Kerala High Court
Commissioner Of Income Tax vs M. Appukutty on 20 August, 2001
JUDGMENT S. Sankarasubban, J.
1. This Income-tax Reference is at the instance of the Revenue. The question of law referred to this Court under Section 256(1) of the income-tax Act is as follows:
"Whether, on the facts and in the circumstances of the case, was the Tribunal right in upholding the assessee's claim that Rs. 1 lakh received as per agreement dated 3.7.1986 as consideration for transfer of possession of shop No. 9/866, is exempt and thus deleting the same from the computation of capital gains arising during the year on the basis of shop Nos. 9/865 and 9/866?"
The facts of the case are as follows:
2. One Appukutty was the Managing Partner of a partnership firm, M/s. M. Appukutty. Originally, it was a proprietary concern. It was converted into a partnership only in 1964. Appukutty was a tenant of shop No. 9/866 from 1941. By document No. 2225 of 1960, Appukutty bought the jenomom right of shop 9/866 and the adjacent shop No. 9/865 for consideration of Rs. 10,800/-. The Firm was in possession of building 9/866. By agreement dated 3.7.1986, the possessory right of shop No. 9/866 was transferred by the Firm in favour of one Mohammed Berami and others for a consideration of Rs. 1,00,000/-. By another sale deed executed by Appukutty the right over shop Nos. 9/865 and 9/866 was sold for Rs. 90,000/-.
3. In the return of income for the assessment year 1987-88, the Firm did not include Rs. 1,00,000/- received for the transfer of the possessory right of shop No. 9/866 for computation of capital gains on the ground that there was no cost of acquisition for this item of property as it was a self-generated asset. But the Assessing Officer rejected this contention and included the amount of Rs. 1,00,000/- for computation of capital gains.
4. The assessee, aggrieved by the order, disputed the matter in appeal before the Deputy Commissioner of Income Tax (Appeals), Calicut. The Deputy Commissioner did not agree with the Assessing Officer. He was of the view that no capital gains can be assessed regarding the transfer of possession. The matter was taken before the Tribunal by the Revenue. The Tribunal held that the possessory right over the property was there at the time of acquisition of the property.
5. Copies of relevant documents were produced. The particular document by which possession was transferred is the document dated 3.7.1986, i.e. with regard to shop No. 9/866. It is an agreement executed by the Firm, represented by its partners in favour of one K.V. Ahammed Barami. The document says thus:
"Whereas shop room bearing No. 9/866 situated in Big Bazaar, Nagaram amsom and desom belongs to No. 1 amongst us (No. 1 is Appukutty) in jenomom right and we are conducting business therein as partners and the same is in our exclusive possession.
AND WHEREAS we have decided to sell the possession right that we have along with No. 1 in the said shop room retaining the jenomom right through mediators for a consideration of Rs. 1,00,000/- (Rupees one lakh only)".
In the body of the document, it is stated that: "In consideration of Rs. 1,00,000/- fixed for delivering the possession of the said shop room paid by you as per cheque No. 009155 dated 27.6.86 drawn on Chartered Bank for a sum or Rs. 1,00,000/- the receipt of which we do hereby acknowledge". Copy of document dated 30.8.1960 was produced, which shows that Appukutty was in possession of Shop No. 9/866. The consideration shown in Rs. 10,000/-. Copy of partnership deed dated 1.4.1962 was also produced. It shows that the business of the Firm shall be carried on at No. 9/590, Big Bazar, Calicut. Subsequently, that partnership was reconstituted by another deed dated 2.3.1985. It shows that the business of the Firm shall be carried on in No. 9/866. Thus,it is clear that the Firm was in possession of the building. Learned counsel for the assessee submitted that the building was in possession of the original partner. It was not acquired by paying any consideration and so there was no cost for acquiring possessory right and hence, he contended that no capital gain arises from that. Section 45(1) of the Income Tax Act reads thus: "Any profits or gains arising from the transfer of a capital asset effected in the previous years shall, save as otherwise provided in Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H 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" Capital asset is defined in Section 2(14) of the Income Tax Act. Section 48 of the Act deals with mode of computation. It says that 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 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 asset and the cost of any improvement thereto."
