Whether leasehold right in a property is akin to capital asset, and thus consideration received on surrender of such rights attracts provisions of Sec 50C- NO, rules ITAT

 THE issues before the Bench are - Whether leasehold right in a property is akin to capital asset, and thus the consideration received on surrender of such rights attracts provisions of Sec 50C; Whether merely because assessee is a party to the tripartite agreement signed on sale of the property, the receipt received by the assessee-tenant is attributable to ownership right and whether cost of acquisition of tenacy rights is to be computed by totalling up the rentals paid and the benefits of cost inflation index for computing capital gains tax. And the answer goes against the Revenue.

Facts of the case

Assessee, alongwith one Amardeep Singh, had acquired, vide registered lease deeds dated 19th November 1992 with Shree Khubchand Sethia Charitable Trust (KSCT, in short) , lease hold rights for 99 years in a house property in Kolkata. This property was collectively purchased by three entities, namely Sugam Builders Pvt Ltd, Neelanchal Sales and

Suppliers Pvt Ltd and Pleasant Niryat Pvt Ltd (collectively referred to as ‘purchasers’), from the owner, i.e. Khubchand Sethia Charitable Trust, vide registered deed dated 20th day of July 2007. This registered sales deed was a tripartite agreement between the owner, i.e. KSTC, the lessees, i.e. the assessee and Amardeep Singh, and the purchasers. Under the said agreement, while owner transferred “all its rights, title and interest, ownership and reversionary rights in the said property” etc for a consideration of Rs 1,00,00,000, the lessees gave up all its rights and interests in the said property and proceeded to, inter alia, “grant, convey, transfer and assign their leasehold rights, title and interest in the said premises”, for a consideration of Rs 3,19,00,000. The total consideration of Rs 3,19,00,000 paid by the purchasers for the said premises was thus divided as follows:- (i) Rs 1,00,00,000 for the owner of the premises i.e. KSCT; (ii) Rs 1,59,50,000 for Tejinder Singh, i.e. the assessee before us in this appeal; and (iii) Rs 1,59,50,000 for Amardeep Singh, i.e. co lessee.

In the course of assessment proceedings, the Assessing Officer noted that the stamp duty valuation of the property, which was sold by KSCT, was Rs 5,59,57,375, whereas the stated sales consideration of the property was only Rs 4,19,00,000. He was of the view that, in terms of the provisions of Section 50C, the sales consideration, for the purpose of computing the capital gains, is to be taken at the stamp duty valuation adopted by the stamp valuation authority. He thus adopted the amount of Rs 5,59,57,375 as sales consideration, and proceeded to notionally divide the said amount amongst the owner and the lessees in the same ratio in which the actual consideration was divided. Accordingly, as against the amount of Rs 1,59,50,000 actually received by the assessee, he included the amount of Rs 2,12,47,375 in computation of capital gains in the hands of the assessee. He then proceeded to compute cost of acquisition as the lease rentals paid by the assessee over the years, and after indexing the same, computed the cost of acquisition at Rs 28,79,698. On this basis, long term capital gain was computed at Rs 1,84,17,692. The Assessing Officer then noted that since while the gross sales consideration under section 50C in the hands of the assessee is Rs 2,12,97,390, the assessee had made an investment of Rs 1,96,03,685 in qualifying investments under section 54F, and, accordingly, assessee was entitled to 54F deduction only to the proportionate extent. The deduction under section 54F was thus computed at Rs 1,69,53,000, and the balance capital gain of Rs 14,64,692 was brought to tax in the hands of the assessee.

On appeal, the CIT(A) held that the assessee was a tenant in the property sold by the owner and, therefore, so far as the assessee was concerned, the receipt was in the nature of receipt on surrendering tenancy rights. He was further of the view that the provisions of Section 50C apply only in respect of ‘land’, ‘building’ or ‘land and building’. Relying upon various decisions of the Tribunal, he was his view that the provisions of Section 50 C cannot be pressed into service in a case in which the assessee has received the amount on surrender of tenancy rights. He, therefore, held that “Section 50 C has no application to the facts of the case under consideration and the capital gains will have to be recomputed on the basis of actual consideration and not the stamp duty value”.

As regards the alternate plea that full consideration on sale of capital asset has been invested in qualifying investments under section 54F, the CIT(A) declined to deal with the same and observed that “Since the ground no. 1 has been allowed and it has been held that the AO was not correct in applying the deeming provisions of Section 50 C, the alternative additional ground taken by the appellant that the deeming fiction under section 50 C will not be applicable to Section 54F as far as the meaning of full value of consideration is concerned, becomes academic and, is, therefore, not considered”.

