Judgment:
1. This is an appeal by the assessee, the Star Trading Co. (P.) Ltd. Although several grounds have been raised in this appeal, at the time of hearing Shri S.P. Mehta, the learned counsel for the assessee, pressed only one ground which in the words of the assessee reads as under : Without prejudice to above it is submitted that even if the entire sum is not the subject-matter in the Income-tax Act, a sum of Rs. 1,50,000 is merely a capital receipt not involving any gain or any income.
2. The assessee was a sub-lessee of a property comprising of four flats which had been leased out to Sueseen Textile Bearings Ltd. By an indenture of lease dated 29-4-1970, Raja Dhanraj Girji Narsingirji leased the four flats constructed by him on the plot taken from the Bombay Port Trust for a lease of 99 years to Star Textile Engg. Works subsequently known as Sueseen Textile Bearings Ltd. From 15-11-1973 Sueseen Textile Bearings Ltd., agreed to assign and transfer to the appellant-firm (the Star Trading Co. (P.) Ltd.) the said four flats on payment of a sum of Rs. 5,09,242 being the balance of advance rent then outstanding and Rs. 40,000 being the security deposit paid to Raja Dhanraj Girji. The lessee had taken a loan from Bank of Baroda and wanted the assessee-company to take over the liability in respect of repayment of the loan to the Bank at the time of transferring the flats to the assesssee-company. The bank did not agree to this proposal. The lessees were also not able to transfer the flats to the assessee in view of the Urban Land Ceiling Act. The sub-lease agreement was cancelled and on 30-9-1978 the assessee agreed to return the flats to the lessee Sueseen Textile Bearings Ltd. on payment of Rs. 10,04,237 which consisted of the following items : (a) Rs. 4,57,212--being the balance of advance rent outstanding and remaining to be set off; (b) Rs. 40,000--being security deposit paid to the Raja Dhanraj Girji; (c) Rs. 2,52,788--being the reimbursement of expenses for renovation of the flats incurred by the appellant ; and (d) Rs. 1,50,000--being the compensation or damages payable to the appellant.
The assessee was in possession of the flats between the period of 15-11-1973 and 18-11-1978.
3. In the present appeal we are concerned with the taxability or otherwise of the amount of Rs. 1,50,000 being the compensation or damages payable to the assessee. The treatment given by the assessee to other receipts and the decision of the Commissioner (Appeals) on the ITO's order in respect of the other items was challenged before us, but the ground in this regard was not pressed by Shri S.P. Mehta. The assessee claimed before the ITO that the receipt of Rs. 1,50,000 was in the nature of compensation for damages ; it was a capital receipt which did not result in any capital gains because it amounted to surrender of tenancy rights or occupational rights which had no cost. The ITO held that the amount of Rs. 1,50,000 was received for the assessee relinquishing rights over the flats and such extinguishment or relinquishing of the assessee's right amounted to transfer and, therefore, there was capital gain within the meaning of Section 45 of the Income-tax Act, 1961 ('the Act').
He also held that Rs. 1,50,000 was a trading receipt, as it was intended to compensate the assessee for loss of profits on account of its continuance of carrying on business in the said premises.
4. When the matter went before the Commissioner (Appeals) he held that although in the agreement the amount had been described as damages, in reality it was a consideration for the assessee not enforcing its rights under the lease to remain in possession for the unexpired period of lease of 99 years. He, therefore, held that the assessee was liable to capital gains on the difference between the amount received under the agreement dated 18-11-1978 and the cost of acquisition. He further held that the ITO had taken the cost of acquisition as the written down value of the assets without adjusting the profit under Section 41(2) of the Act. Since under Section 55 of the Act the cost of acquisition of depreciable assets has to be increased by the profit assessed under Section 41(2), the capital gains computed by the ITO were reduced by the amount of Rs. 1,27,780 being the profit under Section 41(2) by the Commissioner (Appeals). The order of the Commissioner (Appeals) covers the treatment of the entire receipt of Rs. 10,04,237 and its exigibility to capital gains. We are in the present appeal only concerned with the treatment of a part of this receipt, viz., Rs. 1,50,000.
5. Shri S.P. Mehta argued that the amount of Rs. 1,50,000 was a capital receipt for surrendering occupational rights which had no cost and relied on the decision of the Bombay High Court in the case of CIT v.Mrs. Shirinbai P. Pundole [1981] 129 ITR 448. The Commissioner (Appeals), on the other hand, relied on another decision of the Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 594.
