A.R. Krishnamurthy/A.R. Rajagopalan vs Commissioner of Income Tax

V. Ramaswami, J.—The assessee, a body of individuals, filed a return for the assessment year 1971-72 admitting a total income of Rs. 43,953 from business and other sources. During the course of the assessment proceedings, the ITO noticed that the assessees had purchased an extent of 11.23 acres of land for Rs. 12,700 on 17-10-1966 and another extent of 3.32 acres on 31-5-1966 for a sum of Rs. 14,560 and thus they owned an extent of 14.55 acres costing about Rs. 27,260. He further noticed that by what is styled an instrument of lease-cum-licence, dated 10-9-1970, they granted a mining lease in favour of Sri Krishna Tiles & Potteries (Madras) (P.) Ltd. (hereinafter called "the company"), an allied concern of the assessee. Under the document the lessee had to pay a premium or salami of Rs. 5 lakhs in addition to payment of royalty calculated at Rs. 12 per 100 cubic feet of clay extracted by the lessee, subject to a minimum royalty of Rs. 60,000 per year. The lease was for a period of ten years from 10-9-1970 with a clause for renewal at the expiry of the term of lease on such terms as may be mutually agreed upon. Before the ITO, the assessee contended that though a grant of the lease of the land may constitute "transfer" within the meaning of section 45 of the income tax Act (hereinafter referred to as "the Act"), in view of the decision in COMMISSIONER OF Income Tax, MADRAS Vs. K. RATHNAM NADAR., no capital gains would arise for taxation. The ITO overruled this objection in view that ""the entire rights, of which the leasehold right is one, were in part acquired by the assessee for a consideration of Rs. 27,260 and that the cost of the leasehold right imbedded in such cost does not mean that there is no cost in this regard. The ITO then proceeded to work out the cost of such leasehold interest. He found that if the entire property was to be sold, the fair market value would amount to Rs. 8 lakhs. The leasehold interest was transferred for Rs. 5 lakhs. He, therefore, came to the conclusion that five-eighth of the total cost of acquisition would represent the leasehold value. Accordingly, he worked out the cost of acquisition of the leasehold right at five-eighth of Rs. 27,260, namely, Rs. 17,040, and after reducing this cost from Rs. 5 lakhs, brought the balance of Rs. 4,82,960 as long-term capital gains. The assessee preferred an appeal to the AAC. Before the AAC, in addition to contending that the rights transferred under the document cannot be considered to be a capital asset, it has also contended that there was no transfer of any capital assets. The AAC held that the term "property" would include, in the case of land, the right to enjoy such land and there was a transfer for consideration of Rs. 5 lakhs of such right of enjoyment in the land and, that, therefore, it is a case of transfer of a capital asset. He then proceeded to consider the cost of acquisition of such right and held that, on the facts of the case, the cost for the purpose of ascertaining the capital gains would be the sum of Rs. 27,260 and did not approve of the manner of ascertaining the cost of leasehold right as found by the ITO in the assessment order.

The assessee preferred an appeal to the Tribunal. The Tribunal treated the case as if there was a transfer of a leasehold interest, that the term capital asset"" in section 2(14) of the Act would include a leasehold interest as held in TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., , and that, therefore, section 45 was attracted. On the further finding that the sum of Rs. 5 lakhs was paid as consideration for the transfer of such leasehold interest in favour of the company and that the principle in CIT v. N. Rathnam Nadar (supra) will not be applicable to the facts of the case, the Tribunal confirmed the order of the AAC and dismissed the appeal.

At the instance of the assessee, the following two questions have been referred by the Tribunal u/s 256(1) of the Act:

Whether, on the facts and in the circumstances of the case, the instrument of lease dated 10-9-1970 effected the transfer of capital asset within the meaning of section 45 of the income tax Act, 1961, and accordingly liable to capital gains tax?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the cost of leasehold right is capable of valuation and as such capital gains can be computed?

