1. This appeal has been posted for hearing before the Special Bench since while delivering judgment in the case of assessee in IT Ref. No.123 of 1996 on 6th Feb., 2001, Cadell Wvg. Mill Co. (P) Ltd. v. CIT and other connected writ petitions and income-tax appeals, the Hon'ble Bombay High Court have answered the question (p), "Whether on the facts and in the circumstances of the case and in law, was the Tribunal justified in not dealing with the ground relating to the determination of Book profit under Section 115J of the Act?" as under: "In the light of our judgment, the Tribunal is directed to decide the ground relating to the determination of book profit under Section 115J of the IT Act." 2. Questions (a) to (o) have been answered by Their Lordships as indicated below: Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in holding that the receipts of Rs. 1,40,00,000 by the applicant on the surrender/termination of the tenancy rights/possessory rights was casual and non-recurring receipts within the meaning of s. 10(3) of the IT Act? Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in holding that the compensation received by the statutory tenant towards the surrender of statutory tenancy rights/possessory rights was casual and non-recurring within the meaning of s, 10(3) of the IT Act? Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in holding that the surrender of the tenancy rights/possessory rights by the statutory tenant to the landlord did not amount to "transfer" within the meaning of s, 2(47) of the IT Act? In the negative i.e., in favour of assessee and against the Department.
[f] Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in holding that the applicant, a statutory tenant had no right or interest, which could be considered as property for computing capital gains? Whether, on the facts and in the circumstances of the case and in law, the Tribunal while determining the taxability of the compensation received on the surrender of tenancy rights was justified in making a distinction between the rights of a contractual tenant and that of a statutory tenant? Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in ignoring the decisions of the Bombay High Court in the case of (i) CIT vs. Shirinbai P. Pundole (1981) 129 OS 448 (Bom); (ii) Off vs. Gehmi Jal Cooper (IT Appeal No. 59 of 1977); and Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in neither following nor even referring to the aforesaid decisions of the Bombay High Court in the cases which were cited and the copies of the game were filed in the course of the hearing before the Special Bench, dealing with the identical issue about taxability of compensation received on the surrender of the tenancy rights by the statutory tenants? In the negative i.e., in favour of the assessee and against the Department.
Whether, on the facts and in the circumstances of the case and in. law, was the Tribunal justified in ignoring the following decisions cited at the time of hearing of the appeal which directly supports the case of the applicant : (i) Shrinbai P. Pundole's case (supra); (x) Associated Pharmaceutical lad. (P) Ltd. (ITAT (Mad) Bench 'A' (1993) 47 ITD 656 (Mad)} Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in holding that the receipt of Rs. 1,10,00,000 by the applicant on surrender of tenancy rights/possessory rights was not a capital receipt? Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in holding that the receipt of Rs. 1,40,00,000 by the applicant on the surrender of the tenancy rights/possessory rights is income within the meaning of s. 2(24) of the IT Act? Whether, on the facts and in the circumstances of the case and in law, has the Tribunal misdirected itself in basing its Conclusion by ignoring the Bombay High Court judgments in the cases of (i) Smt.
Shiinbai P. Pundole's case (supra); In the affirmative i.e., in favour of assessee and against the Department.
which has direct bearing on the issue involved before the Special Bench? Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in deciding the question, which was not the one that was referred to the Special Bench for its consideration? Does not arise for consideration in view of the statements made across the bar by the learned advocates on both sides.
Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in holding that the capital gains which do not fall under the ambit of s. 45 of the IT Act, the same would be considered as income exigible to tax under s. 10(3)? Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in not referring to the CBDT Circular No.158, dt. 27th Dec., 1994, which was submitted in the course of hearing of the appeal, stating that under the provisions of s. 10(3), only receipts in the nature of income would be brought to tax and not the capital receipts, which circular was binding on the AO.Whether, on the facts and in the circumstances of the case and in law, was the Tribunal justified in holding that for the purpose of s. 10, no distinction exists between the Revenue receipts and the capital receipts and that both would be covered under s. 10 of the IT Act 3. The brief facts may be recapitulated. During the relevant previous year, the assessee received a sura of Rs. 1,40,00,000 as consideration for surrendering its tenancy rights in a property situated at Cadell Road, Prabhadevi, Bombay. The question before Their Lordships in the income-tax reference, at the instance of the assessee, was whether the sum was liable to tax as casual and nonrecurring income under Section 10(3) of the IT Act. A Special Bench of the Tribunal had held that the sum was so assessable. Various other assessees were also before the Hon'ble High Court in respect of the identical issue and all the cases were bunched and heard by Their Lordships. It was ultimately held that the tenancy right is a capital asset that the surrender thereof for consideration gives rise to capital receipt, that since tenancy right has no cost of acquisition the consideration cannot be brought to tax under the head 'Capital gains' nor can the compensation be assessed as casual or non-recurring income under Section 10(3).
