M/S.beardsell Ltd v. The Joint Commissioner Of Income-Tax, Special Range-I

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 16.04.2007 Coram : THE HONOURABLE MR.JUSTICE P.D.DINAKARANANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.88 of 2004 M/s.Beardsell Ltd.,No.47, Greams Road,Chennai-600 006. ..AppellantVs The Joint Commissioner of Income-tax,Special Range-I,121, Nungambakkam High Road,Chennai-600 034. ..Respondent Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras Bench 'C', Chennai inI.T.A. No.433(Mds)/99 dated 26.06.2001 for the assessment year 1994-95against the order of Commissioner of Income Tax Chennai in CS.218-i (2)97-98 dated 12.2.99 against order in GI.No. PA 8-B/47-004-C8-7161, dated30.8.2006 on the file of the Deputy Commissioner of Income Tax, SpecialRange-I Madras. For Appellant :Mr.T.R.Senthil KumarFor Respondent :Mrs.Pushya Sitaraman,Sr. Standing Counsel forIncome-tax Department JUDGMENT (Judgment of the Court was delivered byP.P.S.Janarthana Raja, J.) This appeal is filed under Section 260A of the Income Tax Act, 1961by the assessee, against the order of the Income Tax Appellate Tribunal,Madras Bench 'C' in I.T.A. No.433(Mds)/99 dated 26.06.2001. On23.02.2004, this Court admitted the appeal and formulated the followingsubstantial question of law. "Whether on the facts and in the circumstances of thecase the Appellate Tribunal is right in law in holdingthat the sum agreed to be paid to the appellant as sub-lessee by the lessee of the premises for the failure to https://hcservices.ecourts.gov.in/hcservices/ provide alternate accommodation is taxable under thehead Capital Gains, which is prior to the amendment bythe Finance Act, 1995?" 2.The facts leading to the above substantial question of law areas under: This appeal is filed under Section 260A of the Income Tax Act, 1961by the assessee, against the order of the Income Tax Appellate Tribunal,Madras Bench 'C' in I.T.A. No.433(Mds)/99 dated 26.06.2001. On23.02.2004, this Court admitted the appeal and formulated the followingsubstantial question of law. "Whether on the facts and in the circumstances of thecase the Appellate Tribunal is right in law in holdingthat the sum agreed to be paid to the appellant as sub-lessee by the lessee of the premises for the failure to https://hcservices.ecourts.gov.in/hcservices/ provide alternate accommodation is taxable under thehead Capital Gains, which is prior to the amendment bythe Finance Act, 1995?" 2.The facts leading to the above substantial question of law areas under: The assessee is engaged in the manufacture of expanded polytheneinsulation material, marketing of chemicals, motors, engineering productsand also in export business. The relevant assessment year is 1994-95 andthe corresponding accounting year ended on 31.03.1994. The assessee is acompany incorporated under the Companies Act. The assessee filed Returnof income for the assessment year showing total loss at Rs.11,23,596/-.The case was processed under Section 143(1) of the Income-tax Act ("Act"in short) on 12.01.1995 accepting the returned loss. Later, notice underSection 143(2) of the Act was served and the assessment was completed on30.08.1996 under Section 143(3) of the Act, determining the net loss atRs.7,61,580/-. During the course of assessment proceedings, it wasnoticed that an amount of Rs.99,00,000/- was credited in the Profit andLoss Account, under the head "Commission, Fees and Miscellaneous". It wasexplained by the assessee that the said amount had been received by way ofsurrender of tenancy rights and also claimed that this receipt was nottaxable being in the nature of a capital receipt. The contention of theassessee was accepted by the Assessing Officer and hence the said amountof Rs.99,00,000/- was not included in the computation of income. TheCommissioner of Income-tax was of the view that the said assessment orderpassed by the Assessing Officer was erroneous and prejudicial to theinterest of the Revenue and hence proceedings were initiated underSection 263 of the Act. Show Cause Notice was also issued on 12.08.1998calling for the assessee's objections if any, to the proposed revisionunder Section 263 of the Act. The Commissioner of Income-tax was of theview that the order is wrong in view of the decision of the ITAT, Spl.Bench, Mumbai in the case of Cadell Weaving Mill Co. P. Ltd. (217 ITA (AT)51). In that decision, it was held that the