Capital gains on transfer of tenancy right, not being in the nature of land or building or both, cannot attract the provisions Section 50C of the Act
Court : Mumbai bench of Income-tax Appellate Tribunal
Citation : The Mumbai bench of Income-tax Appellate Tribunal (the Tribunal) in the case of Kishori Sharad Gaitonde v ITO (ITA No. 1561/M/09) held that for attracting the provisions of Section 50C of the Income-tax Act, 1961 (the Act) a capital gains should arise from the sale of land or building or both. However, since in the present case the taxpayer earned capital gains from the transfer of tenancy right which is not a capital asset, being land or building or both, the Tribunal held that Section 50C of the Act was not applicable to the instant case.
BriefKishori Sharad Gaitonde v ITO (ITA No. 1561/M/09)
Background: - Under Section 50C of the Act if the consideration received or accruing to a taxpayer on transferring of any land or building is less than the value adopted by any State government authority, the value so adopted shall be considered as full value of consideration.
Facts of the case
- · The taxpayer gave her property on tenancy basis to two tenants for a certain number of years. The tenants with the consent of the taxpayer transferred their tenancy rights to a new tenant for a total consideration of INR 3 million. The tenants retained one-third of the total consideration while the balance two-third was received by the taxpayer.
- · However, the Assessing Officer (AO), based on Section 50C of the Act, adopted the valuation made by the state government authority and considered total consideration as INR 3.31 million instead of INR 3 million taken by the taxpayer. Accordingly, the AO assessed long term capital gain of INR 207,447 in the hands of the taxpayer being two third share of INR 311,200.
- · The Commissioner of Income-tax (Appeals) upheld the order of the AO.
- · The taxpayer contended that the provisions of Section 50C of the Act are not applicable as the capital gains earned were due to transfer of ‘tenancy rights’ and not from sale of land or building or both as required by Section 50C of the Act.
- · The AO had not referred the matter to valuation officer for computing the value of transfer of tenancy rights.
- The Tribunal referred to the ‘Notes on clauses’ and ‘Memorandum explaining the provisions in the Finance Bill 2002’ and observed that under section 50C of the Act if the consideration received on sale of land or building or both is less than the value adopted for stamp duty purpose in respect of such transfer, the value so adopted shall be deemed to be the full value of consideration and capital gain shall be computed under section 48 of the Act.
- Further, a legal fiction has been created under Section 50C of the Act for assuming the value adopted by any state government authority as full value of sale consideration received in respect of transfer of land or building or both. The Tribunal after relying on the decisions of the Supreme Court in the cases of (1) CIT v. Amar Chand Shroff  48 ITR 59 (SC) and (2) CIT v. Mother India Refrigeration Industries (P) Ltd.  155 ITR 711 (SC), held that such legal fiction confined to restricted operations cannot be widened to include within its sweep all the cases where ‘such property’ is not covered.
- For attracting the provisions of section 50C of the Act, a capital asset under consideration should be land or building or both registered by sale deed. If the capital asset is not land or building or both, section 50C of the Act cannot come into operation.
- However, since in the present case there is transfer of tenancy right which is not a capital asset, being land or building or both, the Tribunal held that Section 50C of the Act is not applicable.
Our Views: – It is a welcome ruling where the Mumbai Tribunal has held that transfer of tenancy right cannot be considered as capital asset in the nature of land or building or both for the purpose of section 50C of the Act. Accordingly, profits from transfer of tenancy right cannot be brought to tax under the provisions of section 50C of the Act.