As already stated, the document dated 10-9-1970 is styled as an instrument of lease-cum-licence under which the assessee granted a lease-cum-licence to the company to extract clay from the schedule lands in consideration of the payment of Rs. 5 lakhs as and by way of premium or salami for a period of 10 years. The other clauses in the deed provided that the company shall pay royalty calculated at Rs. 12 per 100 cubic feet of clay, extracted by the company subject to a minimum royalty of Rs. 60,000 per year. The company shall be entitled to use the land for extracting clay up to the available depth. The company was also permitted to sub-lease the right granted under the document after obtaining the written consent of the assessee. The period of the lease was 10 years commencing from 10-9-1970 with a right to the company to get a renewal of the lease at the expiry of the term of lease on such terms which may then be mutually agreed upon. The default clause provided that in the event of the company failing to pay the royalty as per the terms and conditions of the document and within the time stipulated therein, the assessee shall be at liberty to terminate the lease-cum-licence and re-enter the property.

The learned counsel for the assessee contended that the right conferred under the lease on the company is a right to enjoy the property and not a full right in the land itself. Even that right was not an indefeasible right but it was a right to be in possession for a period of ten years subject to cancellation even within that period on certain situations. No title in the property or any portion of property as such was transferred. So far as the assessee is concerned, the "capital asset" in his hands is the land and each one of the rights in respect of that land owned cannot be treated as separate and distinct "capital asset". In the circumstances, therefore, it cannot be considered that the right conferred on the company was a "capital asset" in the hands of the assessee within the meaning of section 2(14). He further contended that even if it were to be held that the right to possession and enjoyment vested in the owner can be separated from ownership and treated as a separate capital asset of the owner, there was no transfer of such capital asset in favour of the "company" within the meaning of section 2(47) of the Act. According to the learned counsel the definition in section 2(47), though in form appears to be an inclusive definition, the words "sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law" are illustrative and that the definition is exhaustive. So construed, unless it is a transaction of sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition, the transaction could not be treated as a "transfer" of a "capital asset". The lease deed of the type with which we are now concerned is such that it cannot be treated as amounting to transfer of a capital asset.

The relevant portion of section 2(14) defines "capital asset" as meaning property of any kind held by an assessee, whether or not connected with his business or profession. The definition excludes certain categories of assets with which we are not concerned. u/s 45, 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", and shall be deemed to be the income of the previous year in which the transfer took place. "Transfer" is defined in section 2(47) and stated that"" "transfer", in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law."" Section 105 of the Transfer of Property Act defines a lease right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration 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 on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service, or other thing to be so rendered is called the rent. A lease thus consists of a right to the possession and use of the property owned by some other person. It is an outcome of the separation of ownership and possession. The lessor of the land is he who owned and possessed it, but has transferred the possession of it to another. The price, paid for the transfer of possession or the right to enjoy the property is called the premium u/s 105 of the Transfer of Property Act The periodical payments made for the continuous enjoyment of the benefits under the lease are called rents or royalties.

In one of the earliest decisions in Kamakshya Narain Singh of Ramgarh v. CIT (1943) 11 ITR 513, the Privy Council dealing with leases for mining held:

The payments which under the leases are exigible by the lessor may be classed under three categories: (i) the salami or premium; (ii) the minimum royalty; (iii) the royalties per ton. The salami has been, rightly in their Lordships'' opinion, treated as capital receipt. It is a single payment made for the acquisition of the right of (the lessor by) the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account. But the royalties are on different footing.

In MEMBER FOR THE BOARD OF AGRICULTURAL Income Tax, ASSAM Vs. SINDHURANI CHAUDHURANI AND OTHERS (AND OTHER CASES)., 9, the Supreme Court denned "salami" as follows:

The indicia of salami are (1) its single nonrecurring character, and (2) payment prior to the creation of that tenancy. It is the consideration paid by the tenant for being let into possession and can be neither rent nor revenue but is a capital receipt in the hands of the landlord.

This was further elaborated in the later decision of the Supreme Court in Commissioner of Income Tax, Assam etc. Vs. The Panbari Tea Co. Ltd., It was held in that case that it is not necessary that there should be a single lump sum payment and that salami can be paid by a single payment or by instalments. After referring to the definition in section 105 of the Transfer of Property Act, the Supreme Court further observed:

...The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt....

