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Case Law Details

Case Name : Kewal Silk Mills Vs Assistant Commissioner of Income-tax (ITAT Mumbai)
Appeal Number : IT Appeal No. 4335 (MUM.) OF 2012
Date of Judgement/Order : 12/10/2012
Related Assessment Year :
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ITAT MUMBAI BENCH ‘A’

Kewal Silk Mills

Versus

Assistant Commissioner of Income-tax

IT APPEAL NO. 4335 (MUM.) OF 2012
[ASSESSMENT YEAR 2009-10]

OCTOBER 12, 2012

ORDER

I.P. Bansal, Judicial Member.

This appeal is filed by the assessee. It is directed against the order passed by the learned Commissioner of Income-tax (Appeals)-25, Mumbai dated June 20, 2012 for the assessment year 2009-10. The grounds of appeal raised by the assessee read as under :

“1. The learned Commissioner of Income-tax (Appeals) has erred in law and on the facts of the case in sustaining the order of the Assessing Officer in taxing the consideration of Rs. 3,75,00,000 received against transfer of sub tenancy rights, deemed tenancy rights under the head ‘Income from other sources’ instead of under the head ‘Capital gains’ holding that the consideration received by the assessee cannot be treated as consideration for transfer of a capital asset and holding that the amount received is in the nature of compensation in connection with loss of business profit as also convenience and hardship on account of shifting elsewhere.

2. The assessee-company craves leave to add, alter or amend the above ground of appeal.”

2. The assessee is a partnership firm. In the return of income the assessee has declared the long-term capital gains on surrender of sub-tenancy rights and claimed exemption under section 54EC of the Income-tax Act, 1961 (the Act) of Rs. 50 lakhs by making investment in NHAI bonds. The Assessing Officer did not accept such claim of the assessee on the ground that the agreement of the assessee dated June 13, 1972 with M/s. Modern Textiles and Silk Mills P. Ltd. (Modern) being the original tenant was only in respect of taking licence on looms and machinery, more particularly described in the schedule annexed to that. Thus according to the Assessing Officer clause one of the said agreement described the licence of looms and machinery ; clause 5 of the agreement describes the shed by way of permissible use on licence basis only, therefore, it was incidental to use the looms and machinery and cannot be construed as sub-lease ; clause 6 of the agreement speaks of lease of machinery and equipment only ; clause 7 of the agreement states that the original licensor, namely, Modern Textile Rayons, shall pay regularly in respect of rent of the shed and premises to the landlord namely Mr. Paresh S. Shah and was not to jeopardize their right of tenancy by any act or default during the substances of the agreement, therefore, the assessee cannot be construed as a sub-lessee in any form of the said portion of the shed thus there was no existence of right of tenancy with the assessee ; clause 8 of the agreement states an obligation of the assessee for prompt and regular payment to the original licensor of all taxes and payments and that payment does not include any payment for use of portion of the shed on which the looms have been affixed ; clause 10 of the agreement states about the obligation of the assessee for insurance of machinery and factory which also does not create any right in the shed in favour of the assessee ; clause 11 states that the assessee shall not be entitled to make any structural alteration in any of the portion of the shed without permission of Modern and if any alteration is done that will become the absolute property of Modern ; clause 12 states the assessee is not entitled to carry on any other business on the portion of the said shed except without prior permission of Modern. Referring to the aforementioned clauses of the agreement, the learned Assessing Officer has come to a conclusion that the assessee cannot be said to have had sub-tenancy rights particularly with regard to land for which compensation has been received by the assessee and, therefore, the amount received by the assessee is not assessable under the head “Capital gain”.

3. The Assessing Officer also examined the purchasers of the said land namely are Mr. Pravin Raghavji Makwana and Mr. Rajesh Raghavji Makwana and asked them the question that in the deed of purchase no name of the assessee firm was mentioned. It was replied that according to the purchase deed Modern and M/s. Saurdeep Chemicals P. Ltd., were the tenant. However, the actual possession and occupation was held by the assessee and the payment has been made to the assessee in order to get peaceful and vacant possession of the property. The Assessing Officer also referred to the reply of the assessee vide letter dated November 21, 2011 in which it was mentioned that the assessee firm had got lease rights of looms, machinery and premises from Modern, vide agreement dated June 13, 1972. Modern was the licensor and the assessee is in continuous occupation of the premises and had enjoyed exclusive and unfitted possession of the premises since June 13, 1972. The Assessing Officer observed that the payment received by the assessee is in the nature of nuisance value and assessee does not have any capital right. The possession of the portion of the shed was incidental to the licence granted to it for the use of machinery. Therefore, the Assessing Officer came to the conclusion that the amount received by the assessee is merely gratuitous and nothing else and is assessable as “income from other sources”. The Assessing Officer also referred to the definition of tenant under the Maharashtra Rent Control Act and has denied the claim of assessee of being a sub-tenant as the assessee was not conferred with any legal right over the property at any point of time. He distinguished the decisions relied upon by the assessee and has assessed the amount received by the assessee as income from other sources and benefit of section 54EC was also denied.