The Commissioner (Appeals) further observed that the assessee had not only transferred its rights under the sub-lease agreement with Sueseen Textile Bearings Ltd. but had also transferred the capital asset, furniture, airconditioning plant, etc. The Commissioner (Appeals) had agreed that the assessee had appropriated Rs. 8,54,237 out of the sale price towards the various assets accounts in the books as discussed by him in the order. The appropriations were as under : 6. The short question for decision before us is whether any capital gains could be said to arise out of the receipt of Rs. 1,50,000 which are admittedly capital receipts. It may be pointed out here that in his direction under Section 144B(4) of the Act, the IAC has made the following observation about the receipt of Rs. 1,50,000 which was said to be compensation receipt :London & Thames Haven Oil Wharves Ltd. v. Attwooll (Inspector of Taxes) [1968] 70 ITR 460 (CA) that where damages are recovered for an injury inflicted on a man's trading, making, as to speak, the hole in his profit, the amount of damages would go to fill that hole and would be a trading receipt. The compensation of Rs. 1,50,000 in the instant case, is to fill that gap and hole in the assessee's business which could not be continued for an on account of handing over the flair back to the sub-lessee (sic.)London & Thames Haven Oil Wharves Ltd. v.Attwooll (Inspector of Taxes) [1968] 70 ITR 460 (CA), the IAC observed that the amount received by the assessee which went to fill the hole in the profits would be in the nature of trading receipt, even then the IAC directed that they should be taken into account for the purpose of computation of capital gains. Thus, it is not disputed by the department that the amount of Rs. 1,50,000 is a capital receipt. What is now argued before us by Shri S.P. Mehta, for the assessee, is that this amount was received as a compensation or damages for surrendering rights of occupation and such rights of occupation did not have any cost just as tenancy rights have no cost. In that sense no capital gains could be calculated in respect of this receipt because this was an amount received in respect of a surrender of an asset for acquiring which the assessee did not have to pay any specific cost. For this proposition, Shri Mehta has relied on the decision of the Bombay High Court in the case of Mrs. Shirinbai P. Pundole (supra), where the Bombay High Court held that the surrender of the tenancy right to the company in exchange for an ownership flat in the building did not attract capital gains tax under Section 45. On the other hand, the Commissioner (Appeals) relied on the Bombay High Court decision in the case of Tata Services Ltd. (supra). In this case, the Bombay High Court held that a right to obtain conveyance of immovable property is clearly a property as contemplated by Section 2(14) of the Act. In this case under an agreement dated 31-7-1961 the assessee had agreed to purchase 5,000 sq. yards out of a residential plot of land admeasuring 7,012 sq.
yards in Bombay at Rs. 75 per sq. yard and had paid Rs. 90,000 as earnest money. The purchase was to be completed within six months. The vendor was to obtain at his cost the necessary permission from the municipal or other public authorities for the sub-division of the main plot and if such permission was not obtained on any account whatsoever, the vendor was entitled to cancel the agreement, upon which the earnest money deposited was to be refunded. Later the vendor wanted to cancel the agreement on the ground that the sub-division of the plot had not been granted by the municipal corporation. This was not accepted by the assessee. Ultimately under an agreement the assessee transferred and assigned in favour of one A and B its right, title and interest under the agreement and received a sum of Rs 5,90,000 from A and B as consideration for the transfer of the assessee's right and title. The Court on these facts held that the actual cost to the assessee of the right to obtain the sele deed on the date of the agreement of sale was Rs. 90,000. All that the assessee had was the right to obtain sale deed. The entire amount of Rs. 5 lakhs, being the difference between the amount of Rs. 5,90,000 received by the aseessee and Rs. 90,000 originally paid by the assessee as earnest money, would be capital gains in the hands of the assessee. In the instant case these facts are clearly distinguishable from the facts of the case before us. The assessee before us had not entered into an agreement to purchase a property and the money received by the assessee was not a consequence of an agreement since that agreement was not fulfilled by the vendor.
The assessee was a sub-lessee of a property comprising of four flats leased out to its sister concern, Sueseen Textile Bearings Ltd. Since the lessees were not able to transfer the flats to the assessee in view of the Urban Land Ceiling Act, the sub-lease agreement was cancelled.
The assessee agreed to return to the lessee the flats on a payment of Rs. 10,04,237 which consisted of various different components the details of which have been narrated hereinabove. Rs. 1,50,000 was intended as a compensation for surrender of occupancy rights and neither the ITO nor the Commissioner (Appeals) has pointed out the exact cost of the asset that was so surrendered for which this amount was received. The IAC's argument that the advance rent of Rs. 5,09,240 and the security deposit of Rs. 40,000 represented cost of acquiring right of occupation does not appear to be logical. In the first place even in the case of a tenant when advance rent is paid that does not constitute the cost of tenancy right. Secondly, the security deposit paid by the assessee has been separately and independently shown in the receipt of Rs. 10,04,237 and taken into account in the computation of capital gains in respect of the rest of the assets. This amount cannot be mixed up with or confused with the receipt of Rs. 1,50,000 which has been described as quantified compensation or damages payable to the sub-lessee.
7. At the time of hearing Shri Mehta has in fairness given the recomputa-tion of capital gains after taking note of profits under Section 41(2). The Commissioner (Appeals) has observed while drawing support from the decision of the Bombay High Court in Tata Services Ltd.'s case (supra) that the assessee had not transferred the rights under the sub-lease agreement, but had also transferred the capital asset, viz., furniture, air-conditioning plant, etc. However, Shri Mehta is not pressing the taxability of capital gains arising out of the transfer of such assets. As for the receipt of Rs. 1,50,000 the Commissioner (Appeals) has observed that although in the agreement the amount has been described as damages in reality on the facts discussed by us above it was consideration for the assessee not enforcing its rights under the lease to remain in possession for the unexpired period of lease of 99 years. In other words, what was surrendered was a right of occupation and the argument of Shri Mehta that right which was akin to right of tenancy did not have any specific cost has not been effectively met by the ITO or the IAC or the Commissioner (Appeals), nor has it been rebutted at the time of hearing before us. We would, therefore, following the decision of the Supreme Court in the case of CITv. B.C. Srinivasa Setty [1981] 128 ITR 294, hold that what was surrendered was an asset in the acquisition of which it was not possible to envisage a cost. In any case such cost has not been specifically determined or determinable. Therefore, we agree with the assessee's representative that the amount of Rs. 1,50,000 was a capital receipt which did not give rise to any capital gain because it was received in respect of relinquishment of a right of occupation the cost of which was not determined or determinable.