1. This reference under s. 256(1) of the I.T. Act 1961 (hereinafter referred to as 'the Act') poses the following question for the opinion of this court :
'Whether, on the facts and in the circumstances of the case and on a correct interpretation of the provisions of section 2(14), section 45 and section 48 of I.T. Act, 1961, the Tribunal was justified in holding that capital gains had arisen on the receipt of Rs. 30,000 on surrendering of tenancy right of the first floor of premises 710, Ballimaran Chandni Chowk, Delhi ?'
2. The facts briefly are these. The assessment year under reference is 1966-67 of which the relevant previous year is financial year ending March 31, 1966. The assessed is an individual and is engaged in profession as an advocate. He carried on his professional work till the accounting year relevant to the assessment year 1963-64. Thereafter the assessed carried on the same profession in partnership with another advocate. The assessed took the premises at 710, Ballimaran Chandni Chowk, Delhi, on rent in 1947-48. During the relevant accounting year the assessed surrendered the tenancy rights of the first floor of the said premises. The assessed received on March 18, 1966, an amount of Rs. 30,000 for surrendering the said premises in favor of 'All India Bank Employees Association'. The ITO took the view that the assessed's tenancy rights vis-a-vis 710, Ballimaran, Chandni Chowk, Delhi, represented a capital asset and that the amount of Rs. 30,000 was assessable as capital gains under s. 45 of the Act. The ITO accordingly included the amount of Rs. 25,000 as capital gains being the net amount after allowing the statutory exemption, in the assessed's total income rejecting the assessed's contention to the contrary.
3. An appeal was field by the assessed before the AAC who held that the tenancy rights did represent a capital asset but no capital gains could arise to the assessed by surrender of the rights, because the tenancy rights had not cost the assessed anything and that they were not purchased by him. The AAC deleted the amount of Rs. 25,000 from the assessed's total income.
4. The Department went in second appeal before the Income-tax Appellate Tribunal (for short, called 'the Tribunal'). It was contended that the AAC had accepted the position that the tenancy rights represented a capital asset and that there could been dispute that the assessed had relinqished or surrendered the capital asset. The deparmental representative urged that the amount of Rs. 30,000 had to be considered for being processed as capital gains and that it was for the assessed to lead evidence about the actualcost of asset at the time of its acquisition or at least the market value of the asset as on January 1, 1954. The Tribunal allowed the Department's appeal. It was held that the tenancy rights represented a capital asset because s. 2(14) of the Act made it clear that capital asset included property of any kind held by an assessed and the tenancy rights did represent right of property, that the tenancy rights have clearly to be distinguished from goodwill in which case there may be some difficulty about determining the actual cost of acquisition of goodwill but such a difficulty would not arise in case of tenancy rights and that any rate there would be no difficulty in determining the market value of the tenancy rights as on January 1, 1954. The question was posed in another way by the Tribunal for its answer. It observed that the question would be as to what would be the 'pagri' which the assessed would have got on January 1, 1954, for surrendering the accommodation and that this amount would have to be deducted from Rs. 30,000 before arriving at the capital gains. The Tribunal set aside the finding of the AAC and restored the appeal to his file and directed him to dispose of the appeal after determining the capital gains on the basis indicated in the Tribunal's order. The AAC was called upon to determine the value of tenancy as on January 1, 1954, and then to deduct the amount from Rs. 30,000 which the assessed had received. It opined that the balance was to represent the capital gains subject to statutory exemption.
