Income Tax Appellate Tribunal - Ahmedabad
Amora Chemicals Pvt. Ltd. vs Assistant Commissioner Of Income Tax. ... on 5 July, 1996
Equivalent citations: [1997]60ITD18(AHD)
ORDER
R. K. Bali, A. M.
1. These two cross-appeals, one by the assessee and the other by the Revenue relating to asst. yr. 1986-87, are taken up together and disposed of by a common order for the sake of convenience.
2. ITA No. 2122/Ahd/1991 is the appeal by the assessee wherein the assessee has taken as many as 9 grounds of appeal. However, the only point of dispute projected in these nine grounds is with regard to the action of the Departmental authorities in treating a sum of Rs. 15 lacs received by the assessee-company from L. M. Patel & B. M. Patel (HUF) (hereinafter referred to as 'the HUF') for relinquishment of its tenancy rights in respect of 4th to 8th floors of Suraj Plaza Building, as an amount liable to income-tax subject to the deduction of cost of acquisition of tenancy rights as long-term capital gains.
3. Briefly, the facts are that the assessee-company has acquired the tenancy rights in respect of 4th to 8th floors of Suraj Plaza-I Building as per agreement dt. 1st July, 1978, which was executed on a stamp paper of Rs. 10. In July, 1978, the building of Suraj Plaza was under construction. As per lease agreement dt. 1st July, 1978, the assessee-company entered into a rent agreement with the HUF and acquired the tenancy rights at monthly rent of Rs. 16,480. The company also paid advance of Rs. 6 lacs to the said HUF at an interest rate of 6% per annum. During 1984 the said HUF wanted the said premises in Suraj Plaza-I to be vacated and vacant possession handed over to them by the assessee. Consequently, the board of directors of the assessee-company, viz., Arora Chemicals Pvt. Ltd. resolved vide resolution dt. 10th June, 1984 to relinquish the tenancy rights in respect of 4th to 8th floors of Suraj Plaza-I on a consideration of a sum of Rs. 15 lacs to be paid to the assessee as compensation for such transfer and relinquishment of tenancy rights. Consequent to the above resolution, the assessee-company relinquished the tenancy rights in 1985 and it received the sum of Rs. 15 lacs in the accounting year relevant to asst. yr. 1986-87. In a note appended to the return of income it was stated by the assessee that the aforesaid receipt of Rs. 15 lacs is the capital receipt not liable to income-tax.
3.1 During the course of hearing before the Assessing Officer (AO) as well as before the Dy. CIT under s. 144A, it was admitted that the transfer of the tenancy rights by way of relinquishment under s. 2(47) falls in the previous year relevant to asst. yr. 1986-87. However, it was submitted before the AO as well as before the Dy. CIT that the receipt of Rs. 15 lacs by the assessee-company was not chargeable to capital gains tax as there was no cost of acquisition of the tenancy rights in the hands of the assessee and, accordingly, no capital gains was chargeable with reference to the receipt of Rs. 15 lacs on the basis of the ruling of the Supreme Court in the case of CIT vs. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC). The AO as well as the Dy. CIT, to whom reference was made under s. 144A, did not accept the submissions of the assessee and held that the ruling of the Supreme Court referred to supra was not applicable to the case of the assessee as it related to the transfer of goodwill which is a self-generating asset having no cost of acquisition, whereas in the case of the assessee the cost of acquisition of the tenancy rights cannot be considered as nil. It was held by the AO that the lease/rent agreement dt. 1st July, 1978, was executed on a stamp paper of Rs. 10. The assessee-company also paid advance of Rs. 6 lacs towards the rent/lease rights at 6% per annum and these two items definitely constituted cost of acquisition of the tenancy rights in the assessee's hands. Accordingly, the AO made an addition of Rs. 8,99,990 on account of long-term capital gains on relinquishment of tenancy rights.
