COMMISSIONER OF INCOME TAX, MUMBAI v. D.P. SANDU BROS. CHEMBUR (P) LTD

Citation: [2005] 1 S.C.R. 895

Court: Supreme Court of India

Bench: RUMA PAL, ARIJIT PASAYAT, C.K. THAKKER

Case summary

COMMISSIONER OF INCOME TAX, MUMBAI v. D.P. SANDU BROS. CHEMBUR (P) LTD.pdf

Judgment text

>- _/ COMMISSIONER OF INCOME TAX. MUMBAI v. ~ D. P. SAN DU BROS. CHEMBUR (P) LTD. JANUARY 3I, 2005 ·.. [RUMA PAL, ARIJIT PASAYAT AND CK TEAKKER, JJ. ] Income Tax Act, 1961 (Pi"ior to 1995 Amendment)-Sections ! 0(3), 14, 45 and 56-Capital Gains Tax - Liability-On the amount received against surrender of tenancy rights-Stand of Revenue before Court that the . cost of acquisition was incapable of being ascertained-Liability negated by Courts below-On appeal, held: Though cost of acquisition of tenancy right is ascertainable assessee not liable to tax in view ofthe stand ofRevenue-The income being capital receipt and assessable only under Item E ofSection 14, cannot be taxed under Section I0(3) either-~(the income is included in any one ofthe heads, it cannot be brought to tax under the residuary provisions of Section 56. ... _, Respondent-assessee entered into lease agreement with lessor for 50 years.

He prematurely surrendered the tenancy rights to the lessor and in lieu of that received an amount. The amount was credited to reserve and surplus account in the Assessee's return for the assessment year 1987- 88; But the same was disallowed by Revenue holding that the amount was taxable as "income from other sources" under Section 10(3) r/w Section 56 of Income Tax Act, 1961. In Assessee's appeal Revenue Authority held him liable to pay capital gains on the amount. Tribunal in view of amendment to Section 55(2) of the Act in 1995 held that the assessee did ' >- not incur any cost to acquire the leasehold rights and that if at all any cost had been incurred it was incapable of being ascertained. Therefore, ':> since the capital gains could not be computed as envisaged in Section 48 of Income Tax Act, Capital gains earned by the assessee was not exigible to tax. Appeal of Revenue was dismissed by High Court.

'' On appeal, Revenue contended that surrender value of tenancy rights was chargeable to capital gains under Section 45; and that even if it was ~, not chargeable, the same was liable to be taxed as "income from other sources" under Section 10(3) r/w Section 56 of the Act. The connected A'. , appeals also raised identical issue. Dismissing the appeals, the Court HELD : I. A tenancy right is not a capital asset of such a nature that the actual cost on acquisition could not be ascertained as a natural legal corollary. A tenancy right is acquired with reference to a particular date. It is also possible that it may be acquired at a cost. It is ultimately a question of fact. In the present case, however, the Department's stand before the High Court was that the cost of acquisition of the tenancy was ihcapable of being ascertained. In view of the stand taken by the Department before the High Court the decision of the High Court on this issue is upheld. (900-F-H; 901-A) A. R.

Krishnamurthy and Ors. v. Commissioner ofIncome Tax, Madras, (1989) 176 ITR 417; Bawa Shiv Charan Singh v. Commissioner ofIncome Tax, Delhi, (1984) 149 ITR 29; The Commissioner ofIncome Tax v. Mangtu Ram Jaipuria, (1991) 192 ITR 533 (Cal. ); Commissioner ofIncome Tax v. Joy Ice Cream (Bang) Pvt. ltd. , (1993) 2001 ITR 895 (Kar. ); Commissioner of Income Tax v. Markapakula Agamma, (1987) 165 ITR 386 (A. P. ) and Commissioner ofIncome Tax v. Merchandisers (P) ltd. , (1990) 182 ITR 107 (Ker. ), referred to. 2. 1. It cannot be said that even if the income cannot be chargeable under Section 45 of Income Tax Act, 1961, because of the inapplicability of the computation provided under Section 48, it could still impose tax under the residuary head. If the income cannot be taxed under Section 45, it cannot be taxed at all. (902-B-C( S. G. Mercantile Corporation (P) Ltd. v. Commissioner ofIncome Tax, Calcutta, (1972) 83 ITR 700; United Commercial Bank ltd. v. Commissioner ofIncome Tax ltd.

, West Bengal, (1957) 32 ITR 688; East India housing and land Development Trust ltd. v. Commissioner ofIncome Tax, West Bengal, (1961) 42 ITR 49 and Commissioner ofIncome Tax v. Chugandas and Co. , ,. (1964) 55 ITR 17, relied on. 2. 2. If the income is included under any one of the heads, it cannot be brought to tax under the residuary provisions of Section 56. A tenancy right is a capital asset the surrender of which would attract Section 45 so that the value received would be a capital receipt and assessable if at all only under Item E of Section 14. That being so, it cannot be treated as a C. l. T. v. D. P. SANDU BROS. CHEMBUR (P) LTD. [RUMA PAL, J. ] 897 . f casual or non recurring receipt under Section 10(3) and be subjected to tax under Section 56. It would be illogical and against the language of J s~ction 56 to hold that everything that is exempted from capital gains by statute could be taxed as a casual or non recurring receipt under Section 10(3) read with Section 56.

