The Commissioner of Income Tax vs Binny Limited

P.P.S. Janarathana Raja, J.—The Revenue has come up on appeal as against the order of the Income Tax Appellate Tribunal, ''A'' Bench,

Chennai dated 10.11.2004 in I.T.A. No. 444/MDS/1998 raising the following substantial question of law:

Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in upholding the order of the Commissioner of

income tax (Appeals) even though the amount received of Rs. 50,00,000/-on surrender of tenancy right is casual and non-recurring receipt u/s

10(3) of the Income Tax Act, 1961 is valid?

The brief facts of the case are as follows:

The Assessee is a domestic Company, in which the public are substantially interested. It involved in the manufacture of Textiles, Engineering

Products and services. The relevant assessment year is 1994-95 and the corresponding account year ended on 31.03.1994. The

Assessee/Respondent company filed its return of income on 31.11.1994 computing the assessable loss of Rs. 19,30,14,502/-. Later, the Assessee

filed a revised return of income on 26.02.1996 computing assessable loss of Rs. 39,56,24,432/-. Subsequently, the Assessing Officer sent notice

u/s 143(2) of the Income Tax Act, 1961 (hereinafter called as the ""Act"") on 31.03.1995. The Assessing Officer completed the assessment u/s

143(3) of the Act determining the loss at Rs. 30,76,94,998/- and declared ""Nil Demand"". While completing the assessment, the Assessing Officer

found that the Assessee received a sum of Rs. 50,00,000/-, which is a consideration received from the land owner for surrendering tenancy rights.

The Assessing Officer was of the view that the same is assessable u/s 10(3) of the Act and granted deduction of Rs. 5,000/-and the remaining

amount of Rs. 49,95,000/-is assessable under the head ''other sources''. Aggrieved by the same, the Assessee filed an appeal before the

Commissioner of Income Tax (Appeals). The CIT (Appeals) held that the amount received is a capital receipt and the same was not liable to tax

as treated by the Assessing Officer as casual and non-recurring income u/s 10(3) of the Act. Aggrieved by the same, the Revenue went on appeal

before the Income Tax Appellate Tribunal. The Appellate Tribunal also held that the same is not assessable u/s 10(3) of the Act and confirmed the

order of the Commissioner of Income Tax (Appeals) and dismissed the appeal preferred by the Revenue. Aggrieved by the same, the Revenue

filed the present appeal raising the above question of law.

Learned Counsel appearing for the Revenue vehemently contended that the Tribunal ought to have appreciated that the amount received on

surrender of tenancy rights is a casual and non-recurring receipt u/s 10(3) of the Income Tax Act, 1961. Therefore, the order passed by the

Tribunal is not in accordance with law and the same should be set aside.

Inspite of notice served on the Assessee/Respondent, there is No. representation on behalf of the Assessee and the name of the

Assessee/Respondent also appears in the cause list.

Heard the learned Counsel for the Revenue and perused the documents available on record. The Assessee was a tenant of a shop at Connaught

place, New Delhi. There was an agreement entered into between the Assessee/tenant and the landlord Shri K. Dutta in the year 1953 and the

same was renewed from time to time. The said premises was sold by the landlord to M/S. Bird Travels, who acknowledged the Assessee as a

tenant and given him tenancy rights and collected the rents. By an agreement dated 21.12.1993, the Assessee agreed to vacate the premises and

was paid compensation of Rs. 50 lakhs towards termination of tenancy right.

There is No. dispute by the Revenue that the amount received towards termination of tenancy rights is not subjected to capital gains at the

relevant point of time. The Assessing Officer was of the view that the same is taxable under the head ""other sources"". Further, the Assessing

Officer also granted deduction of Rs. 5,000/-as per Section 10(3) of the Act and made addition of Rs. 49,95,000/-. Whether the amount received

towards surrendering of tenancy rights could be brought under the head ''other sources'' was dealt with by the Supreme Court and this Court in the

following cases.

1) Commissioner of Income v. D.P. Sandu Bros. Chembut (P) Ltd reported in (2005) 273 ITR 0001.

