1. This appeal has been filed by the assessee against the order dated 5-12-1979 of the Commissioner (Appeals) relating to the assessment year 1975-76, the previous year of which ended on 13-11-1974. The assessee is a partnership firm, deriving income from business in the manufacture and sale of rubber balloons. It was the occupant-cum-tenant of one factory premises situated at Sonawala Cross Road, Goregaon, Bombay, since the year 1945 or thereabout. On 16-2-1973, the assessee purchased the said property from the owner-landlord at a price of Rs. 21,806. The case of the assessee was that it had already acquired tenancy rights in the premises and so it was able to get the property from the landlord at a price which was considerably less than the ruling market price. On 14-3-1974, the assessee sold the said property for Rs. 80,000. The question arose as to what capital gains, if any, was earned by the assessee on the sale of the premises on 14-3-1974 for Rs. 80,000. The case of the assessee before the ITO was that the value of the tenancy rights which it acquired because of long occupation could be valued at Rs. 60,000 which should be added to the sum of Rs. 21,806 paid to the landlord in cash, so that the total cost of the property to the assessee came to Rs. 81,806. As the property was sold for only Rs. 80,000 there was no capital gains. Alternatively, it was argued that the tenancy rights were acquired by the assessee much before 1-1-1954 and so it had the option to substitute the fair market value as on 1-1-1954 of the tenancy rights in place of its cost under Section 55(2) of the Income-tax Act, 1961 ('the Act'). He got the value of the said tenancy rights as on 1-1-1954 valued at Rs. 41,680 by R.W. Gudal & Associates, Architects, Engineers and Valuers, The claim of the assessee was that the fair market value of the tenancy rights as on 1-1-1954 valued at Rs. 41,680 should be added to the sum of Rs. 21,806 paid in cash to the landlord, so that the total cost of acquisition of the asset sold later, came to Rs. 63,486. Thus, the alternative case of the assessee before the ITO was that the difference between Rs. 80,000 and Rs. 63,486, amounting to Rs. 16,514, alone could be treated as capital gains arising out of the sale of the asset.
2. The ITO did not agree with the claim of the assessee. The assessee had placed before him a copy of the order dated 7-1-1972 of the Tribunal in IT Appeal No. 1076 (Bom.) of 1970-71 in support of its contention. The ITO, however, observed that the said Tribunal decision was not conclusive and in any case the facts in that case were different. According to the ITO, the assessee had the tenancy rights in the premises before it purchased it but, when it purchased the asset, its tenancy right was converted into full ownership rights. He observed that the assessee could not be regarded both as a tenant as well as an owner at the same time. As the assessee had paid only Rs. 21,806, the ITO refused to add the estimated value of the tenancy rights at Rs. 60,000 to the said amount in order to increase the cost of acquisition.
Regarding the alternative claim of the assessee for substituting the market value as on 1-1-1954 for the cost of the acquisition of the tenancy rights under Section 55(2), he rejected the same on the ground that the assessee became the owner and ceased to be a tenant, prior to the date of sale of the asset. On the above reasoning, the ITO calculated the capital gains at Rs. 52,594 though the difference between Rs. 80,000 and Rs. 21,608 came to Rs. 58,392. Further, he treated this capital gains as short-term capital gains and completed the assessment accordingly.
3. The assessee appealed to the Commissioner (Appeals) and contended that the action of the ITO was erroneous. It was explained that the assessee was able to purchase the property cheaply only because it was already a tenant of the property, having vested tenancy rights therein.
