A.R. Krishnamurthy and A.R. Rajagopalan vs Commissioner of Income Tax, Madras

V. Ramaswami, J.—The assessee, a body of individuals, filed a return for the assessment year 1971-72, admitting a total income of Rs.

43,953 from business and other sources. During the curse of the assessment proceedings, the ITO noticed that the assessee had purchased an

extent of 11.23 acres of land for Rs. 12,700 on October 17, 1966, and another extent of 3.32 acres on May 31, 1966, for a sum of Rs. 14,562

and thus they owned an extent of 14.55 acres costing about Rs. 27,260. He further noticed that by what is styled an instrument of lease-cum-

licence, dated 10th September, 1970, they granted a mining lease in favour of M/s. Sri Krishna Tiles & Potteries (Madras) Private Ltd.

(hereinafter called ""the company""), an allied concern of the assessee. Under the document, the lessee had to pay a premium or salami of Rs. 5

lakhs in addition to the payment of a royalty calculated at Rs. 12 per 100 cubic feet of clay extracted by the lessee, subject to a minimum royalty of

Rs. 60,000 per year. The lease was for a period of ten years from 10th September, 1970, with a clause for renewal at the expiry of the term of the

lease on such terms as may be mutually agreed upon. Before the ITO, the assessee contended that though a grant of the lease of the land may

constitute ""transfer"" within the meaning of s. 45 of the I.T. ACt, in view of the decision in COMMISSIONER OF Income Tax, MADRAS Vs. K.

RATHNAM NADAR., , no capital gains would arise for taxation. The ITO overruled this objection in the view that the entire rights of which the

leasehold right in one were in part acquired by the assessee for a consideration of Rs. 27,260 and that the cost of the leasehold right imbedded in

such cost does not mean that there is no cost in this regard. The ITO then proceeded to work out the cost of such leasehold interest. He found that

if the entire property was to be sold, the fair market value would amount to Rs. 8 lakhs. The leasehold interest was transferred for Rs. 5 lakhs. He,

therefore, came to the conclusion that 5/8ths of the total cost of acquisition would represent the leasehold value. Accordingly, he worked out the

cost of acquisition of the leasehold right at 5/8ths of Rs. 27,260, namely, Rs. 17,040 and after reducing this cost from Rs. 5 lakhs, brought the

balance of Rs. 4,82,960 as long-term capital gains.

The assessee preferred an appeal to the AAC. Before the AAC, in addition to contending that the rights transferred under the document cannot

be considered to be a capital asset, it was also contended that there was no transfer of any capital asset. The AAC held that the term ""property

would include, in the case of land, the right to enjoy such land and there was a transfer for a consideration of Rs. 5 lakhs of such right of enjoyment

in the land and that, therefore, it is a case of transfer of a capital asset. He then proceeded to consider the cost of acquisition of such right and held

that, on the facts of the case, the cost for the purpose of ascertaining the capital gains would be the sum of Rs. 27,260 and did not approve of the

manner of ascertaining the cost of leasehold right as found by the ITO in the assessment order.

The assessee preferred an appeal to the Tribunal. The Tribunal treated the case as if there was a transfer of a leasehold interest, that the term

capital assets"" in s. 2(14) would include a leasehold interest as held in TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income

Tax, BIHAR AND ORISSA., , and that, therefore, s. 45 was attracted. On the further finding that the sum of Rs. 5 lakhs was paid as

consideration for the transfer of such leasehold interest in favour of the company and that the principle in COMMISSIONER OF Income Tax,

MADRAS Vs. K. RATHNAM NADAR., will not be applicable to the facts of the case, the Tribunal confirmed the order of the AAC and

dismissed the appeal.

At the instance of the assessee, the following two questions have been referred by the Tribunal under s. 256(1) of the Act :

Whether, on the facts and in the circumstances of this case, the instrument of lease dated September 10, 1970, effected the transfer of a capital

asset within the meaning of s. 45 of the Income Tax Act, 1961, and, accordingly, liable to capital gains tax ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the cost of leasehold right is capable of

valuation and, as such, capital gains can be computed ?

