Holding

The amount received on surrender of tenancy rights is not taxable because, although it is a capital receipt, the cost of acquisition is unascertainable, rendering Section 45 inapplicable and precluding taxation under any other head, including Section 56.

Summary

The respondent, D.P. Sandhu Bros. Chembur (P) Ltd., entered into a 50‑year lease in 1959 and prematurely surrendered its tenancy rights in March 1986, receiving Rs 35 lakhs. The Assessing Officer treated the receipt as income from other sources under Sec. 10(3) read with Sec. 56, while the Commissioner of Income Tax (Appeals) held it was liable to capital gains tax under Sec. 45 after allowing a cost of acquisition of Rs 7 lakhs. The Tribunal, relying on the decision in Commissioner of Income Tax v. Srinivasa Setty and the pre‑1995 position of the Act, held that no cost of acquisition could be ascertained, so capital gains could not be computed and were not taxable. The High Court dismissed the Revenue’s appeal. The Supreme Court affirmed that a tenancy right is a capital asset and its surrender is a transfer, but because the cost of acquisition was deemed unascertainable, Sec. 45 could not be applied and the receipt could not be taxed under any other head, including Sec. 56. Consequently, the Revenue’s appeal was dismissed.

Issues considered

Whether the amount received on surrender of tenancy rights is chargeable to capital gains tax under Section 45 of the Income Tax Act, 1961.
If not chargeable under Section 45, whether the receipt can be taxed as income from other sources under Section 10(3) read with Section 56.

Legislation cited

Income Tax Act, 1961s. 10(3), s. 14, s. 2(24)(vi), s. 45, s. 48, s. 55(2), s. 56

Subjects

capital gainstenancy rightSection 45Section 56income from other sourcescost of acquisitiontransfer of capital assetmutual exclusivity of heads of incomeIncome Tax Act

Judgment

>-

_/
COMMISSIONER OF INCOME TAX. MUMBAI A
v.
~
D.P. SAN DU BROS. CHEMBUR (P) LTD.

JANUARY 3 I, 2005

·.. [RUMA PAL, ARIJIT PASA Y AT AND CK TEAKKER, JJ.] B

Income Tax Act, 1961 (Pi"ior to 1995 Amendment)-Sections !0(3), 14,
45 and 56-Capital Gains Tax - Liability-On the amount received against
surrender of tenancy rights-Stand of Revenue before Court that the .cost of
acquisition was incapable of being ascertained-Liability negated by Courts
c
below-On appeal, held: Though cost of acquisition of tenancy right is
ascertainable assessee not liable to tax in view of the stand of Revenue-The
income being capital receipt and assessable only under Item E of Section 14,
cannot be taxed under Section I 0(3) either-~( the income is included in any
one of the heads, it cannot be brought to tax under the residuary provisions D
... of Section 56.

_, Respondent-assessee entered into lease agreement with lessor for 50
years. He prematurely surrendered the tenancy rights to the lessor and
in lieu of that received an amount. The amount was credited to reserve
and surplus account in the Assessee's return for the assessment year 1987- E
88; But the same was disallowed by Revenue holding that the amount was
taxable as "income from other sources" under Section 10(3) r/w Section
56 of Income Tax Act, 1961. In Assessee's appeal Revenue Authority held
him liable to pay capital gains on the amount. Tribunal in view of
amendment to Section 55(2) of the Act in 1995 held that the assessee did F
' >- not incur any cost to acquire the leasehold rights and that if at all any
':> cost had been incurred it was incapable of being ascertained. Therefore,
since the capital gains could not be computed as envisaged in Section 48
of Income Tax Act, Capital gains earned by the assessee was not exigible
to tax. Appeal of Revenue was dismissed by High Court.
'' G
On appeal, Revenue contended that surrender value of tenancy rights
~
was chargeable to capital gains under Section 45; and that even if it was
,
not chargeable, the same was liable to be taxed as "income from other
sources" under Section 10(3) r/w Section 56 of the Act. The connected

895 H
I
A'.,

896 SUPREME COURT REPORTS [2005) I S.C.R.

A appeals also raised identical issue.
Dismissing the appeals, the Court

HELD : I. A tenancy right is not a capital asset of such a nature
that the actual cost on acquisition could not be ascertained as a natural
B legal corollary. A tenancy right is acquired with reference to a particular
date. It is also possible that it may be acquired at a cost. It is ultimately a
question of fact. In the present case, however, the Department's stand
before the High Court was that the cost of acquisition of the tenancy was
ihcapable of being ascertained. In view of the stand taken by the
C Department before the High Court the decision of the High Court on this
issue is upheld. (900-F-H; 901-A)

A.R. Krishnamurthy and Ors. v. Commissioner of Income Tax, Madras,
(1989) 176 ITR 417; Bawa Shiv Charan Singh v. Commissioner of Income
Tax, Delhi, (1984) 149 ITR 29; The Commissioner of Income Tax v. Mangtu
D Ram Jaipuria, (1991) 192 ITR 533 (Cal.); Commissioner of Income Tax v.
Joy Ice Cream (Bang) Pvt. ltd., (1993) 2001 ITR 895 (Kar.); Commissioner
of Income Tax v. Markapakula Agamma, (1987) 165 ITR 386 (A.P.) and
Commissioner ofIncome Tax v. Merchandisers (P) ltd., (1990) 182 ITR 107
(Ker.), referred to.