The Supreme Court had again occasion to consider this question in Maharaja Chintamani Saran Nath Sah Deo Vs. Commissioner of Income Tax, Bihar and Orissa, It was held:

Salami is a single payment made for the acquisition of the right of the lessor by the lease to enjoy the benefits granted to him by the lease. That general right may properly be regarded as a capital asset and the money paid to purchase it may properly be held to be a payment on capital account.

[Emphasis supplied by us]

The Supreme Court thus, in these decisions, had regarded the right of the owner to be in possession and enjoyment as such owner as a distinct owner and a capital asset which can be transferred for a price separately from the right to receive royalties or rents from the tenants for a continued enjoyment of that right. It is also clear from these decisions that it is not necessary in every case that there should be a price paid for the grant of

lease. Sometimes it may be a payment or a part payment of royalty in advance, but it will have to be determined with reference to the terms and conditions of the lease and the intention of the parties. These decisions are also authorities for the position that the general right of the owner to be in possession and enjoyment of the property could be regarded as a capital asset, though that is also one of the incidence of ownership as any other right in the property as such owner. We may also mention, though that cannot conclude the question, that in a number of cases, the leasehold interest in the hands of the lessee has been held to be a capital asset. We are, therefore, of the opinion that the right conferred on the lessee under the lease deed was also a capital asset in the hands of the assessee-lessor.

In support of the argument that in order to attract capital gains the transfer of the capital asset should be one of the type of transfers mentioned in section 2(47) and a transfer by way of lease would not be covered by section 45, the learned counsel relied on the decision of the Judicial Committee of the Privy Council in Dilwarth v. Commr. of Stamps and Dilwarth v. Commr for Land & income tax (1899) AC 99 and the decision of the Supreme Court in The South Gujarat Roofing Tiles Manufacturers Association and Another Vs. The State of Gujarat and Another, . In the first of these two cases, the Privy Council in construing section 2 of the Charitable Gifts Duties Exemption Act, 1883 which defined the term charitable purposes"" as including devices, bequests and legacies of real or personal property, respectively, of whatever description, etc., observed:

The word "include" is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. But the word "include" is susceptible of another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. It may be equivalent to "mean and include", and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expression.

This passage was quoted with approval by the Supreme Court in the other case referred to above. In that case, the question turned on the construction of the Explanation to entry 22 in Part I of the Schedule to the Minimum Wages Act which read as follows:

Employment in potteries industry

Explanation: For the purpose of this entry, potteries industry includes the manufacture of the following articles of pottery, namely:-

[Then it lists out 9 items of potteries] The argument was that the words "potteries industry" should be understood in the wide sense as taking in all objects that are made from clay and hardened by fire and as such they will include Mangalore pattern roofing tiles which was not one of 9 items listed in the Explanation. The Supreme Court, referring to the Explanation which said that potteries industry includes the manufacture of 9 articles of pottery specified therein, held that the word "include" has been used in the sense of "means".

Relying on these decisions, the learned counsel for the assessee contended that there could be no doubt that sale and exchange are "transfer".

There are decisions holding that compulsory acquisitions are also transfers. Relinquishment and extinguishment of rights are also certain special types of transfers and in these circumstances, when the Legislature specifically mentioned only these items after the word "includes" in the definition, it should be held that the word "includes" was used in the definition in the sense of "means". In that sense, the word "includes" in the definition is not a word of extension, but a word of limitation. This argument is not open to the learned counsel as the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs. R.M. Amin. (Legal representative of the Late Chunibai Amin), has considered the definition in section 2(47) and observed that it is an inclusive definition and that there can be no doubt that the inclusive definition is intended to enlarge the meaning of connotation of the word "transfer". In the words of the Gujarat High Court:

