occupation, possession and management in favour of her landlord brothers. The AO also examined the import of term "life interest". It was mentioned that the words "life interest" have not been defined in any Act. This suggests that these words mean a limited right granted or acquired for the life time and such interest is not transferable under the transfer of property Act or any other Act. In other words, life interest in a real estate in favour of a beneficiary is credited to safeguard his interest during the life time of the beneficiary. The right of the disposal of the property remains with the owner. In view of the impugned agreement dated 15.10.96, the right has been compensated in monetary terms. Upon doing so, it lost the characteristics of life interest and assumed J "We characteristics of right to use the property. This was nothing but transfer of the asset, liable to tax under the head "capital gains. He also referred to the objections raised by the assessee to the proposed sale by the landlords, in which the assessee disclosed herself as care taker of the property. This, according to the AO, disproves the claim that she had life interest in the property.
2.2. In the appellate proceedings, the assessee took a number of arguments before the learned CIT(A), which has been summarized on page 11 of the appellate order. It was claimed that - I) being in the nature of compensation, the receipt is a capital receipt, ii) even if the transaction amounts to transfer of the capital asset, no capital gains can be computed as the cost of acquisition was nil, iii) the amount was received as a consequence of family settlement and thus there is no transfer, and iv) the impugned receipt was invested in acquisitiojiof a new house property and other assets entitled for exemption Under Section 54EA and therefore, exemptions under this section and Section 54F may be granted. The learned CIT(A) considered the facts of the case and various arguments placed before him. He referred to the agreement dated 15.10.96, which shows that the brothers had allowed the assessee to use and occupy the said property during her life time. According to the learned CIT(A), the words used in the agreement "allowed Mrs. Nargis to use and occupy the said property till her life time" implied that there was no pre existing written instrument with either party in regard to the aforesaid allowance. Thereafter, he referred to the asscssee's response to the public notice given by the intending purchasers of the property in which it was inter-alia mentioned that she is using and enjoying the said property for last many years and the entire property is in her sole possession and enjoyment and it was further mentioned that she informed by the said objection that her prior consent should have been taken in respect of the proposed transaction. On the basis of this objection of the assessee, the learned CIT(A) was of the view that the AO had not properly appreciated the facts of the case. He was also of the view that what the assessee had surrendered was the right to occupy and enjoy the property and that it could in no way be connected with any life interest as claimed. The learned CIT(A) also pointed out that the facts of this case are not in pari-material with the facts in the case of Shri B.C. Srinivasa Shetty in regard to the cost of acquisition. It was pointed out that goodwill was a self generated asset and no cost of acquisition could be identified or envisaged. However, the right of possession and occupancy of a property is not a self generated asset. In this case, such right was granted to her by her brothers. Therefore, he concluded that the right was in the nature of easement right, which was acquired at Nil cost. She enjoyed this easement right to the exclusion of all other persons, which was transferred for consideration of Rs. 60.00 lakh. Accordingly, he held that the impugned transaction amounted to transfer, liable to capital gains.
2.3. Before us, the learned Counsel of the assessee filed a paper book of 30 pages consisting of submissions made before the ITO, copy of public notice given in the newspaper by the proposed buyer, objections raised by the assessee to the public notice, possession note dated 17.02.97, articles of agreement dated 15.10.96, statement of income for AY 1997-98, and sale deed dated 10.01.97. It was pointed out by him that the main controversy in the case revolves around computation of capital gains in respect of property situated at 42, Sasson Road, Bund Garden, Pune, owned by the brothers of the assessee. the assessee had been staying in this property with her parents for about 40 years. The brothers wanted to sell the property to M/s Kalyani Estates. In order to find any defects in the title of the property, the intending buyer issued a public notice in the news paper. The assessee raised objections by writing a letter which does not bear any date. In this letter, it was inter-alia intimated that she had been residing and using, occupying and enjoying the property for the last 40 years and she had also been caretaker of the said property, out-house, open space, garden, etc. It was intimated that all these rights and privileges were enjoyed by her independently with the consent of owners for the past many years and such right may be taken into consideration in such a manner that no inconvenience is caused to me or my rights are not in any manner violated, infringed or adversely effected or prejudiced, in confirmation of which, my prior consent should necessarily be taken by you before any transaction of sale or development of the property is concluded. The learned Counsel further pointed out that in view of the objections raised by the assessee, a settlement agreement was arrived at between the owners and the assessee on 15.10.96. Under this agreement, a sum of Rs. 60.00 lakh was paid to the assessee for handing over vacant possession of the property, subject to certain terms and conditions, namely, that, i) the assessee is paid a sum of Rs. 60.00 lakh in recognition of her interest of using and enjoying the property, to avoid litigation and to save dignity and good name of the family and after receipt of the said amount she will remove herself and family members and all of her belongings from the property and hand over vacant and peaceful possession of the property to the landlords, and ii) she will give up of her claims of using and enjoying the said property during her life time, and if necessary, she will execute the deed of release in favour of landlords upon receipt of Rs. 60.00 lakh. If required, she also give no objection or consent letter for proposed agreement of sale between the landlords and M/s Kalyani Estates and withdraw her objections dated 29.09.05. The question was whether the iasessee's right amounted to capital asset or not.
