The Commissioner of Income Tax vs M.N. Enterprises

N. Ananda, J.—This reference is at the instance of revenue and the questions under reference are:

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the consideration received on account of surrender of leasehold rights in carrying on hotel business which was sub-leased and not carried on by the assessee itself is not a business receipt but capital gains, but not taxable as no costs were involved?

Whether, the Tribunal as a final fact finding body, was it not obliged to hold that if in case a capital receipt is not taxable under the head ''Capital Gains'', the same is assessable under the head ''other sources'' in view of the inclusive definition of income in Section 2 and Section 10(3) which takes into its ambit all receipts which are not chargeable under the head capital gains?

The facts and the proceedings that gave rise to the questions under reference in brief are as follows:

The assessee was carrying on hotel business by acquiring leasehold rights in premises bearing No. 44/1, Residency Road, Bangalore. Incidentally, it is necessary to state that M/s. Ramana Associates of Delhi was carrying on hotel business in the said premises under the name and style ''Corner House''. M/s. Ramana Associates discontinued business and sold it to assessee on 01.11.1983. However, the document of transfer dated 01.11.1983 makes no reference to any consideration for the capital value. The assessee carried on hotel business from 30/10/1983 to 31/3/1984. On 01.04.1984 under a deed of licence, assessee granted licence to carry on business in the said premises to M/s Corner House Fun Food Cafe on licence fee of Rs. 60,000/- per quarter. On 31/3/1987, assessee transferred its interest in the business and leasehold rights to M/s. Corner House Fun Food Cafe for a consideration of Rs. 5,53,166/-. In the document of transfer it is recited that a sum of Rs. 5,00,000/- is received as consideration for transfer of good-will and the remaining sum of Rs. 53,166/- for sale of tangible articles.

In the returns filed for the assessment year 1987-88, the assessee claimed receipt of Rs. 5,00,000/- as capital receipt on account of transfer of good-will in favour of M/s. Corner House Fun Food Cafe under the document dated 31/3/1987. The assessing officer, after hearing the assessee, rejected the contention of the assessee and treated the income as ''business income.'' The assessee filed Appeal No. ITA/19/C III/CIT(A)III/89-90 before the Commissioner of Income Tax. The I Appellate Commissioner by order dated 6/2/1990 allowed the appeal and held that the amount realised by the under the aforementioned deed of transfer dated 31.03.1987 was a capital gain. The I Appellate Commissioner further held that the cost of acquisition is incapable of determination and not subject to tax u/s 45. Therefore, the Revenue was before the Income Tax Appellate Tribunal in I.T.A.N No. 1022/Bang/90. The Tribunal concurring with the order of the I appellate Commissioner, dismissed the appeal by order dated 21/4/1998. The Tribunal, while doing so, followed the judgment of this Court in the case of Joy Ice Creams reported in Commissioner of Income Tax Vs. Joy Ice-creams (Bang.) P. Ltd., Thereafter, at the instance of Revenue, this reference is before this Court.

We have heard Sri M.V. Seshachala for Revenue and Sri Sarangan, learned Senior Counsel for assessee.

Before adverting to the submissions of the learned Counsel for the parties, it is necessary to state that the assessee filed return claiming the income as capital receipt, which was not accepted by the Assessing Officer. However, the I appellate Commissioner and the Tribunal agreeing with the assessee brought the income under "capital gains" but declined to apply charging section by holding that cost of acquisition does not admit determination. Thus, we find throughout, the contention of the assessee, has been that the cost of acquisition of leasehold right held by assessee does not admit determination and cannot be charged u/s 45 of the Act.

In order to answer the questions under reference, we have to consider whether the I Appellate Commissioner and Tribunal were justified in holding that since the cost of acquisition of capital gain cannot be determined and the same be subjected to tax u/s 45 of the Act.

Sri. M.V. Seshachala, the learned Counsel for revenue, relying on the decision of the Supreme Court reported in (1985) 176 ITR 417 (A.R. Krishnamurthy v. Commissioner of Income Tax) has contended that the cost of acquisition of lease-hold rights is capable of ascertainment and it can be determined. In the aforesaid decision, at page 421 it is held:

...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....

