Case Law Details
IN THE ITAT MUMBAI BENCH ‘F’
Vinod V. Chhapia
versus
Income-tax Officer, Ward-21(2)(3), Mumbai
IT Appeal No. 3178 (MUM.) of 2010
[ASSESSMENT YEAR 2006-07]
NOVEMBER 21, 2012
ORDER
D. KarunakaraRao, Accountant Member
This appeal filed by the assessee on 23.4.2010 is directed against the order of CIT (A)-32, Mumbai dated 9.2.2010 for the assessment year 2006-2007.
2. In this appeal, assessee raised the following grounds read as under:
“1. The Ld CIT (A) erred in confirming addition of Rs. 7,26,000/- being amount received for consenting to transfer of tenancy rights as income from other sources.
2. The Ld CIT (A)failed to appreciate that the appellant was owner of the building as a capital asset and amount received being derived for transfer of rights in such capital asset is a capital receipt liable to tax under the head “capital gains”.
3. Without prejudice to above, the Ld CIT (A) failed to appreciate that having held that the said amount is windfall the same is not liable to tax at all and ought to have directed Assessing Officer to reduce the same from total income.”
3. Briefly stated relevant facts of the case are that assessee owned ‘VallabhNiwas’ in an HUF status and occupied part of the property and the other part was rented to Smt. BayabhaiVelji in the year 1962. Smt. DamyantiSanatkumar Shah, being the daughter and an accomplice of Smt. BayabhaiVelji, inherited the tenancy rights over the said rented property on the demise of her mother in 1986. Thus, Smt. Damayanti S. Shah acquired the tenancy rights and surrendered the said rights and the property in favour of the land lords to facilitate renting of the said property to the new tenants namely Smt. Akshita B. Haria and ShriBhavesh K. Haria. In this connection, the ‘new tenants’ paid a sum of Rs. 14,74,000/- as a consideration to Smt. Damayanti S. Shah vide the cheques dated 21.6.2005. They also paid a sum of Rs. 7.26 lakhs to the assesse vide two cheques dated 21.6.2005 for Rs. 2,63,000/- each. Assessee accepted to surrender of the tenancy rights and possession of the said property by the new tenants for a monthly rent of Rs.129.34 paisa and accepted a sum of Rs. 7,26,000/- from the new tenants namely Smt. Akshita B. Haria and ShriBhavesh K. Haria. Assessee received the same ‘as consideration for granting them monthly tenancy of the said flat and accepting from them a sum of Rs. 390/- only as interest from security deposit in respect of the said flat and also for executing the receipt in their favour”. There are other conditions in para 8 of the Declaration & Indemnity, a tripartite agreement. During the assessment proceedings, AO found the said receipt of Rs. 7,26,000/- was received by the assessee and the same was invested in the NABARD Bonds and claimed exemption u/s 54EC of the Act. On inquiry, AO found the receipt of Rs 7,26,000/- is not a “capital receipt”, therefore, held that the said investment in NABARD Bonds is not an allowable claim of the exemption u/s 54EC of the Act. However, as per the assessee, the said amount when received towards surrender of a right, which is part of the bundle of the rights owned by the assessee in respect of the said property, the assessee received the impugned consideration of Rs 7.26 lakhs in lieu of the extinguishment of the said rights and therefore, the claim is validly allowable. In this regard, assessee relied on the various decisions to suggest that the amount received on surrender of tenancy right was a capital receipt which is taxable under the head “capital gains”. After considering the assessee’s submissions, AO debated the conceptual variation in meanings between the expressions “transfer of tenancy rights” vis-à-vis “surrender of the tenancy rights”. As per the AO, there was no surrender of the tenancy rights to the hands of the assessee and it was a transfer of right of residence to the new tenants by the existing tenant. AO also discussed fact of payment of consideration by the new tenant to both original tenant and the land lord. Further, as per the AO the tenancy rights are still with the original tenant and he can still enjoy the said rights as when the new tenant is checks in to the impugned property. AO distinguished the cited judgments and mentioned that all the judgments relates to the cases of surrender of ‘tenancy rights’. As per the AO, Smt. Damyanti S. Shah, who holds the right of ‘tenancy rights’ surrendered the same in favour of the new tenants and certainly not to the assessee, the land lord. AO reasoned stating that Rs 7.26 lakhs was received from the new tenant for consenting for transfer of tenancy to the new tenant, the sum received is not for surrender of tenancy and therefore, the same amount is not a capital receipt and consequently, the claim of exemption u/s 54EC does not arise. Finally, AO held that a sum of Rs. 7,26,000/- received from Akshita B. Haria and ShriBhavesh K. Haria is nothing but income for the HUF chargeable to tax under the head “income from other sources”. Thus, AO rejected the claim of exemption u/s 54EC of the Act. Aggrieved with the above decision of AO, assessee filed appeal before the first appellate authority.