2) Beardsell Ltd. Vs. The Joint Commissioner of Income Tax, Special Range-I, .

In the judgment in the case of Commissioner of Income v. D.P. Sandu Bros. Chembut (P) Ltd, cited supra, the Apex Court in paragraph Nos.

14 to 17, held as follows:

Section 14 of the income tax Act, 1961 as it stood at the relevant time similarly provided that ""all income shall for the purposes of charge of

income tax and computation of total income be classified under six heads of income, namely:

(A) Salaries (B) Interest on Securities (C) Income from house property (D) Profits and gains of 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

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 u/s

10(3) and be subjected to tax u/s 56. The argument of the Appellant that even if the income cannot be chargeable u/s 45, because of the

inapplicability of the computation provided u/s 48, it could still impose tax under the residuary head is thus unacceptable. If the income cannot be

taxed u/s 45, it cannot be taxed at all. (See. S.G. Mercantile Corporation P. Ltd. Vs. Commissioner of Income Tax, Calcutta, .

Furthermore, it would be illogical and against the language of Section 56 to hold that everything that is exempted from capital gains by the statute

could be taxed as a casual or non-recurring receipt u/s 10(3) read with Section 56. We are fortified in our view by a similar argument being

rejected in Nalnikant Ambalal Mody Vs. Commissioner of Income Tax, Bombay, .

Further, this Court also in the case of Beard sell Ltd. v. Joint Commissioner of Income Tax, cited supra has considered a similar issue and held

in paragraph 10 as follows:

The Commissioner of income tax has set aside the order of the assessment u/s 263 of the Act on the ground that the order is erroneous and

prejudicial to the interests of the Revenue in view of the decision of the Special Bench, Mumbai in the case of Cadell Weaving Mill Company P.

Ltd v. Asst CIT (1996) 217 ITR 51. The said Special Bench held that the amount received on surrender of the tenancy right is assessable as

casual income u/s 10(3) of the Act. Aggrieved by that order, the Assessee in that case, filed an appeal to the Bombay High Court. The Bombay

High Court considered the scope of Section 10(3) and also Section 45 of the Act and held that any amount received on transfer of a capital asset

is liable to be taxed in accordance with the specific provisions of Section 45 to Section 55 of the Act and if any amount of capital gain is not

taxable as capital gain for any reason, then, that amount cannot be treated as a casual and non-recurring receipt u/s 10(3) of the Act because

Section 10(3) does not apply to capital receipts. The said Bombay High Court judgment is reported in Cadell Weaving Mill Co. P. Ltd. Vs.

Commissioner of Income Tax, . Aggrieved by the order of the Bombay High Court, the Revenue preferred an appeal to the Supreme Court. The

said judgment is reported in (2005) 92 ITD 11 , wherein it was held that the tenancy right is a capital asset and also the surrender of the tenancy

right amounts to transfer and hence the consideration received is a capital receipt within the meaning of Section 45. Further, it was also held that

the amendment to Section 55(2) takes effect from April 1, 1995, and applies only in relation to the assessment year 1995-96 and subsequent

assessment years. Further, the Supreme Court by following its earlier decision in the case of Commissioner of Income Tax, Bangalore Vs. B.C.

Srinivasa Setty, , held that till the amendment in the year 1995, the law was that if the cost of acquisition of a capital asset could not in fact be

determined, the transfer of such capital asset would not attract capital gains.

By following the above Apex Court as well this Court judgment, we are of the view that the amount received towards surrender of tenancy

rights cannot be taxed as casual and non-recurring u/s 10(3) of the Act. Both the authorities have given a concurrent finding that the amount

received towards tenancy rights is not taxable u/s 10(3) of the Act based on the valid material evidence and also the orders of the authorities are in

conformity with the principle enunciated by the Supreme Court and this Court. Therefore, we do not find any error or illegality in the order of the

Tribunal that warrants interference. Hence, we answer the above question of law in favour of the Assessee and as against the Revenue. The Tax

Case (Appeal) is devoid of merits and the same is dismissed. No. costs.