It could not have been evicted from the premises. The tenancy right was obviously acquired by it long before 1-1-1954 and so the assessee had the option to substitute the market value of the said right as on 1-1-1954 in place of its cost. The Commissioner (Appeals) rejected the claim of the assessee on the ground that the assessee paid only Rs. 19,805 to the landlord and taking into account the other incidental expenses, the total amount spent in cash by the assessee amounted to Rs. 21,806 only. According to him, only the sum of Rs. 21,608 could be taken as the cost of acquisition of the asset. He rejected the alternative contention of the assessee on the ground that the assessee was not the owner of the property as on 1-1-1954. Regarding the decision dated 1-11-1972 of the Tribunal relied on by the assessee, he observed that the facts therein were totally different and also no finality was reached therein because the matter was sent back to the ITO.4. Shri N.R. Mulla, the learned representative for the assessee, urged before us that the revenue authorities erred in their decisions. At the outset, Shri Mulla referred to the decision of the Supreme Court in the case of Damadilal v. Panhram AIR 1976 SC 2279, for the proposition that the tenancy right acquired by the assessee by virtue of its occupation of the premises since 1945 was a valuable and independent right which was acquired prior to 1-1-1954. He stated that the tenancy right acquired by the assessee was an estate in itself. He also referred to the decision in the case of A. Gasper v. CIT  117 ITR 581 (Cal.) wherein it has been held that the monthly tenancy or leasehold right is a capital asset which was capable of being transferred for the purpose of capital gains. Again, he referred to the decision of the Tribunal in the case of Mrs. M.D. Dudha v. Sixth ITO in IT Appeal No. 1076 (Bom.) of 1970-71 dated 7-1-1972, wherein it has been held that the right of a tenant not to be evicted from the premises occupied by him, is a valuable right and it has to be valued for the purpose of ascertaining the net capital gains. He contended that the cost of acquiring that estate or property might be nil to the assessee but Section 55(2) gives an option to the assessee to substitute the market value of the asset as on 1-1-1954 for its cost. He urged that the assessee could not be prevented from exercising the option given to it under the law provided the conditions for exercising the option are satisfied. These conditions are that the thing acquired must be an asset capable of being transferred and that the said asset must have been acquired prior to 1-1-1954. He stated that in the instant case both these conditions are satisfied in respect of the tenancy right acquired by the assessee and so the claim of the assessee should have been accepted. As a logical consequence, he urged that the asset having been acquired long before its sale on 14-3-1974, the capital gains arising therefrom should be treated as long-term capital gains.
5. Shri A.R. Viswanathan, the learned representative for the department, on the other hand, supported the order of the Commissioner (Appeals). The main plank of his argument was that the assessee paid only one sum of Rs. 21,806 to acquire all the rights in the property which was ultimately sold on 14-3-1974. According to him, the tenancy rights acquired prior to 1-1-1954 no longer existed separately after 16-2-1973 when the assessee purchased the premises from the landlord.
In other words, his argument was that whatever rights the assessee had prior to 16-2-1973, got merged in the rights he acquired by purchase on 16-2-1973 and it was a single asset that he sold on 14-3-1974 and the cost of that single asset to the assessee was only Rs. 21,806 and nothing more.
6. We have carefully considered the contentions of both the parties as well as the facts on record. We have gone through the decision in the case of Damadilal (supra) wherein it has been held that a contractual tenant, like the assessee before us, has an interest or property in the subject-matter of the tenancy which is heritable. Further, it has been held therein that on determination of the tenancy, the estate does not disappear (para 11 of the judgment). In the case of A. Gasper (supra), it has been held by the Calcutta High Court that the tenancy or leasehold right of a tenant is a capital asset which ,can be transferred for the purpose of capital gains under Section 45 of the Act. Similar is the view taken by the Tribunal in their order dated 7-1-1972 referred to above. Hence, in our opinion, there cannot be any doubt about the fact that the tenancy right in the premises, which was admittedly acquired by the assessee long before 1-1-1954, was a separate capital asset. That capital asset was different from the residuary rights of ownership which remained with the landlord. What the assessee got from the landlord on 16-2-1973 was the reversionary and the residuary rights of ownership which still belonged to the landlord. But the fact remains that the assessee had already acquired a capital asset in the shape of the tenancy rights in the premises long before 1-1-1954.
