T. V. RAJAGOPALA RAO, PRESIDENT :
The following question is referred to this Special Bench :
"Whether, the amount of Rs. 1,40,00,000 received by draft dt. 5th December, 1989 in consideration of surrendering the statutory tenancy rights and/or possessory rights in property situated at Cadell Road, Prabhadevi, Bombay can be construed to be a casual and non-recurring receipt within the meaning of s. 10(3) of the IT Act, 1961 and as such is exigible to tax under s. 56 of the Act ?"
2. The assessee is a company engaged in the business of weaving and dyeing cloth. It had entered into two agreements on 26th September, 1963 with M/s Elphinston Dye Works Pvt. Ltd. whereunder it became the tenant and obtained leasehold rights in the property situated at Cadell Road, Prabhadevi, Bombay. Since there is no dispute with regard to the identity of the tenanted property, we can hereinafter call it as tenanted premises for the sake of brevity. The period of tenancy agreed upon under the terms of the above two indentures was for 15 years. As per the terms of the lease the assessee had to pay a monthly rent of Rs. 575 to the landlord. The contractual terms of lease were not extended and so the terms of the above two indentures expired on 25th October, 1978. However, from that date onwards the assessee was continuing in possession of the tenanted premises as a statutory tenant under s. 12 of the Bombay Rents, Hotel Lodging House Rates Control Act, 1947 which is going to be referred to as "Bombay Rent Act" for the sake of brevity throughout this order. Sec. 12(1) and 12(2) of the Bombay Rent Act are as follows :
"Sec. 12. No ejectment ordinarily to be made if tenant pays or is ready and willing to pay standard rent and permitted increases. - (1) landlord shall not be entitled to the recovery of possession of any premises so long as the tenant pays, or is ready and willing to pay, the amount of the standard rent and permitted increases, if any, and observes and performs the other conditions of the tenancy, in so far as they are consistent with the provisions of this Act.
(2) No suit for recovery of possession shall be instituted by a landlord against a tenant on the ground of non-payment of the standard rent or permitted increases due, until the expiration of one month next after notice in writing of the demand of the standard rent or permitted increases has been served upon the tenant in the manner provided in s. 106 of the Transfer of Property Act, 1882."
Therefore, it is clear that according to the above provisions the assessee is entitled to remain in possession of the tenanted premises as a statutory tenant so long as he continues to pay the agreed rent together with the permitted increases and also observes the other conditions laid down under the Bombay Rent Act. While the assessee was continuing in possession of the tenanted premises as a statutory tenant a suit bearing No. RAE 1234/4016 of 1986 was filed in Bombay Small Causes Court by the landlord namely Prabhadevi Properties & Trading Co. Pvt. Ltd. who appeared to be the successors of the original lessor for eviction of the assessee from the tenanted premises. Four years after the filing of the suit a compromise was effected between the parties as per the terms of the compromise petition dt. 11th December, 1989 filed before the Court.
3. It is stated in the terms of the compromise that the plaintiff landlord required the tenanted premises for its bona fide personal use and occupation. The landlord conceded that the assessee defendant would be put to a great hardship if the decree for ejectment is passed against them. The plaintiff landlord, therefore, expressed its willingness to provide to the defendant assessee reasonable alternative accommodation in lieu of the tenanted premises to mitigate the hardship. It is further stated that both the parties to the suit were trying to look and secure a suitable premises for the defendant-assessee as a reasonable and alternative accommodation. However, the averments in the compromise continued that neither the landlord not the assessee tenant were stated to be able to find out any reasonable alternative accommodation.
4. Clauses 5, 6, 7 and 9 of the compromise petition filed before the Bombay Small Causes Court are felt to be pertinent and, hence, they are extracted as under :
"5. As a plaintiffs requirement is urgent. The plaintiff have offered to pay to the defendant a sum of Rs. 1,40,00,000 in order to enable to secure a reasonable and alternative accommodation of their choice as and when available in lieu of the suit premises.
6. The defendant had accepted the plaintiffs offer and acknowledge having received from the plaintiff the aforesaid amount of Rs. 1,40,00,000 by a bank draft bearing No. 952191 dt. 5th December, 1989 on the Canara Bank, Mahalaxmi Branch, Bombay.
7. In view of the receipt of the said amount by the defendant, it is agreed that no hardship would be caused to the defendant, if a decree of ejectment is passed against them.
9. It is recorded that the defendant had handed over to the plaintiff and the plaintiff had received from the defendant quiet, vacant and peaceful possession of the premises described in cl. (8) above, i.e., the premises on which the defendants were the lessees/tenants of the plaintiff which were in occupation of the defendants."
5. Thus, it can be seen that in lieu of surrendering the possession of the tenanted premises, the assessee tenant had obtained Rs. 1,40,00,000 on 5th December, 1989 which falls in the accounting year relevant to the asst. yr. 1990-91. The P&L account maintained by the assessee tenant for the accounting year in question disclosed a profit of Rs. 1,42,29,178. The assessee tenant purported to have derived these receipts from sale of cloth, processing charges and compensation said to have been derived on surrendering of tenancy rights. However, the amount shown in the P&L account was not either declared or offered for taxation under s. 115J of the IT Act, 1961 in the IT return filed for the year in question. It is the case of the assessee tenant that this receipt is not liable to any tax and more so as capital against under s. 45 of the IT Act. Since there is no purchase value for acquisition of tenancy rights and, hence, the machinery provision for computation of capital gains cannot come into operation and, therefore, according to the Honble Supreme courts decision in CIT v. B. C. Srinivasa Setty when the machinery provisions fail, the main
provision of computing capital gains itself fails and, hence, the capital gains cannot be computed.
6. However, the Assessing Officer (AO) did not agree with the contentions of the assessee but he wanted to bring the amount to tax since he wanted to treat it as casual and non-recurring income under the head "income from other sources" and he mainly relied upon the judgment of the Honble Allahabad High Court in the case of CIT v. Gulab Chand (1991) ITR 495 (All).
7. The assessee took the following contentions before the AO :
Sec. 10(3) of the IT Act is a provision which deals with grant of exemption and it is not a taxing provision. A tenancy right is a capital asset and transfer of a capital asset yields capital gains. If for some reason or the other, the amount cannot be taxed under capital gains, it cannot be taxed under any other head, including other sources also and for that reason it cannot be considered as casual and non-recurring receipt.
8. It is also contended by the assessee that the receipt does not bear the character of income.
9. The above contentions were rejected by the AO one after the other. Firstly he held that the receipt is in the nature of income. He held that under the scheme of the IT Act, whichever receipt falls within the ordinary and natural meaning of the word "income" should also be taken as income and in support of this proposition, he relied upon a Privy Council decision in CIT v. Shaw Wallace & Co. . The AO held that income signifies all those incomes comprehended within its natural meaning and also the casual and non-recurring income which comes within the meaning of s. 2(24) of the IT Act. He found that the receipt as per the meaning given to the word in English dictionary is the amount of money received. He held that there was no doubt that the assessee had received the money, and every receipt including a non-recurring receipt can also in fact be taxed under the scheme of the IT Act. He relied upon the decision of the Honble Supreme Court in Raghuvanshi Mills v. CIT for this purpose. The AO
held that as per the authority of the Honble Privy Council in Gopal Narain Saran Singh v. CIT (1935) 3 ITR 237 (PC) at 242, the word "income" is not limited by the words "profits and gains" and any receipt which can be properly described as income is taxable under the Act unless expressly exempted. The AO conceded that there is no capital gains involved in the transaction. However, he was of the view that the amount received is casual and non-recurring receipt. According to him his view was further strengthened by the fact that the assessee had credited the amount to his P&L account. He holds that under s. 10(3) the expression "receipt" should be read as synonymous to the word "income". He further held that s. 10(3) of the IT Act does not distinguish between the word "capital receipt" and the "revenue receipt" making it clear thereby that all the receipts, notwithstanding whether they are capital or revenue in nature form part of the income. He held that the amount received is a casual and non-recurring receipt within the meaning of s. 10(3) of the IT Act and, therefore, is justified to include the sum of Rs. 1.40 crores in the total income of the assessee. After giving a deduction of Rs. 5,000 which is exempt under s. 10(3) he brought to tax the total amount of Rs. 1,39,95,000 under the head income from other sources.