E 2.1. It cannot be said that even if the income cannot be chargeable
under Section 45 of Income Tax Act, 1961, because of the inapplicability
of the computation provided under Section 48, it could still impose tax
under the residuary head. If the income cannot be taxed under Section
45, it cannot be taxed at all. (902-B-C(
F S.G. Mercantile Corporation (P) Ltd. v. Commissioner of Income Tax,
Calcutta, (1972) 83 ITR 700; United Commercial Bank ltd. v. Commissioner
of Income Tax ltd., West Bengal, (1957) 32 ITR 688; East India housing and
land Development Trust ltd. v. Commissioner of Income Tax, West Bengal,
(1961) 42 ITR 49 and Commissioner of Income Tax v. Chugandas and Co.,
G (1964) 55 ITR 17, relied on.
,.
2.2. If the income is included under any one of the heads, it cannot
be brought to tax under the residuary provisions of Section 56. A tenancy
right is a capital asset the surrender of which would attract Section 45 so
that the value received would be a capital receipt and assessable if at all
G only under Item E of Section 14. That being so, it cannot be treated as a
C.l.T. v. D.P. SANDU BROS. CHEMBUR (P) LTD. [RUMA PAL, J.] 897
.f
casual or non recurring receipt under Section 10(3) and be subjected to A
tax under Section 56. It would be illogical and against the language of
J
s~ction 56 to hold that everything that is exempted from capital gains by
statute could be taxed as a casual or non recurring receipt under Section
10(3) read with Section 56. (901-H; 902-A-BI

-. Nalinikanl Ambalal Mody v. S.A.L. Narayan Row, CIT (1966) 61 ITR B
428, 432, 435, relied on.

A. Gasper v. Commissioner of Income Tax, (1991) 192 ITR 382,
referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2335 of2003. c
From the Judgment and Order dated 6.2.2001 of the Bombay High
Court in I. T.A. No. 262 of 2000.

WITH
D
-t- Civil Appeal No. 2333 of 2003.

_, C.A. Nos. 2334, 2336-2338, 4468/2003, 1387, 6996-6997/2004 and
801 of 2005.

Mohan Parasaran, Additional Solicitor General, Preetesh Kapur and E
B. V. Balaram Das for the Appellants.

Joseph Vellappally, Ms. Ruby Singh Ahuja, Ms. Saloni Gupta, Mrs.
Manik Karanjawala, Ms. Nandini Gore, Rustom B. Hathikhanawala, Annam
D.N. Rao, Jay Savla and Ms. Meenakashi for the Respondents.
~
F
' The Following Judgement/Order of the Court was delivered by
~

RUMA PAL, J. The primary question involved in this appeal is whether
the amount received by the respondent-assessee on surrender of tenancy rights
y' is liable to capital gains tax under Section 45 of the Income tax Act, 1961.
The assessment year in question is 1987-88. The lease agreement was entered G
in 1959 for 50 years under which an annual rent was paid by the lessee to
the lessor. The lease would have continued till 2009. During the relevant
previous year, in March 1986, the respondent surrendered its tenancy right to
its lessor prematurely. In consideration for such premature tennination, the
lessor paid the lessee a sum of Rs. 35 lakhs.
H
898 SUPREME COURT REPORTS f'.?.005] I S.C.R.
""\...
A In the assessee 's return the sum of Rs. 35 lakhs had been credited to
its reserve and surplus account. This was disallowed by the Assessing Officer \.
who held that the amount of Rs. 35 lakhs was taxable as "income from other
sources" under Section I0(3) read with Section 56. The assessee appealed to
the Commissioner of Income Tax (Appeals) who came to the conclusion that
the assessee was liable to pay capital gains on the amount of Rs. 35 lakh after
B deducting an amount of Rs. 7 lakhs as the cost of acquisition. The
Commissioner had determined the cost of acquisition at Rs. 7 lakhs on the
basis of the market value of the property as on 1.4.1974. Both the Department t
and the assessee challenged .the decision of the Commissioner before the
Tribunal.
c The Tribunal relied upon the decision of this Court in Commissioner of
Income Tax v. Srinivasa Setty, 128 !TR 294 = (1981] 2 SCC 460 as well as
the amendment to Section 55(2) of the Act in 1995 and held that the assessee
did not incur any cost to acquire the leasehold rights and that if at all any cost
had been incurred it was incapable of being ascertained. It was therefore held
D that since the capital gains could not be computed as envisaged in Section 48
of the Income Tax Act, therefore capital gains earned by the assessee if any ·j-

was not exigible to tax.