As already stated, the document dated 10th September, 1970, is styled as an instrument of lease-cum-licence under which the assessee granted

a lease-cum-licence to the company to extract clay from the schedule lands in consideration of the payment of Rs. 5 lakhs (rupees five lakhs only)

as and by way of premium or salami for a period of 10 years"". The other clauses in the deed provided that the company shall pay royalty

calculated at Rs. 12 (rupees twelve only) per 100 cubic feet of clay, extracted by the company subject to a minimum royalty of Rs. 60,000 per

year. The company shall be entitled to use the land for extracting clay up to the available depth. The company was also permitted to sub-lease the

right granted under the document after obtaining the written consent of the assessee. The period of the lease was 10 years commencing from 10th

September, 1970, with a right to the company to get a renewal of the lease at the expiry of the term of the lease on such terms which may then be

mutually agreed upon. The default clause provided that in the event of the company failing to pay the royalty as per the terms and conditions of the

document and within the time stipulated therein, the assessee shall be at liberty to terminate the lease-cum-licence and re-enter the property.

The learned counsel for the assessee contended that the right conferred under the lease on the company is a right to enjoy the property and not

a full right in the hand itself. Even that right was not an indefeasible right but it was a right to be in possession for a period of ten years subject to

cancellation even within that period on certain situations. No title in the property or any portion of property as such was transferred. So far as the

assessee is concerned, the ""capital asset"" in his hands is the land and each one of the rights in respect of that land owned cannot be treated as

separate and distinct ""capital assets"". In the circumstances, therefore, it cannot be considered that the right conferred on the company was a

capital asset"" in the hands of the assessee within the meaning of s. 2(14) of the Act. He further contended that even it it were to be held that the

right to possession and enjoyment vested in the owner can be separated from ownership and treated as a separate capital asset of the owner, there

was no transfer of such capital asset in favour of the company within the meaning of s. 2(47) of the Act. According to the learned counsel, the

definition in s. 2(47) of the Act, though in form appears to be an inclusive definition the words ""sale, exchange or relinquishment of the asset or

extinguishment of any rights therein or the compulsory acquisition thereof under any law"" are illustrative and that the definition is exhaustive. So

construed, unless it is a transaction of sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory

acquisition, the transaction could not be treated as a ""transfer"" of a ""capital asset"". The lease deed of the type with which we are now concerned is

such that it cannot be treated as amounting to a transfer of a capital asset.

The relevant portion of s. 2(14) defines ""capital asset"" as meaning ""property of any kind held by the assessee, whether or not concerned with his

business or profession"". The definition excludes certain categories of assets with which we are not concerned. Under s. 45 any profits or gains

arising from the transfer of a capital asset effected in the previous year, shall 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. ""Transfer"" is defined in s. 2(47) and states that ""`transfer'', in

relation to a capital asset includes the sale, exchange or relinquishment of an asset or the extinguishment of any rights therein or the compulsory

acquisition thereof under any law"". Section 105 of the Transfer of Property Act defines a lease of immovable property as ""a transfer of a right to

enjoy such property, made for a certain time, express or implied or in perpetuity, in consideration of a price paid or promised, or of money, a

share of crops, service or any other thing of value to be rendered periodically or on specified occasions to the transferor by the transferee, who

accepts the transfer on such terms. The transferor is called the lessor the transferee is called the lessee, the price is called the premium and the

money, share, service or other thing to be so rendered is called the rent"". A lease thus consists of a right to the possession and use of the property

owned by some other person. It is an outcome of the separation of ownership and possession. The lessor of the land is he who owned and

possessed it, but has transferred the possession of it to another. The price paid for the transfer of possession or the right to enjoy the property is

called the premium under s. 105 of the Transfer of Property Act. The periodical payments made for the continuous enjoyment of the benefits under

the lease are called rents or royalties.

In one of the earliest decisions in Kamakshya Narian Singh v. CIT [1943] 1 ITR 513 the Privy Council, dealing with leases for mining, held thus

(p. 519) :

The payments which under the leases are exigible by the lessor may be classed under three categories : (i) the salami or premium; (ii) the minimum

royalty; (iii) the royalties per ton. The salami has been,rightly in their Lordships'' opinion, treated as capital receipt. It is a single payment made for

the acquisition of the right of the lesses to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital

asset, and the money paid to purchase it may properly be held to be a payment on capital account. But the royalties are on a different footing.

In MEMBER FOR THE BOARD OF AGRICULTURAL Income Tax, ASSAM Vs. SINDHURANI CHAUDHURANI AND OTHERS

(AND OTHER CASES)., , the Supreme Court discussed the characteristics and incidence of salami : The indicia of salami are (1) its single non-

recurring character, and (2) payment prior to the creation of the tenancy. It is the consideration paid by the tenant for being let into possession and

can be neither rent nor revenue but is a capital receipt in the hands of the landlord.

This was further elaborated in a later decision of the Supreme Court in Commissioner of Income Tax, Assam etc. Vs. The Panbari Tea Co.