4. The assessee appealed and the learned CIT(A) upheld the action of the AO in holding that the amount of Rs. 15 lacs received by the assessee company was a capital receipt liable to tax under the head "long-term capital gains" but it directed the AO to recalculate the cost of acquisition of the capital asset because during the course of proceedings before the CIT(A) it further came to light that the amount advanced by the assessee-company to the HUF was not Rs. 6 lacs but actually it was Rs. 8,50,000 and further this amount of Rs. 8,50,000 was obtained by the assessee-company by getting overdraft facilities from the bank to whom the premises were sublet by the assessee-company for which the assessee paid interest at the rate of 15% per annum. The CIT(A) after referring to the judgment of the Hon'ble High Court in the case of A. R. Krishnamurthy & Anr. vs. CIT (1989) 176 ITR 417 (SC) came to the conclusion that the amount of Rs. 8,50,000 which the assessee has given to the HUF as loan at 6% per annum was an added consideration over and above the lease rent and it can be safely inferred that the losses suffered by the assessee-company for having given Rs. 8,50,000 to the HUF at 6% interest having borrowed the same amount from the bank at 15% interest per annum, was the consideration for the acquisition of the tenancy rights. Accordingly, the CIT(A) directed the AO to find out the difference of such interest in each of these years from the year in which the loan was advanced till the date of transfer of the property and receipt of Rs. 15 lacs. According to the CIT(A), the discounted value of total of this difference in interest for all the years can be regarded as cost of acquisition of the tenancy rights. He accordingly directed the AO to calculate the cost of acquisition in the light of the above remarks after giving an opportunity of being heard to the assessee for working out the discounted value.
5. The assessee is aggrieved with the order of the CIT(A) and has come up in second appeal before us. Shri D. A. Mehta, Advocate, the learned representative of the assessee, submitted that the learned CIT(A) has erred in holding that the transaction in dispute is covered by the ratio of the decision of the Supreme Court in the case of A. Krishnamurthy & Anr. (supra). It was submitted that the CIT(A) has erred in holding that the cost of acquiring tenancy rights by the assessee-company can be evaluated in terms of money. It was submitted that the receipt of Rs. 15 lacs for surrendering tenancy rights was only a capital receipt not liable to income-tax in the hands of the assessee as there was no cost of acquisition of the tenancy rights in the hands of the assessee-company. It was submitted that the case of the assessee was squarely covered by the decision of the Hon'ble Supreme Court in the case of B. C. Srinivasa Setty (supra). Shri Mehta, the learned representative of the assessee, further submitted that in this connection it was very useful to refer to the observations of the Hon'ble Gujarat High Court in the case of Rajabali Nazarali & Sons vs. CIT (1987) 163 ITR 7 (Guj) at page 15 wherein the Hon'ble Gujarat High Court has referred with approval the decision of the Hon'ble Delhi High Court in the case of Bawa Shiv Charan Singh vs. CIT (1984) 149 ITR 29 (Del) wherein, an advocate-assessee, who had taken certain premises on rent without paying any lump sum but while surrendering the tenancy rights of the first floor thereof, he received a sum of Rs. 30,000. The Tribunal held that the tenancy rights being a capital asset and any payment received for the transfer thereof could only be termed as capital receipt and not revenue receipt. Shri Mehta made pointed reference to the case of Bawa Shiv Charan Singh decided by the Delhi High Court referred to in (1984) 149 ITR 29 (Del). Head note at page 30 [(iii) and (iv)]. In the said decision it is held that there are varieties of elements which contributed to the making of the value of the tenancy rights, but there could be no account in value of the factors producing it. It was a composite thing referable in part to its locality, in part to the use to which the premises were put, in part to the nature of the business carried on, if commercial premises, in part to the success of the business conducted, in part to the trend of the customers or litigants, in part to the likelihood of competition and in part to several other unpredictable factors, like whims and eccentricities of persons wanting to acquire the tenancy rights. Accordingly, Shri Mehta submitted, that there could be no value of these tenancy rights in terms of money. Reliance was also placed on the decision of the Supreme Court in the case A. Gasper vs. CIT (1991) 192 ITR 382 (SC) at page 385 wherein, in almost similar circumstances the Hon'ble Supreme Court observed that the amount received on surrendering of tenancy rights was not liable to capital gain tax in view of the decision of the Supreme Court in the case of B. C. Srinivasa Setty (supra) but since this decision was not referred to and could not have been referred to before the Hon'ble Calcutta High Court who decided the case as A. Gasper vs. CIT (1979) 117 ITR 581 (Cal) and no question was raised before the Tribunal as well as before the High Court with regard to the calculation of cost of acquisition of the tenancy rights, the Supreme Court decided the issue against the assessee. He, accordingly, submitted that in view of the decision of the Delhi High Court in Bawa Shiv Charan Singh (supra) as well as the observations of the Supreme Court in the case of A. Gasper vs. CIT (supra) at page 385, the amount of Rs. 15 lacs received by the assessee from the HUF was a capital receipt not liable to tax as there was no cost of acquisition.