The Department preferred an appeal before the High Court. The High
E Court dismissed the appeal. Being aggrieved by the decision of the High
Court, this further appeal has been preferred by the Department.

The Department has contended that the surrender value of the tenancy
rights was chargeable to capital gains under Section 45 of the Act. If not, it
was liable to be taxed as 'income from other sources' under Section 10(3)
F read with Section 56 of the Act.

Section 2(24)(vi) defines 'income' as including "any capital gains
chargeable under Section 45". Section 45 provides that any profits or gains
arising from the transfer of a capital asset effected in the previous year is
chargeable to income tax under the head 'capital gains' and is deemed to be
G the income of the previous year in which the transfer took place, subject to
certain exceptions which are not material in this case. Section 48 provides for
the mode of computation of income chargeable under the head 'capital gains'.
The method of computation prescribed is by deducting from the full value of
the consideration received or accruing as a result of the transfer of the capital
H asset, certain prescribed amounts including the cost of acquisition of the
C.l.T. 1·. D.P. SANIJL; BROS. CHEMlllJR <P) LTD. [RUMA PAL. .1.J 899

assets and the cost of any improverm:nL thereto. A
That the tenancy right is a capital asset, the surrender of the tenancy
right is a "transfer" and the consideration received therefore a capital receipt
within the meaning of Section 45 has not been questioned before us and must
in any event be taken to be concluded by the decision of this Court in A.
Gasper v. Commissioner of Income Tax 1• Normally the consideration would B
therefore be subjected to capital gains under Section 45.

In 1981 this Court in Commissioner of Income Tax v. B.C. Srinivasa
Settj held that all transactions encompassed by Section 45 must fall within
the computation provisions of Section 48. If the computation as provided
under Section 48 could not be applied to a particular transaction, it must be C
regarded as "never intended by Section 45 to be the subject of the charge".
In that case, the Court was considering whether a firm was liable to pay
capital gains on the sale of its goodwill to another firm. The Court found that
the consideration received for the sale of goodwill could not be subjected to
capital gains because the cost of its acquisition was inherently incapable of D
~ being determined. Pathak J. as his Lordship then was, speaking for the Court
said:

"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 E
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."

In other words, an asset which is capable of acquisition at a cost would F
be included within the provisions pertaining to the head 'capital gains' as
opposed to assets in the acquisition of which no cost at all can be conceived.
The principle propounded in Srinivasa Setty has been followed by several
High Courts with reference to the consideration received on surrender of
tenancy rights. [See: Among Ors. Bawa Shiv Charan Singh v. Commissioner G
of Income Tax, Delhi (1984) 149 ITR.29; The Commissioner of Income Tax
v. Mangtu Ram Jaipuria, (1991) 192 ITR 533 (Cal.); Commissioner of Income
Tax v. Joy Ice Cream (Bang) Pvt. lid., (1993) 2001 ITR 895 (Kar.)
I. (1991) 192 ITR 382 (S.c.)

2. (1981) 1281TR294; [1981] 2 sec 460 H
I
~

900 SUPREME COURT REPORTS [2005] I S.C.R.
-..._
A Commissioner of Income Tax v. Markapakula Agamma, ( 1987) 165 ITR 3 86
(A.P.) and Commissioner of Income Tax v. Merchandisers (P) ltd., (1990)
182 ITR I07 (Ker.)] . In all these decisions the several High Courts held that "
if the cost of acquisition of tenancy rights cannot be determined, the
consideration received by reason of surrender of such tenancy rights could
not be subjected to capital gains.
B
According to a Circular issued by the Central Board of Direct Taxes3
it was to meet the situation created by the decision in Srinivasa Setty and the
subsequent decisions of the High Court that the Finance Act 1994 amended
Section 55 (2) to provide that the cost of acquisition of inter-alia a tenancy
c right would be taken as nil. By this amendment, the judicial interpretation put
on capital assets for the purposes of the provisions relating to capital gains
was met. In other words the cost of acquisition would be taken as determinable
but the rate would be nil.