amount received by theassessee on surrender of tenancy right, should be considered as casualincome and therefore the same is taxable under Section 10(3) of the Act.In view of the same, the Commissioner of Income-tax held as follows:-"10. On the other hand, the receipt in question isto be considered as income as the said receipt aroseout of an agreement which was arrived at between theassessee, Beardsell Ltd. and the lessee, M/s.FrancisTheodore D'Souza and Mahadeo Soma Tamboskar. The Spl.Bench, Mumbai in the decision cited in 217 ITR ITATReports P.51, had held that the assessee i.e., CadellWeaving Mill Pvt. Ltd. was only a statutory tenant whodid not have any right to further transfer its tenancyright under the terms of the original tenancy agreementand therefore had no transferable right nor any assetwhich it can transfer. It had only a mere personalright which cannot be transferred to another person.Thus the receipt obtained by the assessee towards https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ surrender of his tenancy rights cannot be considered asa capital receipt or capital gain, but can beconsidered merely as receipts which are synonymous withincome. While arriving at this conclusion, the Spl.Bench, ITAT relied on the cases reported in CIT v.Gulab Chand (192 ITR 495 - A11) and the decision of theSupreme Court in A.Gasper vs. CIT (192 ITR 382). Afterconsidering the facts and circumstances of the case,the ITAT, Spl. Bench concluded that sec. 10(3) of theI.T. Act squarely applies to the receipt and the amountof Rs.1.40 crores received by Cadell Weaving Mill Pvt.Ltd. for surrendering its tenanted premises was held asits casual and non-recurring income for the assessmentyear 1990-91. 11. The facts being identical in the assessee'scase, the decision of the Spl. Bench Mumbai reported in217 ITR ITAT Report P.51 is followed and the amount ofRs.99 lacs received by the assessee on the surrender oftenancy rights is held to be in the nature of casualincome chargeable u/s. 10(3) of the Income-tax Act. 12. The assessment for 1994-95 is, therefore,being erroneous and prejudicial to revenue, revisedu/s.263 with a direction to the assessing Officer toassess the amount of Rs.99 lacs received by theassessee on the surrender of tenancy rights."Aggrieved by the order, the assessee filed an appeal to the Income-taxAppellate Tribunal ("Tribunal" in short). The Tribunal dismissed theappeal and held that the amount is taxable on the basis that it results intransfer of capital asset and held as follows:- "9. As observed earlier, notwithstanding theobservation of the Commissioner to the decision of theSpecial Bench, the fact remains that the issue in theinstant case is one of assignment of interest oftenancy etc. in favour of another tenant who perfectedhis title to the tenancy. The Tribunal under sec. 254(1) of the Act is required to pass such orders as itthink fit, meaning thereby if an item of receipt istaxable as income and the authorities have held it astaxable under a particular section, the Tribunal whenfinding that the receipt is taxable, it could hold sothough the section that was referred to by theauthorities may not be applicable. In the instantcase it is not a case of surrender of tenancy right isour finding. The finding is that it is a case ofassignment of rights in tenancy in favour of the thirdtenant for which the assessee was compensated.Therefore, the amounts are taxable on the basis thatit results in transfer of capital asset. The order ofthe Assessing Officer, which did not bring to tax thisamount, is clearly erroneous and prejudicial to theinterests of revenue. We accordingly modify the order 3. of the C.I.T. to the extent observed above and thatthe amount so received would be brought to tax as longterm capital gains and the provisions concerningsections 45 to 55 would apply to the facts of thecase." 3.Learned counsel appearing for the assessee submitted that thecapital gain is not attracted in the assessee's case as the cost ofacquisition of the capital asset is nil and relied on the judgment of theSupreme Court in the case of Commissioner of Income-tax, Bangalore Vs.B.C.Srinivasa Setty reported in 128 ITR 294 to support his contention.Further it is contended that the assessment year involved in the presentcase is 1994-95 which is prior to the amendment of Section 55(2) of theAct and hence no capital gain is attracted. 