6. Shri M. P. Lohia, the learned Departmental Representative on the other hand, strongly relied upon the order of the CIT(A) and submitted that the facts of the case were squarely covered by the decision of the Supreme Court in the case of A. R. Krishnamurthy & Anr. (supra) and the ratio of the decision of the Supreme Court in the case of B. C. Srinivasa Setty (supra) was not at all applicable. It was submitted that the decision of the Delhi High Court in the case of Bawa Shiv Charan Singh vs. CIT (supra) should be considered to have been impliedly overruled by the decision of the Supreme Court in the case of A. R. Krishnamurthy & Anr. (supra) wherein it is specifically held that the cost of acquisition of lease hold rights can be determined. Reliance was also placed on the decision of the Special Bench of the Tribunal in the case of Cadell Weaving Mills Co. Pvt. Ltd. vs. Asstt. CIT (1995) 53 TTJ (Bom) (SB) 538 : (1996) 217 ITR 51 (AT) (Bom) (SB). It was submitted that the Special Bench of the Tribunal has duly considered the decision of the Supreme Court in the case of A. Gasper (supra). Reference was made to the observations of the Special Bench of Tribunal at pages 82 and 88 of the report. Reliance was also placed on the observations of the Supreme Court in the case of CIT vs. Narang Dairy Products (1996) 219 ITR 478 (SC) for the proposition that the definition of "transfer" in s. 2(47) is an inclusive one and does not exclude the contextual or the ordinary meaning of the word "transfer". It was submitted that since there was a transfer within the meaning of s. 2(47) of the tenancy rights, whose cost can be determined as per the ratio of the decision of the Supreme Court in the case of A. R. Krishnamurthy & Anr. (supra), the CIT(A) was perfectly justified in holding that the receipt of Rs. 15 lacs was liable to capital gains tax and he was more than justified in directing the AO to value the cost of acquisition of the tenancy rights as per the directions given in the impugned order. He accordingly supported the order of the CIT(A).
7. Shri D. A. Mehta, the learned representative of the assessee, in rebuttal submitted that the decision of the Special Bench of Tribunal in the case of Cadell Weaving Mills Co. Ltd. (supra) is not applicable to the facts of the case because in the said decision it was held that the amount received by an assessee on the surrendering of tenancy rights is a casual and non-recurring receipt and was liable to income-tax under s. 2(24) r/w s. 10(3) of the Act. It was submitted that in the case of the assessee the AO as well as the CIT(A) both have held that the amount of Rs. 15 lacs received by the assessee was capital receipt chargeable to capital gains tax under s. 45 and if it is now held that it is in the nature of casual and non-recurring receipt as per the ratio of the decision of Special Bench of Tribunal, then, it will tantamount to enhancement of the income by the assessee by the Tribunal although no appeal or cross-objection in this regard was filed by the Revenue which is not permissible in view of the decision of the Supreme Court in the case of State of Kerala vs. Vijaya Stores (1979) 116 ITR 15 (SC) wherein it is held that the Tribunal has no jurisdiction or power to enhance the assessment in the absence of an appeal or cross-objection by the Department. He accordingly submitted that in this view of the matter the decision in the case of Cadell Wvg. Mills Co. Ltd. (supra) cannot be applied to the facts of the assessee's case. Shri D. A. Mehta, the learned representative of the assessee, further submitted that in the case of Cadell Wvg. Mills Co. Ltd. reliance was placed on the decision of the Supreme Court in the case of Anand Nivas Pvt. Ltd. vs. Anandji Kalyanji's Pedhi AIR 1965 SC 414 which has been impliedly overruled by the Supreme Court in the case of Kalyanji Gangadhar Bhagat vs. Virji Charmal & Anr. (1995) 3 SCC 725. As regards the decision in the case of A. R. Krishnamurthy & Anr. (supra), it was submitted that the said decision is distinguishable on facts because there the question was to determine the cost of acquisition of leasehold rights which were embedded in the cost of land (transferred), whereas in the case of the assessee there was no transfer of land/building/floors as such but only the tenancy rights were transferred. He accordingly submitted that the facts of the case are to be governed by the ratio of the decision of the Supreme Court in the case of B. C. Srinivasa Setty (supra) and not by the ratio of the decision of the Supreme Court in the case of A. R. Krishnamurthy & Anr. (supra).
