No Tax to partnership on surrender of Tenancy Right held by partners

tax1By Legal Cell, Accommodation Times Bureau

In the instant case, no where the assessee-firm is considered as the tenant. In thepartnership deed dated 4-4-1990 also, it is stated that all rights over trade name, goodwilllicense and permits shall belong to the partners. It is the legal heirs of ‘A’ and ‘V’, who have continued to hold the tenancy rights and have used the name of the business only for the sake of convenience, which had been continuance from the pre-partition days.Moreover, none of the partners at no point of time have ever introduced his/her share in the tenancy as capital in the accounts of the firm. The ‘tenancy of the premises’ was always held by the individual and later on individuals only, and never by the firm, as held by the Assessing Officer. Even the relevant provisions of Bombay Rent,Hotels and Lodging House Rates Control Act, 1947, comes to the rescue of the individuals, wherein, the statute itself defines ‘tenant means any person by whom or on whose account rent is payable for any premises includes sub-tenants and other persons or have derived title under a tenant before 1-2-1973?. Section 14(aa) says ‘any person to whom interest in premises has been assigned a transferred as permitted or deemed to be permitted under section 15?. This only means that the firm was never the tenant. The individuals were, thus, correct, who had not only taken the compensation for surrender of tenancy rights but also deposited the same in NABARD Bonds.


Income-tax Officer, 17(3)(1), Mumbai


Bombay Electrical Laundry

IT Appeal No. 4167 (Mum.) of 2008

[Assessment year 2006-07]

Date of Pronouncement – June 13, 2012


Vivek Varma, Judicial Member – The appeal filed by the department arises from the order of the CIT(A) XXIII, Mumbai dated 25-03-2009.



Section 50C not applicable to tenancy rights and unregistered document


On applicability of Section 50C of the Act in absence of registered document –Capital gain has to be computed on the basis of sale consideration received or accruing to the taxpayer. Even if the document was not registered, the capital gain has to be computed on the basis of the saleconsideration shown and received by the taxpayer unless there was material to show that the sale consideration was understated. In this case, the document was not registered and no stamp duty had been paid. Therefore, stamp duty value cannot be adopted for the purpose of computation of capital gain and the value shown in the agreement has to be adopted as there is no material to show that the taxpayer had understated the sale consideration.

It is pertinent to note that an amendment has been made in Section 50C of the Act with effect from 1 October 2009 to bring unregistered document   also under the purview of Section 50C of the Act. In view of this amendment, this Ruling would not hold good for the sale transactions entered into post 1 October 2009. However, it would still hold good for the sale transactions that are entered into prior to 1 October 2009

On applicability of Section 50C of the Act to tenancy rights Only for the limited purpose ofcomputation of capital gain in respect of sale of land and building, stamp duty value has to be substituted for sale consideration in view of specific provisions of Section 50C of the Act.Therefore, provisions of section 50C of the Act cannot be applied in case of transfer of tenancy rights in respect of land or building or both.


ITA No. 6320/M/2010

Assessment Years: 2007-08

Asstt. Commissioner of Income tax


M/s. Munsons Textiles

Date of pronouncement :3.2.2012











Holding period of asset received in exchange to be counted from possession date


The dispute is regarding addition made by the Assessing Officer on account of computationof capital gain from sale of flats. The assessee who was owner of the land since 1962 had sold the land as per development-cum-sale agreement dated 21-2-2001 to the builder. The consideration agreed was a cash payment of Rs .61 lakh and 55 per cent share in the built-up area to be constructed by the builder amounting to 6147.52 sq.ft. Subsequently, 55 per cent of the share of the assessee was revised to 14322 sq.ft. in view of the property being released from CRZ control. Thus the consideration receivable by the assessee for transfer of 45 per cent right in the land to the builder was payment of Rs. 61.00 lacs and cost of construction of 55 per cent of built-up area to the builder. Since the possession of the land had been given in August 2001, the assessee had declared capital gain from the transfer of 45 per cent right in land in the assessment year 2002-03. The building had been constructed during the period 2002-05. The assessee had been given possession of the flats vide full occupation certificate dated 24.2.2005. The assessee sold two flats during the assessment year under consideration for aggregate consideration of Rs.5.38 crores on 10-4-2006 and 2-5-2006 with each flat having built-up area of 2850 sq.ft.  

