Mrs. G. Seetha Kamrajj vs Commissioner of Income Tax

Bilal Nazki, J.—Heard learned Counsel for the parties.

This is a reference made by the Tribunal at the instance of the assessee and the following question has been referred :

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in construing the sub-lease agreement and holding that the deposit of Rs. 4,30,000 received by the assessee was a consideration for granting sub-lease of the assessee''s rights and not a payment of monthly rent in advance and as such liable to tax as short-term capital gains ?

The facts, which gave rise to the reference, are that the assessee took on lease for 99 years a building from her husband and as per the terms of the deed, the lease was to start from June 1, 1986. The assessee paid a sum of Rs. 5,000 as premium for obtaining lease and was supposed to pay a monthly rent of Rs. 300. The lessee had also a right to create a sub-lease and she actually created a sub-lease in favour of M/s. Bhavani Shankar and Gopi Venkata Sanyasaiah Somanath by a deed dated February 10, 1988, for a period of 97 years and 5 months starting from January 1, 1988 to June 11, 2085. The assessee received a lump sum of Rs. 4,30,000 as consideration. It was stated to be adjustable against monthly rent of Rs. 367.83. The Income Tax Officer assessed tax and was of the view that an amount of Rs. 3,87,500 was capital gain and an, amount of Rs. 42,500 was the cost of acquisition. Thereafter, in an appeal, the Commissioner of Income Tax, upheld the assessment following the decision of the Supreme Court in A.R. Krishnamurthy and Another Vs. Commissioner of Income Tax, Madras, . When the matter was taken to the Tribunal, the Tribunal also agreed with the Commissioner of Income Tax. Thereafter a request for reference was made by the assessee.

Learned Counsel for the assessee has relied on various judgments being R.K. Palshikar (HUF) Vs. Commissioner of Income Tax, M.P., Nagpur, ; TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., ; A.R. Krishnamurthy and Another Vs. Commissioner of Income Tax, Madras, ; A. Gasper Vs. Commissioner of Income Tax, ; MAHARAJA CHINTAMANI SARAN NATH SAH DEO Vs. COMMISSIONER OF Income Tax, BIHAR and ORISSA., and Commissioner of Income Tax, Assam etc. Vs. The Panbari Tea Co. Ltd., .

We have gone through the judgments.

The facts in R.K. Palshikar (HUF) Vs. Commissioner of Income Tax, M.P., Nagpur, , are more close to the facts of the case at hand. The assessee in this case changed a piece of land into plots and developed the land for making it suitable as building sites. The assessee started leasing building sites to various parties from May, 1958. The first lease was granted by the assessee for a period of 99 years. It was agreed under the lease deed that on the expiration of the said period of lease, the lessor or his legal heirs would execute a new lease deed in favour of the lessee or his legal heirs on the terms and conditions as would be settled later. The "salami" or premium for the said lease was fixed at Rs. 10, 312 out of which an amount of Rs. 501 was paid in advance and the balance amount of Rs. 9, 811 was agreed to be paid before the grant of lease. The annual lease rent of the plot was fixed at Rs. 75 which was to be paid by the lesse in advance. The lessor reserved his right to take back possession of the land leased if the rent was not paid for two consecutive years and to recover the rent. Thereafter, certain other plots were also sold on payment of "Salami" or premium. This was assessed as capital gain by the Income Tax authorities and ultimately two questions were referred to the High Court by the Income Tax Appellate Tribunal. The questions being (page 314) :

(1) Whether, on the facts and in the circumstances of the case, the land sold by the assessee constituted a capital asset within the meaning of Section 12B of the Indian Income Tax Act or was agricultural land as defined in Section 2(4A) of the Act ?

(2) Whether the transaction of lease effected by the assessee amounted to a transfer within the meaning of Section 12B so as to attract liability for capital gains tax ?