8. We have considered the rival submissions and have gone through the orders passed by the AO as well as the CIT(A). Undisputed facts are that the assessee-company, which deals in manufacture and sale of chemicals, entered into the agreement with the HUF and in terms of the agreement the assessee took on lease from the HUF a partly constructed building on a monthly rent of Rs. 9,970 per floor. The building at the time of agreement was constructed upto 8th floor. It was provided in the agreement that the rent shall be payable by the assessee-company at the said rate for the further floors to be constructed by the HUF. The assessee-company agreed to advance loan of Rs. 6 lacs carrying interest at the rate of 6% per annum. However, actually the assessee-company granted a loan of Rs. 8,50,000 to the HUF and charged interest at the rate of 6% per annum. The assessee-company arranged with the Bank of Baroda an oral agreement for leasing out the said property at higher rent and also got overdraft facilities carrying interest rate of 15% per annum. The income from rent was being treated by the assessee-company as its business income. The company granted loan to the HUF at cheaper rate so that the HUF may be able to construct more floors which could be available to the assessee on the same monthly rent as agreed between the assessee-company and the HUF. The expenses in the form of interest at 15% on loan of Rs. 8,50,000 taken by the company from the Bank of Baroda which was given to the HUF at a cheaper rate of interest of 6% per annum was treated as expenses for business purpose and was allowed as a deduction. It is also worth noting that the assessee-company had not itself occupied all leased floors but had straightaway sublet the same to the Bank of Baroda. In the lease agreement dt. 1st July, 1978, there is no bar against subletting and since immediately after getting the floors on lease, the company sublet the same to Bank of Baroda, it can be inferred that the rent paid by the assessee-company was not only for the use of the premises for its own purpose but also for acquiring right to sublet it to another person for business purpose. As such it has to be held that the acquisition of tenancy rights as per agreement dt. 1st July, 1978 included further right of subletting and the consideration paid was the lease rent and also payment of advance of Rs. 8,50,000 at a cheaper rate of interest, viz., 6% per annum which was taken by the assessee from the Bank of Baroda by way of overdraft facilities at the rate of 15% per annum. In the decision of the Supreme Court in the case of A. R. Krishnamurthy & Anr. (supra) the issue was regarding the chargeability of capital gains in respect of grant of mining lease for ten years. In that case, it was held that what was parted was the right to exploit the land by extracting the clay, which right came directly from the ownership of the land. This right evaluated in terms of money formed part of the cost of acquisition of land. It was held that there is live nexus between the cost of acquisition of the land and the rights granted under the lease. The amount paid for purchasing the land as not only for the cost of acquiring the land but also for acquiring the bundle of rights in the said land including the right to grant lease and since the value of leasehold rights in the cost of acquisition of land being determinable, the provisions under the Act are applicable and s. 45 was considered as being attracted. The Hon'ble Supreme Court at page 421 of the report negatived the contention of the learned counsel for the assessee that conceptually, there is no "cost of acquisition" which is attributable to the right of limited enjoyment transferred by the grant of the lease. The Court held, "..... So far as the apportionment of the cost of acquisition is concerned, it is a question of fact to be determined by the ITO in each case on the basis of evidence. The determination of the cost of the right to excavate clay in the land in terms of money may be difficult but is nonetheless of money value....". Thus, as per the decision of the Supreme Court in the case of A. R. Krishnamurthy & Anr. (supra), the contention of Shri D. A. Mehta, the learned representative of the assessee, that there is no cost of acquisition of tenancy rights, has to be negatived and the valuation of leasehold rights being determinable, the computation provisions under the Act are applicable and s. 45 would be attracted to the facts of the case. The decision in the case of B. C. Srinivasa Setty (supra) is not at all applicable to the facts of the present case.
9. As regards the valuation of the cost of acquisition of tenancy rights we are of the opinion that the CIT(A) has been more than fair to the assessee in restoring the matter to the file of the AO for determining the cost of acquisition of the tenancy rights being the discounted value of total of the differential in interest charged by the assessee from the HUF and paid to the bank by the assessee for all the years, as cost of acquisition of the tenancy rights. Accordingly, we will uphold his order in this regard also. The appeal filed by the assessee is dismissed.
10. ITA No. 2142/Ahd/91 is the appeal by the Revenue wherein the ground taken is as under :
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the lease rent received should be treated as income from other sources."
10.1 The learned representative of the assessee submitted that the issue in dispute is covered in favour of the assessee and against the Revenue as per the decision of Third Member of the Tribunal in the assessee's own case for asst. yrs. 1979-80 to 1981-82 as reported in (1987) 23 ITD 51 (Ahd) which decision was followed by the Tribunal in ITA No. 2890/Ahd/1988 for the asst. yr. 1983-84 vide order dt. 10th Feb., 1992. Respectfully following the said decision of the Tribunal in the assessee's own case supra, we do not find any merit in the appeal filed by the Revenue which is, accordingly dismissed.
11. In the result, both the appeals filed by the assessee as well as by the Revenue are dismissed.