NON – Taxability of surrender of tenancy rights prior to 1-4-94

By Vimal Punmiya, Chartered Accountant

Posted on 26 July 1999

The issue regarding taxability/non-taxability of surrender of Tenancy rights is giving sleepless nights to millions of Tenants, especially in city like Mumbai where Pugree system is in great vogue.

The decision of the Special Bench constituted by the Bombay Tribunal in the case of Cadell Wvg. Mill Co. (P) Ltd. V/s. ACIT reported in (1995) 55 ITD 137 (Bom.) sent shocking waves to millions where in the Tribunal had taken stand that the amount received on surrender of tenancy right was casual income and taxable and that only where permission was granted to the tenant at any time by the Landlord under the terms of the contractual tenancy or where any permission to sub-lease was obtained by the tenant from the Landlord, the surrender of tenancy rights even by the statutory tenant is a valid transfer of capital asset.

Recently on similar facts and issues the Special Bench constituted under the Delhi Tribunal in the case

The amount received on surrender of Tenancy rights is a Capital Receipt.

It can be charged to tax only under Capital Gains.

But chargeability failed because of the decision of the Apex Court in the case of BC Srinivas Shetty reported in 128 ITR 294/5 Taxman 1(c) provisions cannot be applied was regarded as never intended by section 45 to be subject of charge.

That the amendment made in section 55(2) by the Finance Act 1994 taxing the receipts as Capital Gains was only prospective in operation.

For arriving at the aforesaid decision the Delhi Court decision and distinguished the issues with the High Court which have taken a contrary view.

In order to treat the receipts as Capital receipts reliance was placed in the case of BAWA SHIV Charan Singh V/s. CIT (1984) 149 ITR 29 (Delhi) where it was held Property is a term of widest import and it signifies every possible interest which a person can acquire, hold and enjoy. Tenancy right is a Capital Asset. When the interest of the Lessor is a parted with, the price paid would be premium or salami, but the periodical payments by the lessee for continous enjoyment of the benefits under the lease are in the nature of rent, the former is a capital receipt the letter a revenue receipt.

The apex court in Universal Radiators V/s. CIT (1993) 201 ITR 800 /68 Taxmann 45 (SC) has held that the eligibility to tax is different from liability to pay tax. Since the amount falls within the ambit of eligibility to tax the same is outside the purview of exempt income. The Allahabad Court in Smt. Anand Bala Bhusan V/s. Cit (1995) 83 Taxmann 548 (all.) has stated that Section 10(3) applies to casual and non-recurring income which are not chargeable U/s. 45 of the Act. The term All receipts in Section 10(3) cannot enlarge the scope of Section 10(3). Similarly the Delhi High Court has distinguished the decision of the Bombay Tribunal is Cadell wvg. Case stating that the said case was rendered with reference to the provision of the Bombay Rents, Hotels, Lodging House Rates Control Act, 1947. Section 12 thereof only entitled the statutory tenant to continue to be in possession till standard rent or permitted increase are paid. Therefore, the statutory tenant did not have an estate or interest capable of being transferred placing reliance in the case of Anan Niwas P.Ltd. V/s. Anandji Kalyanji pedhi AIR 1979 SC 144. The said Section of the Bombay Act entitlked statutory tenant to continue to be in possession till standard rent or permitted increases are paid, nothing further whereas under DRC Act, rights of a statutory tenant were held to be heritable.

The Delhi Tribunal has also held that the decision of the Allahabad High Court in CULABCHANDS case reported in 192 ITR 495 wherein it was held the receipts were of casual and non-recurring nature and provisions of section 10(3) are applicable is not correct because the said decision is revered by the Calcutta High Court in B.K. Roy (P) Ltd. V/s. CIT (1997) 211 ITR 500, Karnataka High Court in Joy ICW Creams (Bang.) P.Ltd and Cadell Wvg, Mills Coo. Pvt. Ltd. (Bom. Tribunal) also the same Allahabad High Court on similar facts in the case of Smt. Anand Bala Bhushan V/s. CIT (1995) 83 Taxmann 548 (all.) head held that the receipts of compensation was nto of the nature of ordinary income and, therefore, the question of treating the same as a casual receipt for the purposes of income tax did not arise.

The Delhi Tribunal has stated that under the Delhi Rent Control Act a tenant even after the determination of the tenantncy continues to have an interest in the tenanted premises as held in SMT. Gian Devi Anand V/s. Jeevan Kumar AIR 1985 SC 796.

Further under the following cases :

Surrender of tenancy rights in a premises for ownership rights in another premises does not constitute a transfer :

(1991) 192 ITR 382 (S.C.) A. Basper

(1984) 148 ITR 99 (Bom) Nila Products

(1981) 129 ITR 448 (Bom.) Mrs. Shirinbai P.Pundole

(1979) 117 ITR 581 (Cal.) A. Gasper

In view of the decision of the Delhi Tribunal I am of the view that on representations made the Bombay Tribunal may reconsider or review its decision because if section 5(3) of DRC Act prohibits the tenant from claiming or receiving payment in consideration of relinquishment transfer or assignment of his tenancy, and section 48(1)(b) of DRC Act prescribes penalty for contravention of the provisions of Section 5 of DRC Act the similar provisions are also available in the Bombay Rent Act and even under the Bombay Rent Act a tenant continues to have an interest in the tenanted premises.