10. The appeal preferred by the assessee before the CIT(A), Bombay failed as per his impugned order dt. 13th September, 1993 against which the assessee filed the second appeal before this Tribunal.
11. When the matter came up for hearing before the Division Bench comprising of Shri T. V. K. Natarajachandran, learned Accountant Member, and Shri M. K. Chaturvedi, learned Judicial Member, both Members made a reference under s. 253 to the then President who agreed for the formation of a Full Bench. The question for consideration before the Full Bench was already extracted.
12. The first question which arises for consideration before the Full Bench is to find out what is the nature of the interest held by the statutory tenant under the provisions of the Bombay Rent Act.
13 . Shri Y. P. Trivedi, learned Advocate, appeared for the assessee and Shri K. L. Tilakchand, Senior Departmental Representative, appeared for the Department. Several other Advocates and Chartered Accountants appeared for the interveners and tried to strengthen the arguments advanced on behalf of the assessee alleging that the cases of interveners are almost similar in facts to the case of the assessee before us. Both the assessee as well as the interveners filed voluminous paper books. However, we do not propose to deal with the individual cases of the interveners. We propose to lay down certain principles while deciding the case of the present assessee before us. The cases of interveners will be decided by the respective Division Bench before which they come, following the ratio of this Full Bench.
14. Shri Y. P. Trivedi, learned advocate for the assessee, and all other learned counsel appearing for the interveners also contended that the receipt is not liable to tax since it is in the nature of capital gains. They contend that the compensation received by statutory tenant towards the surrender of the statutory tenancy rights to the landlord is a capital asset or receipt. It is also the contention that the statutory tenant has a transferable right to the tenanted premises and by surrender of that right to the landlord, he derives capital receipt and, therefore, the sum of Rs. 1.40 crores received by the assessee tenant in this case is in the nature of capital receipt and, hence, not taxable under s. 10(3) of the IT Act, 1961.
15. In order to test the efficacy of the said argument of the learned counsel for the assessee and also the interveners, we will have to find out what sort of interest a statutory tenant enjoys while he is continuing in possession of the tenanted premises. Further we will have to explore and find out whether the right enjoyed by him is a transferable right within the meaning of s. 2(47) of the IT Act. Even in the beginning we have noticed that the tenanted premises is governed by the provisions of the Bombay Rent Act. The provisions of the Bombay Rent Act were considered by several decisions of the Bombay High Court as well as the Supreme Court. The important question as to what sort of interest a statutory tenant under the Bombay Rent Act, 1947 enjoys in the tenanted premises in his possession was considered, inter alia, by the three following important decisions :
1. Anand Niwas Pvt. Ltd. AIR 1965 SC 414;
16. In Anand Niwass case (supra), the majority judgment was delivered by Justice Shah. After quoting the provisions of s. 12 of the Bombay Rent Act, he held that a person continuing in possession of the tenanted premises let to him after the determination of or expiry of the period of contractual tenancy, is commonly though in law not accurately called a statutory tenant. Dealing with the right of such a statutory tenant, at para 27 of his judgment, his Lordships stated the following :
"Such a person is not a tenant at all; he has no estate or interest in the premises occupied by him. He has merely the protection of the statute in that he cannot be turned out so long as he pays the standard rent and permitted increases, if any, and perform the other conditions of the tenancy. His right to remain in possession after the determination of the contractual tenancy is personal : it is not capable of being transferred or assigned and devolves on his death only in the manner provided by the statue. The right of a lessee from a landlord on the other hand is an estate or interest in the premises and in the absence of a contract to the contrary is transferable and the premises may be sublet by him. But with the determination of the lease, unless the tenant acquires the right of a tenant holding over, by acceptance of rent or by assent to his continuing in possession by the landlord, the terms and conditions of the lease are extinguished, and the rights of such a person remaining in possession are governed by the statute alone. Sec. 12(1) of the Act merely recognises his right to remain in possession so long as he pays or is willing to pay the standard rent and permitted increases and perform the other conditions of the tenancy, but not the right to enforce the terms and condition of the original tenancy after it is determined."
17. In that case, their Lordships were considering the question whether a statutory tenant had a right to sub-let the premises and holding that no such right existed in him in para 30 of his judgment, the learned Judge held the following :
"As a statutory tenant he had no estate or interest capable of being assigned or transferred and his statutory right to occupy could not in law be sublet, because a lawful subletting postulates a right to enjoy the property and a right to transfer the same to another. There can be no subletting when there is no right in the premises especially when the statutory tenancy ceases when the tenant parts with possession."
18. In Para 33, his Lordships held that a statutory tenant had no interest in the premises occupied by him and he has no estate to assign or transfer. In para 35 at page 426, he laid down the following :
"A statutory tenant is, as we have already observed, a person who on determination of his contractual right is permitted to remain in occupation so long as he observes and performs the conditions of the tenancy and pays the standard rent and permitted increases. His personal right of occupation is incapable of being transferred or assigned, and he having no interest in the property there is no estate on which sub-letting may operate. If it be assumed that a statutory tenant has the right of sub-letting some very surprising consequences may ensue."
19. In AIR 1986 Bom 184 (supra), the Full Bench headed by Chief Justice K. Madhava Reddy considered the following four important questions which were extracted at pages 185 at the close of para No. 3 :
"1. Whether a statutory tenant governed by the Bombay Rent Act retains transferable interest in the premises ?
2. Whether a statutory tenant governed by the Bombay Rent Act retains heritable interest in the premises ?
3. Whether a statutory tenant governed by the Bombay Rent Act could have created a valid licence before 1973 ?
4. Whether, Vasart Tatoba Hargude v. Dikkaya Muttaya Pujari and Chandrakant Kashinath Thakur v. Narayana Lakhanna Shetty & Ors (First Appeal No. 754 of 1978) (reported in 1980 Bombay RC 122) were correctly decided ?"
20. Out of the four questions, question No. 1 is very important for our present investigation. The Honble Bombay High Court had considered whether a statutory tenant under the Bombay Rent Act retains transferable interest in the tenanted premises or not. The Honble Bombay Full Bench while considering the said question had duly taken note of the Honble Supreme Courts decision in AIR 1965 SC 414 (supra), J. C. Chatterjee v. S. K. Tandon ; Ganpat v. Shashi Kant ; V. Dandi Lal v. Prabhu Ram ,
V. Dhanpal Chettiar v. Yasedai Ammal Gian Devi v.
Jeevan Kumar ultimately held in paras 11 and 12 of their judgment as follows :
"11. The question whether a statutory tenant has a transferable interest or not would depend upon on the terms of the contractual tenancy. Such term would continue to be operative even after the contractual tenancy comes to an end and the tenant becomes a statutory tenant. But this again would be subject to contrary provision in the Bombay Rent Act. It would, therefore, be necessary to discuss in detail this aspect of transferability of contractual tenant and/or statutory tenancy.
12. Under s. 108(j) of the TP Act in the absence of a contract to the contrary the lessee has a right to transfer his tenancy rights absolutely or by way of sub-lease, etc. This right would continue to exist in favour of a statutory tenant but all this would be subject to the provisions of the Bombay Rent Act. Sec. 15 of the Bombay Rent Act provides that notwithstanding anything contained in any law but subject to a contract to the contrary it shall not be lawful for the tenant to sublet his interest. Thus it would be necessary to read this provision and s. 108(j) of the TP Act together. So read, it would be clear that a tenant under the TP Act can sublet his interest if there is no contract to the contrary. However, s. 15 [now s. 15(1) of the Rent Act] prohibits any sub-lease assignment or transfer by a tenant of his interest if there is no contract to the contrary; a breach thereof renders the tenant liable to eviction under s. 13(1)(e). Thus under the Rent Act, sub-tenancy will be permissible not when the contract is silent but when the contract specifically permits a sub-lease. The net result is that the contractual tenants will be divided into two categories :
A. A tenant who, under the tenancy agreement, is specifically entitled to sub-lease his interest (for short category A tenant).
B. A tenant who under the tenancy agreement is not so specifically entitled to sub-lease or whose tenancy agreement is silent about it (for short category B tenant).
Category A tenant, even after the termination of his tenancy, would continue to have right to sub-lease that right under the original contractual lease has not been taken away by the Bombay Rent Act. In fact that right has been kept in tact. However, the tenant of category B would not either before or after the termination of his contractual tenancy be able to sublet his interest in view of the specific bar under s. 15."