2.4. The learned Counsel referred to Section 6 of the transfer of property Act under Clause (d) of which an interest in property, restricted in its enjoyment to the owner personally, cannot be transferred by him. It may be mentioned that Section 6 deals with the transfer of a property and it provides that subject to certain exceptions, property of any kind may be transferred. Clause (d) of this section is also an exception to the general rule and it is provided that if interest in property is restricted in its enjoyment to the owner personally, the same cannot be transferred. In the first place, the section deals with the transfer of properly and the second place it is provided that if the enjoyment is restricted to the owner personally, then it cannot be transferred. From various documents placed before us, it is not shown that the enjoyment of the property was restricted to the assessee personally. The agreement dated 15.10.96 specifically mentions that after the receipt of the such entire sum, Mrs. Nargis will remove herself and her family members and all of her belongings from the said property and will handover vacant and peaceful possession of the said property to landlords and will give up her claim of using and enjoying the said property for herself. This shows that the assessee had complete domain over the property in so far as its enjoyment is concerned, which extended to her and family members. It appears that she and her family were enjoying the property in an unrestricted manner. However, the terms of her rights were not shown by any pre-existing document. In any case, the enjoyment was not restricted personally to the assessee as the property could be enjoyed by others along with the assessee as per her choice, even as per the documents existing on record.
2.5. The learned Counsel of the assessee pointed out that the definition of the term "immovable property" is furnished in negative term in Section 3 of the aforesaid Act and it is defined that immovable property does not include standing timber, growing crops, or grass. Therefore, we have to look to Section 3(26) of the General Clauses Act. This Sub-section defines the term "immovable property" to include land, benefits arise out of land and things attached to the earth or permanently fastened to the earth. Movable property is defined to be a property of every description, which is not the immovable property. We find that in the case of Ramachandra Annappa v. Subbaraya Thimmayya AIR 1951, Bombay 127, the Hon'ble Court pointed out that an interest in immovable property can be acquired a person not only if he has the totality of rights in and over such property. He can also have an interest in immovable property: if he has transferred to him certain rights in or over the property, which would come within the definition as bona-fide use arising out of the land. In the case of Udayanaran Ananga Bhima Dev v. Vadia Dasu. AIR 1952, Orissa 11,6, the Hon'ble Court held that right to collect rent from the tenants who pay it for use and occupation of the land is a right to the benefits out of those lands and such a right is immovable property. On the basis of these decision, it can be said that ownership is a bundle of rights, which could be unbundled and only one or more of such unbundled rights can be transferred. Such unbundled rights also constitute immovable property. Not only that, even right to collect rent from tenants of an immovable property is an immovable property. The assessee's right to occupy and control the property, is more valuable than mere right to collect rents form the tenants. Therefore, it can be said that the right of the assessee, under which general clauses Act amounts to immovable property.
2.6. The learned Counsel referred to the findings of the learned CIT(A) that her right in the property was easement right. It was pointed by him that easement right arises on adverse possession conceded involuntarily by the owner of the property. In this case, the right for the life was given voluntarily by the brothers of the assessee. Therefore, the impugned right does not amount to an easement right.
