Whether, for the purpose of taxation, cost of acquisition of tenancy right is to be taken as NIL in case of enhanced compensation - YES: HC

THE issue before the Bench is - Whether, for the purpose of taxation, cost of acquisition of tenancy right is to be taken as NIL in case of enhanced compensation. And the answer of the High Court is YES.

Facts of the case

The assessee, Late G S Bapna, was wife of Late Kesar Singh, who was a sub-lessee to M/s Delhi Pottery Works (P) Ltd. During the relevant year under consideration, the Govt. of India had transferred 24.1 acres of Arkpur village land in favour of Delhi Pottery through registered lease deed dated 19th Mar, 1924. Subsequently, 19.1 acres out of this land was sub-leased by Delhi

Pottery to late Kesar Singh and his sons for a period of 17 years at a rent of Rs. 500 p.m., whereupon factory premises were constructed and machineries were installed by Kesar Singh. Thereafter, Delhi Pottery went into liquidation and the leasehold rights were transferred in favour of Harnam Kaur, widow of Ram Singh Kabli, on March, 1949 and rent payable under the sub-lease was paid to her. Notification u/s 4 & 6 of Land Acquisition Act (LAA) dated 15th Sep, 1962 and 5th Dec, 1968 was issued in respect of the said land including the land under sub-tenancy and occupation of the assessee. In Jan, 1975, two awards were made by the Land Acquisition Officer (LAO) fixing compensation for the acquired land and the assessee handed over the vacant possession of land and factory building. In the meanwhile, in 1964, Harnam Kaur had executed a Trust Deed whereby Sardarni Harnam Kaur Trust was assigned rights in the land. Accordingly, compensation for acquisition of land and building was proportionately awarded as 25% to the Union of India, Rs. 1,20,000 to Harnam Kaur Trust being 20 years capitalization of monthly rent of Rs.500 and the balance amount to the assessee. However, being dissatisfied with the quantum of compensation awarded, the assessee filed reference u/s 18 of LAA.

Consequently, the AO brought to tax Rs. 59,63,410 after excluding 50% of the compensation so awarded in terms of Section 48(2) of IT Act. On appeal, the CIT(A) observed that the assessee was only a sub-lessee of the land and her interest was only that of a tenant. Since, there was no cost of acquisition of the tenancy right, capital gain was not chargeable to the assessee. The CIT(A) further held that the compensation paid, was not taxable till the dispute was finally decided by the High Court.

On further appeal, the Tribunal rejected the contentions of Revenue by observing that the term “received” u/s 45(5) of IT Act would not include or mean “compensation received”, if the assessee was liable for refund of the amount so received. Further, the compensation paid was for acquisition of tenancy right and not for acquisition of ownership rights. Moreover, Section 55(2)(a) of IT Act, substituted by Finance Act, 1994 stated that the cost of acquisition of tenancy rights could be taken as NIL in cases where there was no purchase price and the said amendment was applicable only with effect from the A.Y 1994-95.

The counsel for assessee submitted that the AO and the Appellate Authorities including the Tribunal had not given a finding that the cost of acquisition of tenancy right was determinable and thus, Section 45(5) could not be invoked. It was further submitted that Section 45(5) only stipulated as to how capital gains had to be charged, and it was not the computation provision.

Having heard the parties, the High Court held that,

++ we have heard the parties and carefully perused the materials on record. We note that the Supreme Court in case of CIT vs. D.P. Sandu Bros. Chembur (P) Ltd., has held that the cost of acquisition could be computed in cases of acquisition of tenancy rights. Moreover, in the present case, sub-lease in question was for a period of 17 years and a factory was also constructed by the predecessor of the assessee. The assessee in the land acquisition proceedings claimed that they were entitled to compensation on acquisition of their land under the sub-lease. Accordingly, the compensation was assessed and paid. It means that the tenancy right had value, as compensation was paid. Once it was held that it was possible to ascertain the cost of acquisition of tenancy rights, then it follows that capital gains could be computed and shall be payable. Further, Section 45(5) is both the charging as well as the computation provision. It specifically provides for how and in what manner capital gain on compulsory acquisition of land is to be computed and taxed. For the purpose of taxation of enhanced compensation received, cost of acquisition has to be taken as NIL as per the mandate of Section 45(5);

++ the argument of assessee that capital gains on enhanced compensation received is taxable only when the original or earlier compensation itself was taxed, is untenable and contrary to the dictum of the Supreme Court in case of Ghanshyam (HUF). There is no evidence that original compensation received by the assessee was not taxed and there is no such factual finding to that effect by any authority. Moreover, each A.Y is separate and distinct and the assessee or Revenue cannot take advantage of a wrong computation or failure to tax or erroneous taxation in an earlier year. The argument of assessee that they would have availed benefit of Section 54/54F of IT Act, is equally fallacious. It is not the case of the assessee that they had taken benefit u/s 54/54F. In view of this discussion, the questions are answered in favour of Revenue.