21. Therefore, the Full Bench of the Bombay High Court after considering all the decisions held that under the Bombay Rent Act sub-tenancy will be permissible not when the original tenancy contract was silent but when it had specifically permitted the sub-lease. It further held that the right under the original contractual lease had not been taken away by the Bombay Rent Act and infact that right had been kept in tact.
22. Here it is necessary for us to consider whether the Bombay Full Bench became final or it was overruled by any Supreme Court decision especially by AIR 1987 SC 117. (referred to supra). After going through the Full Bench of the Bombay High Court as well as AIR 1987 SC 117, we find that the ratio of the Full Bench of the Bombay High Court on the first of the points posed before it which deals with the question whether the statutory tenant governed by the Bombay Rent Act retains transferable interest in the tenanted premises or not was not disturbed, and therefore, in our opinion, the Full Bench decision of the Bombay High Court on that aspect of the matter should be taken to have become final. We find that it was only the third question formulated in its decision by the Full Bench which came up for consideration of the Honble Supreme Court in AIR 1987 SC 117. The Honble Supreme Court itself had extracted the four questions set before itself by the Full Bench of the Bombay High Court and in fact it had extracted all of them at the close of para 23 of its judgment. In the beginning of para 24, the Supreme Court clearly held that in the appeal before them, the controversy was considered on question No. 3 referred to by the Bombay Full Bench which is as follows :
"Whether a statutory tenant governed by the Bombay Rent Act could have create a valid licence before 1973 ?"
23. However, the Honble Supreme Court had noted the decision of the Bombay Full Bench on each of the four questions considered by the Full Bench. In para 35 of its judgment, the Honble Supreme Court extracted the exact question which came up for their consideration as follows :
"The question that falls for consideration in this appeal is as to who is the licensee mentioned in s. 15A of the Act. What kind of licence is contemplated by sub-s. (1), can a licence of a statutory tenant whose contractual tenancy has come to an end contemplate under the provisions of this Act ? The Full Bench of the Bombay High Court has held that a statutory tenant whose contractual tenancy did not specifically authorise him to sublet or grant lease cannot create a licence which can be sought recognised by s. 15A of the Act. Is that view right is the question that we have to answer."
During the course of his judgment reported in AIR 1987 SC 117 Justice Sabyasachi Mukharji duly took into consideration the earlier decision of the Supreme Court on the subject namely AIR 1965 SC 414 and paraphrased the majority decision as well as the minority decision in that judgment in paras 46, 47 and 48. So also he duly took notice of the decision in AIR 1972 SC 2526 relying upon the majority decision in AIR 1965 SC 414. The only point that was decided in AIR 1987 SC 117 was found stated in para 70 of the judgment which is as follows :
"In the aforesaid view of the matter, we are unable to sustain the judgment under appeal. In the premises it must be held that all licensees created by landlords or by the tenant before 1st February, 1973 and who were in actual occupation of a premises which was not less than a room as licensee on 1st February, 1973 be the licensees of the landlord or tenant and whether there be any term in the original agreement for tenancy permitting creation of such tenancy or licences or not would become tenant and enjoy the rights granted under the Act specially those mentioned in s. 14(2) of the Act."
The earlier judgment in AIR 1965 SC 414 should be taken to have been overruled so far as it had come in conflict with the later Supreme Court decision in AIR 1987 SC 117. However, so far as it does not come into conflict with the later decision the earlier decision in AIR 1965 SC 414 should be taken to be a valid and binding authority even now.
24. In the facts of the case before us, we are not concerned with any grant of licence by the tenant to a sub-tenant before 1st April, 1972 or the said sub-tenant continuing in possession of any portion of the tenanted premises. Therefore, the question whether any sub-tenant under the head tenant could have the right to continue as tenant under the landlord is not the question which arose before us at all. The only question with which we are concerned in this appeal was whether a statutory tenant under the Bombay Rent Act has any transferable right or not. The Bombay Full Bench had decided this issue and it became final. Whether a tenant had a right of transfer or not would depend upon the contractual terms of the tenancy agreement. If the contractual tenancy confers upon the tenant such a specific right to create a sub-lease or to grant a sub-lease of the tenanted premises, he continues to enjoy the right even after the contractual tenancy was over and when the tenant remains in the possession only as a statutory tenant under the provisions of the Bombay Rent Act. The lease deeds are dt. 23rd September, 1963 and they are filed at pages 19 to 26 and 28 to 33 of the assessees paper book. In the first of the lease deeds cl. (h) contains the following specific terms :
"Not to sublet or part with the possession of the premises or any part thereof without the consent in writing of the lessor."
In para 2(h) of the second lease deed (indenture) also contained a similar stipulation which is as under :
"Not to sublet, assign or part with the premises or any part thereof without the consent in writing of the lessor."
25. Therefore, it is clear that no specific right to sub-let the demised premises was ever given to the tenant under the terms of the tenancy agreements dt. 23rd September, 1963. It was never the case of the assessee that any consent was obtained from the landlord during the subsistence of tenancy, either contractual or statutory.
26. In the cases of all the interveners before us, the tenancy agreements are to be gone into and it should be found whether the right to grant sub-tenancy was granted to the head tenant at any time by the landlord under the terms of the contractual tenancy or whether any permission to sub-lease the tenanted premises was obtained by the tenant from the landlord under the terms of the tenancy agreement. In all such cases where such permission was found granted it should be held that the surrender of tenancy right even by statutory tenant is a valid transfer of a capital asset. Since there is no dispute that tenancy right as such is a capital asset. However, in cases where no such right was granted to the tenant or no such term of contract was existing in the lease deed or the lease deed was silent about it or there is a specific clause prohibiting such sub-tenancy or it was never the case of the tenant that he had ever obtained valid consent from the landlord to sub-let the premises and such case was not proved then in all such cases it should be held that the tenant had no right to transfer his interest in the tenanted premises inasmuch as he had no right of transfer both under the Full Bench case of the Bombay High Court in AIR 1986 Bom 184 as well as the Honble Supreme Court in AIR 1965 SC 414. In the cases of each of the interveners this exercise was found not done by the lower authorities and, therefore, all those cases must be remanded, in our opinion, to the first appellate authority to find out from the clauses of the governing lease agreements and decide the issue afresh and in accordance with law as laid down above.
27. Broadly stated the cases before us fall in two categories. The first category is governed by the Full Bench decision of the Bombay High Court as well as the majority decision in AIR 1965 SC 414 and in all such cases there is no term in the tenancy agreement giving right to the tenant to sub-lease the premises. This type of cases would fall into category No. A. In the second category, there are cases where there is a term in the agreement of tenancy giving right to the tenant to sub-lease the premises. All such tenants even though their contractual term of tenancy is over and even though they remain in possession only as a statutory tenants, according to the Full Bench decision of the Bombay High Court AIR 1986 Bom 184, they should be held not to have lost the rights which they obtained under the original tenancy even though they continue to remain in possession as statutory tenants. They retained the right of transfer and, therefore, they should be held eligible to transfer their tenancy right and all of them fall into category No. B.
28. All tenants falling under category A cannot be considered to be tenants at all. They have no asset or interest in the premises occupied by them. Their right to remain in possession after the determination of their contractual tenancy is personal and it is not capable of being transferred or assigned. Sec. 2(47) of the IT Act defines transfer in relation to a capital asset and it is as follows :
" Sec. 2(47) :
In this Act, unless the context other wise requires :
(47) "transfer" in relation to a capital asset, includes :
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in s. 53A of the TP Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of or requiring shares in a co-operative society, company or other AOP or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property."
The definition of "transfer" under the above provision is much wider than the word transfer as understood under the TP Act, under which any interest in property restricted in enjoyment to the owner personally cannot be transferred by him. The only right which a statutory tenant had got in the tenanted premises as we have already seen from our above discussion is the right to remain in possession so long as he goes on paying standard rent and permitted increases. Such right is held to be a personal right to the tenant which cannot be transferred or assigned. Such right does not also bring in any interest in property or estate which he can sub-let, surrender, assign, etc. In the book titled as Principles of Law of Transfer 5th Edn., Tripathi Publication by S. M. Shah at page 9 under the heading surrender the following is what is stated :
"Surrender of a lease is not a transfer within the meaning of s. 5 of the Act. Since it is the falling of the lesser estate into a greater one (Makhan Lal v. Nagendranath 60 Cal 379)."