4.Learned Senior Standing Counsel appearing for the Revenuesubmitted that the Tribunal is right in its finding that it is a case ofassignment of rights in tenancy in favour of the third party for which theassessee was compensated and therefore the amount is taxable on the basisthat it resulted in transfer of capital assets. Hence the order passed bythe Tribunal is in accordance with law. 4.Learned Senior Standing Counsel appearing for the Revenuesubmitted that the Tribunal is right in its finding that it is a case ofassignment of rights in tenancy in favour of the third party for which theassessee was compensated and therefore the amount is taxable on the basisthat it resulted in transfer of capital assets. Hence the order passed bythe Tribunal is in accordance with law. 5.Heard the counsel. M/s.New Sun Mills Co. Pvt. Ltd. owned apiece and parcel of land admeasuring 3609.50 sq. Yards (32485 sq.ft.) atSun Mill Road, Lower Parel, Bombay. By Lease Deed dated 20.06.1961, thesaid land was given on lease for 25 years to the partners of CremaIndustries, namely, Mr.Francis Theodore D'Souza and Mr.Mahadeo SomaTamboskar. The said lease was renewed for a further period of 99 years bya Lease Deed dated 27.01.1988. On 24.09.1971, the assessee entered into alease arrangement with Crema Industries to occupy and use an areameasuring 4945 sq.ft. in Block A of the Sun Mill Compound, Lower Parale,Bombay. The rent payable by the assessee was Rs.1 per sq.ft. per month.The said Lease Agreement was to come into effect on 11.10.1971 and remainin force for a period of 36 months with a option to renew it for a furtherperiod of 36 months on the same terms. The assessee remained inpossession even after the expiry of 72 months from 11.10.1971. On22.01.1993, sub-lessee, the assessee requested the lessee, Mr.FrancisTheodore D'Souza for permission to sub-let a portion of the abovepremises. Permission was given on 29.01.1993 to the assessee to sub-letthe premises. On 10.06.1993, the assessee sub-let 3000 sq.ft. of thepremises to Turel Sales Corporation at a minimum charge of Rs.25,000/- permonth payable quarterly. On 01.12.1993, Mr.Francis Theodore D'Souzarequested the assessee that he need the premises for his own purposes andfurther, he agreed to get an alternate accommodation of equal area in nearabout locality within a reasonable time, failing which he agreed to payadequate compensation. Later a memorandum was entered on 04.01.1994between Mr.Francis Theodore D'Souza (lessee) and the assessee. Clause 2of the memorandum states that the lessee will give alternativeaccommodation within a period of six weeks from that day to the sub-lessee, failing which he will be liable to pay Rs.99,00,000/- to the sub-lessee in lieu of providing alternative accommodation. On 07.03.1994, https://hcservices.ecourts.gov.in/hcservices/ Mr.Francis Theodore D'Souza informed the assessee that he was not able toprovide the alternative accommodation and hence he will arrange to pay thecompensation of Rs.99,00,000/- as agreed in the agreement. Further, heinstructed Mr.A.E.Turel of M/s.Turel Sales Corporation to pay to theassessee on his behalf, Rs.90,00,000/- immediately and the balance ofRs.9,00,000/- after the surrender of the premises. The assessee receivedcompensation and on 31.03.1994, surrendered the premises to Mr.FrancisTheodore D'Souza. The assessee is compensated for surrendering thetenancy right. The finding given by the Tribunal is that it is a case ofassignment of right in the tenancy in favour of the third party in whichthe assessee was compensated and therefore the amount is taxable on thebasis that it results in transfer of capital asset. It is not disputedthat there is no cost for acquisition of the tenancy right. Theassessment year involved in the present case is 1994-95 which is prior tothe amendment to Section 55(2) of the Act. The amended section reads asfollows:- "(2) For the purposes of sections 48 and 49, "cost ofacquisition",- (a) in relation to a capital asset, beinggoodwill of a business, tenancy rights, stage carriagepermits or loom hours,-i) in the case of acquisition of such assetby the assessee by purchase from a previous owner,means the amount of the purchase price; and "(2) For the purposes of sections 48 and 49, "cost ofacquisition",- (a) in relation to a capital asset, beinggoodwill of a business, tenancy rights, stage carriagepermits or loom hours,-i) in the case of acquisition of