Commissioner of Income Tax vs Javerilal and Co. (P.) Ltd.

G. Sivarajan, J.—The following question of law is referred by the Income Tax Appellate Tribunal, Cochin Bench, to this court pursuant to the direction issued by this court in the judgment dated November 11, 1998, in O. P. No. 11138 of 1998, at the instance of the Commissioner of Income Tax, Cochin.

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in interfering with the order of the Commissioner of Income Tax (Appeals) ?"

The brief facts necessary for decision of this case are as follows. The assessee is a company in which the public are not substantially interested. The assessee obtained a leasehold right in respect of a piece of land from the Cochin Port Trust and the assessee had constructed a building therein for the purpose of his business. The assessee sold the building during the accounting period relevant to the assessment year 1986-87 to M/s. Ram Bahadur Thakur Pvt. Ltd, for a consideration of Rs. 2,34,000. The Assessing Officer computed the capital gains on the transfer of the property at Rs. 1,37,120. According to the assessee, there cannot be an assessment to capital gains in respect of this transaction. Therefore, the assessee took up the matter in appeal before the Commissioner of Income Tax (Appeals) and contended that the consideration of Rs. 2,34,000 received included compensation for the surrender of the leasehold right in the land. The appellate authority directed the Assessing Officer to verify the actual amount of capital gains on the transfer of the land and exclude the same from the computation. Pursuant to the said direction, the Assessing Officer took the view that the capital gains relating to the land was nil and so the assessee was not entitled to any relief. This was again taken up before the Commissioner of Income Tax (Appeals). However, the appellate authority confirmed the assessment order holding that the assessee had in fact surrendered the leasehold right in favour of the Cochin Port Trust, and therefore, the assessee has no tenancy right over the land at the time of transfer. However, in further appeal filed by the assessee, the Tribunal, after considering the various documents produced before it, took the view that the transfer was both in respect of the building and in respect of the leasehold right and consideration received was a composite one for both. The Tribunal also found that the assessee''s estimate of consideration towards the surrender of leasehold right at Rs. 1 lakh is reasonable. The Tribunal thereafter relying on the decision of the Supreme Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, , held that the consideration received on the surrender or transfer of the leasehold right was not liable to capital gains. Hence, the reference.

Sri P. K. R. Menon, senior Central Government standing counsel for taxes appearing for the applicant, submits that the Tribunal erred in holding that the transfer evidenced by a registered document dated June 28, 1985, clearly says that the transfer was only in respect of the building and improvements and not the land or the leasehold right in respect of the land. Senior counsel based on the above submitted that when the document clearly says that the transfer was only in respect of the building, the Tribunal was not justified in holding that the transfer was in respect of the leasehold right also. Senior counsel also took us to the various clauses in the lease agreement as well as the sale deed in support of his contentions.

Sri P. Balakrishnan, learned counsel appearing for the respondent, on the other hand, submits that the transfer was not only in respect of the building, but also in respect of the leasehold right, and the consideration received was in respect of both. Counsel also took us to the various correspondences between the assessee and the Cochin Port Trust, and the conditions specified in the communication issued by the Cochin Port Trust as also in the registered document, and submitted that the Tribunal had considered all the relevant documents and had come to the conclusion as a fact that the transfer was a composite one both in respect of the leasehold right and in respect of the building, and, therefore, the consideration in respect of the land has to be separately taken, and the same cannot be subjected to capital gains tax in view of the decision of the Supreme Court in B.C. Srinivasa Shetty''s case mentioned above.

We have considered the rival submissions and have also perused the three orders of the authorities. It is seen from the assessment order that the assessee had deducted a sum of Rs. 1 lakh from the sale consideration claiming that this portion is for the transfer of leasehold right, as the building was constructed on the land obtained on lease from the Cochin Port Trust. The assessee had also taken the contention that a sum of Rs. 1 lakh received as consideration for the transfer of the leasehold right cannot be subjected to capital gains tax since there was no cost of acquisition. The Assessing Officer has taken the view that the consideration was only for the transfer of the building. The first appellate authority, it is seen, has taken a view that the assessee had surrendered the leasehold right in favour of the Cochin Port Trust, and therefore no leasehold right was available with the assessee for transferring it to the purchaser, namely, M/s. Ram Bahadur Thakur Pvt. Ltd. at the time of transfer. However, we find that the Tribunal has elaborately considered the question as to whether the transfer was in respect of the building only or was in respect of the leasehold right in the land on which the building is situated also, with reference to the lease deed executed between the assessee and the Cochin Port Trust, the communication issued by the Cochin Port on January 11, 1985, to the assessee and the terms of the sale deed also. The Tribunal ultimately came to the conclusion that the transfer was both in respect of the building and in respect of the leasehold right in the land.

