1. This appeal by the assessee, an individual, relates to his assessment for the assessment year 1977-78. The assessee and his mother jointly owned a flat in 'Shanti Kutir', Bombay, which they sold with vacant possession during the previous year. The flat held an area of about 1,800 sq. ft. and was taken by his father, Dr. A.B. Irani, for residential purposes in the year 1962-63 on a monthly rent of Rs. 175.
The flat was, thus in occupation of the assessee's father as tenant and after his death on 26-3-1974 in the occupation of the assessee and his widow-mother. In May 1974, the existing tenants of the building 'Shanti Kutir' formed a society and entered into an agreement with the landlords for the purchase of the building, The ownership of the building was transferred to the society in January 1976, as a result of which the assessee and his mother like all other tenants jointly paid Rs. 46,287 towards, the purchase price of the flat and became its owners. The flat has been sold by the assessee and his mother to Mr.
V.B. Dalai and Mrs. B.V. Dalai for Rs. 1,80,000 with vacant possession in May 1976.
2. The ITO computed the surplus at Rs. 1,31,213 by deducting Rs. 46,287 being the purchase price and Rs. 2,500 being the legal expenses incurred in connection therewith from the sale consideration. The assessee's share in the flat being half and the sale having taken place within four, five months of the purchase, he included Rs. 65,606 (half of Rs. 1,31,213) as the assessee's income from short-term capital gains. Before the Commissioner (Appeals), the1 assessee's contention was that the assessee had sold the flat with vacant possession, that this comprised of two 'capital assets', namely, occupancy right and the remaining rights of the owner including title, that these two capital assets were acquired by the assessee in 1962-63 and in January 1976 and that, therefore, both the computation of the profits and gains and its treatment as income from short-term capital gains were not justified.
However, the Commissioner (Appeals) rejected the contentions for reasons given in paragraph 3 of his order. According to him, the fact that the assessee was a tenant in possession before he purchased the remaining rights of the owners over the flat was irrelevant for the purpose of considering his liability to capital gains as what was sold was the flat which the assessee had, admittedly, acquired during the year of sale itself, i.e., previous year.
3. It is pertinent to mention that Bombay Bench 'D' of the Tribunal held in the case of A.B.C. v. Third ITO  1 ITD 724 that the sale price in such a case should be apportioned and the difference between the sale price attributable to occupancy rights and the cost thereof be taxed as income under the head long-term capital gains while the difference between the sale price attributable to the remaining rights including title over the flat and the purchase price thereof be treated as income under the head short-term capital gains. However, on a difference of opinion between the learned members who heard the identical issue in another case of Jai Hind Rubber Industry v. First ITO  2 ITD 303 (Bom.) (TM), the Third Member held that when a tenant in occupation purchased the remaining rights including the title over the flat, his rights as a tenant merged and became extinct so much so that at the time of sale there was only one asset, namely, the flat, and, therefore, the excess of sale price over the purchase price of the flat is taxable as income under the head short-term capital gain in entirety.
4. On noticing conflict of views between the different Benches of the Tribunal, the Bench which heard the appeal originally referred the case for constituting a Special Bench. The proposal was accepted. That is how this appeal has come up before this Special Bench.
5. It is submitted before us by Shri V.H. Patil, the learned counsel for the assessee, that the departmental authorities have failed to appreciate the facts correctly. It is stated that Section 45 of the Income-tax Act, 1961 ('the Act'), creates a charge on income under the head 'capital gains' in respect of profits or gains arising from the transfer of 'capital asset'. The expression 'capital asset' is defined in the Act under Section 2(14) of the Act as meaning property of any kind held by an assessee subject, of course, to certain exclusions. The tenancy rights in a property is as much a 'capital asset' as the rights of ownership over a property other than occupancy rights and both are capable of being transferred separately. In support, he has relied on the following decisions-Ahmed G.H. Ariff v. CWT  76 ITR 471 (SC), Municipal Corporation v. Lala Pancham AIR 1965 SC 1008, A. Gasper v.CIT  117 ITR 581 (Cal), Arshad Waliullah v. CED  83 ITR 150 (AII.), A.R. Krishnamurthy and A.R. Rajagopalan v. CIT  133 ITR 922 (Mad.), Baijnath Chaturbhuj v. CIT  31 ITR 643 (Bom.) and Traders & Miners Ltd. v. CIT  27 ITR 341 (Pat.).