29. As regards the question as to whether a surrender of life estate by a Hindu widow is or is not a transfer as defined in s. 5 of the TP Act there exists conflict of decisions amongst the High Courts which was ultimately resolved by the Supreme Court in Natwar Lal v. Dadubhai 56 Bom LR 447 SC holding that such surrender is not a transfer within the meaning of s. 5 since it is only an act of self effacement by the widow and accelerates the succession to her husbands estate. Thus a deed of surrender executed by a life tenant in favour of the remaindermen under a deed of settlement is not a transfer within the meaning of ss. 5 and 53 of the Act Palanivelu v. Ouseph Mathai ).
Similarly, a deed of surrender simplicitor cannot effect any transfer of title of releaser in favour of the releasee Mst. Samarathi Devi v. Parasuram Pandey .
30. The word surrender is defined and the words surrender by operation of law are also defined in Blacks Law Dictionary, 5th Edn. at page 1295 as follows :
To give back; yield; render up; restore; and in law, the giving up of an estate to the person who has it in reversion or remainder, so as to merge it in the large estate. A yielding up of an estate for life or years to him who has an immediate estate in reversion or reminder wherein the estate for life or years may drown by mutual agreement between them. Roberts Inv. Co. v. Hardie Mfg. Co. 142 Or 179, 19 p. 2d 429, 431; Kimberlin v. Hicks, 150 Kan. 449 94 P. 2d 335, 339. The giving up of a lease before its expiration. In old English Law, yielding up a tenancy in a copy hold estate to the lord of the manor for a specified purpose. The giving up by a bankrupt of his property to his creditors for their assignees; also his due appearance in the bankruptcy Court for examination as formerly required by the bankruptcy acts.
Surrender is contractual act and occurs only through consent of both parties. Motchs Admr v. Portner 237 Ky. 25, 34 S.W. 2d 744, 745. Surrender differs from abandonment as applied to leased premises, inasmuch as the latter is simply an act on the part of the lessee alone; but to show a surrender, a mutual agreement between lessor and lessee that the lease is terminated must be clearly proved."
Surrender by operation of law
This phrase is properly applied to cases where the tenant for life or years has been a party to some act the validity of which he is by law afterwards estopped from disputing, and which would not be valid if his particular estate continued to exist. An implied surrender occurs when an estate incompatible with the existing estate is accepted, or the lessee takes a new lease of the same lands. Any acts which are equivalent to an agreement on the part of the tenant to abandon, and on the part of the landlord to resume the possession of the demised premises amount to a surrender by operation of law. The rule may be said to be that a surrender is created by operation of law when the parties to a lease do some act so inconsistent with the subsisting relation of landlord and tenant as to imply that they have both agreed to consider the surrender as made."
In cases coming in category No. A mentioned above, a statutory tenant will have no other right except to remain in possession of the tenanted premises so long as he goes on paying monthly rent and permitted increases. He has no estate as such and his right is personal to himself and he cannot transfer his right to any other person. Having regard to the above, we will have to hold that such a person will not have any interest in the property which he can convey to others. It is a trite law to state that no man can convey a better title than what he himself has. When a tenant had no interest and his right is only personal and cannot be transferred what can he surrender to his landlord ? When he does not possess any interest where is the question of any transfer of such interest and where is the question of such transfer being a transfer of a capital asset under s. 45 of the IT Act. Thus to our minds the pivotal argument advanced by the learned counsel for the assessee that the surrender of statutory tenancy amounts to surrender of tenancy right and the tenancy right is always considered to be a capital asset, that the transfer of such capital asset yields capital receipt and because such a statutory tenancy bears no purchase value, the ratio of the Honble Supreme Court decision in B. C. Srinivasa Setty (supra) comes to the aid of the
assessee and for that reason, the surrender of tenancy right does not give rise to capital gains and, therefore, no part of Rs. 1.40 crores received by the assessee constitute capital gains, does not appear to be either acceptable or convincing argument. As already stated above, in the facts of this case, there is nothing for the statutory tenant to transfer. He can only relinquish what he had under law. But when there was no right at all to relinquish, there is no question of transfer or relinquishment or surrender of that right.
31. Now let us see whether the receipt in question is income and whether it is taxable under the IT Act or not. The assessee contends that the receipt in question does not bear the income nature at all. In our opinion, this contention is to be rejected for the reasons given by the AO in his assessment order dt. 22nd March, 1993, which are quite convincing and are fully acceptable to us. The AO held in para 3(ii) of his assessment order that the receipt in this case constitute income. The reasons given by him are as follows :
"The term income is of a very wide and vague import. It is an expression of elastic ambit and its description at any time cannot be exhaustive. Under s. 2(24) of the Indian IT Act, the word income specifies not only those things which it includes (capital gains being one of them) but also such other things which the word in its natural connotation implies. The scheme of the Act is such given its ordinary and natural meaning, the word income will take in any monetary return coming in CIT v. Shah Wallace & Co. . However, this does not mean that income must have the necessary attribute of recurring regularity. Non recurring receipts can also be income taxed under the scheme of the Act Raghuvanshi Mills Ltd. v. CIT . Incomes is an ordinary word in the English language and unless the context otherwise requires that it should be given its ordinary natural meaning. Given the scheme of the Act, the word income signifies all that it can encompass within its natural meaning and also the artificial categories specified in sub-s. (24) of s. 2. "
Significantly the assessee contends that the receipt in question is not an income at all. Receipts as per the meaning given in Oxford English Dictionary means the fact or action of receiving or being received into a persons hands or possession, especially of payment of some dues. It also means the amount of money received. There is no doubt about the fact or action of the assessee having received the money which is a receipt after all.
32. The above meaning of the word income was also approved by the Honble Supreme Court in Universal Radiators v. CIT . At pages 804 and 805, the following is what is stated :
"The word income ordinarily, in the normal sense connotes any earning or profit or gain periodically, regularly or even daily in whatever manner and from whatever source. Thus, it is a word of very wide import. Clause (24) of s. 2 of the Act is legislative recognition of its elasticity. Its scope has been widened from time to time by extending it to the varied nature of income. Even before it was defined as including profits, gains, dividends and contribution received by a trust, it was held to be a word of broadest connotation which could not be understood in restricted or technical sense. The wide meaning of the word was explained by this Court in Raghuvanshi Mills Ltd. v. CIT and it was emphasised that the expression from
whatever source derived widened the net."
It is contended by the learned Senior Departmental Representative that even if a receipt did not fall within the ambit of any of the clauses enumerated under s. 2(24) of the IT Act, it may still be income comprehended by the natural meaning of that word. This argument finds support in the Honble Supreme Court judgment CIT v. G. R. Karthikeyan , the following is what is stated :
"Further, even if a receipt does not fall within sub-cl. (ii) or for that matter any of the sub-clauses in s. 2(24) , it may yet constitute income. To say otherwise, could mean reading the sub-clauses in s. 2(24) as exhaustive of the meaning income when statute expressly states that it is inclusive. It would be a wrong approach to place a receipt under one or other sub-clauses under s. 2(24) and if it does not fall under any of the sub-clauses, to say that it does not constitute income. Even if a receipt does not fall within the ambit of any of the sub-clauses under s. 2(24) it may still be income if it partakes of the nature of the income. The idea behind providing an inclusive definition under s. 2(24) is not to limit its meaning but to widen its net. This Court has repeatedly said that the word income is of the widest amplitude, and that it must be given its natural and grammatical meaning."
In the case of Navinchandra Mafatlal v. CIT , it was held that capital gains is included in the natural meaning of the word income. In the said case the meaning of the word income was explained and the following is what is stated at page 764 :
"What, then, is the ordinary, natural and grammatical meaning of the word income ? According to the dictionary it means a thing that comes in (See Oxford Dictionary, Vol V. page 162, Stroud Vol. II pages 14-16). In the United States of America and in Australia both of which also are English speaking countries the word income is understood in a wide sense so as to include a capital gains. Reference may be made to Eisner v. Macomber, Merchants Loan & Trust Co. v. Smietanka and United States of America v. Stewart and Resch v. Federal Commr. of Taxation. In each of these cases very wide meaning was ascribed to the word income as its natural meaning. The relevant observations of the learned Judges deciding those cases which have been quoted in the judgment of Tendolkar J. quite clearly indicate that such wide meaning was put upon the word income not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary English word income. Its natural meaning embraces any profit or gain which is actually received. This is in consonance with the observations of Lord Wright to which reference has already been made."