4. Before the first appellate authority, assessee submitted that consent of the assessee is mandatory for the Original tenant with tenancy rights to allow the new tenant to enjoy the right of residence. Thus, the assesse gave up some of the bundle of rights attached to the said property, capital asset. Assessee relied on the judgments in the cases of CIT v. D.P. Sandu Bros. Chembur (P) Ltd. [2005] 273 ITR 1 and Cadell Weaving Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 265 for the proposition that the amount received on surrender of tenancy rights as a capital receipt is taxable under the head “capital gains” and not “income from other sources” as held by the AO. On considering the submissions of the assessee, CIT (A) rejected the same and confirmed the order of the AO and held that the assessee continue to hold the ownership rights even after the new tenant entered the house and Smt. Damyanti S. Shah, who holds the tenancy rights, merely transferred the tenancy rights to Smt. Akshita B. Haria and ShriBhavesh K. Haria till they reside in the property. Otherwise, Smt. Damyanti S. Shah shall get back the tenancy rights once the new tenant vacates the premises. Assessee, being the owner of the flat gave merely a consent for such transfer and for that he received a sum of Rs. 7,26,000/-, which cannot be termed as a receipt for surrender of tenancy rights. As per the revenue, it is the original tenant who owns the tenancy right and surrender of the same is done by the said tenant and in such surrender, the consideration is paid by the land lord. Thus, in the present case the original tenant merely surrendered the right of residence in favour of the new tenant and therefore, it is not case of surrender of tenancy rights and consequently, the case laws relied upon by the assessee are distinguishable. Therefore, so far as the assessee is concerned, it is the case of encashment of the power of ‘consent’ for transfer of the tenancy rights to the new tenant. Further, he discussed that if a new tenant (Akshita B. Haria and ShriBhavesh K. Haria) again transferred the property to some other tenant, the assessee would be entitled to receive similar amount. Otherwise the ownership rights on the property continue to vest with the assessee. Therefore, the CIT (A) dismissed the assessee’s claim that Smt. Damyanti S. Shah surrendered tenancy rights in full to the assessee. This is a case of getting windfall gain by the change of tenant in the said property. Accordingly, he confirmed the addition made by the AO.
5. Aggrieved with the same, assessee filed the present appeal before us with the grounds mentioned above.
6. Before us, Shri Chetan A Karia, Ld Counsel for the assessee submitted that the rights attached to an immovable property constitute “bundle of rights”. Exploitation of these rights gives rise to capital gains. But for the surrender of tenancy rights by the original tenant to the assessee, the Kartha of HUF would not have consented for transfer of residence in favour of the new tenant. Therefore, the consideration received the assessee is in the context of surrender of tenancy rights, which is a capital receipt and therefore, the claim of the assessee is valid. Right of residence granted to the new tenant against which assessee received a sum of Rs. 7,26,000/-, constitutes a capital asset, therefore, the gains made by the assessee is not ‘windfall gain’; but it rightly attracts the provisions relating to capital gains under section 45 of the Act. Further, referring to the Tripartite Agreement named Declaration & Indemnity among the assessee, the original tenant – Smt. Damyanti S. Shah and the new tenants ie Smt. Akshita B. Haria and ShriBhavesh K. Haria, Ld Counsel referred to para 4 of the said agreement and mentioned that Smt. Damyanti S. Shah is a sole owner of the tenancy rights and she surrendered the flat to the land lords including the tenancy rights. Ld Counsel also referred to the contents of para 6 of the said agreement. Ld Counsel relied on various decisions to suggest that the amount received by the assessee is a capital receipt taxable under the head “capital gains”.