4. Arguments submitted before the Assessing Officer were reiterated before the learned Commissioner of Income-tax (Appeals). For deciding the issue against the assessee the learned Commissioner of Income-tax (Appeals) has taken into account the following 15 points and has upheld the action of the Assessing Officer.

1. The licence agreement dated June 13, 1972, is between Modern Textile and Silk Mills P. Ltd. (hereinafter referred as MTRSMPL) as licensor and the assessee M/s. Kewal Silk Mills (hereinafter referred as KSM) as a licensee. The owner of the land is not a party to the agreement.

2. The license agreement was essentially for the purpose of taking on licence (rent), looms and machinery only as described in schedule (Ref.: second unnumbered para of 1st page of the agreement).

3. The agreement was not registered under the Registration Act, 1908, perhaps due to reason of lease of movable property or otherwise (any agreement relating to immovable property exceeding value of Rs. 100 is compulsorily registrable whereas registration of agreement relating to movable property is optional (Ref.: sections 17 and 18 of the Registration Act, 1908).

4. The licensor, i.e., to say MTRSMPL is not the owner of the immovable property, i.e., to say land in question. It had only tenancy right on the land.

5. The owner of the land/immovable property Shri Paresh Shantilal Shah who incidentally happens to be a director of MTRSMPL. However, the ownership of land in question is of Shri. Paresh Shah in his individual capacity and as an individual right, i.e., to say not as a director of MTRSMPL. It is well settled under corporate jurisprudence that shareholder/director and company are different entities. The company is a definite legal entity, and a juridical person distinct from its members and directors, capable to sue and to be sued upon.

6. It is crystal clear that the licensor MTRSMPL is not the owner of the impugned property but is only a tenant who had carried out his business activities thereon.

7. The assessee, i.e., to say licensee had taken 18 looms and allied machinery on licence (rent) from MTRSMPL, i.e., to say on rent. In other words, the assessee had taken on licence only machineries from MTRSMPL which is evident from licence agreement.

8. The clause 1 of the agreement states that the licensor shall give to the licensee and the licensee shall take from licensor the looms and machinery, more particularly descried in the schedule.

9. The second unnumbered para of the agreement states that licensee (i.e. the assessee) desirous of taking on licensee looms and machinery more particularly described in schedule for a certain period for manufacturing cloths and licensor had agreed to that too. Clause 5 of the agreement clarifies this facts with more clarity which reads as under :

“During the period of this agreement, a licensee shall be entitled to use a portion of the said shed in which looms are situated by way of permissive use on licensee basis only as incidental to using the said looms and machinery and shall never be construed as sub-lessees in any form of the said portion of the said shed.”

10. Clause 6 of the agreement states that “the licensees, (M/s. Kewal Silk Mills) shall have the option to renew the ‘lease of machinery and equipment’ for further two years. The licensees can terminate the lease hereby given by giving to the licensors three months notice in advance in writing of their intention to terminate the lease or vis-a-vis”.

Thus, the licensor had categorically mentioned in the agreement that the lease is exclusively for the machinery and equipment and the renewal is exclusively for the machinery and nothing has been mentioned about the shed since the use of the shed was only incidental and the looms and machinery could not be transported since the same are married to the ground on which they have been fixed.

11. Clause 7 of the agreement states that the licensors, (Modern Textile Rayon and Silk Mills P. Ltd.) shall pay regularly the rent in respect of the said shed and premises to the landlord (Mr. Paresh S. Shah) and shall not jeopardize their right of tenancy by any act or default during the subsistence of this agreement.