The assessee computed the gain from sale of flats as long term capital gain taking holding period from the date of development-cum-sale agreement. The Assessing Officer has not accepted the claim of the assessee and has computed capital gain as short term capital gainas the assessee had taken possession of the flats only on 24-2-2005 and therefore, in his view the flats were held only from that date. The case of the assessee is that it had right of claim in the flats since the date of agreement in the year 2001, which was an asset and therefore, it was right of claim in the flats which was sold by the assessee. It has also been submitted that the expenditure incurred during 2002-05 for construction of building and 55 per cent share of the assessee in the said construction was merely cost of improvement of the asset held by the assessee since 2001. Thus, in the opinion of the assessee the asset had been held for more than 3 years and, therefore, the gain has to be computed as long term capital gain. The assessee has relied on several decisions of the Tribunal and the High Courts in support of the plea. On careful consideration of the entire facts and circumstances, the claim of the assessee cannot be accepted. Right to claim the flat as per agreement in the year 2001 was an asset but the assessee had not sold the right to acquire the flats. The assessee had sold the flats of which he was owner. The right to acquire the flats, no longer subsisted once the assessee acquired the flats and took possession of the same on 24-2-2005. The right to acquire the flats and ownership of the flats are two different assets. The assessee had sold the flats and had not transferred the right to acquire the flat which had extinguished. The capital gain had therefore to be computed in respect of sale of flats and not in respect of right to acquire the flats.

However, there is substance in the alternate plea of the assessee that the right of the assessee in the flats also included the right in the proportionate part of the land as the assessee had transferred only 45 per cent of right/interest in the land to the builder and 55 per cent of the right/interest was retained by the assessee. Therefore, sale consideration also included price paid in respect of right in the land in addition to price for superstructure. There is no merit in the argument of the revenuethat this being a fresh plea should not be entertained. The entire issue of computation of capital gain is in dispute before the Tribunal and, therefore, all aspects relating thereto have to be considered. The claim of the assessee to bifurcate the capital gain in two parts i.e. one relating to sale of right in the land and the other relating to sale of superstructure is quite reasonable.

In instant case, the assessee along with flats had also sold right of the assessee in the land which was an independent asset and which was being held by the assessee since 1962 as an owner. Therefore, following the judgment of the High Court of Bombay in the case of CIT v. Hindustan Hotel’s Ltd. [2011] 335 ITR 60, the capital gain in respect of transfer of right of assessee in the land has to be computed separately as long term capital gains and gain in respect of sale of superstructure has to be treated as short term capital gain. The assessee has argued that in case of Hindustan Hotels Ltd. (supra), the gain in respect of superstructure had been taken at about 17 per cent and therefore in this case also while attributing the sale consideration towards price of superstructure, a margin of 17 per cent on the cost of construction should be adopted. However, it is noted that in case of Hindustan Hotels Ltd. (supra), the period of construction was 1990-95 and it had been sold soon thereafter, in June 1995 whereas in the instant case the period of construction was 2002-05 and flats had been sold in the year 2006. Considering the facts and circumstances of the case it held that it would be reasonable to adopt a profit margin of 25 per cent on the cost of construction of the flats to arrive at the sale consideration pertaining to the superstructure. The balance sale consideration of the flats will be appropriated towards the sale price for the transfer of right in the land. The capital gain will thus be computed as long term capital gains in respect of transfer of right in the land and short term capital gain in respect of transfer of superstructure of the flats. The assessee will be entitled to the benefit of investment in the Rural ElectrificationCorporation Bonds under section 54EC in accordance with law. The Assessing Officer will re-compute capital gain accordingly


Assistant Commissioner of Income-tax


Jaimal K. Shah

IT Appeal No. 6966 (Mum.) of 2010

[Assessment Year 2007-08]

MAY 30, 2012


Rajendra Singh, Accountant Member – This appeal by the revenue is directed against the order dated 30.7.2010 of CIT(A) for the assessment year 2007-08. The only dispute raised in this appeal is regarding computation of capital gain from sale of flats by the assessee during the year.

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