A R KRISHNAMURTHY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) 1.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 curse of the assessment proceedings, the ITO noticed that the assessee had purchased an extent of 11.23 acres of land for Rs. 12, 700 on October 17, 1966, and another extent of 3.32 acres on May 31, 1966, for a sum of Rs. 14, 562 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 10th September, 1970, they granted a mining lease in favour of M/s. Sri Krishna Tiles & Potteries (Madras) Private 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 the payment of a 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 10th September, 1970, with a clause for renewal at the expiry of the term of the 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 s. 45 of the I.T. ACt, in view of the decision in CIT v. K. Rathnam Nadar no capital gains would arise for taxation.

(2.) THE ITO overruled this objection in the view that the entire rights of which the leasehold right in 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 5/8ths of the total cost of acquisition would represent the leasehold value. Accordingly, he worked out the cost of acquisition of the leasehold right at 5/8ths 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 was also contended that there was no transfer of any capital asset. 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 a 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.

(3.) THE former is a capital income and the latter a revenue receipt." *THE Supreme Court against had an occasion to consider this question in Maharaja Chintamani Saran Nath Sah Deo v. CIT 9171 (82) ITR 464. It was held (p. 467) :"Salami is a single payment made for the acquisition of the right of the lessor by the lessee to enjoy the benefits granted to him by the lease. THE 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" *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 right and a capital asset which can be transferred for a price separately from the right to receive royalties or rents from 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 types of transfers mentioned in s. 2 (47) and a transfer by way of lease would not be covered by s. 45 , the learned counsel relied on the decision of the Judicial Committee of the Privy Council in Dilworth v. Commissioner of Stamps 1899 AC 99 and the decision of the Supreme Court in South Gujarat Roofing Tiles Manufacturers Association v. State of Gujarat. In the first of these two cases, the Privy Council in construing s. 2 of the Charitable Gift Duties Exemption Act, 1883, which defined the term "charitable purposes" as including devises, bequests, and legacies of real or personal property respectively of whatever description etc., observed (p. 105) : "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 statue and when it is so used these words or phrases must be constructed 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 suceptible 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 expression 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, 1948, 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 times 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 the 9 items listed in the Explanation.