The assessee had obtained a lease of land from the Cochin Port Trust as per the document dated March 14, 1957, for a period of 30 years, which was due to expire on March 14, 1987. The lease deed, inter alia, provided in Clause (a) that the lessee shall not at any time without the prior consent in writing of the lessor use the said building or permit the same to be used for any other purpose than for godown ; and Clause (b) provided that the lessee shall not assign, transfer or sub-let the demised premises or any part thereof without the consent in writing of the lessor. Clause (c) thereof also provided that the lessee shall have the option of renewing the lease for such further period and on such terms as may be mutually agreed upon during the first six months of the year 1986. The assessee admittedly had constructed a building having a plinth area of about 7,200 square feets with asbestos roofing on the leasehold land and the same was being used by the assessee for the purpose of his business. Since the assessee wanted to transfer the building and the leasehold right in favour of M/s. Ram Bahadur Thakur Pvt. Ltd., the assessee wrote a letter on October 31, 1984, to the Cochin Fort Trust for their permission. In answer to the said request, the estate manager of the Cochin Port Trust wrote to the assessee on January 11, 1985, expressing consent subject to certain conditions stipulated in the said letter. The said letter is extracted, in paragraph 7 of the appellate order. It is specifically stated therein that the chairman has accorded sanction to transfer the lease of 50.11 cents of land in plot No. 10 leased to the assessee in Cat. II to M/s. Ram Bahadur Thakur (Kerala) P. Ltd., Cochin-3, subject to the assessee agreeing to abide by the following terms and conditions. Clauses (i) to (vi) contain the modus operandi to be followed for such grant. The first condition is that the assessee should transfer the structures constructed by it on the leasehold land by a sale deed executed in favour of the transferee. The second condition is that the assessee should surrender the land to the Port Trust to enable the Port to allot the land to the transferee. The third condition is that the transferee would be getting the lease only for the remaining period of lease, i.e., up to March 13, 1987. The fourth condition is that the transferee should agree to abide by the terms and conditions applicable to fresh lease and also for payment of rent at the rate of Rs. 30,000 per annum plus 15 per cent. surcharge. The fifth condition is that the transferee should execute a fresh lease deed for a period up to March 13, 1987, on the terms and conditions mentioned in item (iv) above. Various other stipulations are also made which are not relevant to the facts of this case. It is also stated that in case the assessee is agreeable to the conditions mentioned above, a letter of acceptance to the effect may be sent within 15 days from the receipt of this communication. Thus, it is evident from this letter that the Cochin Port has accorded sanction to the assessee to transfer the leasehold right in respect of the land in which the building is situated, provided the conditions are satisfied. There is no dispute in this case that the assessee has satisfied the conditions stipulated in the said letter. Agreement dated March 11, 1985, between the assessee and the transferee, namely, M/s. Ram Bahadur Thakur (Kerala) P. Ltd. is seen considered by the first appellate authority. Clause (1) of the said agreement which is extracted in the first appellate authority''s order says that the vendor will sell free of all encumbrances, and the purchaser will purchase the schedule building together with all the improvements therein, for the total price or consideration of Rs. 2,34,000 upon and subject to the terms and conditions and covenants herein contained. Clause (5) of the said agreement further provided that, the vendor undertakes to surrender the land to the Port Trust to enable the Port Trust to allot the land to the purchaser and to abide by all the terms and conditions enumerated by the Cochin Port Trust in its letters dated January 11, 1985, January 31, 1985, and February 23, 1985, referred to above, and also get the consent of the vendor company, if any, required for the sale of the scheduled building, and render all required assistance in getting the plot of land leased by the Cochin Port Trust in favour of the purchaser. The Tribunal, it is seen, has extracted this Clause (5) of the agreement in the appellate order. Here, it must be noted that the letter dated January 11, 1985, mentioned in Clause (5) of the agreement is the communication received from the estate manager of the Cochin Port Trust, which says that the chairman of the Cochin Port had accorded sanction to transfer the leasehold right in respect of the land to M/s. Ram Bahadur Thakur (Kerala) P. Ltd. Thus Clause (5), in turn, refers to the contents of the said letter which contains the various conditions also. From a reading of the lease agreement executed between the assessee and the Cochin Port, the communication dated January 11, 1985, issued by the estate manager of the Cochin Port, and Clause (5) of the agreement executed between the assessee and M/s. Ram Bahadur Thakur (Kerala) P. Ltd., it is very clear that what is transferred by the assessee in favour of M/s. Ram Bahadur Thakur is the building together with the leasehold right which vested in the assessee under the agreement executed dated March 14, 1957, executed between the assessee and the Cochin Port Trust, and the permission granted by the Cochin Port in the communication dated January 11, 1985, is in terms of Clause (b) of the lease agreement. The reason for non-inclusion of the leasehold right in the sale deed executed by the assessee in favour of M/s. Ram Bahadur Thakur Pvt. Ltd., is that the Cochin Port Trust in the letter dated January 11, 1985, had specifically stated that the assessee shall execute a sale deed only in respect of the structures in the leasehold land. Of course, the sale deed also refers to the communications sent by the Cochin Port including the communication dated January 11, 1985.

In these circumstances, we are of the view that the Tribunal has correctly held that the transfer by the sale deed executed by the assessee in favour of M/s. Ram Bahadur Thakur Pvt. Ltd. is both in respect of the building and in respect of the leasehold premises in which the building is constructed, and that the consideration was for transfer of both these items. There is no doubt that the leasehold right in respect of a land is a very valuable right and without that right, even if the building is transferred, it does not have any value as a building, unless the leasehold right in respect of the land in which the building is situated is also obtained by the transferee. Otherwise, the building will only have the value of the materials. The transferee will not be entitled to occupy the building based on the sale deed obtained. Thus, we are of the definite view that the assessee had transferred both the leasehold right in respect of the land strictly in accordance with the provisions of the lease agreement executed between the assessee and the Cochin Port and the building situated therein and the consideration received is a composite one for both. We also find that the assessee had offered Rs. 1 lakh as the consideration for the transfer of the leasehold right which was accepted by the Tribunal as reasonable. We do not find any reason to interfere with the said finding also.

In the above circumstances, we answer the question referred in the affirmative, that is, in favour of the assessee and against the Revenue.

A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.