"...Now the word "include" is ordinarily used ''in order to enlarge the meaning of words or phrases occurring in the body of the statute; and, when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include''. It gives an extended statutory meaning to the word defined which is in addition to its ordinary popular and natural sense. Now sale and exchange would clearly be covered by the ordinary natural meaning of the word "transfer" but relinquishment would not be so covered as held by the Supreme Court in Commissioner of Income Tax, Bombay Vs. The Provident Investment Co. Ltd., . The Legislature, therefore, included relinquishment within the definition of "transfer" by an artificial extension of the meaning of the word. Similarly, the Legislature also introduced extinguishment of any rights in a capital asset within the artificial definition of "transfer" so as to enlarge the meaning and content of the word "transfer" for the purpose of section 45. When a right in a capital asset extinguished and the right ceases to exist, it is difficult to assimilate this process to the juridical concept of transfer, for transfer as ordinarily understood postulates the continued '' existence of the subject-matter transferred so that what belonged to one prior to the transfer vests in another as a result of the transfer. To call extinguishment of a right in a capital asset as a transfer would be doing violence to the language but that is expressly authorised by the inclusive definition of "transfer"....

There can be no doubt, therefore, that we cannot give any restricted meaning to the word "transfer" in section 2(47).

The learned counsel also referred to a decision of the Andhra Pradesh High Court in Ghanshyamdas Kishan Chander Vs. Commissioner of Income Tax, . In that case the equity of redemption was brought to sale in execution of a money decree against the owner of the equity of redemption. The contention of the assessee who was the owner of the equity of redemption was that the value of the equity of redemption would be the total mortgage money plus interest due and as such there would be no capital gain. He also pleaded that there was transfer of the assets u/s 45 even at that time when the mortgage deed was created. Repelling this contention, the Court held that mortgage is a transfer of an interest in immovable property and that is different from the transfer of a totality of interest in respect of a capital asset and that mere delivery of immovable property, cannot be treated as equivalent to conveyance of the immovable property so as to come within the definition of "transfer". This decision is no authority for either the contention that in order to constitute a "transfer" within the meaning of section 2(47), there should be a transfer of a totality of the interest in the land and right to possession and enjoyment alone cannot be treated as a capital asset capable of being transferred. In fact, in TRADERS AND MINERS LTD. Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., the Patna High Court held that the lease relating to the surface, right together with nine mica mines located in that area was held to be a transfer of the "capital asset" within the meaning of section 12B of the Indian income tax Act, 1922. Though there is no discussion, the point was directly decided. We, therefore, hold that there was a transfer of a capital asset for a consideration of Rs. 5 lakhs under the instrument dated 10-9-1970.

It was next contended by the learned counsel for the assessee that in order to attract capital gains tax, there should be a cost of acquisition in terms of money to the assessee, and in this case, there is no separate cost of acquisition for possession and enjoyment and as such the income is not chargeable to capital gains tax. In this connection he relied on the decision in The Additional Commissioner of Income Tax, Madras Vs. K.S.

Sheik Mohideen, . It is true that in these two decisions it was said that unless the asset had cost something in terms of money for its acquisition, it was not possible to conceive of capital gains as envisaged by the statute though an asset of a capital nature has been transferred. The learned counsel also referred to sections 48 and 49 in this connection. Section 48 refers to actual cost and section 49 refers to, what we may call, costs to be determined in terms of the provision. The learned counsel contended that there is no third definition and that either there should be an actual cost or costs as determined under the provisions of section 49. We have already seen that the rights of the owner of a land include a right to be in possession and enjoyment as well. The right of enjoyment vested in the assessee in the present case is the right to exploit the land by extracting

clay. This right of exploitation of the land formed part of the cost of acquiring the land. The land by itself may have no value except for its usefulness in extracting clay. Therefore, the value of the right to excavate clay in the land in terms of money must have formed part of the price paid by the assessee for the land. Whatever difficulty there may be in assessing its value, it may not be correct to assume that there was no cost for the value of the right to excavate the land in terms of money. The AAC had considered these aspects and held that the entire sum of Rs. 27,260 may be allowed as cost of acquisition for the purpose of determining the capital gains. We are, therefore, of the opinion that there is no basis for the contention that the right to possession and enjoyment transferred to the company was not paid for by the assessee when it acquired the property

itself. We accordingly answer the two questions referred in the affirmative. The revenue will be entitled to its costs. Counsel's fee Rs. 500.