7. On the other hand, Ld DR relied on both the orders of AO as well as CIT (A). Further, he mentioned that normally in the case of surrender of tenancy rights, it is the original tenant who receives the consideration from the land lord in response to the surrender of tenancy rights. But the instant case is unique in nature and the land lord did not pay the consideration to the original tenant and it is the new tenant who paid the consideration to the original tenant. Under these factual matrix of the case, the principle relating to the surrender of tenancy rights is not applicable to the assessee and it is a case of windfall gain received by the assessee which was rightly taxed as “income from other sources”. Ld DR mentioned that assessee continuous to hold the right of ownership in the property and the tenancy rights cannot be said to have been fully surrendered as the assessee. The original tenant continuous to hold the tenancy rights and she shall continue to enjoy the windfall gains as and when the tenants were changed. Further, Ld DR filed a couple of decisions i.e. one in the case of Manoj B. Joshi v. ITO [2009] 179 Taxman 30 (Bom) for the proposition that amount received by the assessee indemnifying developer against any possible legal action is not a capital gain but “income from other sources” and the second one in the case of Bharat Forge Co. Ltd. v. CIT [1994] 205 ITR 339 for the proposition that compensation received for breach of contract since, there is no extinguishment of any asset for which the assessee received compensation – the same cannot be considered as a ‘capital gain’.
8. We have heard both the parties and perused the orders of the Revenue. We have also gone through the citations by Ld Counsel before the Revenue Authorities as well as the decisions cited by the Ld DR before us. On perusal of the citations by the Ld Counsel, we find that all of them are decided on the facts relating to an undisputed surrender of tenancy rights and consequent receipt of the consideration. In that sense, the said judgments are distinguishable on facts. Same is the case with the citations relied upon by the Ld DR. Therefore, none of the case laws filed by either party are directly applicable to the facts of the present case under consideration. The facts that made the present case different include the consideration was not paid by the assessee landlord for surrender of the tenancy rights; it is the land lord who received the sum of Rs 7.26 lakhs; the new tenant made the impugned sum to the land lord as well as the original tenant; it is known as to how the receipt in the hands of the original tenant was treated by the concerned AO etc. The case of the Revenue is that the assessee has not received the tenancy rights from the original tenant and assessee has not paid the consideration for receiving the same. Therefore, assessee is not the holder of tenancy rights and it only holds the ownership rights. Therefore, the consent given by the assessee is merely a windfall gains, which is taxable under the head ‘income from other sources’. Per contra, the case of the assessee is that the clause 4 of the tripartite agreement enables the surrender of tenancy rights by the original tenant and the original tenant is divested of the said rights. Therefore, the gains made by the assessee is in the context of the surrender of certain capital rights attached to the immovable property and therefore the gains are not windfall gains but they are capital gains attracting the provisions relating to ‘capital gains’.
9. Thus the parties in the dispute have taken a divergent stands and admittedly, there is no dispute on the facts relating to the issue. The undisputed facts are that Smt. DamyantiSanatkumar Shah, being the daughter and an accomplice of Smt. BayabhaiVelji, inherited the tenancy rights over the said rented property on the demise of her mother in 1986. Thus, Smt. Damayanti S. Shah surrendered the flat to the landlords as stated in the ‘Declaration & Indemnity – a Tripartite agreement’ reached among the assessee, Smt Shah and the new tenants namely Smt. Akshita B. Haria and ShriBhavesh K. Haria. In this connection, the ‘new tenants’ paid a sum of Rs. 14,74,000/- as a consideration to Smt. Damayanti S. Shah vide the cheques dated 21.6.2005. They also paid a sum of Rs 7.26 lakhs to the assesse vide two cheques dated 21.6.2005 for Rs. 2,63,000/- each. Assessee accepted to surrender of the tenancy rights and possession of the said property by the new tenants for a monthly rent of Rs.129.34 paisa. Assessee received the same ‘as consideration for granting them monthly tenancy of the said flat and accepting from them a sum of Rs. 390/- only as interest from security deposit in respect of the said flat and also for executing the receipt in their favour” as mentioned in Clause 4 of the said agreement. From the dates mentioned above, so far as the assessee is concerned, the tenancy continues ceaselessly since 1962. The amount of rent and the deposit payable by the new tenant towards the rented property appears nominal. The amount paid by the new tenant to the landlord cannot be termed as payment for surrender of tenancy rights in view of its very definition as in the transaction of surrender of tenancy rights, the lands makes the payment to the holder of the tenancy rights. The new tenants who made the payment of Rs 7.26 lakhs on the 21.6.2005 to the land lords, cannot be said to have any reason to make the payment to the land lords but for the rent or rental advance/deposit.