2.7. Before proceeding to the argument of the learned Counsel regarding failure of machinery section in computation of capital gains, we may also refer to the findings of the learned CIT(A) that life interest is also an asset. The reason advanced by him was that part-F of Schedule - III of the Wealth-tax Act, deals with the valuation of life interest. Paragraph 17 of the Schedule furnishes method of valuation of life interest. Cluase (a) of the Explanation defines "life tenant", to mean a person for the duration of whose life, the life interest is to subsist. On the basis of this definition and the method of computation of life interest for the purposes of taxation under the Wealth Tax Act, a case was made out that life interest in an immovable property will also be an immovable property. It does appear, on the basis of aforesaid provision in a fiscal statute, which may be taken as in the nature of analogues law, that life interest in an immovable property is also an immovable property.
2.8. During the course of hearing, the bench drew the attention of the learned Counsel towards the provisions of Gift-tax Act, 1958, and in particular to Section 4 of that Act regarding "gifts to include certain transfers". In Clause (e) of Sub-section 1 of this section, it is provided that for the purposes of this Act, where a person, who has an interest in the property, as a tenant for a term or for life or remainder-man, surrenders or relinquishes his interest in the property or other wise allows his interest to be terminated without consideration or for a consideration which is not adequate, value of interest so surrendered, relinquished or allowed to be terminated or, as the case may be, the amount by which such value exceeds the consideration received, shall be deemed to be a gift made by such person. While surrender of life interest may not be a gift in the common parlance, as it had to be a deemed gift Section 4 nonetheless it is clear that such a transaction amounts to transfer. There for it also appears that life interest in a property.
2.9. Coming to computation of income under the head "capital gains", the learned Counsel relied on the decision of Hon'ble Supreme Court in the case of CIT, Bangalore v. BC Srinivasa Shetty . It was pointed out by the Hon'ble Court that no business commenced for the first time possesses good will from the start, which is generated-in a new business is carried on and may be accumulated with the passage of time. When goodwill is generated in a new business is sold, the consideration brought to tax, is charged on the capital value of the asset and not any profit or gain. Further, the date of acquisition of the asset is a material factor in computation of the profit or gain. In the case of goodwill generated in a new business, it is not possible to determine the date when it comes in to existence. The learned Counsel also relied on the decision of Hon'ble Bombay High Court in the case of Evans Fraser and Company Ltd. v. CIT . The Hon'ble Court pointed out that the charging section and computation provisions together constitute an integral code. Therefore, in a case where computation provisions cannot be applied, charging section will also not apply. On the basis of these cases, the case of the learned Counsel was that in case of assets like goodwill, where the cost of acquisition of the assessee's right was nil, computation provisions are not applicable and, therefore, no amount can be brought to tax in respect of these transactions.
2.10. As against the aforesaid, the learned DR pointed out that in case capital gains tax is not leviable on the aforesaid transaction, the profits or gains may be brought to tax under the head "income from other sources". This proposition does not hold good as the income has to be classified under the appropriate head only.
3.1 In view of the facts and submissions made before us, we proceed to decide various grounds of appeal as under:
3.2 Ground No. 2 of the appeal states that the learned CIT(A) erred in ignoring various documents and agreements placed before him, according to which the assessee had a right to occupy the property till her life time and, therefore, he failed to appreciate that the amount received by her in-lieu of the interest was a capital receipt. We have already discussed that life interest has been accepted to be a property, which is transferable. In this connection, we may also have regard to provisions of Section 2(14) of the IT Act which defines the term "capital asset" to mean property of any kind held by an assessee, whether or not connected with the business or profession. Certain properties, namely, stock-in-trade, consumable stores, raw materials held for the purpose of business or profession; personal effects and certain agricultural lands have been excluded from the definition of "capital asset". It was not the case of the learned Counsel that his case falls in the exclusionary clauses of Sub-section (14) of Section 2. Therefore, it is held that the assessee's right to possession enjoyment and control over the property was an immovable property and, therefore, it constituted a capital asset. We have seen that life interest is capable of being transferred Section 4 of the Gift-tax Act. Section 2(14), the extinguishments of any right in a capital asset means to transfer. The provision is analogues to the provision discussed under the Gift-tax Act. Therefore, it can be concluded that life interest can be transferred. Schedule - III of the Wealth-tax Act furnishes the method of computation of the value of the life interest. It has been held in a number of cases that the method prescribed for valuation of an asset under the Wealth-tax Act, is equally applicable under the Gift-tax Act and Income-tax Act. Therefore, it can be concluded that such a right is capable of being valued on the date of its acquisition If such a right is acquired without paying the cost, it does not lead to an inference that its cost was nil. What can be concluded is that it was received by way of gift from the earlier owner. Section 49 regarding "cost with reference to certain modes of acquisition" provides that where the capital asset became the property of the assessee under gift or will, the cost of the acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. In view of this section, the cost of the unbundled right of life interest can be taken as the cost of previous owner valued in accordance with the Schedule - III of the Wealth-tax Act. In view thereof, it is held that the assessee had life interest in property, but it is also held that money received by her in-lieu of this right was not a capital receipt in the sense this term has been used in the case of BC Srinivasa Shetty(supra). It is an accretion to the value of the capital asset, liable to capital gains. Thus, ground No. 2 of the appeal is partly allowed.
