Commissioner Of Income Tax, ... vs Hitashi Estates Limited
2008 Latest Caselaw 2085 Del

*            THE HIGH COURT OF DELHI AT NEW DELHI

%                                Judgment delivered on: 26.11.2008

+                          ITA 585/2008

COMMISSIONER OF INCOME TAX                             ......APPELLANT
CENTRAL-III, NEW DELHI

                                  -versus-

HITASHI ESTATES LIMITED                              .....RESPONDENT

Advocates who appeared in this case:

For the Appellant          :     Ms Prem Lata Bansal with Mr Sanjeev Rajpal
For the Respondent         :     Mr Sriram Krishna

CORAM :-

HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER

1.    Whether the Reporters of local papers may
      be allowed to see the judgment ?        Yes

2.    To be referred to Reporters or not ?           Yes
3.    Whether the judgment should be reported
      in the Digest ?                         Yes

BADAR DURREZ AHMED, J (ORAL)

1. The Revenue is aggrieved by the order dated 25.5.2007 passed

by the Income Tax Appellate Tribunal (hereinafter referred to as the

„Tribunal‟) in ITA No. 1359/Del/2006 pertaining to the assessment

year 2002-03 in as much as the Tribunal has directed the Assessing

Officer to assess the profit/loss arising from the surrender of tenancy

rights under the head "capital gains" as claimed by the assessee.

2. Property No 7, KG Marg, New Delhi was taken on rent by the

assessee. Thereafter, the assessee made improvements in the said

rented premises and retained the same for more than five years. The

assessee had shown the said property as inventory in its balance-

sheets for several years. On 4.4.2001 the assessee surrendered the

tenancy right in the said property to the owner for a consideration.

In the year in question, the assessee showed the said property as a

capital asset and the loss incurred on surrender of the tenancy right

in the said property was claimed at Rs 14,10,737/- after claiming the

benefit of indexation. The Assessing Officer did not allow this

claim. The Commissioner of Income Tax (Appeals) [hereinafter

referred to as „CIT(A)‟] also confirmed the stand taken by the

Assessing Officer.

3. Before the Tribunal, the assessee contended that the tenancy

right was a capital asset, particularly, in view of the Supreme Court

decision in the case of CIT vs D P Sandhu Brothers Pvt Ltd: (2005)

273 ITR 1 and that the profit on transfer of the said asset would be

chargeable to tax under the head "capital gains". It was contended

that the cost of acquisition of the said capital asset (the tenancy

right) in the hands of the assessee was nil. However, substantial

improvements to the extent of Rs 33,37,847/- were made in respect

of the said capital asset in different years. Upon indexation, the

same came to Rs 56,10,337/-. On behalf of the assessee it was

contended that the cost of improvement incurred by the assessee had

been wrongly shown as stock-in-trade in its books of accounts and it

is on the basis of such wrong treatment that the tenancy right was

held to be stock-in-trade by the Assessing Officer. It was contended

that since the accounting treatment given by the assessee was

patently wrong, Assessing Officer as well as the CIT(A) were not

justified in deciding the nature of the tenancy right as being stock-in-

trade of the assessee‟s business relying on such wrong treatment.

The assessee contended that its business was purchase and sale of

properties and not to acquire tenancy rights and sell the same so as to

construe tenancy rights as its stock-in-trade.

4. On behalf of the Revenue it was contended that the assessee

itself had shown the said property in all its earlier years as stock-in-

trade and it is only in the year in question that it has been shown as a

capital asset. It was contended that this cannot be permitted and,

therefore, the capital loss claimed by the assessee could not be

allowed.

5. The Tribunal noted that the tenancy right surrendered by the

assessee during the year in question was held to be its stock-in-trade

by the Assessing Officer as well as the CIT(A) mainly on the basis

of the treatment given by the assessee itself to the said tenancy rights

as stock-in-trade in the books of accounts for the earlier years. The

Tribunal noted that apart from this, there was no finding given by the

authority below to the effect that the purchase and sale of tenancy

rights was the business of the assessee company. The Tribunal

observed that on examination of the copies of the balance-sheets and

profit and loss account filed by the assessee for the year under

consideration as well as for the earlier years showed that the assessee

was engaged in the business of purchase and sale of property on

ownership basis and that there was no transaction involving the

purchase or sale of tenancy rights except the one in question. The

Tribunal also observed that the present case was one where property

was taken by the assessee on rent and after making substantial

improvement therein, the same was occupied by it for a considerable

length of time before finally surrendering the tenancy right in the

said property to the owners thereof for consideration. According to

the Tribunal, this was not a part of the business of the assessee. The

Tribunal held that it was a solitary transaction of surrender of the

tenancy right by the assessee in respect of the premises occupied by

it and that too in favour of the owner. Consequently, the Tribunal

returned the finding that the tenancy rights were not acquired by the

assessee for the purposes of sale in the normal course of business.

The Tribunal also returned a finding that the tenancy right did not

represent the assessee‟s stock-in-trade as alleged by the Revenue.

The Tribunal observed that the treatment given by the assessee in its

books of accounts for the earlier years was patently wrong.

Consequently, such wrong treatment could not be held against the

assessee when the clear finding was that the said tenancy right was a

capital asset in the hands of the assessee. It is in these

circumstances, that the Tribunal set aside the order passed by the

CIT(A) on this issue and directed the Assessing Officer to assess the

profit/loss arising from the surrender of tenancy rights under the

head "capital gains" as claimed by the assessee.

6. The Supreme Court, in the case of D.P. Sandhu Brothers Pvt.

Ltd (supra) clearly held that a „tenancy right‟ is a capital asset. The

only issue raised by the Revenue is that, given the fact, that the

assessee treated the „tenancy right‟ as stock-in-trade, even though

erroneously, the assessee ought not to be allowed to treat the same as

a capital asset. We think such a submission is completely untenable.

A transaction of the kind we are considering, that is,

acquisition/surrender of a tenancy right, cannot in law acquire a

different character because of the treatment accorded to it in the

books of accounts of the assessee. This is trite law [see: The

Kedarnath Jute Mfg. Co. Ltd vs CIT: (1971) 82 ITR 363 (SC)].

There may be transactions, in respect of which, while determining

their true nature, the treatment accorded to them by the assessee in

the books of accounts may be one of the factors relevant in coming

to a conclusion one way or the other. This is not such a transaction.

7. No fault can be found with reasoning of the Tribunal. No

perversity in its findings has been pointed out. Consequently, the

appeal is dismissed as no substantial question of law arises for our

consideration. It is made clear that in case the cost of improvement

has been treated as business expenditure in the earlier years then the

Assessing Officer would be within his rights to withdraw the same.

The learned counsel for the respondent does not have any objection

to this direction.

BADAR DURREZ AHMED, J

RAJIV SHAKDHER, J November 26, 2008 mb