10. Thus, the above summary of facts suggests that the consideration paid by the new tenant is consent of the landlord for the transfer of tenancy rights between the new and old tenants. Thus, in our opinion, the amount of Rs 7.26 lakhs is the ‘consideration for consent’. Generally, in matters of the tenancy rights disputes, it is the tenant who gets the financial benefit and the same flows from the pockets of the Landlord in lieu of the surrender of the said tenancy rights by the tenant and certainly the land lords does not receive, which is the case in the instant appeal. Therefore the taxation principles relating to the tenancy rights should not apply in this case.
11. Now we shall examine if the assessee factually received the all rights over the property including the tenancy rights. Clause 4 of the agreement indicates that the Smt Shah surrendered the tenancy rights along with the property to the assessee. If that is true, where is the need for Smt Shah to be the signatory to the agreement in giving the property on monthly rent to the new tenants and why should there be a tripartite agreement? Letting off the impugned property becomes the matter for settlement between the landlord and the new tenant as per the terms and conditions of the land lord, which is not the case here. Further, unanswered questions relates to why the monthly rental and rental advance are so abnormally minimal ie rent of Rs.129.34 paisa per month and sum of Rs. 390/- only as interest from security deposit and why the sum of Rs 7.26 lakhs was paid to the land lord by the new tenant? Clause 4 gives the answer and the same is ‘consideration for consent’. The expression ‘consent’ refers to and existing proposal between two other parties. In the instant case, the said parties are obviously the old tenant and the new tenant and the proposal ought to relate to the issue of transfer of right of residence by old tenant to the new tenant for consideration of Rs 14.48 lakhs, for which there is need for consent of the landlord. Therefore, the above reasoning suggests that the consideration for consent implies no transfer of any capital asset by the land lord to the new tenant. Further, the agreement rules out that the impugned consideration for consent is for the rent or towards the rental advance. Further also, considering the rent-oriented terms and conditions specified in the tripartite agreement, it cannot be inferred that the new tenant received merely rental rights and there is no transfer of any capital rights to the new tenant by the land lord. Therefore Rs 7.26 lakhs is neither a capital receipt nor a rental receipt. In that sense, the argument of the Ld Counsel that some of the capital rights, out of the bundle of rights relating to the immovable property, are transferred to the new tenant does not hold water.
12. Further, it is pertinent to note that there is no time gap between the vacation of the property by the old tenant and grant of rental rights to the new tenant. There is continuity of renting of the property and there is no evidence to infer that the house is in vacant possession of the assessee even after the alleged end of the tenancy of Smt Shah and therefore, it can be stated that the assessee has never got the property in vacant condition. Therefore, it cannot be stated that the impugned house property is entirely free from any tenancy rights vis a visSmt Shah but for the commitment in the said tripartite agreement and of course, there is no claim of the tenancy rights vis a vis the new tenant. Therefore, the views of the AO as well as the CIT(A) on this issue require to be sustained as the amount of Rs 7.26 lakhs, the consideration for consent, does not involve any transfer of capital rights attached to the property on the facts of this case and the amount constitutes a windfall gain to the assessee. Therefore, we are of the opinion, the above order of the CIT (A) does not call for any interference. Accordingly, the grounds raised by the assessee are dismissed.
13. In the result, the appeal of the assessee is dismissed.