such assetby the assessee by purchase from a previous owner,means the amount of the purchase price; and ii) in any other case [not being a casefalling under sub-clauses (i) to (iv) of sub-section(1) of section 49], shall be taken to be nil;"The object of the new provision is to expand the scope of the existingprovision so as to include goodwill, tenancy rights, stage carriagepermits and loom hours. Their cost of acquisition should be taken to bethe amount of purchase price if those assets are acquired by purchase andin other cases nil. The amended provision takes effect from 1[st] April 1995.Here we are concerned with the assessment year 1994-95. The Courts heldthat transfer of goodwill and tenancy right are not subject to income-taxas capital gain. In the case of Commissioner of Income-tax, Bangalore Vs.B.C.Srinivasa Setty (128 ITR 294) the Apex Court considered the scope ofSection 45 and Section 48 of the Act and held as follows:- "Section 45 charges the profits or gains arisingfrom the transfer of a capital asset to income-tax.The asset must be one which falls within thecontemplation of the section. It must bear thatquality which brings s.45 into play. To determinewhether the goodwill of a new business is such anasset, it is permissible, as we shall presently show,to refer to certain other sections of the head "Capitalgains". Section 45 is a charging section. For thepurpose of imposing the charge, Parliament has enacteddetailed provisions in order to compute the profits orgains under that head. No existing principle orprovision at variance with them can be applied fordetermining the chargeable profits and gains. All transactions encompassed by s. 45 must fall under thegovernance of its computation provisions. Atransaction to which those provisions cannot be appliedmust be regarded as never intended by s. 45 to be thesubject of the charge. This inference flows from thegeneral arrangement of the provisions in the I.T. Act,where under each head of income the charging provisionis accompanied by a set of provisions for computing theincome subject to that charge. The character of thecomputation provisions in each case bears arelationship to the nature of the charge. Thus, thecharging section and the computation provisionstogether constitute an integrated code. When there isa case to which the computation provisions cannot applyat all, it is evident that such a case was not intendedto fall within the charging section. Otherwise, onewould be driven to conclude that while a certain incomeseems to fall within the charging section there is noscheme of computation for quantifying it. Thelegislative pattern discernible in the Act is againstsuch a conclusion. It must be borne in mind that thelegislative intent is presumed to run uniformly throughthe entire conspectus of provisions pertaining to eachhead of income. No doubt there is a qualitativedifference between the charging provision and acomputation provision. And ordinarily the operation ofthe charging provision cannot be affected by theconstruction of a particular computation provision.But the question here is whether it is possible toapply the computation provision at all if a certaininterpretation is pressed on the charging provision.That pertains to the fundamental integrality of thestatutory scheme provided for each head. The point to consider then is whether if theexpression "asset" in s. 45 is construed as includingthe goodwill of a new business, it is possible to applythe computation sections for quantifying the profitsand gains on its transfer. The point to consider then is whether if theexpression "asset" in s. 45 is construed as includingthe goodwill of a new business, it is possible to applythe computation sections for quantifying the profitsand gains on its transfer. The mode of computation and deductions set forthin s. 48 provide the principal basis for quantifyingthe income chargeable under the head "Capital gains".The section provides that the income chargeable underthat head shall be computed by deducting from the fullvalue of the consideration received or accruing as aresult of the transfer of the capital asset: "(ii) the cost of acquisition of the capitalasset..." What is contemplated is an asset in theacquisition of which it is possible to envisage a cost.The intent goes to the nature and character of theasset, that it is an asset which possesses the inherent https://hcservices.ecourts.gov.in/hcservices/ quality of being available on the expenditure of moneyto a person seeking to acquire it. It is immaterialthat although the asset belongs to such a class, itmay, on the facts of a certain case, be acquiredwithout the payment of money. That kind of case iscovered by s. 49 and its cost, for the purpose of s.48, is determined in accordance with those provisions.There are other provisions which indicate that s. 48 isconcerned with an asset capable of acquisition at acost. Section 50 is one such provision. So also issub-s. (2) of s. 55. None of the provisions pertainingto the head "Capital gains" suggests that they includean asset in the acquisition of which no cost at all canbe conceived. Yet there are assets which are acquiredby way of production in which no cost element can beidentified or envisaged. From what has gone before, itis apparent that the goodwill generated in a newbusiness has been so regarded. The elements whichcreate it have already been detailed. In such a case,when the asset is sold and the consideration is broughtto tax, what is charged is the capital value of theasset and not any profit or gain." In view of the observation made by the Apex Court, the inevitableconclusion is that the amount received by the assessee not taxable underthe capital gains. 6.The Commissioner of Income-tax has set aside the order of theassessment under Section 263 of the Act on teh ground that the order iserroneous and prejudicial to the interest of the Revenue in view of thedecision of Special Bench, Mumbai in the case of Cadell Weaving Mill Co.P. Ltd. (217 ITA (AT) 51). The said Special Bench held that amountreceived on surrender of the tenancy right is assessable as casual incomeunder Section 10(3) of the Act. Aggrieved by that order, the assessee inthat case, filed an appeal to the Bombay High Court. The Bombay HighCourt considered the scope of Section 10(3) and also Section 45 of the Actand held that any amount received on transfer of a capital asset is liableto be taxed in accordance with the specific provisions of Section 45 toSection 55 of the Act and if any amount of capital gain is not taxable ascapital gain for any reason, then, that amount cannot be treated as acasual and non-recurring receipt under Section 10(3) of the Act becauseSection 10(3) refers to types of income which do not form part of totalincome. Section 10(3) does not apply to capital receipts. The saidBombay High Court judgment is reported in 249 ITR 265. Aggrieved by theorder of the Bombay High Court, the Revenue preferred an appeal to theSupreme Court. The said judgment is reported in 273 ITR 1, wherein it washeld that the tenancy right is a capital asset and also the surrender ofthe tenancy right amounts to transfer and hence the consideration receivedis a capital receipt within the meaning of Section 45. Further it wasalso held that the amendment to Section 55(2) takes effect from 01.04.1995and applies only in relation to the assessment year 1995-96 and subsequent https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ assessment years. Further, the Supreme Court, by following its earlierdecision in the case of Commissioner of Income-tax, Bangalore Vs.B.C.Srinivasa Setty cited supra, held that till the amendment in the year1995, the law was that if the cost of acquisition of a capital asset couldnot in fact be determined, the transfer of such capital asset would notattract capital gains. 7.By following the Supreme Court judgments cited supra and alsotaking into consideration the amended provision of Section 55(2) of theAct, we are of the view that the Tribunal erred in holding that thecompensated amount received by the assessee is subject to capital gainsunder the Income-tax Act. 8.In view of the foregoing reasons, we answer the question of lawin favour of the assessee and against the Revenue. Accordingly, the taxcase is allowed. No costs. km Sd/Asst. Registrar /true copy/ To Sub Asst.Registrar 1.The Joint Commissioner of Income-tax,Special Range-I,121, Nungambakkam High Road,Chennai-600 034. 2. The Assistant Registrar of Income Tax,Rajaji Bhavan, Besant Nagar, Chennai. 3. The Commissioner of Income Tax,No. 121, Mahatma Gandi Road, Chenai. 4. The Deputy Commissioner of income Tax,Special RangeI Madras.+ One cc to m/s Pusya Sitaraman, Advocate sR 24931+ One cc to M/s M. Uttam Reddy, Advocate s?R 24670MBS (co)sg 21/5/07 T.C.(A) No.88 of 2004 16.04.2007