33. In the case of H. H. Maharani Shri Vijayakuverba Saheb of Morvi & Anr. v. CIT , it was held that a voluntary payment may constitute income in the hands of the person receiving them. In order to constitute income, it is not necessary that the payment must proceed from a legal source. Even though if payments cannot be enforced by the payee in a Court of law, the payments may constitute income unless and until those voluntary payments were connected with the office, profession, vocation or occupation of the recipients. It is held that what is taxed under the Indian IT Act, is income from every source including the voluntary payment which can be regarded as having an origin which a practical man regard as a real source of income.
34. Now in this case, the statutory tenant who surrenders his possession has no legal right to enforce payment. It cannot also be said that no practical man can regard the payment in question as depending merely on the whim of the landlord. Therefore, for all the above reasons, we hold, rejecting the argument of the assessee that the receipt in question is not income, that it is definitely to be considered as income in the hands of the assessee.
35. Now let us consider how far the income received by the assessee is taxable in his hands. According to the AO, s. 2(45) IT Act defines total income as meaning the total amount of income referred to in s. 5, computed in the manner laid down in the Act. The assessee being a resident Indian, its total income could, therefore, mean receipts which would come to it from all the sources. According to the AO, s. 10 of the Act enumerates all the receipts which are to be specifically exempted. Hence according to him by a correct appreciation of s. 10 of the Act, one can sieve from the total of all the receipts of the assessee, those receipts which would constitute total income, which is liable to be taxed under the IT Act. For this deductive process adopted by him, he relied upon the Privy Council decision in the case of Gopal Narain Saran Singh v. CIT (1935) 3 ITR 237 (PC) which specifically lays down that the word income is not limited by the words profits and gains of business and anything which can be properly described as income is taxable unless, under the IT Act it is expressly exempted. According to the AO from reading of ss. 2(45) , 4 , 5 , 10 and 14 of the IT Act, it leaves no doubt in his mind to come to a conclusion that the receipt in question constitute taxable income. According to the Revenue, the receipt is casual and non recurring within the meaning of s. 10(3) of the IT Act and since it is not specifically covered by any of the heads of income enumerated in A to D heads of income under s. 14 IT Act, it should be taken to be covered by the residuary head which deals with income from other sources. On the other hand, the contention of the assessee was firstly that the nature of the receipt is capital and not revenue and, hence, the provisions of s. 10(3) do not apply to it. In any event since the moneys were obtained under a compromise entered into between the statutory tenant and the landlord, it should be considered that the moneys were obtained under an agreement and they are anticipated and whichever moneys the tenant obtained under an agreement, cannot be considered as casual receipts. The learned counsel for the assessee relied upon the following case laws in support of their proposition :
CIT v. Indian Textile Engineers Pvt. Ltd. & Anr. ;
CIT v. J. C. Wahal ;
Lohtse Co-op. Housing Society Ltd. v. Seventh ITO (1994) 51 ITD 608
The contention of the assessee was that s. 10 of the IT Act is not a charging section. It only deals with exemptions. According to the assessee an amendment was introduced in s. 55(2) of the Finance Act, 1994 w.e.f. 1st April, 1995 and it is as follows :
For the purposes of ss. 48 and 49 , cost of acquisition
(a) in relation to a capital asset, being goodwill of a business, tenancy rights, stage carriage permits or loom hours :
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price;
(ii) in any other case [not being a case falling under sub-s. (i) to (iv) of sub-s. (1) of s. 49] shall be taken to be nil."
36. When the Finance Act of 1994 was in the stage of a bill, the reasons for its introduction and the purpose and aim of the provision was explained to the legislature as follows :
"Capital gain on transfer of assets where there is no cost of acquisition.
By virtue of the provisions of s. 45 of the IT Act, capital gains arising on transfer of a capital asset is subjected to income-tax. Sec. 48 lays down the method of computing capital gains. The cost of acquisition and expenditure relating to the transfer are deducted from the full value of consideration to arrive at capital gains. Sec. 2(14) defines capital asset to include all kinds of property except a few specified ones.
In a number of cases, the Courts have decided that, in case of self generated assets like goodwill or where the cost of asset to an assessee (not covered by situations mentioned in s. 49 is nil, no tax on capital gains consequent to transfer of such assets could be charged. They have interpreted that, only if an asset did cost something to the assessee in terms of money the provisions relating to the levy of tax on any capital gains under s. 45(1) r/w s. 48(ii) would apply. A transaction to which these provisions cannot be applied has been held to be one never intended by s. 45(1) to be the subject of the charge. The Courts have further interpreted that the intent of levying capital gains tax goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on expenditure of money to a person seeking to acquire it. The Courts have held that none of the provisions pertaining to the head capital gains suggest that capital asset include an asset in the acquisition of which no cost at all can be conceived. The leading case propounding this interpretation is CIT v. B. C. Srinivasa Setty .
In order to overcome the judicial interpretation, the Finance Act, 1987 w.e.f. 1st April, 1988 has provided in s. 55(2)(a) that cost of acquisition in case of self generated goodwill will be taken to be nil. For the purpose of bringing the capital gain arising from transfer of any of the following assets, in the acquisition of which the assessee has not incurred any expenditure, the Finance Bill proposes to amend the provisions relating to capital gains and provide that the cost of acquisition of the following assets is to be taken at nil :
1. Tenancy rights
2. Route permits
3. Loom hours
The proposed amendment will take effect from 1st April, 1995 and will, accordingly, apply in relation to asst. yr. 1995-96 and subsequent years. (Clause 18)"
On the basis of this amendment, the learned counsel for the assessee contended that the legislature for the first time intended to bring capital gains tax on surrender of tenancy rights only from 1st April, 1995 and for that purpose an amendment was introduced in s. 55(2)(a). The memo explaining cl. 18 of the Finance Bill which is extracted above clearly shows that it is intended to overcome the Supreme Court decision in B. C. Srinivasa Settys case (supra). From the above, the intention of the legislature can be clearly gathered. It was never the intention of the legislature to tax capital gains on surrender of tenancy rights before 1st April, 1995. Had it been the intention of the legislature to tax capital gains on surrender of tenancy rights before 1st April, 1995, nothing prevented the legislature to introduce the amendment with retrospective effect. Further, it was argued if the capital gains yielded by surrender of tenancy rights are taxable even without the aid of amendment under s. 55(2)(a) by treating the receipts as revenue and bringing them to tax under s. 10(3) as casual and non-recurring, there is no necessity at all to bring in the amendment as already extracted above. Therefore, according to the learned counsel of the assessee, the legislative action by bringing in amendment in s. 55(2)(a) would clearly show that the receipts obtained on transfer of tenancy rights were never intended to be taxed prior to 1st April, 1995.
37. It is again the contention of the assessee that if any particular receipt is ultimately found to be not chargeable to tax under any other provision of law, it does not become taxable under s. 10. The income chargeable under s. 10 should be casual and non-recurring; it should be purely accidental, if the income is anticipated, it cannot be considered to be casual and non-recurring. IT Act, 1961 postulates taxing of income under various heads. If the receipt is taxable under a particular head in which it falls, but when ultimately it is found to be not taxable under that head, the said receipt cannot be brought to tax under the residuary head of other sources. As the receipt in question in this appeal arose out of an agreement, which was arrived at between the assessee and its landlord after considerable negotiation, deliberation and thought, the receipt by the assessee was not on account of any chance or without design or motivation. Accordingly, it was argued that the amount was not causal and non-recurring. They relied upon the following decision :
CIT v. Mineral Mining Co. Ltd. ; Nalini Kant Amba Lal Modi v. S. A. L. Narayan Row ;
CIT v. Indian Textile Engineers Pvt. Ltd. (supra); CIT v. J. C. Wahal (supra);
CIT v. Smt. T. P. Sidhwa .
38. The learned Departmental Representative, on the other hand, firstly, explained that the receipts which come under the category of casual and non-recurring were exempt from tax prior to 1972 but from 1972 onwards, they were no longer exempt except to the extent of Rs. 1,000 or Rs. 5,000 set out in the section. Therefore, great caution is to be observed while appreciating the case law on the subject. In order to highlight the distinction between the case law prior to 1st April, 1972 and after 1st April, 1972, the learned Departmental Representative cited two decisions reported in :
Universal Radiators v. CIT ;
CIT v. G. R. Karthikeyan (supra).
