Income from transfer of leased premises is taxable as Capital Gains under the Income-tax Act

Income from transfer of a leased premises  amounts to extinguishment of taxpayer’s right in the capital asset and therefore taxable as ‘Capital Gains’ under the Income-tax Act.

Mumbai bench of Income-tax Appellate Tribunal (the Tribunal) in the case of ACIT Vs United Motors (I) Ltd. (2009-TIOL-693-ITAT-MUM) has held that income from transfer of a leased premises without transferring its own business amounts to extinguishment of the taxpayer’s right in the capital asset as per section 2(47) of the Income-tax-tax Act, 1961 (the Act).

The Tribunal also observed that such transfer of a leased premise without transferring the business cannot be considered as loss of source of income. Further, the source of income is always the business which is capable of producing some income and not the building from where the source of income is operated. Accordingly, the Tribunal held that the building itself cannot be considered as source of income.

Facts of the case

• The taxpayer company was in the automobile business in vehicles of TELCO and Mercedes through a premise owned by it in Mumbai. On 18 December 1999 the taxpayer entered into an agreement with Trent Limited, allowing it to use such premises for the period of 10 years for an upfront non-refundable / non-accountable fee of INR 5 million. The AO held that the retailing business agreement entered into by the taxpayer was a business agreement and the consideration from that was a business receipt.
• The Commissioner of Income-tax (Appeals) [CIT(A)] after considering the precarious financial position of the taxpayer company noted that the agreement with Trent Limited will have impact on the source of income of the taxpayer. Further, the premises under reference constituted a capital asset and any compensation received for part immobilisation or sterilisation of such a capital asset was to be treated as a capital receipt. Accordingly, the CIT(A) held that the amount received by the taxpayer from Trent Limited was to be treated as capital receipt not includible in the taxable income.

Taxpayer’s contentions

• The amount received by the taxpayer from Trent Limited was in lieu of giving up a source of income in the form of premises from where the taxpayer was carrying on business of automobiles for a long time.
• The taxpayer relied on the judgement of the Supreme Court and Bombay High Court in the case of Oberoi Hotel Private Limited v. CIT [1999] 236 ITR 903 (SC) and Bombay Burmah Trading Corporation Limited v. CIT [1971] 81 ITR 777 (Bom) respectively and contended that the profit making apparatus of the taxpayer, being the business premises from which the automobile business was carried on, was sterilised hence the receipt was a capital receipt.

Tax Department’s Contentions

• The tax department contended that the amount received by the taxpayer by virtue of the agreement with Trent Ltd. for carrying on the business and was liable to be considered as business income taxable under the Act.

Tribunal’s Ruling

• The Tribunal observed that the one time non-refundable amount received by the taxpayer was not for the automobile business carried on by the taxpayer but for allowing Trent Ltd. to use the premises for the retailing business having no relation with the actual business of the taxpayer. Accordingly, the receipt of INR 5 million cannot be said to be a revenue receipt.
• Further, the consideration from Trent Ltd. was not in lieu of the taking over of automobile business from the taxpayer but only for taking the possession of the premises in which the said business was earlier carried on by the taxpayer. There is a vital difference in the source of income, which is the business itself and the building, which houses the business. The source of income is always the business which is capable of producing some income and not the building from where the source of income is operated. Accordingly, the Tribunal held that the building itself cannot be considered as source of income.
• If the view point of the CIT(A) is accepted, then the income for deprivation of the use of the premises either by way of giving it on rent, lease, licence or otherwise would never form part of the total income, which is totally inconsistent with the scheme of the Act. Further, the Tribunal observed that the facts of the cases relied by the taxpayer i.e. Oberoi Hotel Private Limited and Bombay Burmah Trading Corporation Limited, have no resemblance with the facts of the case under consideration.
• There are provisions contained in the Act such as Chapter IV-C, dealing with income from house property and Chapter IV-E dealing with capital gains, which provide for charging to tax any income from the commercial exploitation of the capital assets or from the transfer of any rights in or capital assets as such. So if the Act provides the charging of a particular income to tax by specific provisions, then such income cannot be pushed away from the tax net by relying on the general principles of taxation.
• As per section 2(14) of the Act any kind of ‘property’ held by the taxpayer would come within the definition of ‘capital asset’. Further, the use of the word ‘held’ is clear indicator of the intention of the legislature that not only the ownership but also non-ownership rights in property also fall within the domain of capital asset. Thus, any kind of property held by an taxpayer would come within the definition of capital asset. Accordingly, the exclusive right to the possession and enjoyment of the premises given by the municipal corporation on lease was a ‘property’ of the taxpayer.
• As per section 2(47) of the Act, extinguishment of any right in a capital asset will attract the provisions of ‘capital gain’. Thus, the surrender of possession, occupation and enjoyment of the premises by the taxpayer for the consideration of INR 5 million for a fairly long period (10 years), would amount to the extinguishment of the taxpayer’s right in the capital asset.
• Accordingly, the Tribunal held that the transfer of a premises by a taxpayer was liable for capital gain tax under section 45 of the Act.

Our Comments

The Mumbai Tribunal has reiterated an important principle and held that income from transfer of a leased premises without transferring its own business amounts to extinguishment of the taxpayer’s right and not loss of source of income and transfer of such capital asset is taxable under the head ‘Capital Gains’ under section 45 of the Act. It is to be noted that the Tribunal did not deal with the issue with respect to cost of acquisition of right to use such leased property.

It is pertinent to note that under the proposed Direct Taxes Code (DTC) the ‘business capital assets’ have been defined to include all tangible and intangible business related assets. Further, income derived from such business capital assets for eg. Profit on sale of business capital asset, amount accruing from the long term leasing or transfer of, or any interest in, any business asset, would be taxed under the head Business Income and not under the head Capital Gains.

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