5. 'Capital asset' is defined by s. 2(14) of the Act to mean property of any kind held by an assessed whether or not connected with his business or profession, but does not include specified items of property. The leasehold rights do not come under any of the exclusions contemplated by that definition. 'Property' is a term of the widest import and subject to any limitations which the context may require, it signifies every possible interest which a person can acquire, hold and enjoy (See Ahmed G. H. Ariff v. CWT : 76ITR471(SC) . The word 'transfer' as defined in s. 2(47), in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinquishment of any rights therein or the compulsory acquisition thereof under any law. The assessed took the premises at 710, Ballimaran, Chandni Chowk, Delhi, on rent in 1947-48. The grant of the tenancy rights to the assessed did not cost him anything and they were not purchased by him. The AAC had accepted this as a fact and there is no challenge to this finding before the Tribunal. On March 18, 1966, the assessed received an amount of Rs. 30,000 for surrendering his tenancy rights. In my opinion, although it is disputed by the assessed, the tenancy right is property. A lease of immovable property is a transfer of a right to enjoy such property. It is a demise, i.e., a partial transfer by way of lease. Such an interest of a tenant is a right to property within the meaning of article 19(1)(f) of the Constitution. The estate transferred is called leasehold. The right of a lessee is an estate or interest in the premises and that, in the absence of a contract to the contrary, it is transferable property. The estate of a lessee is also an estate of inheritance. The leasehold rights would thus be a capital asset. In A. Gasper v. CIT : 117ITR581(Cal) , The Calcutta High Court held that the assessed's monthly tenancy or leasehold right is a capital asset. The assessed in this case received an amount of Rs. 30,000 for surrendering the office premises and by this surrender his rights in it stood extinguished. The transfer in relation to a capital asset includes the extinguishment of any right and this thus a capital asset was transferred within the meaning of the Act.
6. I may also notice the impact of the payment of monthly rent vis-a-vis the capital asset. The lease is defined under the provisions of the Transfer of Property Act, 1882, in s. 105. The consideration for a lease may be 'of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or no specified occasions to the transferor by the transferee'. Normally, the initial amount paid for the acquisition of the leasehold right is 'premium' 'pagri', 'salami' or by whatever name it may be called. This is in consideration for being let in possession. The consideration for relinquishment of the tenancy rights may again be a lump sum called 'pagri'. The periodical payments in terms of money for the use and occupation of the premises is called rent or lease money. What distinguishes rent from 'premium' is that the latter represents money paid as a price or a consideration for being let in possession. 'Pagri' is a consideration for the creation or surrender of the property or the relinquishment of the leasehold rights. A number of cases have arisen under the I.T. Act while considering the question of capital receipt. When the interest of the Lesser is parted for a price, the price paid is premium or salami but the periodical payments made for the continuous enjoyments of the benefits under the lease are in the nature of rent; the former is a capital receipt and the latter a revenue receipt. Parties may camouflage the real nature of the transaction by using clever phraseology and, thereforee, it is not the form but the circumstances of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the courts, having regard to the other circumstances of ascertain the intention of the parties (See CIT v. Panbari Tea Co. Ltd. : 57ITR422(SC) ). Rent is a revenue expenditure and does not go in the cost of the capital asset. The periodic payments of rent made by the assessed are thus not for the acquisition of the capital asset of leasehold rights.
7. The question then arises whether this transfer of a capital asset gives rise to a capital gain for the purpose of the Act. At the relevant time, ss. 45, 48 and 55(2)(i) read as follows :
'45. Capital gains. - (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 and 54D, 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.'
'48. Mode of computation and deductions. - The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accuring as a result of the transfer of the capital asset the following amounts, namely :-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.'
'55(2)(i). Cost of acquisition. - Where the capital asset became the property of the assessed before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessed or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessed.'