He requested us particularly to take into consideration the assessment years involved in both the above cited decisions. In Universal Radiators case, he pointed out that the assessment year involved is 1967-68. Therefore, though the receipt in that case was considered to be casual and non-recurring, ultimately the assessee was found to be not assessable; whereas in Karthikeyans case, the assessment year involved is 1973-74 and, therefore, though the nature of the receipts remained as casual and non-recurring but they were found to be assessable to tax in the hands of the assessee under s. 10(3) of the IT Act. In at page 805, it is held that what is
essential to be proved before a particular receipt is to be taken as casual and non-recurring. After quoting s. 10(3) of the IT Act, 1961, their Lordships held at page 65 of 112 CTR/805 of ITR the following :
"In the substantive clause, an income which was casual and non-recurring in nature was excluded from being charged as income of the assessee. Due to the use of the word and existence of both the conditions was mandatory. Absence of any one of them disentitled the assessee from claiming any benefit under the clause. Casual according to the dictionary, means accidental or irregular. This meaning was approved by this Court in RM AR. AR. RM. AR. AR. Ramanathan Chettiar v. CIT . Non-recurring is one which is not likely to
occur again in a year."
We are inclined to think that the receipts in question are to be considered as casual and non-recurring. They cannot be considered to be capital receipts since no distinction is to be drawn between revenue receipts and capital receipts so long as they are governed by the provisions of s. 10(3). In fact the argument that s. 10(3) of the IT Act, 1961 does not apply to capital receipts was advance but was rejected by the Honble Allahabad High Court in the illustrious case of CIT v. Gulab Chand (supra) :
"It is argued for the assessee that the receipt must first be income, i.e., it must be revenue receipt, and should not be capital receipt. If it is a capital receipt, it will not be a receipt within the meaning of cl. (3), it is argued. We find it difficult to agree with the learned counsel for the assessee that the expression receipts occurring in cl. (3) must necessarily be revenue receipts and not capital receipt. The word receipt must be understood as synonymous with income. The expression income has been defined in cl. (24) of s. 2 to include capital gains. It is precisely for this reason that proviso (i) to cl. (3) of s. 10 expressly excludes capital gains chargeable under the provision of s. 45 from the ambit of the said clause."
Sec. 2(24) of the IT Act gives the definition of income and it is an inclusive definition. In cl. (vi) of the said section, capital gains chargeable under s. 45 is mentioned. Therefore, argued the learned Departmental Representative, that there is no force in the contention that s. 10(3) does not apply to capital receipt. The learned Departmental Representative brought to our notice that a case which was considered by the Honble Allahabad High Court namely Gulab Chands case (supra) with almost similar facts as in the present case was already decided in favour of the Revenue. In the facts of that case, the assessee received a sum of Rs. 15,000 by way of consideration for surrendering the tenancy of a godown occupied by him as a tenant. In the return filed by the assessee, he showed the amount as a capital gain. Later, the assessee claimed before the ITO that the amount was not a revenue receipt and was not taxable. The ITO held that the amount was casual and non-recurring receipt within the meaning of s. 10(3) of the IT Act and, therefore, exempted Rs. 1,000 to tax and assessed the balance sum of Rs. 14,000 to tax. The AAC confirmed the order of the ITO. The Tribunal held that the amount received for the surrender for tenancy rights was a capital receipt. The Honble Allahabad High Court headed by the then Chief Justice (B. P. Jeevan Reddy, as he then was) held that even if the amount received for the surrender of tenancy rights was a capital gain, in view of the decision of the Honble Supreme Court in B. C. Srinivasa Settys case (supra), it was not a capital gain chargeable under s. 45 of IT Act for the reason that there was no cost of acquisition for the tenancy rights. Therefore, the receipt was of a casual and non-recurring nature within the meaning of s. 10(3). Ultimately, the Honble Allahabad High Court held that the Tribunal was in error in holding that the receipt was a capital gain and in directing the ITO to compute the tax accordingly.
39. After going though the judgment, we cannot agree with the contention of the learned Departmental Representative that the facts of that case are quite similar to the facts on hand. First, we do not know whether the tenancy in the cited case was a contractual tenancy or a statutory tenancy. If it is a statutory tenancy, what is the statute, the provisions of which were considered by the learned Bench of the Allahabad High Court. We have already considered the right of a statutory tenant under the Bombay Rent Act to sublet the premises or to further transfer his interest to a third party. Following the Full Bench decision of the Bombay High Court, on the subject, we hold that the right of further transferring the interest of the statutory tenant would have to be found out from the recitals of the original tenancy agreement. If any right to transfer the interest of the tenancy was created under the original tenancy agreement, the same would continue even after the expiry of the term stipulated under the contractual tenancy and it continues even when the tenant remains as a statutory tenant. When no such right was created under the terms of the original tenancy then no right of transfer of the tenancy right could exist in the statutory tenant. After thoroughly reading Gulab Chands case (supra), we found that in the Allahabad case a distinction was drawn between capital gains simpliciter and capital gains chargeable to tax under s. 45 of the IT Act. According to the said decision, there may be receipts which are of the nature of capital receipts but at the same time which are not taxable under s. 45 of the IT Act. There may also be receipts which are in the nature of capital receipts and which are also taxable under s. 45 of the Act. Under the clear provisions of s. 10(3) of the IT Act, the latter category mentioned above only are exempt from tax as casual and non-recurring.
40. At this juncture, it is essential to consider the Honble Supreme Court decision in B. C. Srinivasa Settys case (supra). The ratio of the decision was that the charging section and the computation provision together constitute an integrated code. When there is a case to which computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. In that case, their Lordships were considering whether the goodwill generated in a newly commenced business can be described as an asset within the meaning of s. 45 of the IT Act. Sec. 48 contemplated the machinery section under which the capital gains would be computed. Unless the capital asset has got a cost price it is not possible to determine the capital gains. By observing ss. 45 , 48 and 49 together, their Lordships in that case held a proposition that where a transaction to which the computation provision cannot apply, must be regarded as never intended by the main provision to be the subject of charge. So, if there is no cost price which can be contemplated to a capital asset, s. 45 could not be taken to have intended to charge capital gains, from the transfer of that asset. Similarly, there is no cost price for the surrender of tenancy rights. Even in cases where the right of transfer of tenancy exist in favour of the tenant under the terms of the original agreement, which right continues to exist even while the tenant is continuing as a statutory tenant; if the ratio of B. C. Srinivasa Settys case (supra) is applied, the receipts realised by surrender of tenancy rights to the landlord cannot give rise to any capital asset and those receipts cannot be charged for capital gains under s. 45 of the IT Act. If they cannot be held chargeable under s. 45 , no capital gains can be charged. However, as per the interpretation given in Gulab Chands case (supra), all receipts which are not chargeable to capital gains under s. 45 of the IT Act would still be considered as casual and non-recurring income under s. 10(3) of the IT Act. They cannot be absolved from the charge of tax. Sec. 10(3) along with its two provisos are as under :
"any receipts which are of a casual and non-recurring nature, to the extent such receipts do not exceed five thousand rupees in the aggregate :
Provided that where such receipts relate to winnings from races including horse races, the provisions of this clause shall have effect as if for the words five thousand rupees, the words two thousand five hundred rupees had been substituted.
Provided further that this clause shall not apply to :
(i) capital gains chargeable under the provisions of s. 45 ; or
(ii) receipts arising from business or the exercise of a profession or occupation; or
(iii) receipts by way of addition to the remuneration of an employee."
41. We have already surveyed the provisions of s. 2(24) of the IT Act which defines the word income and we found out that it is an inclusive definition. Under cl. (vi) of the said provision, capital gains were included and were treated as part of the income. Thus, according to the definition of income as found in s. 2(24) , income includes capital gains and according to the second proviso to s. 10(3) , it is not all capital gains which are excluded from the definition of income but only those capital gains chargeable under the provisions of s. 45. Therefore, it is significant that what are excluded under the second proviso of sub-s. (3) to s. 10 of the IT Act are only capital gains which come under s. 45. If there are capital gains which do not come under s. 45 still they cannot go out of the category of income but still to be considered as income exigible to tax under s. 10(3). Gulab Chands case, in our opinion, is an authority for the proposition that all receipts are income and under proviso (ii) to cl. (3) of s. 10 of the IT Act, only capital gain chargeable to tax under s. 45 were expressly excluded and, therefore, no distinction exists between revenue receipts and capital receipts for purposes of s. 10.