However, in the case of the assessee-company, the question whether the compensation would be includible as part of the "book profit" for the purpose of Section 115J was not answered by the Hon'ble High Court since the Tribunal had not considered the question. Therefore the Tribunal was directed to deal with this ground.
4. Accordingly we have heard Mr. Y.P. Trivedi, the learned counsel for the assessee and Mrs. Nishi Singh, the learned CIT (Departmental Representative). Mr. Trivedi's contention was that the Departmental authorities have not examined in depth the question whether the consideration received for surrender of the tenancy rights could be considered as part of the "book profit", that they have simply proceeded on the footing that since the amount is assessable under Section 10(3) as casual and non-recurring income the same would also form part of the book profit for purposes of Section 115J, that now since the Hon'ble High Court has held that the sum cannot be assessed under Section 10(3) it would be in the fitness of things if the matter is restored to the AO to enable him to consider all the aspects of the issue including the ramifications under the relevant provisions of the Companies Act, 1956. He took us through para 7 of the assessment order and para 4 of the order of the CIT(A) to point out the manner in which the Departmental authorities have decided the question. He further pointed out that the clear finding of the Hon'ble High Court was that the amount received by the assessee for the surrender of the tenancy rights was a capital receipt not exigible to capital gains because there was no cost of acquisition and in the light of this finding it would not be permissible to consider the sum as part of the "book profit" for purposes of Section 115J. Mr. Trivedi in fairness stated that in the accounts of the assessee prepared as per Parts n and III of Schedule VI to the Companies Act the amount was shown as part of "other income" appearing in the P&L a/c but contended that the mere disclosure of the amount in such a manner in the accounts does not mean that it is part of the "book profit" within the meaning of Section 115J. He referred to the judgment of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) in this connection wherein it has been held that entries in the books of account are not conclusive of the question whether a particular receipt is taxable or not. Mr. Trivedi submitted that even after the advent of Section 115J which defined what "book profit" is, the fundamental concept of the term "profit" has not been taken away or abridged in any manner so that it can be said that even capital receipts can be brought under the definition.
5. In support of his contentions, Mr. Trivedi relied on the following orders/ judgments : (2) GKW Ltd. v. Jt. CIT (2000) 68 TTJ (Cal) 756 : (2000) 74 ITD 161 (Cal).
6. Mr. Trivedi also relied on the observations made by the author at p.
1960 of A. Ramaiya's Companies Act, where the author has discussed as to how grants given by the Government may be treated in the accounts of the company.
7. On the basis of the aforesaid submissions, Mr. Trivedi contended that all the above aspects will have to be considered by the Departmental authorities and that the proper course would be to direct them to consider those aspects and pass a speaking order on the question whether the amount received for surrender of the tenancy rights would form part of the "book profit" for purposes of Section 115J.8. Mrs. Nishi Singh, the learned CIT (Departmental Representative), on the other hand contended that if at all only the computation part may be directed to be made afresh by the Departmental authorities and that there is no need to restore the main question, viz., whether the amount received for surrender of tenancy rights forms part of the "book profit" for purposes of Section 115J She pointed out that on the main question the judgment of the Hon'ble Bombay High Court in the case of CIT v. Veekaylal Investment Co. (?) Ltd. (2001) 249 ITR 597 (Bom) is directly in favour of the Revenue since in this case it has been held that income from capital gains is to be included in "book profit" for the purpose of applying Section 115J. She also referred to M.R.M.Plantations (P) Ltd. v. CIT (2001) 250 ITR 521 (SC), a recent judgment of the Supreme Court, wherein it has been held, for purposes of levy of additional income-tax on undistributed income under Section 104 of the IT Act, that profits on sale of house properties and rubber plantation treated by the directors of the company as commercial profits and brought into the P&L a/c of the company should be taken into consideration for purposes of levy of additional tax. Mrs. Singh submitted that this judgment also supported the stand of the Revenue.
9. In his brief reply, Mr. Trivedi, the learned counsel for the assessee, clarified that in Veekaylal Investment Co. (P) Ltd.'s case (supra) relied on by the CIT (Departmental Representative), the profit on sale of immovable properties had been offered and assessed under the head "capital gains" and, therefore, it was held by the Hon'ble High Court that for purposes of Section 115J the same would form part of the "book profit" and that in the present case the clear finding of the Hon'ble High Court was that the amount received on surrender of tenancy rights was a capital receipt not chargeable to capital gains since there was no cost of acquisition. Since the amount was not chargeable as capital gains, the decision, according to Mr. Trivedi, was not applicable.
10. We have carefully considered the rival contentions and the issue involved. On the factual aspect, we find that the assessee has included the consideration received for surrender of the tenancy rights in the Prabhadevi property in the P&L a/c under the head "Other income". A note has also been made in the printed accounts to that effect.