8. Section 45 charges the profits or gains arising from the transfer of a capital asset effected in the previous year and by a legal fiction it is deemed to be the income of the previous year in which the transfer took place. Though ss. 4 and 5 of the Act are the charging sections, yet s. 45 also in a way is a charging section. For the purpose of imposing the charge, the legislature has enacted detailed provisions in ss. 48, 49 and 55 in order to compute the profits or gains under that head. Section 48 lays down the mode of computation of the capital gains. The amount of capital gains has to be arrived at by deducting two specified items, namely, (i) expenditure incurred wholly and exclusively in connection with such transfer, and (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto, from the full value of the consideration for which the transfer is made. Section 55 defines the cost of acquisition and cost of improvement. Cost of acquisition means the cost of acquisition of the asset to the assessed where the capital asset became the property of the assessed before the January 1, 1954, or the fair market value of the asset on January 1, 1954, at the option of the assessed. A cost to the assessed in the acquisition of the asset is thus clearly contemplated. The charging section and the computation provisions together constitute an integrated code for the purpose of ascertaining whether the transfer of the tenancy rights which is a capital asset gives rise to a capital gain for the purposes of the Act. If the computation provisions cannot apply at all to a given case, then such a case could not be intended by the legislature to fall within the charging section. The value of the tenancy rights may be called 'pagri', 'premium', or 'salami', etc., but it is an intangible property. Though intangible, it is materially valued. The assessed took the premises on rent in the year 1947-48. The tenancy rights had not cost the assessed anything and they were not purchased by him. On March 18, 1966, the assessed received an amount of Rs. 30,000, i.e., 'pagri', for relinquishment of the tenancy rights or surrender of the tenancy rights. A variety of elements contribute in the making of the value of the tenancy rights, but there can be no account in value of the factor producing it. It is a composite thing referable in part to its locality, in part to the use to which the premises are put, in part to the nature of the business carried if commercial premises, in part to the success of the business conducted, in part of the trend of the customers or litigants, in part to the likelihood of the competition and in part to several other unpredictable factors, like whims and eccentricities of the persons wanting to acquire the tenancy rights. The value may fluctuate from one day to another day depending upon the uncertain demand and supply of comparable premises. It may increase or it may decrease, but such increase or decrease is not like the periodic waning and waxing of the moon. In the year 1947-48 there was no premium. It is not possible to predicate as to the exact moment of its birth and the rate or period of its growth. The process of the growth in value is imperceptible. It is self-created without any contribution by the assessed, monetarily or otherwise. The fact remains that the capital asset has been acquired by the assessed without the payment of any money. it is thereforee, not possible to ascertain in this case when the assessed did not pay any amount in the acquisition of the tenancy rights, as to what is the 'cost of acquisition' or 'cost of improvement' for the purpose of computation of 'capital gains' under s. 48. If the whole of the value of the capital asset transferred is brought to tax, then what would be charged is the capital value of the asset and not any profit or gain as contemplated in s. 45.
9. In CIT v. B. C. Srinivasa Setty : 128ITR294(SC) , the Supreme Court was concerned with the capital asset of 'goodwill' generated in a new business. The date of acquisition of the asset was a material factor in applying the computation provisions pertaining to capital gains, but in the case of goodwill generated in a new business it was not possible to determine on what date it came into existence. It was held that the charging section and the computation provisions together constitute an integrated code and that when there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. It was observed that all transactions encompassed by s. 45 of the Act must fall under the governance of its computation provisions and a transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge. It was held (p. 300) :
'What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It is immaterial that although the asset belongs to such a class, it may on the facts of a certain case, be acquired without the payment of money. That kind of case is covered by s. 49 and its cost, for the purpose of s. 48, is determined in accordance with those provisions. There are other provisions which indicate that s. 48 is concerned with an asset capable of acquisition at a cost. Section 50 is one such provision. So also is sub-s. (2) of s. 55. None of the provisions pertaining to the head 'Capital gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. Yet there are assets which are acquired by way of production in which no cost element can be identified or envisaged. From what has gone before, it is apparent that the goodwill generated in a new business has been so regarded. The elements which create it have already been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain.'