42. We have already held that the assessee tenant in the main case before us (M/s Caddel Wvg. Mills Pvt. Ltd.) is only a statutory tenant who did not have any right to further transfer its tenancy right under the terms of the original tenancy agreement and, therefore, it has no transferable right nor any estate which it can transfer. It has got only a mere personal right which cannot be transferred to another person. Thus the receipt obtained by the assessee tenant towards surrender of its tenancy right cannot be considered to be capital receipt or capital gains. They can be considered merely as receipts which are synonymous with income as per Gulab Chands case (supra).
43. It is only in the case of B category tenants described in our orders above, we will have to consider whether the ratio of the Gulab Chands case hold good or not. The other counsel for the interveners as well as the counsel for the assessee contended that Gulab Chands case was wrongly decided. Sec. 10(3) is not charging section but only a section granting exemption from tax. Gulab Chands case has not taken into consideration the Supreme Court decision in A. Gasper v. CIT which arose out of . The facts of
the case are that the assessee was a tenant in premises No. 240E, Acharya Jagdish Bose Road, Calcutta. He was a monthly tenant in the property since 1940 under certain earlier landlords. On 27th March, 1967, the then landlord entered into an agreement for leasing out the property to Associated Battery Makers (Eastern Ltd.), permitting them to construct a building on the said premises. The assessee was also a party to the said agreement. As party of the said agreement, the assessee received a sum of Rs. 4,50,000 in consideration of which he permitted the new lessees to put up construction in his tenanted premises also. For that purpose, he transferred his tenancy right to Associated Battery Makers and became a licensee in respect of the premises under the Associated Battery Makers. The sum of Rs. 4,50,000 was received in two instalments of Rs. 2,25,000 each. The first instalment was received on 15th March, 1967 and the second on 25th May, 1967. In asst. yr. 1967-68, the ITO treated the sum of Rs. 2,25,000 less certain amount paid to the landlord and solicitor and deducting the statutory exemption, he brought the net sum of Rs. 1,82,201 as capital gains. The assessees objections before the AAC and the Tribunal were unsuccessful. So also the reference before the High Court. Three questions were raised before the Honble Supreme Court which were quoted at page 385 :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessees right of tenancy under the landlords constituted a capital asset within the meaning of s. 2(14) of the IT Act, 1961 ?
2. If the answer to question No. 1 is in the affirmative, whether on the facts and in the circumstances of the case, the Tribunal was right in holding that there was a transfer of the assessees right of tenancy under the landlords within the meaning of s. 2(47) of the said Act ?
3. If the answer to question No. 2 is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the sum of Rs. 1,83,201 represented capital gains assessable under s. 45(1) of the said Act for the asst. yr. 1967-68 ?"
The contention was raised based on the decision of the Honble Supreme Court in CIT v. B. C. Srinivasa Setty (supra). It was submitted that assuming that the assessee had a capital asset and that the consideration had been received for relinquishing some part of his right, the entire sum of Rs. 2,25,000 would not have been brought to tax. He pointed out that the capital gains have to be computed under s. 48 of the IT Act, which provides for a deduction, inter alia, of the actual cost of the asset to the assessee. He submitted that the monthly lease of the premises which the assessee was enjoying was not acquired by him at any ascertainable cost. He, therefore, submitted that B. C. Srinivasa Settys case squarely applies and no capital gains was chargeable to tax in respect of the amounts received by the assessee from the Associated Battery. The Honble Supreme Court found that this plea cannot be entertained by them in view of the fact that the following question was sought to be referred before the Tribunal was rejected :
"Whether the Tribunal was justified in law in computing capital gains at Rs. 1,83,201 within the meaning of s. 48 of the IT Act, 1961 ?"
Consequently, the question which is sought to be raised before the Supreme Court was never argued before the High Court since it is a question of which reference was sought but declined by the Tribunal. Therefore, the Honble Supreme Court refused to permit the assessee to raise the question before them. In those circumstances, the Supreme Court made the following observations :
"As we have stated earlier, it does appear that on merits, the assessee has a good case in view of the decision of the Supreme Court earlier referred to which we are unable to consider for the technical reasons given above. If so advised, it will be open to the assessee to apply to the CBDT for administrative relief by abstaining from recovering the tax that has been levied on this amount if it has not already been recovered. If such an application is made, the Central Board will no doubt consider the same sympathetically and expeditiously."
44. A Single Judge of the Calcutta High Court in B. K. Roy Pvt. Ltd. v. CIT , the decision in Gulab Chands case was dissented from and the following is what is stated as per the head note of the said decision :
" Sec. 10 of the IT Act, 1961 lays down certain categories of income which will not be included in the total income of a person. The proviso (i) to sub-s. (3) of s. 10 clearly recognises that capital gain chargeable under s. 45 will not come within its ambit. The question whether any amount received on transfer of a capital asset is liable to be taxed or not will be decided in accordance with the specific provisions of ss. 45 to 55 of the Act. If any amount of capital gain is not taxable as capital gain for any reason, that amount cannot be treated as a casual and non-recurring receipt under s. 10(3) (See pp. 505B, 504D-E).
CIT v. Gulab Chand dissented from.
Held that the CIT had issued the notice under s. 263 seeking to charge the compensation received on surrender of tenancy as a casual and non-recurring receipt following the decision in CIT v. Gulab Chand ;
45. After considering the facts and circumstances of the case, we are inclined to think that s. 10(3) of the IT Act squarely applies to the impugned receipt and we hold that the impugned receipt of Rs. 1.40 crores is casual and non-recurring income of the assessee. Though the assessee did not have any estate which can be transferred and though the right to remain in possession of the tenanted premises was personal to the assessee, though the compromise entered into between the assessee and his landlord under which the assessee purported to have surrendered its tenancy right, it cannot be considered to be a valid transfer or transfer recognised under law. The assessee received a sum of Rs. 1.40 crores from his landlord. It cannot be considered to be an expected sum by any ordinary prudent man and, therefore, it can only be considered a windfall. The argument that a receipt which is foreseen, known and anticipated, provided for under an agreement cannot be regarded as casual was criticised by the learned author Shri Palkhivala in his Income-tax Law, 7th Edn. at page 234 being too broad a proposition to be accepted. The commentary of the learned author in this regard is at page 234 which is as follows :
"Neither the word casual nor the word non recurring has been defined in the Act and these words must, therefore, be construed in their plain and ordinary meaning. In the Oxford Universal Dictionary, the word casual is defined as meaning (i) subject to or produced by chance; accidental, fortuitous; (ii) coming at uncertain times; not to be calculated on unsettled ...." In some cases it has been observed that a receipt which is foreseen, known, anticipated and provided for by an agreement cannot be regarded as casual, even if it is not likely to recur ever or at least for a considerable time. But this proposition is, it is submitted, too broad and sweeping. A bet or other isolated speculation not amounting to business, or a capital sale (apart from the question of liability to capital gains tax) may result in a receipt which was foreseen, known, anticipated and provided for by agreement and yet the receipt may be casual as is shown by the various dicta and decisions cited below. If the very agreement under which the receipt arises is casual, the mere existence of the agreement will not necessarily prevent the receipt from being casual. This principle has been accepted by the Delhi High Court in CIT v. P. N. Behl in which a lump sum received by the assessee from the party to whom he had given his flat on caretaker basis during his absence from India was held to be exempt as a casual receipt."
46. We fully agree with the learned authors view on the subject since in our view it represents the correct position in law and we prefer to follow the decisions reported in B. Malick v. CIT and CIT v. Dr. P. N. Behl over the decisions cited on
behalf of the assessee. For, in our view the learned authors view on the subject represent the correct legal position and simply because there is an agreement under which a particular sum is agreed to be received by itself should not be the deciding factor to determine whether it is casual and non-recurring. We hold that even casual and non-recurring receipts can be the subject-matter of agreement.