Ltd., . It was held in that case that it was not necessary that there should be a single lump sum payment and that salami could be paid by a single

payment or by instalments. After referring to the definition in s. 105 of the Transfer of Property Act, the Supreme Court further observed (p. 425) :

The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid

periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments

made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue

receipt.

The Supreme Court against had an occasion to consider this question in Maharaja Chintamani Saran Nath Sah Deo Vs. Commissioner of

Income Tax, Bihar and Orissa, . It was held (p. 467) :

Salami is a single payment made for the acquisition of the right of the lessor by the lessee to enjoy the benefits granted to him by the lease. The

general right may properly be regarded as a capital asset and the money paid to purchase it may properly be held to be a payment on capital

account"".

The Supreme Court, thus, in these decisions, had regarded the right of the owner to be in possession and enjoyment as such owner as a

distinct right and a capital asset which can be transferred for a price separately from the right to receive royalties or rents from tenants for a

continued enjoyment of that right. It is also clear from these decisions that it is not necessary in every case that there should be a price paid for the

grant of lease. Sometimes it may be a payment or a part payment of royalty in advance but it will have to be determined with reference to the terms

and conditions of the lease and the intention of the parties. These decisions are also authorities for the position that the general right of the owner to

be in possession and enjoyment of the property could be regarded as a capital asset, though that is also one of the incidence of ownership as any

other right in the property as such owner. We may also mention, though that cannot conclude the question, that in a number of cases, the leasehold

interest in the hands of the lessee has been held to be a capital asset. We are, therefore, of the opinion that the right conferred on the lessee under

the lease deed was also a capital asset in the hands of the assessee-lessor.

In support of the argument that in order to attract capital gains, the transfer of the capital asset should be one of the types of transfers

mentioned in s. 2(47) and a transfer by way of lease would not be covered by s. 45, the learned counsel relied on the decision of the Judicial

Committee of the Privy Council in Dilworth v. Commissioner of Stamps [1899] AC 99 and the decision of the Supreme Court in The South

Gujarat Roofing Tiles Manufacturers Association and Another Vs. The State of Gujarat and Another, . In the first of these two cases, the Privy

Council in construing s. 2 of the Charitable Gift Duties Exemption Act, 1883, which defined the term ""charitable purposes"" as including devises,

bequests, and legacies of real or personal property respectively of whatever description etc., observed (p. 105) :

The Word `include'' is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of

the statue; and when it is so used these words or phrases must be constructed as comprehending, not only such things as they signify according to

their natural import, but also those things which the interpretation clause declares that they shall include. But the word `include'' is suceptible of

another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose

of adding to the natural significance of the words or expression defined. It may be equivalent to ""mean and include"" and in that case it may afford

an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expression.

This passage was quoted with approval by the Supreme Court in the other case referred to above. In that case, the question turned on the

construction of the Explanation to entry 22 in Part I of the Schedule to the Minimum Wages Act, 1948, which read as follows :

Employment in potteries industry.

Explanation. - For the purpose of this entry potteries industry includes the manufacture of the following articles of pottery, namely :-...."" (Then it

lists out 9 times of potteries).

The argument was that the words ""potteries industry"" should be understood in the wide sense as taking in all objects that are made from clay

and hardened by fire and as such they will include Mangalore pattern roofing tiles which was not one of the 9 items listed in the Explanation. The

Supreme Court referring to the Explanation which said that potteries industry includes the manufacture of the 9 articles of pottery specified therein,

held that the word ""include"" has been used in the sense of ""means"".

Relying on these decisions the learned counsel for the assessee contended that there could be no doubt that sale and exchange are ""transfers"".

There are decisions holding that compulsory acquisition are also transfers. Relinquishment and extinguishment of rights are also certain special types

of transfers and in these circumstances, when the Legislature specifically mentioned only these items after the word ""includes"" in the definition it

should be held that ""includes"" was used in the definition in the sense of ""means"". In that sense, the word ""includes"" in the definition is not a word of

extension, but a word of limitation. This argument is not open to the learned counsel as the Gujarat High Court in Commissioner of Income Tax,

Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), has considered the definition in s. 2(47) and observed that is an

inclusive definition and that there can be no doubt that the inclusive definition is intended to enlarge the meaning and connotation of the word

transfer"". In the words of the Gujarat High Court (p. 200) :

