Principal Commissioner Of Incometax - I, Kolkata v. Smt. Shikha Roy

IA NO.GA/2/2021ITAT 162/2021 IN THE HIGH COURT AT CALCUTTASpecial Jurisdiction (Income Tax)ORIGINAL SIDE PRINCIPAL COMMISSIONER OF INCOMETAX - I, KOLKATA -Versus- SMT. SHIKHA ROY Appearance:Mr. Smarajit Roy Chowdhury, Adv.Mr. Arunava Ganguly, Adv....for the appellant.Mr. J.P. Khaitan, Sr. Adv.Mr. Saumya Kejriwal, Adv.Mr. G.S. Gupta, Adv....for the respondent. BEFORE: The Hon’ble JUSTICE T.S. SIVAGNANAM -And- The Hon’ble JUSTICE HIRANMAY BHATTACHARYYA Date : 8[th] February, 2022. The Court : This appeal filed by the revenue underSection 260A of the Income Tax Act, 1961 (the ‘Act’ in brevity) isdirected challenging the order dated 25[th] November, 2020 passed bythe Income Tax Appellate Tribunal, “B” Bench, Kolkata (the‘Tribunal’ in short) in ITA No.1915/Kol/2019 for the assessmentyear 2016-17.The revenue has raised the following substantial questionof law: (i)Whether on the facts and circumstances of thecase the Learned Income Tax Appellate Tribunalis justified in treating the receipts ofcompensation of Rs.10,00,00,000/- for vacatingtenancy to be assessable as “Capital Gains”instead of income under the head “Profit andGains of Business or Profession? standing counsel appearing for the appellant/revenue and Mr. J.P.Khaitan, learned senior standing counsel, assisted by Mr. SaumyaKejriwal, leaned Counsel, appearing for the respondent/assessee.The assessee, an individual, filed a return of income for theassessment year under consideration, AY – 2016-17 declaring atotal income of Rs.6,21,37,340/-. The case was selected forscrutiny and after issuance of notices under Section 143(2) and142(1), the case was discussed with the authorised representativeof the assessee. The assessing officer noted that the assessee hadshown income from rent from house property and long-term capitalgains (LTCG) on sale of tenancy right and interest from fixeddeposits during the year. The assessing officer noted that theassessee sold a tenancy right for a total consideration of Rs.10crores out of which she had claimed deduction under Section 54ECto the tune of Rs.50 lakhs and deduction under Section 54F to thetune of Rs.4,77,95,168/-. The assessee was called upon to producenecessary documents and an agreement dated 8[th] December, 1994 was executed by the assesseee and her son with the landlord wasproduced. The agreement pertains to a flat in Juhu, Maharashtra,Mumbai. This flat was let out to the assessee on a monthly rent ofRs.2,650/- and as per the agreement, the assessee was required topay a sum of Rs.8 lakhs by way of construction loan to thelandlord which loan was repayable with interest at the rate of 4per cent on the expiry of ten years from the date of commencementof the tenancy. By supplementary agreement dated 8[th] December, 1994the assessee/tenant was permitted to sub-let the said flat andalso to transfer the tenancy and also permitted to assign thetenancy to any other person and the landlord was not entitled toterminate the tenancy on any ground except non-payment of rent.The assessee by agreement dated 18[th] February, 2016 transferred theflat in favour of any or other person and received a totalconsideration of Rs.10 crores. The assessee claimed benefit ofLTCG. The assessing officer while completing the assessment byorder dated 23[rd] December, 2018 rejected the claim of the assesseeon the ground that the assessee could not furnish any evidence ofrental payment regarding the claim of tenancy and she did notfurnish details of interest income on the amount of Rs.8 lakhspaid as construction loan. The assessing officer further held thatthe assessee had not paid any price for purchasing the tenancyright neither she could furnish old records as evidence of rentalpayment. The supplementary agreement dated 8[th] December, 1994 was not a registered document. Further, the assessing officer heldthat the tenancy right was not purchased by the assessee nor anyconsideration was given for the purchase of tenancy right and asum of Rs.8 lakhs was given as a loan to the landlord for theconstruction which was refundable to the assessee with interestand, therefore, could not be taken as cost of acquisition of thesaid flat. Therefore, the assessing officer concluded that theamount of Rs.10 crores paid has to be treated as compensation forvacating the tenancy. The assessee filed an appeal before the PrincipalCommissioner of Income Tax (PCIT). The PCIT noted that certaindocuments could not be produced by the assessee at the time ofcompleting the assessment owing to the fact that they are olddocuments and, therefore, called for a remand report. Theassessing officer did not submit the remand report within the timepermitted and, therefore, the PCIT admitted the documents to beplaced before it for consideration. After taking note of theagreement and the various conditions and covenants containedtherein, in paragraph 7 of the order dated 1[st] May, 2019, the PCIThas noted the following facts : “7.I have gone through the order of the ld. A.O. andthe submissions made by our ld. A.R. of the assessee. Thereis no dispute that the assessee had surrendered tenancyrights during the year for a consideration ofRs.10,00,00,000/-. This income was shown as Capital Gains. The ld. A.O. has treated the said income as business income.It may be recalled that vide an Agreement