It is further held:

...The value of leasehold rights in the cost of acquisition of land being determinable, the computation provisions under the Act are applicable and Section 45 would be attracted....

Per contra, Sri Sarangan, the learned senior Counsel for assessee has contended that the observations made in the aforesaid decision are with reference to the facts of that case and from a reading of facts it is clear that the assessee in that case had acquired the property for a sum of Rs. 27,260/-. On the basis of cost of acquisition lease-hold right was determined.

After going through the decision of the Supreme Court in A.R. Krishnamurthy''s case, we find that the observations of the Supreme Court in Krishnamurthy''s case are not restricted to the facts of that case. What has been held by the Supreme Court in the said decision casts a duty on the Income Tax Officer to determine the cost of acquisition in each case on the basis of evidence. Therefore, we are unable to accept the submission of learned senior Counsel for the assessee that observations made by the Supreme Court in A.R. Krishnamurthy''s case are made with reference to the facts of that case.

In view of the decision in A.R. Krishnamurthy''s case, we hold that the I appellate authority, having brought the income under capital gains, had a duty to determine the cost of acquisition by itself or remand the matter to the Assessing Officer to determine the cost of acquisition.

As could be seen from the assessment order, the hotel business was earlier carried on by M/s. Ramana Associates of Delhi in the premises in question. The assessee has no case that Ramana Associates was the owner/landlord of the premises and it had let-out the premises to the assessee. We see from the order of the Assessing Officer that M/s. Ramana Associates transferred its hotel business and leasehold rights in the premises to assessee. Under these circumstances, the finding of I appellate authority, which has been affirmed by the Tribunal, that the cost of acquisition cannot be determined is contrary to what has been held by the Supreme Court in A.R. Krishnamurthy''s case.

The learned senior Counsel for the assessee has contended that in the assessment older it is observed that Ramana Associates has made over the business to the assessee for no consideration which has not been controverted by the revenue. The learned senior counsel for assessee, relying on the judgment of the Supreme Court in the case of B.C. Srinivasa Setty reported in (1981) Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, has contended that since cost of acquisition cannot he determined, capital gains cannot be subjected to tax. In the case of B.C. Srinivasa Setty, the Supreme Court while considering the transfer of self-generated good-will, has held that cost of acquisition of self-generated goodwill cannot be determined. Therefore, we hold that what has been held in the said decision is not applicable to facts of the present case.

The learned senior counsel for assessee next contended that after the judgment in B.C. Srinivasa Shetty''s case, Section 55 of the Act has been amended w.e.f 1/4/1995, to provide for determination of cost of acquisition of good-will, tenancy rights, stage carriage permits or loom hours. The learned senior counsel would contend that these amendments being prospective in nature have no application to this case, which relates to the assessment year 1987-88. We are unable to accept these submissions for more than one reason.

By the aforesaid amendment, a deeming provision is introduced to determine the cost of acquisition of goodwill, tenancy rights, stage carriage permits or loom hours falling u/s 55(2)(a)(ii) of the Act.

The position prevalent prior to the amendments and prospective applicability of the amended provision has been considered by the Supreme Court in the case of Commissioner of Income Tax v. D.P. Sandu Bros. Chembur P. Ltd. reported in 273 ITR 2005 at para 11 it is held:

The amendment took effect from April 1, 1995 and accordingly applied in relation to the assessment year 1995-96 and subsequent years. But till that amendment in 1995, and therefore covering the assessment year in question, the law as perceived by the Department 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.

Therefore, we hold the amendment of Section 55 providing for a deeming provision to determine cost of acquisition in cases falling u/s 55(2)(a)(ii) has no relevance to the facts of the present case.