7. It is common ground before us that the cost of acquisition to the assessee for the tenancy rights was nil. The case of the revenue is that the cost of the acquisition of the tenancy rights long before 1-1-1954 should be completely ignored, only because the said rights got merged in the residuary rights of the owner when the assessee purchased the latter on 16-2-1973. This argument of the revenue ignores the crucial fact that the assessee was already the owner of a capital asset which was also sold on 14-3-1974 along with the residuary rights, which the assessee got on 16-2-1973. Suppose a person had a carriage. Then he buys a horse. Later, he sells the carriage and the horse together. Can it be said that the assessee sold only the horse which he had bought and did not sell the carriage which he had not bought In our opinion, it cannot be so said. The assessee before us sold the full ownership rights which he had acquired in two instalments ; one, tenancy rights which was acquired by long occupation prior to 1-1-1954 and the other, the residuary rights of the owner, which it acquired by purchase on 16-2-1973. Had he sold the tenancy rights alone, which is quite permissible under the law, as held in the authorities referred to earlier, there would have been a capital gain on the transaction and for determination of its quantum the cost of the acquisition could not be ignored. Similarly, if he had sold the ownership rights alone, then also the cost of acquisition of the said rights would have figured separately while computing the capital gains. Respectfully following the aforesaid authorities, we hold that the assessee had an independent capital asset in the form of the tenancy rights which it acquired without payment of cash prior to 1-1-1954, and he got the ownership rights by purchase on 16-2-1973 and he sold both these rights together on 14-3-1974. Consequently, the cost of acquisition of both the aforesaid assets, have to be considered for the purpose of computing the capital gains. So, we do not find force in the contention raised for the revenue on this score. Section 45 says that capital gains arising from transfer of a capital asset is taxable. Section 48 of the Act says that the capital gains shall be computed by deduction from the full value of the consideration received on the transfer of the capital asset, the cost of acquisition of the capital asset and the cost of any improvement thereto.
8. Section 55(2) gives a clear' option to the assessee to substitute the original cost of acquisition of an asset by its fair market value as on 1-1-1954 provided the asset was acquired by the assessee prior to 1-1-1954, The scheme of the provision is quite clear. It exempts the capital gains accrued up to 1-1-1954 from capital gains tax. There is nothing in law which suggests that the assessee can be debarred from exercising that option. Hence, the capital gains arising out of the transaction in this case, in our opinion, has to be calculated by bifurcating the sale proceeds into two components : one representing the sale proceeds of the tenancy rights and the other representing the sale proceeds of the residuary ownership rights. In the absence of any better criterion, the bifurcation of the sale proceeds into its two components can be made in the following manner : After the ITO determines the fair market value of the tenancy rights as on 1-1-1954, it will bear a certain proportion to the cost of the residuary rights of ownership, namely, Rs. 21,608. The sale proceeds of Rs, 80,000 can be split up in the same proportion and the capital gains should be calculated separately in respect of tenancy rights and the residuary rights.
9. The next step is to deduct the cost of acquisition from the respective sale proceeds, i.e., from the two portions into which the sum of Rs. 80,000 is bifurcated. Since the cost of acquisition of the ownership right is known to be Rs. 21,806, this amount should be deducted from the sale proceeds attributable to the sale of this asset.
Coming to the cost of acquisition of the tenancy right, the assessee is clearly entitled to substitute its fair market value as on 1-1-1954 for its original cost which is nil and that market value should be deducted from the sale proceeds attributable to the sale of the tenancy rights.
As to what is the fair market value of the tenancy right as on 1-1-1954, we find that the ITO had no occasion to go through the valuation report furnished by the assessee and so, we deem it fair to give him a chance to examine the same and arrive at the fair market value of the tenancy right as on 1-1-1954 and take that as the cost of acquisition of that asset. Thus, the capital gain arising out of the transaction under consideration has to be computed on two counts, as indicated above. It is also obvious that the capital gains relatable to the tenancy rights will be long-term capital gains while the capital gains relatable to the residuary rights will be short-term capital gains. We, therefore, restore this point to the file of the ITO for being decided afresh in accordance with the law and in the light of our observations above after giving a reasonable opportunity of being heard to the assessee.
10. Before parting with the case, we may state that the assessee, perhaps, could have argued on the basis of the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty  128 ITR 294/ 5 Taxman 1 that capital gains arising out of the transfer of the tenancy right which has cost nothing to it should be taken at nil.
However, no such argument was raised before us and so we refrain from examining the case from that angle.
11. In the result, the appeal may be treated as allowed for statistical purposes.
1. I am unable to agree with the learned Accountant Member. The reasons are not far to seek.
2. The facts of this case are simple and may, briefly, be stated as follows : The assessee-firm carries on business in the manufacture and sale of rubber balloons. It was in occupation of its factory premises as a tenant. On 16-2-1973, the assessee purchased the said property from its landlord for a sum of Rs. 21,806. Later on, it sold this property on 14-3-1974 for Rs. 80,000. Thus, a capital gain of Rs. 59,204 arose to the assessee.
In the course of the assessment proceedings for the assessment year 1975-76, the assessee-firm contended that since it was a statutory tenant, the landlord could not evict it and as such he sold the property to the assessee on 16-2-1973 at a low price of Rs. 21,806.