These questions were considered by the Supreme Court and answered in the following terms (page 317) :

The next question which we have to consider is whether the provisions of Section 12B of the said Act can be brought into play, although what was transferred was only leasehold interest in the lands in question. In this connection, it is significant that the leases are for a long period of 99 years and in all the transactions of lease, premium has been charged by the assessee for the grant of the lease concerned. In TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., a case decided by a Division Bench of the Patna High Court, the assessee let on lease for 99 years a portion of a zamindari (land) acquired by it. The lease related to the surface right together with nine mica mines located in that area. The consideration for the lease was the payment of a ''salami'' and a reserve rent per year. The Income Tax Officer determined the cost to the assessee of the mineral rights and after deducting this amount from the salami, he assessed the balance to tax as capital gains u/s 12B of the said Act. It was held by the Patna High Court that the gains arising from the said transaction were rightly taxed. This decision has been cited without comment by Kanga and Palkhivala in their Commentary on the Law and Practice of Income Tax (7th edition), at page 550, and no case to the contrary has been cited in the said text book or has been brought to our attention. It is true that the decision of the Patna High Court in TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., relates to the case of a mining lease, but, to our mind, the principle laid down in that case can well be applied to the case before us. In the first place, the lease is for a long period, namely, 99 years, and hence it would appear that under the leases in question, the assessee has parted with an asset of an enduring nature, namely, the rights to possession and enjoyment of the properties leased for a period of 99 years subject to certain conditions on which the respective leases could be terminated. A premium has been charged by the assessee in all the leases. In these circumstances, we fail to see how it could be said that the provisions of Section 12B of the said Act cannot be brought into play. The grant of the leases in question, in our view, amounts to a transfer of capital assets as contemplated u/s 12B of the said Act.

The judgment in TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., was from the Patna High Court. The Assessee let on lease for 99 years a portion of a zamindari acquired by it. The court held that the lease was a transfer of a capital asset within the meaning of Section 12B of the Income Tax Act and the gains arising therefrom were rightly taxed.

The facts in A.R. Krishnamurthy and Another Vs. Commissioner of Income Tax, Madras, are that the assessee, a body of individuals, purchased two pieces of land in the year 1966 measuring 14.55 acres at a price of Rs. 27,260. By an instrument of lease-cum-licence dated September 10, 1970, they granted a mining lease in favour of Sri Krishna Tiles and Potteries (Madras) P. Ltd. an allied concern of the assessee. The lease was for a period of 10 years and the lessee had to pay a premium or salami of Rs. 5 lakhs in addition to the payment of a royalty of Rs. 12 per 100 cublic feet of clay extracted subject to a minimum of Rs. 60,000 per year. The Income Tax Officer came to the conclusion that the lease deed was in fact a transfer deed for leasehold interest in the land in favour of the company and the transfer was assessable to capital gains tax. The Supreme Court in these facts held as follows (page 421) :

The amount of Rs. 27,260 paid by the assessee was not only the cost of acquiring the land but also of acquiring a bundle of rights in the said land including the right to grant lease. There is thus no force in the contention of learned Counsel that, conceptually, there is no ''cost of acquisition'' which is attributable to the right of limited enjoyment transferred by the grant of the lease. So far as the apportionment of the cost of acquisition is concerned, it is a question of fact to be determined by the Income Tax Officer in each case on the basis of evidence. The determination of the cost of the right to excavate clay in the land in terms of money may be difficult but is none the less of a money value and the best valuation possible must be made.

In A. Gasper Vs. Commissioner of Income Tax, the question referred was (page 582) :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee''s right of tenancy under the landlords constituted a capital asset within the meaning of Section 2(14) of the Income Tax Act ?

The finding of the Tribunal was that the assessee had received the amounts for transferring his leasehold interest and the monthly tenancy to Associated Batteries, with the consent of the landlords. In these circumstances, the High Court of Calcutta held as follows (page 589) :

Any profits or gains arising from the transfer of a capital asset shall be chargeable to Income Tax under the head ''capital gains''.

In MAHARAJA CHINTAMANI SARAN NATH SAH DEO Vs. COMMISSIONER OF Income Tax, BIHAR and ORISSA., the assessee was the owner of a land by an indenture of lease dated January 22, 1944. The assessee granted a lease of certain mining rights to Messrs. Aluminium Production Company Ltd., in respect of 171.03 acres of land for a period of thirty years on the following terms.