dated 13.05.1992,the assessee Smt. Shikha Roy had obtained tenancy rights,copy of the agreement given during the course of hearing,which stated that the Article of Agreement would be read as08.12.1994 from Mr. Naresh H. Thanawala, who was thelandlord. The assessee, Smt. Shikha Roy, and her son ShriJayanta Roy had obtained the tenancy rights of flat no.1 inJai Hind Co-operative Housing Society Limited at Juhu for amonthly rent of Rs.2,650/-. As per the Tenancy Agreement, theTenant was required to pay a sum of Rs.8,00,000/- foracquisition of tenancy rights by way of construction loand tothe Landlord. The said amount was payable by the Teant withinterest of 4 per cent per annum on the expiry of 10 yearsfrom the date of commencement of the tenancy of the saidflat. BY a Supplemental Agreement dated 08.12.1994 a copy ofwhich was enclosed during hearing, the Tenant was permittedby the Landlord to sub-let the said Flat at such rent asagreed upon. The Tenant, i.e. the assessee was also permittedto assign the tenancy of the said Flat to any other person.Furthermore, by an Agreement dated 08.02.2016, a cpy of whichwas enclosed, between Smt. Shikha Roy and Shri Jayanta Roy ofthe one part and Vaishali Arpan Thanawala on the other part,the tenancy rights over the said Juhu Flat was transferred tothe later for a total consideration of Rs.10,00,00,000/-. Theassessee took and filed the Return of Income in respect ofthe Juhu Flat. Of the proceeds received among others, thesame was invested in REC Bonds to the tune of Rs.50,00,000/-and exemption/deduction was claimed u/s. 54EC of the Income-tax Act, 1961. Further, a sum of Rs.50,00,000/- invested inCapital Accounts Scheme to claim the exemption u/s. 54EC ofthe Income-tax Act, 1961”. After noting the factual position, the PCIT proceeded todecide the question as to whether the surrender of tenancy rightis in the nature of trade or it is a capital asset and whether itwould be assessed to tax under profits and gains of profession orwould be assessed to tax under capital gains. After noting theterms and conditions of the agreement, the PCIT concluded that theconsideration received by the assessee against the surrender oftenancy right is assessable as capital gain and, accordingly,allowed the appeal and reversed the order passed by the assessingofficer. After noting the factual position, the PCIT proceeded todecide the question as to whether the surrender of tenancy rightis in the nature of trade or it is a capital asset and whether itwould be assessed to tax under profits and gains of profession orwould be assessed to tax under capital gains. After noting theterms and conditions of the agreement, the PCIT concluded that theconsideration received by the assessee against the surrender oftenancy right is assessable as capital gain and, accordingly,allowed the appeal and reversed the order passed by the assessingofficer. The revenue carried the matter in appeal before the Tribunal.The Tribunal on its part re-examined the conditions of theagreement and as to how the parties understood the nature oftransaction and found that the payment of Rs.8 lakhs was rightlyclaimed as cost of acquisition in computation of capital gain andthe finding of the assessing officer that the assessee had notpaid any price for purchasing the tenancy right is false. TheTribunal noted the decision of this Court in the case A. GasperVs. CIT 1979 (117) ITR 581 (Cal) wherein it was held that themonthly tenancy of the assessee was a capital asset as definedunder Section 2(14) of the Act. Further, it was held that theassessee’s monthly tenancy right or the leasehold right is acapital asset and on such transfer his rights in it stoodextinguished and the amount received by the assessee must be held to be assessable to tax as capital gains in the hands of theassessee. In the decision of CIT Vs. D.P. Sandu Bros. Chembur (P)Ltd. (2005) 142 Taxman 713 (SC) it was held that the tenancy rightwas a capital asset, surrender of tenancy right was a transfer andthe consideration received thereof was a capital receipt withinthe meaning of Section 45 of the Act. Further, the Court noted thedecision in the case of CIT Vs. B.C. Srinivasa Setty [1981] 128ITR 294 (SC) which was followed by several High Courts and heldthat if the cost of acquisition of tenancy right cannot bedetermined, the consideration received by reason of surrender ofsuch tenancy right could not be subjected to capital gains tax.Further, the Court took note of the circular issued by the CBDTbeing Circular No. 684 dated 10[th] June, 1994, which was issued tomeet the situation created by the decision in B. C. SrinivasaSetty (supra). By Finance Act, 1994, Section 55(2) was amended toprovide the cost of acquisition, inter alia, the tenancy rightcould be taken as nil. By this amendment the judicialinterpretation put on capital assets for the purposes of theprovisions relating to capital gains was met. In the light of the above discussion, we hold that theTribunal rightly dismissed the appeal filed by the revenue and thewe find no grounds to interfere with the same. Accordingly, the appeal filed by the revenueis dismissed and the substantial question of law is answeredagainst the revenue. With the dismissal of this appeal, the stay application (IANo.GA/2/2021) stands closed. (T.S. SIVAGNANAM, J.) (HIRANMAY BHATTACHARYYA, J.) S.Das/ K. Banerjee