The learned senior counsel for the assessee has also relied upon the judgment reported in Anand and Anand Vs. Commissioner of Income Tax, to contend that when no cost of acquisition could be ascertained, the income cannot be charged u/s 45 of the Act. In the said decision at page 423 it is held "since the sum of Rs. 175 lakhs was the capital received, having no costs of acquisition or cost of acquisition could not be calculated, the same was not taxable u/s 45". This judgment also provides for two situations, first having no cost of acquisition and second being cost of acquisition not admitting any determination. Therefore, we hold that this decision would lend support to the view taken by us that it is necessary for the Income Tax Officer to determine the cost of acquisition in every case falling u/s 45 of the Act.

The learned senior Counsel for the assessee has contended this Court in Commissioner of Income Tax Vs. Joy Ice-creams (Bang.) P. Ltd., has held "Amount received for surrendering tenancy rights in premises-No cost of acquisition in acquiring tenancy rights-amounts received not assessable as capital gains-Income Tax Act, 1961, Section 45." The learned senior Counsel would further contend; if this Court were to differ with the view taken by this Court in Joy Ice Cream''s case, statutory procedure may be adopted to avoid conflicting decisions.

After going through the decision reported in Commissioner of Income Tax Vs. Joy Ice-creams (Bang.) P. Ltd., , we hold that the view taken by us in this case is consistent with what has been held by this Court therein. This Court in Joy Ice Cream''s case has held that income derived from surrender of tenancy is a capital gain. However, since no money or expenditure was involved in acquiring tenancy right, the same cannot be subjected to tax u/s 45 of the Act.

In the instant case, we have held that the assessee had not taken the premises for lease from the landlord nor surrendered possession of the premises to the landlord. On the other hand, the assessee had acquired by transfer, the lease hold rights and running hotel business from M/s. Ramana Associates during the year 1983. The assessee carried on hotel business for a period of 5 months and thereafter granted licence rights to M/s. Corner House Fun Food Cafe to carry on the business as licensee. Subsequently, the assessee transferred lease hold rights and all the interest to M/s. Corner House Fun Food Cafe for a consideration of Rs. 5,53,166/-. Though it is recited in the deed that a sum of Rs. 5,00,000/ - was paid towards good-will and a sum of Rs. 53,166/- was paid for tangible articles, there has been concurrent findings against the assessee by the assessing officer, the I appellate authority and also by the tribunal that the assessee had not acquired any goodwill worth of its name. It is also pertinent to note that assessee carried on business for a period of 5 months, thereafter granted licence rights to M/s. Corner House Fun Food Cafe to run the hotel, which carried on business for a period of three years. If at all any good-will was acquired, it was acquired by M/s. Corner House Fun Food Cafe and not by the assessee. The assessee has not challenged the findings recorded by the authorities below that assessee had not acquired any goodwill, therefore, there cannot be transfer of good-will, which was never acquired at all. Under the circumstances, we hold that the decision of the Supreme Court in B.C. Srinivasa Setty''s case and the decision of this Court in Joy Ice Cream''s case, relied upon by the learned senior counsel for the assessee have no application to this case.

In the discussion made supra, we have held that authorities below have abdicated statutory duties to determine the cost of acquisition of leasehold rights. Therefore, the matter requires remand to the Assessing Officer for the purpose of determining the cost of acquisition of leasehold rights according to settled principles of law enunciated in the decisions stated supra, having regard to facts, and circumstances leading to acquisition of leasehold rights by the assessee and transfer of leasehold rights by the assessee.

In view of the discussion made above, we answer question No. 1 that the transfer of lease-hold rights is capital gain and there is statutory obligation on the Income Tax Officer to determine the cost of acquisition of leasehold rights on the basis of facts and evidence in each case.

In view of our answer to question No. 1, following the decision in the case of TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., and decision of the Supreme Court in the case of Commissioner of Income Tax, Mumbai Vs. D.P. Sandu Bros. Chembur (P) Ltd., , we answer question No. 2 that the income from transfer of leasehold rights falls under the head ''capital gains'' and not under the head ''Income from other sources, unless otherwise provided in the Act''.

The Assessing Officer shall determine the cost of acquisition by affording an opportunity of being heard to the assessee.

The reference stands disposed of accordingly.

A copy of this order shall be sent to the Tribunal as required u/s 260(1) of the Act.