(i) Salami (inclusive of Moharkarai and Dewai Negi Rs. 2,25,000 amounting to Rs. 5,000) (ii) Rent 0-8-0 per acre (iii) Royalty 0-6-0 per ton (iv) Minimum royalty Rs. 22 per acre

The Revenue taxed the whole amount as capital gain, but the Supreme Court found from the facts as follows (page 175) :

From the aforesaid discussions it is abundantly clear that the taxing authorities and the Tribunal had before them ample facts and circumstances to come to the conclusion that the sum of Rs. 2,20,000 was not entirely a payment on capital account, but that a considerable portion of it was the capitalised value of future royalty which undoubtedly was a revenue receipt and assessable to tax as such. I am, however, unable to endorse the conclusion of the taxing authorities and the Tribunal that the whole of the amount of Rs. 2,20,000 was in the nature of revenue receipt. Some part of it undoubtedly was by way of price paid for the transfer of the right to enjoy the property, though the major part was on account of advance payment of royalty. On the basis of the four other lessees mentioned in paragraph 12 of this judgment, it would be reasonable to conclude that the amount of capital receipt included within the sum of Rs. 2,20,000 was in the neighbourhood of Rs. 20,000. The actual amount of salami for 171 acres at the rate of Rs. 100 per acre works out at Rs. 17,100. But Mr. Tarkeshwar Prasad, appearing on behalf of the Commissioner of Income Tax, has conceded before us that the amount of salami which would be a capital receipt may reasonably be estimated at the round sum of Rs. 20,000. This sum of Rs. 20,000 being in the nature of capital receipt is obviously not assessable to tax. The remaining sum of Rs. 2,00,000 is, however, a revenue receipt and taxable as such.

The Commissioner of Income Tax, Assam etc. Vs. The Panbari Tea Co. Ltd., was also a case where similar questions were considered by the Supreme Court. It was held by the Supreme Court as follows (page 425) :

Under Section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the 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. 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. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parries.

In our view all the judgments referred to above do not help the cause of the assessee. However, learned Counsel for the assessee submits that even if it is concluded that some amount was taken by way of premium, it was incumbent, in view of the judgments referred to above, for the authorities to see how much money was paid by way of rent and how much money was paid by way of premium.

In fact, exactly, the same procedure has been adopted by the Assessing Officer. He held in paragraph 3 of his order as follows :

In her explanation filed on March 24, 1992, she stated that she is not the owner of the property and what she had taken for 99 years is only lease rights. It is further stated that the lease amount of Rs. 4,30,000 is only a deposit and in this transaction her margin of profit is only Rs. 67.83 per month. In her opinion, the transaction did not result the transfer of any capital asset. The contention of the assessee is not acceptable. Her lease right in the property is an asset and on the alienation of which she received an amount of Rs. 4,30,000. The nomenclature used or the manner in which the lease deed is drafted cannot change the nature of transaction. The basic fact is that the assessee received lease rights in the property for 99 years from her husband, that she has alienated these lease rights in favour of a third person and finally that she had received an amount of Rs. 4,30,000 on which she neither pays any interest nor is she obliged to refund that amount. She received lease rights on June 10, 1986, and she in turn sub-leased it to the third party on January 1, 1988. She held the lease rights for a period of less than 36 months. Therefore, the excess realised on the alienation of the asset over and above the cost of the lease rights is assessable to short-term capital gains. The assessee has to pay lease rent of Rs. 300 per month and the cost of lease right will be taken at 12 1/2 times the lease rent payable per annum which works out to Rs. 37,500. The assessee also paid premium of Rs. 5,000 which is non-refundable. Therefore, the total cost in the hands of the assessee works out to Rs. 42,500. Therefore, the difference of Rs. 3,87,500 will be assessed to short-term capital gains. Penalty proceedings u/s 271(1)(c) are separately initiated.

Therefore, we do not find any merit in the contentions raised on behalf of the assessee and the reference is answered in favour of the Revenue and against the assessee.