3.3 In ground No. 3, the finding of the learned CIT(A) that the right of the assessee was an easement right was assailed. It was also mentioned that even in such a situation, the cost of acquisition was nil. We have dealt with the nature of the right of the assessee in the preceding paragraph. We are of the view that the right of the assessee is not a right of easement. We are also' of the view that the right of the assessee is not the same as good will and, therefore, the ratio of the case of BC Srinivasa Shetty(supra) is not applicable. Thus, ground No. 3 of the appeal is also partly allowed.
3.4. Ground No. 4 of the appeal states that before any tax, it should be shown that there was a transfer of capital asset, as defined in Section 2(14) of the IT Act. As the property was a personal right, it could not have been transferred and, therefore, there was no liability to capital gains. This matter has also been covered in preceding paragraphs, in which it has been held that life interest is a capital asset, which can be transferred. Gift-tax Act contains specific provisions to deem such transfers as gifts. Therefore, the transaction is exigible to tax under the head "capital gains'. Accordingly, ground No. 4 of the appeal is dismissed.
3.5. Ground No. 5 states that the assessee was not a tenant in the property and recital in agreement dated 15.10.96, describing the owners as landlords could not lead to an inference that there was a relationship of landlords v. tenant between the owners and the assessee. On the basis of the discussion in the preceding paragraphs, we are of the view that what the assessee had was life interest in the property for possession, control and enjoyment. Such, persons are sometimes described as life tenants also. However, they are not life tenants in the sense that a hirer of the property as a tenant. Therefore, we are in agreement with the learned Counsel of the assessee that there was no landlord v. tenant relationship between the owners and the assessee. Thus, ground No. 5 of the appeal is allowed.
3.6. Ground No. 1 is against the finding of the learned CIT(A), in which he' confirmed taxation of an amount of Rs. 40.00 lakh under the head "capital gains" in respect of receipt of Rs. 60.00 lakh, obtained on relinquishment of the life interest in the property. On the basis of the aforesaid discussion, it may be said that the assessee had transferred her life interest for a valuable consideration, which is liable to be taxed under Section 45 of the IT Act. However, we are also of the view that the cost of this asset was not nil and it is to be worked out on the basis of provisions contained in Schedule - III of the Wealth-tax Act. The assessee is also entitled to substitute this value with fair market value as on 01.04.81 and thereafter index the cost of acquisition. The difference between the consideration received and the indexed cost would amount to capital gains, liable to tax. Thus, this ground of appeal is partly allowed as indicated above.
3.7. Ground No. 6 is against the finding of the learned CIT(A) that the assessee is not entitled to deduction Under Section 54F as she was holding another property on the date of transfer of instantproperty. The case of the learned Counsel was that since income from that property was computed at nil, the assessee was entitled to(examine Under Section 54F. This exemption is available in a. case where the assessee was not owning any other residential house, income from which was chargeable under the head "income from house property", other than the now asset acquired within the meaning of Section 54F. According to the assessee, the annual value of the property owned by her op, the date of surrender life interest was nil in accordance with the provisions of Section 23 of Act Therefore, she satisfies the condition Iaid down in Section 54F. It was pointed out in the appellate order that income from that property was chargeable to income-tax under the head "income from house property", though the computation of income may lead "nil" income. Therefore, he disallowed the claim of the assessee in this regard. This matter has also been considered. The operative words are "chargeable to tax" and these do not include within their ambit a case where the income is chargeable but computation of income leads to nil income. Therefore, ground No. 6 of the appeal is dismissed.
4. In the result, the appeal of the assessee is partly allowed.