In other words, the licensor, Modern Textile Rayon and Silk Mills P. Ltd. was itself not the owner of the said shed and premise and Modern Textile Rayon and Silk Mills P. Ltd., with whom the assessee had entered into an agreement for the “lease of machinery and equipment” had (i.e., licensor MTRSMPL) itself entered into a lease agreement with his landlord for the shed and premise and the MTRSMPL, lease to the assessee was only for the looms. The machinery and equipment were given on rent to the assessee exclusively for the purpose of weaving cloths and in the agreement, Modern Textile Rayon and Silk Mills P. Ltd. had claimed himself, licensor for the lease of machinery and equipment and the assessee, M/s. Kewal Silk Mills, as the licensee. Further, in the agreement the licensor, Modern Textile Rayon and Silk Mills P. Ltd. had categorically mentioned in clause 5 of the agreement that this agreement is exclusively for the purpose of the licence of the looms and the portion of the shed where these looms have been affixed to the ground is for permissive use only being incidental to the grant of the licence for the looms which being large could not be transported and it is clarified in clause 5 that the licensee of the looms would never claim any right in the shed-Quote “shall never be construed as sub-lessees” in any form of the said portion of the said shed and there will not be any right of tenancy by any act or default during the subsistence of this agreement.

12. Clause 8 of the agreement states that the licensee, the assessee shall promptly and regularly pay to the licensor all the taxes and payment whatsoever or extra taxes payable by them in respect of or relating to their business carried on in the said portion of the shed including electric bills and water bills for the electricity and water consumed by them and shall not do or suffer to be done anything whereby the interest of the licensor in the said shed may be jeopardised.

13. As per clause 11 of the agreement the licensee, the assessee had no right for any change. The assessee had right to carry out his business with the help of looms and machineries taken on lease/licensee from MTRSMPL. In the agreement there is no involvement of the owner of the property, i.e., to say land. The licensor is the tenant of the land who had given on license/lease certain looms and machineries to the assessee. The agreement did not divulge that the assessee had any tenancy or sub-tenancy on the said land. On the contrary, the agreement clearly states that it shall never be construed as sub-lease in any form of any portion being used as incidental or permissible use.

14. As per deed of surrender of tenancy dated October 7, 2008 entered between purchaser of the land, i.e., to say Shri Pravin/Rajesh Makwana and the assessee M/s. Kewal Silk Mills, the compensation of Rs. 3.75 crores was given to find out more alternative premises and also to compensate in connection with loss of business and profit as also the inconvenience and hardship caused on account of shifting elsewhere.

15. There was no agreement with the owner of the land Shri. Paresh Shah with the assessee or the licensor MTRSMPL to give any tenancy or sub-tenancy right to the assessee. There is/was no permission or consent of the landlord, i.e., owner of the land to confer tenancy or sub-tenancy to the assessee. There was no intention on the part of the owner of the land or the licensor to that effect. Similarly there was no express or implied intention of the licensor to give any tenancy or subtenancy right to the assessee, which is clearly evident from the agreement.

5. After narrating the facts the learned authorised representative submitted that though it is the main case of the assessee that the leave and licence agreement dated June 13, 1972 in itself is sufficient to establish the possessory rights of the assessee over the land in respect of which the impugned amounts have been received but even if the case of the Assessing Officer is accepted that the said agreement does not give any right to the assessee in the land which can constitute capital asset then also amendment in the Bombay Rent, Hotel and Lodging and House Rates Control Act, 1947 (Rent Control Act), which was brought into the statute by the Amendment Act of 1973, has converted the status of the assessee from “licensee” to the “deemed tenant” as per section 5(11)(bb). He further submitted that as per section 15A, which was inserted by the Maharashtra Act 17 of 1973, certain licensees in occupation on February 1, 1973 will become tenant. He submitted that by virtue of such amendment the status of assessee had changed from “licensee” to “tenant” and thus the payment received by the assessee was in respect of sub-tenancy which is assessable under the head “Capital gains”. For the sake of convenience the relevant provisions of the Rent Control Act are reproduced below :

Sections 5(1) to 10

“(11) ‘tenant’ means any person by whom or on whose account rent is payable for any premises and includes-

(a) such sub-tenants and other persons as have derived title under a tenant before the 1st day of February 1973;

(aa) any person to whom interest in premises has been assigned or transferred as permitted or deemed to be permitted, under section 15 ;

(b) any person remaining, after the determination of the lease, in possession, with or without the assent of the landlord, of the premises leased to such person or his predecessor who has derived title before the first day of February 1973 ;

(bb) such licensees as are deemed to be tenants for the purposes of this Act by section 15A ;

(bba) the State Government, or as the case may be, the Government allottee, referred to in sub-clause (b) of clause (1A), deemed to be a tenant, for the purposes of this Act by section 15B ;

15A. Certain licensees in occupation on February 1, 1973 to become tenants-(1) Notwithstanding anything contained elsewhere in this Act or anything contrary in any other law for the time being in force, or in any contract, where any person is on the 1st day of February 1973 in occupation of any premises, or any part thereof which is not less than a room, as a licensee, he shall on that date be deemed to have become, for the purposes of this Act, the tenant of the landlord, in respect of the premises or part thereof, in his occupation.