According to Shri Patil, full ownership in case of immovable property means acquisition of bundle of rights which, in turn, means a number of rights culminating into full ownership. This bundle of rights can be purchased or acquired by a person ordinarily by means of one transaction. It can also be purchased/acquired in stages, i.e., by means of more than one transaction so much so that when ultimately the full ownership is transferred, what is transferred is the bundle of rights acquired/purchased in stages which blossomed into the full ownership over the property. Reference in this context has been made to a Tribunal's decision in the case of A.B.C. (supra) wherein a similar case, it was held that the capital gains in a case like the one before us, is to be bifurcated into a long-term and short-term capital gain regarding the transfer of tenancy right and the transfer of ownership rights minus tenancy rights, respectively. He also referred to the Calcutta High Court's decision in the case of Mrs. A. Ghosh v. CIT  141 ITR 45 which, according to him, indirectly supported his submissions. Shri Patil closed his arguments by stating that tenancy rights are valuable rights inasmuch as under the existing rent control provision, this right is protected, heritable and transferable with the consent and approval of the landlord.
6. In fairness to Shri R.J. Joshi, the learned standing counsel for the department, it must be stated that in view of the many authorities cited by the assessee's counsel, he did not dispute that the tenancy rights are valuable rights and are 'capital assets' within the meaning of Section 2(14). However, it was the contention of Shri Joshi that this fact would not make any material difference in the situation because once a tenant purchases the property of which he is a tenant, there is a fusion of the two rights and the identity of the owner as a tenant is lost soon after he becomes the owner of the property. If a tenant, after becoming the owner, sells the property, it is the property which is sold and not the two rights separately. If the assessee had incurred any expenditure for acquiring the tenancy rights, that might form part of the cost of the property. However, there is not even a suggestion that the assessee or his father had paid any amount for acquiring the tenancy rights. Therefore, according to him, this aspect would be of no consequence. In support, Shri Joshi strongly relied on Sections 15 and 19 of the Bombay Rents Hotel Lodging and Boarding Rates Control Act, 1947, a Third Member order of the Tribunal in the case of Jai Hind Rubber Industry (supra) and the Supreme Court's decision in the case of Ramesh Himmatlal Shah v. Harsukh Jadhavji Joshi AIR 7. In reply, Shri Patil submitted that the tenancy right was a much smaller right than the rights as a member of the society but from equitable point of view it cannot be overlooked that the assessee was able to purchase this flat for a sum of Rs. 46,285 only because he was a tenant in possession and to say that at the time of purchase the tenancy rights had no value would be most unrealistic and inequitable.
In other words, his contention is that if it is held that after the fusion of the tenancy right into the ownership right what is transferred is the ownership of the flat which, of course, included the tenancy right, i.e., the right, of occupation, the value of the right of occupation will have to be estimated and then only the short-term capital gain should be computed.
8. In order to appreciate the rival contentions, it is desirable to refer to Section 45, which reads as under : (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54, 54B, 54D and 54E, be chargeable to income-tax under the head 'capital gains' and shall be deemed to be the income of the previous year in which the transfer took place.
The section evidently makes the profits or gains arising from the transfer of a capital asset chargeable to income-tax under the head 'capital gains' in certain circumstances. The crucial expression used in the section is transfer of a 'capital asset'. 'Capital asset' has been defined in Section 2(14) to mean property of all kinds except some species of the property referred to in sub-clauses (i) to (v) of the section. The first question that arises for consideration is whether the 'right of occupation as a tenant' is a capital asset. It will be a capital asset only if it is a 'properly' and does not fall within the exceptions referred to in the different sub-clauses of the section. It is in this context that it becomes necessary to refer to the decision of the Supreme Court in the case of Ahmed G.H. Ariffs (supra) where 'property' has been held to be a term of widest import and subject to any limitation which the context may require, it is held to signify every possible interest which a person can hold and enjoy. The right of occupation as a tenant, it may be stated, is a protected right. It is heritable and subject only to the consent of the landlord, it is transferable also, Sections 15 and 19 of the Bombay Rents Hotel Lodging and Boarding Rates Control Act, do not prohibit subletting by a tenant absolutely. Therefore, having regard to the above Supreme Court's decision, we have no difficulty in holding that the right of occupation as a tenant is 'property' within the meaning of Section 2(14) and since it does not fall within the exceptions, it is also a capital asset.
