The Transfer of Property Act declares that lease of immovable property is a transfer of right to enjoy the property for a certain time in consideration of a price. The price is called the premium, and the money or service to be rendered, the rent. When the interest of the lessor is parted with for a price, the price paid is premium
For jurists, property is not just brick and mortar but a bundle of rights. That is why property is visualised as a concept requiring elaborate definition under various laws, such as the Transfer of Property Act, the Income-Tax Act, the Wealth Tax Act, and so on.
The Transfer of Property Act takes within the ambit of property leaseholds too. Normally, leasehold is granted for 99 years. Wherever a premium is charged on the grant of leasehold, courts have held that there is a transfer of capital assets attracting tax. Even in the case of lease-cum-licence, grant of further lease was considered liable for capital gains tax.
The Supreme Court ruled that the lessor had acquired a bundle of rights in the land and this included the right to grant lease. Section 105 of the Transfer of Property Act declares that a lease of immovable property is a transfer of right to enjoy the property for a certain time in consideration of a price. The price is called the premium, and the money or service to be rendered, the rent.
The Section brings out the distinction between price paid for a transfer of 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 benefit under the lease is in the nature of rent. The former is a capital income and the later is a revenue receipt.
Clever phraseology may camouflage the real nature of the transaction. Advance rent may be termed as premium and rent may be called a deferred price depending on the situation. The Supreme Court pointed out that it is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive, but it helps the court, having regard to other circumstances, to ascertain the intention of the parties.
The Seetha Kamraj case
In this case (Mrs G. Seetha Kamraj vs CIT 284 ITR 54 AP), Seetha took on lease for 99 years a building from her husband. She paid Rs 5,000 as premium for obtaining the lease and had agreed to pay a monthly rent of Rs 300. She created a sub-lease in favour of Bhavani Shankar for a period of 97 years and 5 months and received a lumpsum of Rs 4,30,000 as consideration.
This amount was adjustable against a monthly rent of Rs 367 to be paid by Bhavani Shankar. The income-tax officer (ITO) determined a capital gain of Rs 3,87,500, the cost of acquisition being worked out as Rs 42,500. The assessee agitated the matter in the High Court.
It was argued that Seetha was not the owner of the property and she had taken only lease rights for 99 years. She contended that the lease amount of Rs 4,30,000 was only a deposit and her margin in the transaction was only Rs 67 per month. There was no transaction resulting in the transfer of capital asset. The ITO held that the lease right in the property was an asset and the alienation of the same amounted to transfer of a capital asset. The woman alienated lease rights obtained from her husband in favour of a third person. There was no obligation on her part to pay any interest. Nor was she obliged to refund that amount. She received lease rights from her husband in June 1986 and sub-leased the same to Bhavani Shankar in January 1988. She held the lease rights for less than three years.
Therefore, the excess realised on the alienation of the asset over and above the cost of the lease rights was assessable to short-term capital gains. The assessee had to pay lease the rent of Rs 300 per month and the cost of lease right was to be taken at 12-1/2 times the lease rent payable per annum, which worked out to Rs 37,500. The assessee also paid a premium of Rs 5,000, which was non-refundable. Therefore, the difference of Rs 3,87,500 was assessable to short-term capital gains.
The High Court confirmed these findings and decided the matter in favour of the Revenue. The importance of the case arises from the fact that sublease is considered a capital asset and various devices adopted to defeat the claims of the Revenue were rendered ineffective at the High Court level. Tax planning has its limitations.
T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-tax.)