6. In Commissioner of Income Tax, Bangalore v. B.C. Srinivasa Setty, 128 ITR 294, the Supreme Court had occasion to decide the question whether the transfer of goodwill come within the meaning of transfer of capital assets. In that case, their Lordships dealt with Section 45 of the Act and held as follows: "Section 45 charges the profits or gains arising from the transfer of a capital asset to income tax. The asset must be one which falls within the contemplation of the section. It must bear that quantity which brings Section 45 into play. To determine whether the goodwill of a new business is such an asset, it is permissible, as we shall presently show, to refer to certain other sections of the head "Capital gains". Their Lordships further went on to hold as follows: "All transactions encompassed by Section 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by Section 45 to be the subject of the charge. This inference flows from the general arrangement of the provisions in the I.T. Act, where under each head of income the charging provision is accompanied by a set of provisions for computing the income subject to that charge." Regarding the question of cost of acquisition, the Supreme Court held as follows: "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 is an asset which possess 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 a certain case, be acquired without the payment of money". So far as that case is concerned, the Supreme Court held that in the case of goodwill generated in a new business it is not possible to determine the date when it comes into existence. The date of acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains.
7. Another case referred t us is the decision reported in A.R. Krishnamoorty and Anr. v. Commissioner of Income Tax, Madras, 176 ITR 417. In that case, the appellant a body of individuals, purchased two pieces of land in 1966 at a price of Rs. 27,600/-. In 1970 it granted a mining lease to a private company to extract clay for a period of 10 years at a premium of Rs. 5 lakhs in addition to payment of royalty. The Income Tax Officer determined a sum of Rs. 4,82,960/- as long-term capital gains after determining 5/8ths of the price of the land as cost of acquisition of the leasehold interest. The question arose whether there is any capital gains. Dealing with the contention, the Supreme Court held as follows: "As regards the first contention, Section 2(14) of the Act defines "capital asset" as "property of any kind held by an assessee". What is parted with under the terms of the lease deed is the right to exploit the land by extracting clay, which right directly flows from the ownership of the land. The said right, evaluated in terms of money, forms part of the cost of acquiring the land." The decision reported in Commissioner of Income Tax v. Merchandisers (P) Ltd., 182 I.T.R. 107 is decision by this Court. There, what happened was that the assessee stopped his business and vacated the business premises, which it had taken on rent in 1966 and received Rs. 38,300/- from the vendee of the landlord as consideration for vacating the premises. The Income Tax Officer assessed the said amount to tax as a trading receipt. The Commissioner of Income Tax (Appeals) held that the consideration received was a capital receipt and remanded the matter to the Income Tax Officer. On appeal to the Tribunal both by the Revenue and the assessee, the Tribunal upheld the finding of the Commissioner of Income Tax (Appeals) that the amount received constituted a capital receipt on the ground that the premises taken on lease for business by the assessee were surrendered to the vendee of the landlord and not to the landlord and so the amount received was not relatable to the business activity carried only the assessee. The Tribunal also held that no tax on capital gains could be levied on the amount of consideration since there was no cost of acquisition for the transfer of the tenancy right. Regarding the question whether the amount received by the assessee was liable to capital gains, the court held that the consideration received by a tenant for parting with the tenancy right is not exigible to tax as capital gains in cases where no cost of acquisition for the tenancy can be predicted. Therefore, the Tribunal was justified in holding that no tax on capital gains was leviable on the amount of consideration received on the transfer of the tenancy right. In that decision, this Court mainly referred to the decision of the Delhi High Court reported in Bawa Shiv Charan Singh v. C.I.T., 149 I.T.R. 29. In that case, the Delhi High Court held as follows: "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...." The Calcutta High Court had occasion to decide a similar question in Commissioner of Income Tax v. Octavious Steel and Co. Ltd. 221 I.T.R. 810. In that case, the court held as follows: "the asset in question being a tenancy right, the value of such a right is unascertainable whatever expenditure might have been incurred on stamps and registration. There was no means by which the cost of the tenancy right itself, which was increasing in value overtime, could ever be ascertained nor could the cost of improvement in such asset be determined. The tenancy right was acquired by the assessee without any expenditure incurred by it."
8. So far as this case is concerned, Appukutty was in possession of the building as tenant and he was conducting his proprietary concern in that building. That was converted into partnership. Thus, the partnership came into possession of the building in 1962. Apparently, no amount was paid for getting possession. It can be said to be as self-generated asset. It is true that possessory right is different from tenancy right. Salmond on Jurisprudence, 12th Edition at page 266, it is stated as follows: "Possession differs from ownership in another quite different respect. Ownership, as we saw, consists of a combination of legal rights, some or all of which may be present in any particular instance; and such rights imply the existence of legal rules and a system of law. With possession this is not so. A possessor is not so much one who has certain rights as one who actually has possession. Whether a person has ownership depends on rules of law; whether he has possession is a question that could be answered as a matter of fact and without reference to law at all". According to us, there is no guideline on the basis of which the right can be valued. Further, in this case, it cannot be said that any cost was incurred for acquiring possessory right.
9. In the above view of the matter, we answer the question of law referred to us in the affirmative and against the Revenue.