Kewal Silk Mills v. ACIT ITAT Mumbai `A’ Bench Before I. P. Bansal (JM) and Rajendra (AM) ITA No. 4335/Mum/2012 A.Y.: 2009-10. Dated: 12-10-2012. Counsel for assessee/revenue: Rajan Vora & Hemen Chandriya/Surinder Vit Singh

Facts:

The assessee, a partnership firm, through its partners entered into an agreement dated 13.6.1972 with Modern Textile Rayon and Silk Mills Pvt. Ltd. (Modern) whereby it took on license basis, for a period of one year, loom and machinery described in first schedule of the said agreement on a monthly compensation of Rs. 3,250 per month. Modern was the tenant of the shed belonging to Mr. Paresh S. Shah. This agreement referred to the assessee as licensee. The assessee was entitled to use a portion of the shed in which the looms were situated by way of permissible use on license basis only as incidental to using the said looms and machinery. The agreement provided that the assessee shall never be construed as sublessee in any form of the said portion of the said shed. The assessee was also provided with access to the said portion of the said shed through portion of the shed retained by the licensors or otherwise. Thus, as per the agreement the assessee had incidental right of premises through which the looms were to be used. The said right of the assessee was recognised from the date of the agreement till the date of its surrender.

The assessee regarded this right as sub-tenancy and in the return of income filed the amounts received on surrender thereof were offered for taxation under the head Income from Capital Gains after claiming exemption u/s. 54EC of the Act.

The Assessing Officer after going through various clauses of the agreement dated 13.6.1972 came to the conclusion that the assessee was not a sub-tenant of the land which had been sold by the owner thereof but only had an incidental right to use the shed and that the amounts received are not assessable as capital gains. He also examined the purchasers of the said land who mentioned that only Modern and M/s Saurdeep Chemicals Pvt. Ltd were tenants of the land purchased by them. However, actual possession and occupation was held by the assessee and payments have been made to the assessee in order to get peaceful and vacant possession of the property. The AO observed that the payment received was in the nature of nuisance value and assessee did not have any capital right since the possession of portion of the shed was incidental to the license granted to it for use of machinery. The amount received was assessed to tax under the head Income from Other Sources.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the incidental right to use the premises was provided by the agreement dated 13.6.1972 itself and also that the assessee was referred to as the licensee in the said agreement. By an amendment in 1973, which is subsequent to the date of the agreement entered into by the assessee, certain licensees have been deemed to be tenants u/s. 15A of the Bombay Rent, Hotel & Lodging and House Rates Control Act, 1947 and were to be considered as tenants. Therefore, in any case the assessee had acquired the status of tenant of the landlord. As per provisions of section 55(2) tenancy right has been considered to be a capital asset. Moreover, the definition of capital asset as per section 2(14) of the Act is wide enough to cover “property of any kind” and the type of right acquired by the assessee in the property used by it cannot in any manner be said to be less than “any kind of property” held by the assessee.

The Tribunal also observed from some of the rent receipts filed by the assessee before the Tribunal that the amount being paid by the assessee was considered to be rent by the other parties and thus parties in principle had accepted that the assessee was the tenant from whom the rent was being received by the other party. The further correspondence between the assessee and its licensor, the purchaser of the land and the assessee are also describing the right of the assessee as tenancy right only and the deed executed between purchaser of the premises and the assessee is also described as deed of surrender of tenancy. Thus, the assessee was enjoying a right over the property in the nature of being tenant of the same for the last so many years and that right of the assessee cannot be considered as evaluated much less than the right of tenancy right.

The assessee, in fact, was enjoying the possession of the impugned property and for peaceful vacation thereof it had received the impugned amount which was described by both the parties as the amount paid for surrender of tenancy rights. The assessee had acquired the said right long back and licensor to the assessee also had recognised the said right of the assessee. The right of the assessee was undisputed and nature thereof was “property of any kind” which was held by the assessee and was to be termed as capital asset within the meaning of section 2(14) of the Act. Tenancy right has also been recognised as capital asset within the meaning of section 55(2)(a) of the Act.

The tribunal held that the amount received by the assessee is assessable as capital gains and not as income from other sources. The appeal filed by the assessee was allowed.