47. In (supra), the facts are that the assessee was a medical practitioner and a specialist in treatment of skin diseases (Dermatologist). He went to Stockholm for a week to attend the International Congress of Dermatology as an official delegate from India. He also visited Russia for a week and U.K. for two weeks on his way back to India. He incurred an expenditure of Rs. 5,282 in connection with his foreign tour. He was a tenant of a flat in Delhi and he could not sublet the said property during the time when he and his family was abroad. So he gave the flat to two Americans on a caretaker basis for a short period and received a sum of Rs. 3,000 from the Americans. Now the question was whether the said payment of Rs. 3,000 was a receipt of casual and non-recurring nature in his hands. The Delhi High Court held that it was a receipt of casual and non recurring nature and exempt from tax under the provisions of s. 4(3)(vii) of the Indian IT Act, 1922. The Delhi High Court had held that there was neither any design nor any plan behind the money that the assessee obtained from the Americans. There was no doubt a sort of agreement between the assessee and the two foreigners but the receipt in itself was entirely fortuitous and exceptional. The Delhi High Court in a part of its head note on page 126 held the following :
"For a receipt to be casual it must be the production of a chance or accident or fortuitous and that means that it is neither calculated nor settled nor is there any likelihood of its coming at a certain time. It is too broad and sweeping a proposition to say that a receipt which is foreseen, known, anticipated and provided for by an agreement cannot be regarded as casual. A man may make a bet in the hope that it will bring in a receipt but in that case there has to be an agreement between him and the bookmaker. There is also his anticipation that if that bet succeeds, it will bring in a calculated sum of money. It is, however, the incidental and fortuitous nature of the result that makes the receipt casual."
48. Now we are remained with two important arguments advanced by Shri D. M. Harish, learned Advocate for one of the interveners. They are that not only the tenancy rights but also the possessory rights in a property could be considered to be capital asset and, therefore, the receipts, if any, received on transfer of such capital assets yield capital gains and in support of the said contention, he relied upon Arshad Waliullah v. CED and in the case of B. G. Shah v. CIT . We went through these decisions. We hold the ratio of those decisions does not apply to the facts on hand.
49. In the Allahabad case one M used to be the owner of leasehold rights of a land and a bungalow standing thereon under the State Government. The terms of the lease were expired on 29th November, 1958. After the expiry of the lease M and after his death on 21st February, 1960, his heirs continued to accept rent from M and his heirs. The Asstt. CED included the value of the leasehold property in the valuation of the estate of the deceased M. The Tribunal confirmed the order rejecting the contention of the accountable person that after the expiry of the lease in 1958, there was no interest in the property left to the deceased which he was competent to dispose of. On a reference to the Allahabad High Court, the following is what is held as per the head note :
"Held, that estate duty was rightly levied in respect of the leasehold property as property passing on the death of the deceased. As the deceased remained in possession after the determination of the lease and the Collector accepted rent from him, thereby assenting to his continuing in possession, the deceased was holding over under s. 116 of the Transfer of Property Act and he became a tenant from month to month. The interest of the deceased as such tenant passed upon his death to his heirs, an interest which was transferable and heritable. It was an interest which the deceased at the time of his death was competent to dispose of. Consequently, it was property which must be deemed to have passed on his death."
As can be seen that the cited case was not decided under the provisions of the Bombay Rent Act which is a special Act governing the tenancies in Bombay State. It was a case decided under the Transfer of Property Act which had dealt with the rights of a tenant holding over. Sec. 116 of the TP Act lays down the law as to the rights of the tenant continuing in possession after his term of tenancy was over. However, in our case the special Act namely the Bombay Rent Act the meaning of which was interpreted by the Full Bench of the Bombay High Court as well as by the Honble Supreme Court clearly held that the right of a tenant who continued to be in possession of the property after the tenancy term is over has possessed only a personal right to continue in possession and he has no estate as such which he can transfer to any third party. Thus the decisions which we have considered were decisions which have dealt with a special enactment called the Bombay Rent Act, whereas the decisions cited on behalf of the interveners is a decision rendered under the general law namely the TP Act. It is a trite law that the general law would be abrogated by the special law. Therefore, the Allahabad decision does not apply.
50. In our view B. G. Shah v. CIT (supra) is equally distinguishable from the facts of the present case. In the facts of that case, the assessee entered into an agreement with a company for obtaining a monthly tenancy of certain premises. The assessee filed a suit for specific performance. While the suit was pending, the assessee came to know that a bank was interested in the premises. The assessee approached the company and requested it to negotiate with the bank to their mutual advantage. As a result, the assessee received an amount of Rs. 37,500 from the company by way of compensation for non-performance of the agreement. The assessee claimed before the ITO that the compensation amount was exempt from tax being a capital receipt. However, the ITO held it to be a revenue receipt. The Tribunal affirmed the ITOs view and on a reference, the Bombay High Court held that the assessee had obtained the tenancy intending to use the premises for the purpose of carrying on his business. There was nothing to suggest that he intended to trade in tenancy. The tenancy was, therefore, a capital asset and the sum of Rs. 37,500 was received by the assessee as compensation when the agreement was terminated for non performance of the same, was a capital receipt. A bare reading of the facts would show that the assessee in that case did not obtain any tenancy whatsoever from the company. It had merely entered into an agreement to obtain tenancy. There is a lot of difference between the right of fulfledged tenant and the right of a contractual party to obtain tenancy. In the Bombay case, their Lordships were considering on the facts of that case the nature of the amount received by a contractual party to the tenancy agreement but not on right of tenant itself. The ratio of that decision is neither here nor there for our present purposes. Elsewhere in this order we have already distinguished the present case with the Honble Supreme Courts in A Gaspers case (supra).
51. Another argument advanced was that if income is strictly chargeable under one head, it cannot be charged under any other head. The heads of income enumerated under s. 14 , IT Act, are exhaustive and mutually exclusive to each other. If a receipt is taxable under a particular head in which it falls but when ultimately it was found not taxable under that head for any reason whatsoever, it cannot be brought to tax under any other head and in support of the above proposition, the following case law was cited :
1. United Commercial Bank Ltd. v. CIT
2. East India Housing & Land Development Trust v. CIT
3. CIT v. Chugandas & Co.
4. Nalinikant Ambalal Mody v. CIT (1966) 61 ITR 528 (SC)
5. N. L. Mehta Cinema Enterprises Pvt. Ltd. v. CIT
6. CIT v. National & Grindlays Bank Ltd.
7. Hamilton & Co. Ltd. v. CIT
8. CIT v. Trustees of H. E. H. Nizams Misc. Trust
9. Parekh Traders v. CIT
10. CIT v. Smt. T. P. Sidhwa (supra)
They contended ultimately that as capital gains is chargeable under s. 45 to 55 of the IT Act only the chargeability can be considered only under those sections but not under s. 10(3) of the IT Act.
52. We have already considered in the prior paras of our judgment that what is conveyed under the compromise on the petition is not tenancy right in the tenanted premises. In fact we hold that the tenant after his term of tenancy was over enjoys only a personal right to remain in possession under the Bombay Rent Act and he will not have any transferable right or estate as such and, therefore, all the above decisions cannot be of any avail to the assessee. The above decisions do not apply to the facts of the present case and they are easily distinguishable also and hence the ratio of those decisions cannot be applied to the case on hand.
53. For the above reasons, we agree with the lower authorities that the sum of Rs. 1,39,95,000 should be determined as the taxable income of the assessee for the asst. yr. 1990-91 and we dismiss the appeal of the assessee in ITA No. 7699/B/1993.
54. As regards the cases of interveners, we have already directed that the matter should go back to the first appellate authority who should follow our directions given earlier in our orders and determine their cases afresh according to law. If after enquiry which we have suggested in prior paras, if the first appellate authority comes to the conclusion that any of the interveners (assessees) have a right of transfer of the tenancy rights under the terms of the original lease agreement which they have obtained from their landlords then the said authority should hold that they have transferable right and what they have obtained from their landlord towards surrender of those rights should be considered to be surrender of tenancy rights in which case it should be held that the tenancy right being a capital asset the transfer of which yields capital gains, but in view of the Supreme Court decision in (supra) there is no machinery
provision under which the capital gains can be worked out it should be held that the receipts obtained in such cases are not liable to tax at all. We set aside the orders of the lower authorities in the cases of the interveners and send them for fresh enquiry to the files of the first appellate authority. The appeals of the interveners should be deemed to have been allowed for statistical purposes.