9. That such a right is property has been held by the Supreme Court in the case of Municipal Corporation. (supra) at page 1014 in the context of the expression 'property' occurring in Article 19(1)(f) of the Constitution of India. If such an interest is property under Article 19(1)(f) of the Con-stitution, it cannot but be so under Section 2(14).
Similar view, it may be stated, has been taken, directly or indirectly, by the different High Courts in the following cases- Traders & Miners Ltd. (supra) ; Arshad Waliullah (supra) ; A Gasper (supra) and A.R.Krishnamurthy and A.R. Rajagopalan (supra).
The observations of the Supreme Court in paragraph 18 of its decision in the case of Ramesh Himmatlal Shah (supra) reproduced hereunder and relied upon by the learned standing counsel do not really support the department's case. On the contrary, they also show that the right to occupy a flat is also a species of property : ...We, therefore, unhesitatingly come to the conclusion that this species of property, namely the right to occupy a flat of this type, assumes significant importance and acquires under the law a stamp of transfera-bility in furtherance of the interest of commerce. We have seen no fetter under any of the legal provisions against such a conclusion. The attachment and the sale of the property in this case in execution of the decree are valid under the law. (p. 1476) In view of so may authorities, it must be stated in fairness to Shri Joshi, the learned counsel for the revenue, that he did not seriously dispute the proposition that the right of occupation as a tenant is a valuable right and, therefore, is a property and is a capital asset within the meaning of Section 2(14).
10. Ordinarily, therefore, there should be no difficulty in accepting that the assessee acquired one 'capital asset' in the shape of right of occupation as a tenant in the year 1962-63. He acquired another 'capital asset' in January 1976, when he purchased the remaining rights of the landlord over the flat including the title and these two capital assets representing a flat with vacant possession, he sold in May 1976.
As a natural corollary, there should be no difficulty in further holding that the surplus of sale consideration over the cost of acquisition of the right of occupation as a tenant should be taxed as long-term capital gains and the same in respect of the remaining rights of the landlord over the flat including the title should be taxed as short-term capital gain.
However, the difficulty arises because of the provisions of Section 111 of the Transfer of Property Act, 1882, which provide for determination of the lease in certain cases. It is true that the section does not refer to the determination of the rights'of a month to month tenant as such. All the same, it will only be reasonable to assume that the provisions will apply in the case of a month to month tenant also.
Clause (d) of Section 111, which will have application, provides that in case the interests of the lessee (in this case the tenant) and the lessor (in this case the landlord) in the whole of the property (in this case the flat) become vested at the same time in one person in the same right, the lease of the immovable property (tenancy right in this case) determines, as no person can be the landlord and the tenant in respect of the same premises at the same time. In other words, the tenancy right, i.e., the smaller estate and the remaining interest of the landlord over the property including title, i.e., bigger estate, merge and together become full ownership rights. It was in this context that the learned standing counsel argued that after the assessee purchased the remaining interest of the landlord over the flat, the right of occupation as atenant terminates and loses its independent existence or identity.
In our opinion, the contention of the learned standing counsel is not tenable. It may be that after the assessee purchased the remaining interest of the landlord over the flat, his right of occupation as a tenant lost its identity and merged in the bigger estate. All the same, it will not be quite proper to hold that after the smaller estate, i.e., the right of occupation as a tenant, merged in the bigger estate, i.e., the remaining interest of the landlord over the flat, the two capital assets which were acquired separately became smaller estate or the bigger estate simpliciter. To our mind, after the merger, the asset became a full estate, i.e., composite estate, which is different from the smaller estate as well as the bigger estate, referred to above. It is pertinent to mention that it is this composite estate or full estate which has been sold by the assessee in May 1976.