Now the word `include'' is ordinarily used `in order to enlarge the meaning of the words or phrases occurring in the body of the statue; and, when

it is so used these words and phrases must be construed as comprehending, not only such things as they signify according to their natural import,

but also those things which the interpretation clause declares that they shall include''. It gives an extended statutory meaning to the word defined

which is in addition to its ordinary popular and natural sense. Now, sale and exchange would clearly be covered by the ordinary natural meaning of

the word ""transfer"" but relinquishment would not be so covered as held by the Supreme Court in Commissioner of Income Tax, Bombay Vs. The

Provident Investment Co. Ltd., . The legislature, therefore, included relinquishment within the definition of ""transfer"" by an artificial extension of the

meaning of that word. Similarly, the legislature also introduced extinguishment of any rights in a capital asset within the artificial definition of

transfer"" so as to enlarge the meaning and content of the word ""transfer"" for the purpose of section. 45. When a right in a capital asset is

extinguished and the right ceases to exist, it is difficult to assimilate this process to the juridical concept of transfer, for transfer as ordinarily

understood postulates the continued existence of the subject-matter transferred to that what belonged to one prior to the transfer vests in another

as a result of the transfer. To call extinguishment of a right in a capital asset as a transfer would be doing violence to the language but that is

expressly authorised by the inclusive definition of `transfer''.

There can be no doubt therefore, that we cannot give any restricted meaning to the word ""transfer"" in s. 2(47).

The learned counsel also referred to a decision of the Andhra Pradesh High Court in Ghanshyamdas Kishan Chander Vs. Commissioner of

Income Tax, . In that case, the equity of redemption was brought to sale in execution of a money decree against the owner of the equity of

redemption. The contention of the assessee, who was the owner of the equity of redemption, was that the value of the equity of redemption would

be the total mortgage money plus interest due and as such there would be no capital gains. He also pleaded that there was a transfer of the assets

under s. 45 even at the time when mortgage deed was created. Repelling this contention, the Bench held that mortgage is a transfer of an interest in

immovable property and that is different from the transfer of a totality of interest in respect of capital asset and that a mere delivery of immovable

property, cannot be treated as equivalent to a conveyance of the immovable property so as to come within the definition of ""transfer"". This decision

is no authority either for the contention that in order to constitute a transfer within the meaning of s. 2(47) there should be a transfer of a totality of

the interest in the land and that the right to possession and enjoyment alone cannot be treated as a capital asset capable of being transferred. In

fact, in TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., , the Patna High Court held that the

lease relating to the surface right together with nine mica mines located in that area was held to be a transfer of the capital asset within the meaning

of s. 12B of the Indian I.T. Act, 1922. Though there is no discussion the point was directly decided. We, therefore, hold that there was a transfer

of a capital asset for a consideration of Rs. 5 lakhs under the instrument dated 10th September, 1970.

It was next contended by the learned counsel for the assessee that in order to attract capital gains tax, there should be a cost of acquisition in

terms of money to the assessee, and in this case, there is no separate cost of acquisition for possession and enjoyment and as such the income is

not chargeable to capital gains tax. In this connection he relied on the decision in COMMISSIONER OF Income Tax, MADRAS Vs. K.

RATHNAM NADAR., and The Additional Commissioner of Income Tax, Madras Vs. K.S. Sheik Mohideen, . It is true that in these two

decisions it was said that unless the asset had cost something in terms of money for its acquisition, it was not possible to conceive of capital gains

as envisaged by the statue though an asset of a capital nature has been transferred. The learned counsel also referred to ss. 48 and 49 in this

connection. Section 48 refers to actual cost and s. 49 refers to what we may call, costs to be determined in terms of the provision. The learned

counsel contended that there is no third definition and that either there should should be an actual costs or cost as determined under the provisions

of s. 49. We have already seen that the rights of the owner of a land include a right to be in a possession and enjoyment as well. The right of

enjoyment vested in the assessee in the present case is the right to exploit the land by extracting clay. This right of exploitation of the land formed

part of the cost of acquiring the land. The land by itself may have no value except for its usefulness in extracting clay. Therefore, the value of the

right to excavate clay in the land in terms of money must have formed part of the price paid by the assessee for the land. What ever difficulty there

may be is assessing its value, it may not be correct to assume that there was no cost for the value of the right to excavate the land in terms of

money. The AAC had considered these aspects and held that the entire sum of Rs. 27,260 may be allowed as a cost of acquisition for the purpose

of determining the capital gains. We are therefore, of the opinion that there is no basis for the contention that in the right to possession and

enjoyment transferred to the company was not paid for the by the assessee when it acquired the property itself.

We, accordingly, answer the two questions referred in the affirmative. The revenue will be entitled to its costs. Counsel''s fee Rs. 500.