However, the various issues that cropped up before us in the course of the arguments need to be considered by the Departmental authorities and adjudicated upon. Mr. Trivedi is right when he says that they have proceeded to include the amount as "book profit" for purposes of Section 115J merely on the footing that the said amount has been assessed by them as casual or non-recurring income under Section 10(3) of the Act. Logically, the question whether the amount would be so includible even where it has been held to be a capital receipt and hence not liable to tax under Section 10(3) will therefore have to be considered by the Departmental authorities themselves first. One important question to be considered, as it turned out in the course of the arguments before us, is whether there is merit in the contention of the assessee that the mere inclusion of the disputed amount in the P&L a/c prepared in accordance with Parts II and III of Schedule VI to the Companies Act would not automatically lead to the inference that it is part of the "book profit". An incidental question, which in our opinion, arises is, whether the disputed amount can fall within the term "profit" as is generally and commercially understood and as it is understood for purposes of the Companies Act. In other words, do "capital profits" also fall to be considered as "profits" under the Companies Act? This aspect of the matter, in our opinion, assumes significance because Section 115J(1A) in terms refers to Parts II and III of Schedule VI to the Companies Act and the P&L a/c prepared in accordance therewith. In Surana Steels (P) Ltd. v. Dy. CIT (1999) 237 ITR 777 (SC), the Supreme Court has held, while interpreting another part of Section 115J which referred to Section 205 of the Companies Act, that there is no reason to assign to a term occurring in Section 205 of the Companies Act a meaning different from the one in which that section is understood in the Companies Act while finding out the meaning of the same term which is used in a provision of the IT Act by incorporation. In other words, it was held that whatever meaning that was assigned to Section 205 under the Companies Act is to be applied while interpreting Section 115J of the IT Act which expressly referred to the section. Section 115J(1A) refers to Parts II and III of Schedule VI to the Companies Act and the P&L a/c prepared in accordance therewith. Therefore, applying the same rule of interpretation which the Supreme Court has adopted in the decision cited above, it may be necessary for the Departmental authorities to consider how to understand the meaning and import of the word "book profit" and whether a capital receipt which is not normally to be considered as profit for purposes of Companies Act can still be considered as profit for purposes of Section 115J, notwithstanding the accounting treatment given to the same by the assessee. The decision of the Special Bench of the Tribunal in the case of Sutlej Cotton Mills Ltd. v. Asstt. CIT (1993) 46 TTJ (Cal)(SB) 310 : (1993) 45 ITD 22 (Cal)(SB) may throw light on this point. Though this decision has been referred to by the Hon'ble Bombay High Court in Veekaylal Investment Co. (P) Ltd.'s case (supra), no comment or opinion has been expressed about the correctness of the decision. It is also for the consideration of the Departmental authorities as to whether the judgment in Veekaylal Investment Co. (P) Ltd.'s case (supra) can be applied to a case where the disputed amount has been held by the Hon'ble High Court to be a capital receipt and not casual or non-recurring income. On all these aspects of the matter, the Departmental authorities have not had the benefit of the arguments ably placed before us by both the sides. As already noted elsewhere, their decision to treat the amount as part of the "book profit" for purposes of Section 115J appears to be a corollary to their view that the same is taxable as casual or non-recurring income under Section 10(3). Now that their view is no longer operative, having been reversed by the Hon'ble High Court, they have to consider whether still it would be legally permissible or correct for them to consider the amount as part of the "book profit" for purposes of Section 115J. The various authorities to which our attention has been drawn by both the sides may be of assistance to them in reaching a correct conclusion.
11. For the above reasons we are of the view that the matter needs to be restored to the file of the AO. He will now consider afresh the question whether the amount received for surrender of the tenancy rights in the Prabhadevi property is includible as part of the "book profit" for purposes of Section 115J and take a decision in accordance with law and after affording adequate opportunity to the assessee to put forth its case.
12. So far as the first issue is concerned, viz., whether the amount was rightly assessed as casual or non-recurring income under Section 10(3) r/w. Section 56, we hold, respectfully following the decision of the Hon'ble High Court in respect of questions (a) to (o) that the amount is not so taxable. We also hold that the amount received is a capital receipt and that it is not exigible to capital gains tax under Section 45 because no "transfer" within the meaning of Section 2(47) is involved on the surrender of tenancy/possessory rights. We further hold that there is no distinction between a statutory tenant and contractual tenant for the purpose of determining the taxability of the compensation received on surrender of tenancy rights. The compensation cannot be brought under Section 10(3) on the ground that it does not fall under Section 45. Only revenue receipts are covered under Section 10 and not capital receipts. The compensation cannot be considered as "income" within the meaning of Section 2(24).