(2) The provisions of sub-section (1) shall not affect in any manner the operation of sub-section (1) of section 15 after the date aforesaid.”

6. The learned authorised representative submitted that the aforementioned position of law of converting licensee into protective tenant and protective sub-tenant regardless of the intention of the original grant either of the lessor or of the lessee has been explained by the hon’ble Supreme Court in its decision in the case of Anandram Chandanmal Munot v. Bansilal Chunilal Kabra, AIR 2000 SC 288 (copy of this decision filed at pages 43 to 59 of the paper book). He invited our attention towards following observations of the hon’ble Supreme Court :

“After the commencement of the amending Act of 1973 a tenant is barred even to give on licence the whole or any part of the premises let to him. Sub-section (2) of section 15 validates any sub-tenancy created before the first day of February 1973 and in that case a tenant is not 1iabIe to eviction under clause (e) of sub-section (1) of section 13 of the Act.

We may at this stage refer to the relevant provisions of law under the Act. Section 5(11) of the Act defines tenant which is as under :

‘5(11) “Tenant” means any person by whom or on whose account rent is payable for any premises and includes :

(a) such sub-tenant and other persons as have derived title under a tenant before the 1st day of February 1973 ;

(aa) any person to whom interest in premises has been assigned or transferred as permitted or deemed to be permitted, under section 15 ;

(b) any person remaining, after the determination of the lease, in possession, with or without the assent of the landlord, of the premises leased to such person or his predecessor who has derived title before the 1st day of February 1973 ;

(bb) such licensees as are deemed to be tenants for the purposes of this Act by section 15A ;

(bba) the State Government, or as the case may be, the Government allottee referred to in sub-clause (b) of clause (1A), deemed to be a tenant, for the purposes of this Act by section 15B ;'”

7. Thus it was submitted by the learned authorised representative that by section 15A read with section 5(11)(bb), the assessee has become the tenant and amounts received by the assessee is in respect of surrender of tenancy and is assessable as capital gain.

8. The learned authorised representative referred to the decision of the hon’ble Karnataka High Court in the case of CIT v. Joy Ice-creams (Bang.) (P.) Ltd. [1993] 201 ITR 894 to contend that payment in lieu of alternative premises to be provided to the assessee by purchaser of the premises is not assessable as business receipts. The consideration was towards the relinquishment or surrender of tenancy rights and consequently it was a capital receipt.

9. The learned authorised representative further referred to the decision of the hon’ble Delhi High Court in the case of Shiv Charan Singh v. CIT [1984] 149 ITR 29, wherein the assessee’s tenancy right was held to be capital asset and surrender thereof was considered as extinguishment of the right. Thus it was held that it was a transfer of capital asset within the meaning of the Income-tax Act.

10. The learned authorised representative also referred to the decision of the hon’ble Supreme Court in the case of Union of India v. Cadell Weaving Mill Co. (P.) Ltd. [2005] 273 ITR 1, wherein also tenancy rights was held to be giving rise to capital gains.

11. Reference was also made to Narang Overseas (P.) Ltd. v. Asstt. CIT [2008] 111 ITD 1 (Mum.)(SB), wherein mesne profits awarded under the decree of the court by way of compensation for wrongful possession of property after termination of leave and license agreement was held to be capital receipt.

12. Thus, the learned authorised representative pleaded that amount received by the assessee was nothing but with regard to capital asset and the Assessing Officer has wrongly assessed the same under the head “Income from other sources” and the learned Commissioner of Income-tax (Appeals) has also wrongly confirmed the same.

13. On the other hand, the learned Departmental representative relying upon 15 points relied on by the learned Commissioner of Income-tax (Appeals) pleaded that the learned Commissioner of Income-tax (Appeals) has rightly upheld the action of the Assessing Officer.

14. In the rejoinder, it was submitted by the learned authorised representative that the assessee had possessory right of the property and by virtue of these possessory right for more than 36 years the right was converted into capital asset and transfer/surrender thereof will be assessable under the head “Capital gains”.