10. In a subsequent case before the Bombay High Court in 'Evans Fraser and Co. Ltd. v. CIT : 137ITR493(Bom) , a question arose about the transfer of goodwill acquired by the assessed from another. Acquisition of the goodwill of the business is, without doubt, acquisition of a capital asset, but merely because it is a capital asset, it does not mean that it becomes automatically subject to the charge of capital gains tax. The Bombay High Court made a reference to various decided cases and came to the conclusion that the charging section and the computation provisions in the Act, together constitute an integrated code and, in a case to which the computation provision cannot apply, the charging section will not also apply. It was held that the income chargeable to capital gains tax is to be computed by deducting from the full value of the consideration the cost of acquisition of the capital asset and the cost of any improvement there and that since the cost of improvement of goodwill cannot be ascertained, gains, arising; on its transfer, would not be liable to tax.
11. In the case of Addl. CIT v. K. S. Sheik Mohideen : 115ITR243(Mad) a question arose before a Full Bench of Madras High Court. The assessed there made remittances under the National defense Remittance Scheme and such remittances earned import entitlements which were sold by the assessed resulting in profit which was assessed to capital gains tax by the ITO. The Tribunal, however, held that there was no capital gains liable to be taxed. A reference on a question of law was made to the High Court as to whether there would be no liability to capital gains tax on the sale of import entitlement certificates in the assessed's case. It was held (p. 247) :
'The view, thereforee, has been taken that it is not only the charging section that should be taken into account but the whole scheme of the Act must be looked into and when the Act is viewed in that manner, it has to be taken that the legislature did not intend to impose any capital gains on goodwill or on import entitlement merely by reason of the fact that the assessed had received monies when the capital asset or goodwill or import entitlement had been transferred. This was so said also for the apparent reason that the imposition in these circumstances will not be really on the profits and gains but on the entire capital asset itself, and one of the learned judges who dealt with this matter has said that the tax which is said to be on profits and gains will then be covered into a tax on the capital asset. An intention to impose a tax on 'capital amount' as distinct from 'capital gains' could not be attributed to the statute and, thereforee, the other view was taken, namely, that the statute did not intend to tax such capital assets as goodwill and import entitlement.'
12. In CIT v. Clive Mills Co. Ltd. : 148ITR14(Cal) the Calcutta High Court was concerned with the sale of loom hours by the assessed. No cost had been incurred by the assessed in the acquisition of loom hours. It was held (p. 15 of ITR) :
'....... capital gain arises only on the transfer of a capital asset which has actually cost to the assessed something. Such cost in the context of the I.T. Act being cost in terms of money cannot apply to transfer of capital asset which did not cost anything to the assessed in terms of money in its creation or acquisition. In the present case also the acquisition of the loom hours did not cost anything to the assessed. The sale of loom hours, thereforee, does not attract the provision of s. 45 of the I.T. Act, 1961. The additions on account of sale proceeds of loom hours in both the years are accordingly deleted.'
13. It is not possible to apply the computation sections for quantifying the profits and gains on the transfer of leasehold rights which were acquired by the assessed without any cost. The mode of computation and deduction set froth in s. 45 provided the principal basis for quantifying the income chargeable under the head 'Capital gains.' What is contemplated is an asset in the acquisition of which it is possible to envisage a cost. In the case of self-created value of a tenancy right, it is not possible to determine the date of acquisition of the asset. A subsidiary point may also be noticed in which the Tribunal had directed the determination of the value of tenancy right as on January 1, 1954, and to deduct the amount from Rs. 30,000 which the assessed received. It opined that the balance would represent capital gains subject to statutory exemption. The authorities under the Act have no jurisdiction or power to direct the ascertainment of the cost of acquisition in relation to a capital asset. The option is given to the assessed whether to adopt the cost of acquisition of the asset to the assessed or the fair market value of asset on the 1st day of January, 1954. The assessed has not exercised the option, nay, he has not even been called upon to do so. There is, thereforee, no basis for directing the determination of the value of the tenancy rights as on January 1, 1954.
14. The question is, thereforee, answered in the favor of the assessed and against the Revenue with no order as to costs.
15. I agree.