(901-H; 902-A-BI -. Nalinikanl Ambalal Mody v. S. A. L. Narayan Row, CIT (1966) 61 ITR 428, 432, 435, relied on. A. Gasper v. Commissioner of Income Tax, (1991) 192 ITR 382, referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2335 of2003. From the Judgment and Order dated 6. 2. 2001 of the Bombay High Court in I. T. A. No. 262 of 2000. WITH Civil Appeal No. 2333 of 2003. -t- _, C. A. Nos. 2334, 2336-2338, 4468/2003, 1387, 6996-6997/2004 and 801 of 2005. Mohan Parasaran, Additional Solicitor General, Preetesh Kapur and B. V. Balaram Das for the Appellants. Joseph Vellappally, Ms. Ruby Singh Ahuja, Ms. Saloni Gupta, Mrs. Manik Karanjawala, Ms. Nandini Gore, Rustom B. Hathikhanawala, Annam D. N. Rao, Jay Savla and Ms. Meenakashi for the Respondents. ~ ' The Following Judgement/Order of the Court was delivered by ~ RUMA PAL, J.

The primary question involved in this appeal is whether the amount received by the respondent-assessee on surrender oftenancy rights ' is liable to capital gains tax under Section 45 of the Income tax Act, 1961. The assessment year in question is 1987-88. The lease agreement was entered in 1959 for 50 years under which an annual rent was paid by the lessee to the lessor. The lease would have continued till 2009. During the relevant previous year, in March 1986, the respondent surrendered its tenancy right to its lessor prematurely. In consideration for such premature tennination, the lessor paid the lessee a sum of Rs. 35 lakhs. ""\... In the assessee's return the sum of Rs. 35 lakhs had been credited to its reserve and surplus account. This was disallowed by the Assessing Officer \. who held that the amount of Rs. 35 lakhs was taxable as "income from other sources" under Section I0(3) read with Section 56.

The assessee appealed to the Commissioner of Income Tax (Appeals) who came to the conclusion that the assessee was liable to pay capital gains on the amount of Rs. 35 lakh after deducting an amount of Rs. 7 lakhs as the cost of acquisition. The Commissioner had determined the cost of acquisition at Rs. 7 lakhs on the basis ofthe market value ofthe property as on 1. 4. 1974. Both the Department t and the assessee challenged . the decision of the Commissioner before the Tribunal. The Tribunal relied upon the decision of this Court in Commissioner of Income Tax v. Srinivasa Setty, 128 ! TR 294 = (1981] 2 SCC 460 as well as the amendment to Section 55(2) of the Act in 1995 and held that the assessee did not incur any cost to acquire the leasehold rights and that if at all any cost had been incurred it was incapable of being ascertained.

It was therefore held that since the capital gains could not be computed as envisaged in Section 48 of the Income Tax Act, therefore capital gains earned by the assessee if any ·jwas not exigible to tax. The Department preferred an appeal before the High Court. The High Court dismissed the appeal. Being aggrieved by the decision of the High Court, this further appeal has been preferred by the Department. The Department has contended that the surrender value of the tenancy rights was chargeable to capital gains under Section 45 of the Act. If not, it was liable to be taxed as 'income from other sources' under Section 10(3) read with Section 56 of the Act. Section 2(24)(vi) defines 'income' as including "any capital gains chargeable under Section 45".

Section 45 provides that any profits or gains arising from the transfer of a capital asset effected in the previous year is chargeable to income tax under the head 'capital gains' and is deemed to be the income of the previous year in which the transfer took place, subject to certain exceptions which are not material in this case. Section 48 provides for the mode of computation of income chargeable under the head 'capital gains'. The method of computation prescribed is by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, certain prescribed amounts including the cost of acquisition of the C. l. T. 1·. D. P. SANIJL; BROS. CHEMlllJR (C) Income from house property; (D) Profits and gains and business or profession; (E) Capital gains; (F) Income from other sources unless otherwise, provided in the Act.

Section 56 provides for the chargeability of income of every kind which has not to be excluded from the total income under the Act, only if it is not chargeable to income tax under any of the heads specified in Section 14 items A to E. Therefore, if the income is included under any one of the 902 SUPREME COllRT REPORTS [200511 S. C. R. heads, it cannot be brought to tax under the residuary provisions of Section 56. There is no dispute that a tenancy right is a capital asset the surrender of which would attract Section 45 so that the value received would be a capital receipt and assessable if at all only under Item E of Section 14. That being so, it cannot be treated as a casual or non recurring receipt under Sectio•. i I0(3) and be subjected to tax under Section 56.

The argument of the appellant that even if the income cannot be chargeable under Section 45, because of the inapplicability of the computation provided under Section 48, it could still impose tax under the residuary head is thus unacceptable. If the income cannot be taxed under Section 45, it cannot be taxed at all. (See: S. G. Mercantile Corporation (P) ltd. v. Commissioner of Income Tax, Calcutta, (1972) 83 ! TR 700). Furthermore, it would be illogical and against the language of Section 56 to hold that everything that is exempted from capital gains by statute could be taxed as a casual or non recurring receipt under Section I0(3) read with Section 56. We are fortified in our view by a similar argument being rejected in Nalinikant Ambalal Mody v. S. A. l. Narayan Row CIT, (1966) 61 ITR 428,432,435. The appeal is accordingly dismissed without any order as to costs. ORDER Leave granted in special leave petition. In view of our judgment passed in Civil Appeal No.

2335 of 2003 - Commissioner of Income Tax, Mumbai v. D. P. Sandhu Chembur (P) ltd ··-' today these appeals are dismissed. K. K. T. Appeals dismissed.