On appeals by both the parties, the ITAT held that,

++ the Assessing Officer has treated the assessee a seller of property apparently because the assessee was a party to the sale deed, and because, according to the Assessing Officer, “consideration is paid on sale of the property for giving up right of the owner of the property” and that “in the case of leasehold property, the right of owner is divided between lessor and lessee”. We are unable to share this line of reasoning. It is not necessary that consideration paid by the buyer of a property, at the time of buying the property, must only relate to ownership rights. In the case of tenanted property, while the buyer of property pays the owner of property for ownership rights, he may also have to pay, when he wants to have possession of the property and to remove the fetters of tenancy rights on the property so purchased, the tenants towards their surrendering the tenancy rights. Merely because he pays the tenants, for their surrendering the tenancy rights, at the time of purchase of property, will not alter the character of receipt in the hands of the tenant receiving such payment. What is paid for the tenancy rights cannot, merely because of the timing of the payment, cannot be treated as receipt for ownership rights in the hands of the assessee. This distinction between the receipt for ownership rights in respect of a property and receipt for tenancy rights in respect of a property, even though both these receipts are capital receipts leading to taxable capital gains, is very important for two reasons – first, that the cost of acquisition for tenancy rights, under section 55(2)(a), is, unless purchased from a previous owner – which is admittedly not the case here, treated as ‘nil’; and, - second, since the provisions of Section 50 C can only be applied in respect of “transfer by an assessee of a capital asset, being land or building or both”, the provisions of Section 50 C will apply on receipt of consideration on transfer of a property, being land or building or both, these provisions will not come into play in a case where only tenancy rights are transferred or surrendered;

++ it is, therefore, important to examine as to in what capacity the assessee received the payment. No doubt the assessee was a party to the registered tripartite deed dated 20th July 2007 whereby the property was sold by the KSCT, but, as a perusal of the sale deed unambiguously shows, the assessee has given up all the rights and interests in the said property, which he had acquired by the virtue of lease agreements with owner and which were, therefore, in the nature of lessee’s rights; these rights could not have been, by any stretch of logic, could be treated as ownership rights. It has been specifically stated in the sale deed that the lessee, which included this assessee before us, had proceeded to, inter alia, “grant, convey, transfer and assign their leasehold rights, title and interest in the said premises”. There is nothing on the record to even remotely suggest that the assessee was owner of the property in question. The monies received by the assessee, under the said agreement, were thus clearly in the nature of receipts for transfer of tenancy rights, and, accordingly, as the learned CIT(A) rightly holds, Section 50 C could not have been invoked on the facts of this case. Revenue’s contention that the provisions of Section 50C also apply to the transfer of leasehold rights is devoid of legally sustainable merits and is not supported by the plain words of the statute;

++ Section 50C can come into play only in a situation “where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, (emphasis supplied by us by underlining) is less than the value adopted or assessed or assessable by any authority of a State Government …… for the purpose of payment of stamp duty in respect of such transfer”. Clearly, therefore, it is sine qua non for application of Section 50C that the transfer must be of a “capital asset, being land or building or both”, but then a leasehold right in such a capital asset cannot be equated with the capital asset per se. We are, therefore, unable to see any merits in revenue’s contention that even when a leasehold right in “land or building or both” is transferred, the provisions of Section 50C can be invoked. We, therefore, approve the conclusion arrived at by the CIT(A) on this aspect of the matter;

++ the Assessing Officer has adopted cost of acquisition of the asset as lease rent paid for the same and even granted indexation benefits thereon. In the impugned order, CIT(A) has directed that consideration for computation of capital gains on surrendering the tenancy rights is to be taken at actuals, and not as recomputed by the Assessing Officer by taking stamp valuation as the sale consideration for the property, but then what the CIT(A) has apparently missed out is the fact that in the case of surrender of tenancy rights, the cost of acquisition of the tenancy rights, in view of the specific provisions of Section 55(2)(a), should have been taken as ‘nil’. This aspect of the matter is somewhat academic and tax neutral because admittedly qualifying investment under section 54F is more than the consideration for surrender of these tenancy rights. The Assessing Officer has given a categorical finding about the quantum of qualifying investment of Rs 1,96,03,685. In view of these discussions, we are of the considered view that the assessee did not have any taxable capital gain in respect of receipt of Rs 1,59,50,000 on account of surrender of tenancy rights. The relief granted by the CIT(A), therefore, deserves to be upheld.