The amendment took effect from I st April 1995 and accordingly applied
D in relation to the assessment year 1995-96 and subsequent years. But till that
amendment in I 995, and therefore covering the Assessment Year in question,
f
the law as perceived by the Department was that if the cost of acquisition of
a capital asset could not in fact be determined, the transfer of such capital ...
asset would not attract capital gains. The appellant now says that Srinivasa
Setty 's case would have no application because a tenancy right cannot be
E equated with goodwill. As far as goodwill is concerned, it is impossible to
specify a date on which the acquisition may be said to have taken place. It
is built up over a period of time. Diverse factors which cannot be quantified
in monetary terms may go into the building of the goodwill, some tangible
some intangible. It is contended that a tenancy right is not a capital asset of
F such a nature that the actual cost on acquisition could not be ascertained as ... ..
a natural legal corollary.
.(

We agree. A tenancy right is acquired with reference to a particular
date. It is also possible that it may be acquired at a cost. It is ultimately a
question of fact. In A.R. Krishnamurthy and Ors. v .. Commissioner of Income
G Tax, Madras, (I 989) 176 ITR 417 this Court held that it cannot be said
conceptually that there is no cost of acquisition of the grant of the lease. It
held that the cost of acquisition of leasehold rights can be determined. In the .I.
•
present case however, the Department's stand before the High Court was that
the cost of acquisition of the tenancy was incapable of being ascertained. In

H 3. Circular No. 684 dated 10th June 1994
C.l.T. v. D.P. SANDU BROS. CHEMBUR (P) LTD. (RUMA PAL .I.] 90 \
..,.-
view of the stand taken by the Department before the High Court, we uphold A
the decision of the High Court on this issue.

Were it not for the inability to compute the cost of acquisition under
Section 48, there is, as we have said, no doubt that a monthly tenancy or
leasehold right is a capital asset and that the amount receipt on its surrender
was a capital receipt. But because we have held that Section 45 cannot be B
applied, it is not open to the Department to impose tax on such capital receipt
by the assessee under any other Section. This Court, as early as in 1957 had,
in United Commercial Bank Ltd. v. Commissioner of Income Tax Ltd., West
Bengal, ( 1957) 32 ITR 688, held that the heads of income provided for in the
Sections of the Income Tax Act, 1922 are mutually exclusive and where any
item of income falls specifically under one head, it has to be charged under
c
that head and no other. In other words, income derived from different sources
falling under a specific head has to be computed for the purposes of taxation
in the manner provided by the appropriate Section and no other. It has been
further held by this Court in East India Housing and Land Development
Trust Ltd. v. Commissioner of Income Tax, West Bengal, (1961) 42 ITR 49 D
.,.. that if the income from a source falls within a specific head, the fact that it
may indirectly be covered by an another head will not make the income
~
taxable under the latter head. (See also: Commissioner of Income Tax v.
Chugandas and Co., (1964) 55 ITR 17).

Section 14 of the Income Tax Act 1961 as it stood at the relevant time E
similarly provided that "all income shall for the purposes of charge of income
tax and computation of total income be classified under six heads of income,"
namely;

(A) Salaries;
)...
F
(B) Interest on Securities;
'> (C) Income from house property;

(D) Profits and gains and business or profession;

(E) Capital gains;
G
(F) Income from other sources unless otherwise, provided in the Act.

Section 56 provides for the chargeability of income of every kind which
has not to be excluded from the total income under the Act, only if it is not
chargeable to income tax under any of the heads specified in Section 14
items A to E. Therefore, if the income is included under any one of the H
902 SUPREME COllRT REPORTS [200511 S.C.R.

A heads, it cannot be brought to tax under the residuary provisions of Section
56.

There is no dispute that a tenancy right is a capital asset the surrender
of which would attract Section 45 so that the value received would be a
capital receipt and assessable if at all only under Item E of Section 14. That
B being so, it cannot be treated as a casual or non recurring receipt under
Sectio•.i I0(3) and be subjected to tax under Section 56. The argument of the
appellant that even if the income cannot be chargeable under Section 45,
because of the inapplicability of the computation provided under Section 48,
it could still impose tax under the residuary head is thus unacceptable. If the
income cannot be taxed under Section 45, it cannot be taxed at all. (See: S. G.
c Mercantile Corporation (P) ltd. v. Commissioner of Income Tax, Calcutta,
(1972) 83 !TR 700).

Furthermore, it would be illogical and against the language of Section
56 to hold that everything that is exempted from capital gains by statute
D could be taxed as a casual or non recurring receipt under Section I0(3) read
with Section 56. We are fortified in our view by a similar argument being
rejected in Nalinikant Ambalal Mody v. S.A.l. Narayan Row CIT, (1966) 61
ITR 428,432,435.

The appeal is accordingly dismissed without any order as to costs.
E
ORDER

Leave granted in special leave petition.

In view of our judgment passed in Civil Appeal No. 2335 of 2003 -
F Commissioner of Income Tax, Mumbai v. D.P. Sandhu Chembur (P) ltd ··-'
today these appeals are dismissed.

K.K.T. Appeals dismissed.