15. We have carefully considered the rival submissions in the light of the material placed before us. Copy of agreement dated June 13, 1972 is filed by the assessee in the paper book at pages 20 to 24. The assessee being a partnership through its partners has been referred to as licensees who were desirous of taking licences of loom and machinery more particularly described in schedule for a period of one year from the date of the agreement on a monthly compensation of Rs. 3250 per month. The licensor has been referred to be Modern Textile Rayon and Silk Mills P. Ltd. (Modern) and in clause 5, it has been mentioned that the licensees are entitled to use a portion of the said shed in which the said looms are situated by way of permissible use on licence basis only as incidental to using the said looms and machinery and shall never be construed as sub-lessee in any form of the said portion of the said shed. The assessee has also been provided with access to the said portion of the said shed through portion of the shed retained by the licensors or otherwise. In a nutshell the assessee has been referred to as licensor. From the agreement deed it is clear that the assessee had incidental right of the premises through which the looms were to be used. The said right of the assessee has been recognised from the date of agreement till surrender of the said right. Even the original tenant and the original owner did not dispute such right of the assessee over the property. Now, the case of the Revenue is that the agreement dated June 13, 1972 did not provide any right to the assessee of sub-tenancy of the premises but it was only with respect to looms and machinery and user of the premises was only incidental. But the fact remains that incidental right to use the premises was provided by the agreement itself. The fact also remains that assessee has been referred to as licensee in the said agreement. The provisions of section 5(11)(bb) and 15A of the Rent Control Act have already been reproduced above. By virtue of amendment in 1973, i.e., subsequent to the date of agreement of the assessee that the licensees who are deemed to be tenant under section 15A were to be considered as tenant. Therefore, in any case, the assessee had acquired the status of tenant of the landlord. As per the provisions of section 55(2) tenancy right has been considered to be capital asset. Moreover, the definition of capital asset as per section 2(14) of the Act is wide enough to cover “property of any kind” and the type of right acquired by the assessee in the property used by it cannot in any manner be said to be less than “any kind of property” held by the assessee.

16. Apart from the above conclusion it may be mentioned here that the assessee has filed copies of some rent receipts obtained by it from Modern. The first copy of such receipt is at page 25 of the paper book vide which a sum of Rs. 39,000 has been paid by the assessee to Modern on February 9, 2002, by cheque No. 679943 “towards rent for the months from July 2001 to December 2001”. The said amount has been duly acknowledge to be received by Modern. The second receipt is dated April 3, 2003 copy of which is placed at page 26 of the paper book which is a receipt dated April 3, 2003, vide which a sum of Rs. 19,500 has been paid by cheque No.621974, dated March 26, 2003 “towards rent for month from January 2003 to March, 2003”. The third receipt is dated February 9, 2005 copy of which is placed at page 27 of the paper book, whereby a sum of Rs. 13,000 has been paid vide cheque No. 013369 dated January 17, 2005 to Modern “towards rent for months of December 2004 and January 2005”. All these receipts duly show that what was being paid by the assessee was considered to be rent by the other parties and thus parties in principle had accepted that the assessee was the tenant from whom the rent was being received by the other party. The further correspondence between the assessee and its licensor, the purchaser of the land and the assessee are also describing right of the assessee as tenancy right only and the deed executed between purchaser of the premises and the assessee is also described as deed of surrender of tenancy. Thus, the assessee was enjoying a right over the property in the nature of being tenant of the same for the last so many years and that right of the assessee cannot be considered or evaluated much less than the right of tenancy.

17. In view of the above discussion, it is to be held that the assessee, in fact, was enjoying possession of the impugned property and for peaceful vacation thereof it had received the impugned amount which was described by both parties as amount paid for surrender of tenancy rights. The assessee had acquired the said right long back and the licensor to the assessee also had recognised the said right of the assessee. The right of the assessee was undisputed and the nature thereof was “property of any kind” which was held by the assessee and was to be termed as a capital asset within the meaning of section 2(14) of the Act. Tenancy rights have also been recognised as capital asset within the meaning of section 55(2)(a) of the Act. The case law and decisions relied upon by the learned authorised representative supports the case of the assessee. Therefore, we hold that the amount received by the assessee is assessable under the head “Capital gains”. The same cannot be assessed as income from other sources.

18. In the result, the appeal filed by the assessee is allowed in the manner aforesaid.

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