11. The next question that arises for consideration is whether the sale consideration for the aforesaid composite or full estate is one sum. It can be apportioned into what is attributable towards the smaller etsate. i.e., the right of occupation as a tenant and the bigger estate, i.e., the remaining interest of the landlord over the flat. In this connection, it is desirable to refer to the decision of the apportionment of the sale price does not appear to be legally possible in view of what the Supreme Court has held in the cases of CIT v.Mugneeram Bangur & Co.  57 ITR 299, CIT v. West Coast Chemicals & Industries Ltd.  46 ITR 135 and Associated Clothiers Ltd. v. CIT  63 ITR 224. These were cases of slump sale, i.e., where the business was sold lock, stock and barrel. Separate values for each asset were not fixed in the agreement of sale. A question was posed whether any portion of the sale consideration was attributable or can be attributed to any individual asset of the business. The question was answered in the negative. The Bombay High Court decision in the case of Baijnath Chaturbhuj (supra) where a different view has been taken is, thus, of not much consequence. Therefore, in view of the aforesaid decisions of the Supreme Court, it may not be possible, assuming it is desirable, to apportion the sale consideration in the present case to the right of occupation as a tenant and to the remaining rights of the owners of the flat.
12. Thus, what is sold or transferred in this case is a composite asset or, say, composite estate, which has, admittedly, come into existence as a result of fusion or merger of the smaller estate and the bigger estate, i.e., the right of occupation as a tenant and, the remaining interest of the landlord over the flat including the title. The two components of the composite estate were acquired by the assessee separately and in two different years. For reasons given in the earlier paragraph, the sale consideration of the composite estate is not capable of apportionment in law. The question, naturally, arises what should be done in such a case.
13. The solution, to our mind, is to take either the smaller or bigger estate as the main estate. If the smaller estate, i.e., the right of occupation as a tenant, is taken as the main estate, the cost of the bigger estate will have to be treated as an improvement over the smaller estate but in that case, the period will have to be reckoned from the date of the acquisition of the smaller estate for the purpose of considering whether the surplus is liable to long-term or short-term capital gains. On the other hand, if the bigger estate, i.e., the remaining interest of the landlord over the flat including the title, is taken as the main estate, the market value of the smaller estate as on the date of the acquisition of the bigger estate will have to be taken into account though the date material for the purpose of considering the surplus as long-term or short-term capital gain will, in such a case, be the date of acquisition of the bigger estate.
14. The department has, admittedy, proceeded to consider the bigger estate as the main estate and has treated the surplus as liable to short-term capital gains. Therefore, it is only in the fitness of things that the cost of the composite estate sold herein is computed by taking into account the market value of the smaller estate as on the date of acquisition of the bigger estate. Since the ITO has not considered the issue from this point of view, we set aside the order of assessment and direct the ITO to recompute. the surplus liable to short-term capital gain afresh after allowing the assessee an opportunity of being heard.
15. In our above view, we find support from a Calcutta High Court decision in the case of Mrs. A. Ghosh (supra). The assessee in that case held debenture bonds of a company in December 1962. Under the second mortgage debenture trust deed executed in September 1963, the debenture holders had an option to exchange the debentures into fully paid-up equity shares. The assessee exercised her option on 1-10-1963 and exchanged the debentures for equity shares. In March 1964, she sold the equity shares. The ITO treated the surplus of such sale as a short-term capital gain and this was upheld by the Tribunal. However, it was held by the Hon'ble High Court that the cost of acquisition of the debentures could not be taken as the cost of acquisition of the shares and, therefore, when the asses see gave up the debentures and acquired the shares on 1-10-1963, the assessee acquired an asset which was distinct and separate from the debentures. Accordingly, the cost of acquisition of the shares must be the price the debentures would have fetched if sold in the open market on the date on which the debentures were exchanged for the shares. This case is, thus, a clear authority for the proposition that the value of the assessee's right of occupation as a tenant should be treated as part of the cost of the flat though this right of his merged in the bigger estate at the time of the purchase of the remaining rights over the flat.