The assessee claimed that the value of its tenancy rights was Rs. 60,000 and so the cost of the property should be taken at Rs. 81,806. In other words, according to the assessee, there was no capital gain. The alternative contention of the assessee was that since the property had been held by it, as a tenant, prior to 1-1-1954, the cost price of the property, as on 1-1-1954, should be taken at Rs 41,680. In support of its case, the assessee referred to the decision of the Appellate Tribunal in the ease of Mrs. M.H. Dudha (supra). The ITO rejected both the contentions of the assessee. He held (i) that when the assessee purchased the property on 16-2-1973 and became its owner, its tenancy rights came to an end, and (ii) that the actual expenditure incurred by the assessee in acquiring the asset which was actually sold should determine the cost of that asset for the purpose of assessing the capital gains.
According to him, the notional value of the tenancy rights which were not in existence at the time of final sale of the property and which could not be, and were not, sold, could not be added to the cost of the property for determining the capital gains on its sale.
He, therefore, assessed the capital gain of the assessee at Rs. 52,594 after making necessary adjustments.
On appeal, the Commissioner (Appeals) agreed with the ITO. The assessee has, therefore, filed the present appeal.
3. Before us, the learned representative of the assessee reiterated the contentions raised by him before the ITO whereas the learned representative of the department relied upon the orders of the authorities below. Their respective arguments have been recorded by my learned brother in his order and the same need not be repeated.
4. After going through the record and hearing the learned representatives of the parties, I am of the opinion that the stand taken by the department is unassailable. Section 45(1) provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head 'Capital gains'. Then Section 48 provides that the capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset (i) the expenditure incurred wholly or exclusively in connection with such transfer, and (it) the cost of acquisition of the capital asset and the cost of any improvement thereto (emphasis supplied). Since the sale price of Rs. 80,000 is not in dispute, the decision of the case depends upon the answers to the following questions : 2. What is the cost of the capital asset which has been transferred 5. As regards the first question, it is evident from the facts of the case that the assessee-firm was a tenant of the property up to 16-2-1973. Then it purchased the property for Rs. 21,806. The tenancy right envisages a right to occupy the property as a tenant under some other person. A person cannot be a tenant under himself. That being so, when the assessee-firm purchased the property on 16-2-1973, its tenancy right came to an end. Thereafter, the assessee could not be both a landlord and a tenant. After purchasing the property, the assessee could only let out the property on rent, but could not claim to be a tenant under itself. Thus, when the assessee sold the property on 14-3-1974, it did not possess any tenancy right under itself as landlord or any other landlord. In such a situation, what the assessee sold on 14-3-1974 was its ownership rights including his right to let out the property on rent to somebody else, but not the non-existent tenancy rights under itself, or any other landlord. Evidently, therefore, the capital asset which the assessee 'transferred' on 14-3-1974 within the meaning of Section 45 was his ownership right in the property. Since he did not have any tenancy rights as such, at that time, the question of transfer of such tenancy rights could not arise.
6. The second question for consideration relates to the cost of the capital asset which was transferred by the assessee on 14-3-1974. On this point, there is no dispute that the assessee purchased the property on 16-2-1973 for Rs. 21,806, through a registered sale deed.
There is no material on the record to prove that the sale price was understated in the sale deed on account of the tenancy rights (or that the value of the tenancy rights was Rs. 60,000) as contented by the assessee. Such a contention of the assessee is based upon mere surmises and conjectures. The possibility that the assessee needed the property very badly for its business at the relevant time and wanted to purchase it without litigation and so it paid the correct and the prevailing market value or the price demanded by the landlord cannot be ruled out.
That apart, the sale deed being a registered document, it must be presumed that it represents the true value of the property and that the consideration shown therein is the real consideration. We cannot read in this document something which is not there. In my opinion, therefore, the cost of the property which was sold on 14-3-1974 amounts to Rs. 21,806 only and the capital gains tax has to be charged on this basis.
7. As already held, the ownership rights in the property constitute the capital asset which was transferred on 14-3-1974 under Section 45.
Since no tenancy rights of the assessee were in existence on 14-3-1974, the question of transfer of such rights on that date did not arise.
When the tenancy rights could not be sold and were not actually sold on 14-3-1974, it would be irrelevant to determine the cost or the value of these rights on 17-2-1973 or on 1-1-1954.
8. The authorities cited by the learned representative of the assessee have no bearing on the present case. According to the decision of the Supreme Court in the case of Damadilal (supra), the tenancy right acquired by an assessee is a valuable right. This proposition has nothing to do with the present case, as the assessee did not have any tenancy rights on the date of the sale of the property. Similarly, the decision of the Calcutta High Court in the case of A, Gasper (supra) is not relevant for deciding the present case. In that case, the tenant had transferred his tenancy rights to a third person with the consent of the landlord and it was held that the tenancy right was a capital asset and the transfer of the same gave rise to capital gains. In the present case, the assessee did not sell any tenancy rights and, hence, the question of charging any capital gain in respect thereof does not arise. The decision of the Appellate Tribunal in the case of Mrs. M.D.Dudha (supra) is also of no help to the assessee. In that case, the landlord agreed to pay a sum of Rs. 55,000 to the tenant for purchasing a flat in lieu of surrendering his tenancy rights and it was held that such a transfer gave rise to transfer of capital asset. Evidently there is nothing common between the facts of that case and the facts of the present case.
9. Lastly, a reference may be made to an illustration given by my learned brother in para 7 of his order. This illustration is as follows : 'Suppose, a person had a carriage. Then he buys a horse. Later, he sells the carriage and the horse together. Can it be said that the assessee sold only the horse which he had bought and did not sell the carriage which he had not bought In our opinion, it cannot be so said.' With respect, the above illustration is not, in my opinion, applicable to the present case. The reason is that the person concerned had two separate distinct and tangible assets, i.e., a horse and a carriage, at the time of sale. He sold both these assets and as such the transfer involved two assets. The facts of the present case are different. Perhaps, the following illustration, though not exactly on all four, may approach nearer to the instant case. Suppose, a person takes a cab on daily or monthly hire from its owner and plies it as a taxi for earning his livelihood. Later on, he purchases the cab and then sells it after some time. Can we say that he has sold two assets, i.e., a cab which he used to take on hire and ply, and the other which he has purchased Evidently, the capital gains, if any, will arise only on the sale of the cab purchased by him and the fact that he used to hire the cab before he purchased it will have to be ignored.
10. The method proposed by my learned brother for assessing the capital gains in paras 8 and 9 of his order has not got the sanction of law and is not supported by any provisions of the Act.
11. In view of the above discussion, I am of the opinion that the authorities below have rightly charged the capital gains, keeping in view the sale price of the property, amounting to Rs. 80,000, and its cost at Rs. 21,806. They have also, correctly, rejected the plea of the assessee for determining the value of the tenancy rights as on 16-2-1973 or on 1-1-1954 for the purpose of computing the capital gains in the present case. The impugned orders of the authorities below, therefore, deserve to be confirmed.
Reference under Section 255(4) of the Income-tax Act, 1961 - We, having differed in our views on the following points, hereby refer the matter to the President under Section 255(4) of the Act: 1. Whether the tenancy rights of the assessee-firm came to an end when it purchased the property on 16-2-1973 2. Whether, on the facts and in the circumstances of the case, the cost of acquisition of the tenancy rights as on 1-1-1954 is to be deducted while computing the capital gains arising on the sale of the property on 14-3-1974 1. Consequent on a difference of opinion between the members of the Bench who heard this appeal, the following two questions have been referred to me by the President under Section 255 of the Act: 1. Whether the tenancy rights of the assessee-firm came to an end when it purchased the property on 16-2-1973 2. Whether, on the facts and in the circumstances of the case, the cost of acquisition of the tenancy rights as on 1-1-1954 is to be deducted while computing the capital gains arising on the sale of the property on 14.3.1974? 2. The facts of the case, as also the reasons that impelled the members of the original Bench to come to the different conclusions, have been very ably set out by both of them in their respective orders. I do not, therefore, consider it necessary to reiterate them over again in the present order. Suffice it to say that having carefully considered the matter in the light of the opinions expressed by my two learned brothers, as also the able arguments of the representative of both the sides, I find myself in agreement with the views expressed by my learned brother, the Judicial Member.
I would, accordingly, answer the two questions that have been referred to me, in the following manner : The matter will now go back to the original Bench for passing orders conformably to the majority view.