$~R-72
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 2nd September, 2014
+ ITA 146/2002
COMMISSIONER OF INCOME TAX ..... Appellant
Through Mr. Kamal Sawhney, Sr. Standing
Counsel with Mr. Sanjay Kumar, Jr. Standing
Counsel.
versus
FRICK INDIA LTD. .... Respondent
Through Mr. Mayank Nagi, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J. (ORAL)
This appeal by the Revenue under Section 260A of the Income
Tax Act, 1961 (,,Act, for short) relates to assessment year 1997-98 and
was admitted for hearing vide order dated 28 th November, 2002, on the
following substantial question of law:-
"Whether on the facts and in the
circumstances of the case the Tribunal was
correct in law in holding that the capital asset
transferred was a long term capital asset?"
2. The respondent-assessee, a company, in their return for the
ITA 146/2002 Page 1 of 10
assessment year in question had declared long-term capital gains of
Rs.6.78 crores on account of surrender of tenancy rights, which were
acquired during the financial year 1972-73 in Jeevan Vihar Building,
Parliament Street, New Delhi. The said tenancy right was acquired by
way of a written lease executed by the landlord-Life Insurance
Corporation of India (LIC) for a period of 3 years commencing from
15th March, 1973. After the end of the said term of 3 years, the
respondent assessee continued to occupy the premises as a tenant, but
no fresh written document was executed. On 24 th January, 1997, the
respondent-assessee entered into a Memorandum of Understanding
(,,MoU) with Bank of Tokyo, Mitsubishi and received Rs.6.78 crores
upon fulfilling the following conditions, (a) they shall deliver to the
LIC a letter, draft of which was enclosed with the MOU, informing
their decision to vacate the tenanted area; (b) they shall surrender the
tenancy of the tenanted area on or before 18th February, 1997; and, (c)
they shall provide to the bank a duly certified copy of the resolution
adopted by them as stipulated in draft enclosed as Annexure-B to the
MOU. There were certain other stipulations also. On fulfilling the
said stipulations, the respondent assessee vacated the tenanted premises
and received the aforesaid payment. As noticed above, the payment
was offered to be taxed as long-term capital gain.
3. The Assessing Officer held that the tenancy rights of the
ITA 146/2002 Page 2 of 10
respondent-assessee were a capital asset and there was also a transfer
of the asset on surrender of the tenanted premises but the transfer
should be treated as a short-term capital gain and not as a long-term
capital gain. The logic behind the aforesaid finding of the Assessing
Officer was that the tenancy after the initial period of 3 years by of a
written instrument, was month-to-month. Thus, tenancy rights
extinguished on the last day of each month and a fresh or new tenancy
was created. A fresh tenancy had begun on 1 st February, 1997 and
was relinquished on 18th February, 1997. Therefore, the period of
holding of the tenancy rights was only 18 days and thus, less than 36
months.
4. The Commissioner of Income Tax (Appeals) dismissed the
appeal of the respondent-assessee agreeing with the reasons of the
Assessing Officer that at the beginning of every month, a new tenancy
was created and thus a new capital asset had come into existence on 1 st
February, 1997. This new tenancy was relinquished on 18th February,
1997, which meant that the period of holding was less than 36 months.
The Commissioner of Income Tax (Appeals) further observed that
unless the respondent-assessee had paid rent for each month,
possession of the property would not have continued.
5. The Tribunal, however, reversed the said finding and decided the
issue in favour of the respondent-assessee observing that lease of an
ITA 146/2002 Page 3 of 10
immoveable property deemed to be a month-to-month lease is
terminable by either the lessor or lessee, but this fiction cannot be
extended. It was further observed that month-to-month tenancy does
not come to an end by a mere afflux of time and in such cases demand
of possession or intimation determining tenancy was pre-requisite
before filing a suit for ejectment. Reference was made to the
judgments of the Bombay High Court and the Supreme Court in which
Sections 106 and 107 of the Act and Section 116 of the Transfer of
Property Act, 1882 were examined and elucidated.
6. It is apparent from the facts of the present case that the
respondent-assessee came into possession of the premises under a
written agreement on 15th March, 1973. The tenancy period specified
therein was till 14th March, 1976. Thereafter, the respondent-assessee
continued to use and occupy the premises as a tenant. The rent for the
premises was paid and accepted by the landlord. On 18th February,
1997, the tenancy rights were surrendered and consideration of Rs.6.78
crores was received from a third party. The payment was for surrender
of the said tenancy rights.
7. Under Section 107 of the Transfer of Property Act, lease of an
immoveable property can be created either by a registered instrument
or by an oral agreement accompanied by delivery of possession. In the
present case, we do not have the original agreement dated 15th March,
ITA 146/2002 Page 4 of 10
1973 on record and we are not aware whether the original agreement
was by way of registered instrument or not. In the absence of a
registered instrument, it would have resulted in creation of month-to-
month tenancy. The said tenancy could be determined by issue of
notice under Section 106 of the Transfer of Property Act.
8. Assuming that there was a registered instrument under which the
lease was first created on 15th March, 1973, the assessee upon end of
the term of the lease would be a tenant by holding over under Section
116 of the Transfer of Property Act. The said section provides that
where a tenant after end or determination of the lease, remains in
possession of the property and rent is accepted by the lessor (the
landlord), in the absence of an agreement to the contrary, the lease is
treated as renewed from year to year or from month to month, as the
case may be. In such cases also when rent is paid and accepted,
Section 106 of the Transfer of Property Act would apply and notice of
termination has to be issued. Section 116 of the Transfer of Property
Act also, therefore, makes Section 106 applicable once rent is accepted
after determination or end of the tenure of the lease. The effect thereof
on applicability of Section 106 of the Transfer of Property Act is the
same in either case. Month-to-month tenancy cannot be confused with
the right to occupy as a tenant as a notice under Section 106 of the
Transfer of Property Act is required to be issued before ejectment
ITA 146/2002 Page 5 of 10
proceedings are initiated.
9. "Long-term asset" has been defined in Section 2(29b) of the Act
as an asset which is not a short-term capital asset and the expression
"short-term capital asset" has been defined in Section 2 (42A) of the
Act to mean the capital asset held by an assessee for not more than 36
months immediately preceding the date of its transfer. The expression
"held by the assessee" means the date from when the assessee acquired
the right, got hold of and started enjoying the said asset. In the present
case, the assessee had acquired tenancy rights on 15th March, 1973 and
since then they had held the said tenancy rights till the surrender was
made on 18th February, 1997. The transfer of tenancy had taken place
on 18th February, 1977 and not before. The period of holding,
therefore, was from 15th March, 1973 till 18th February, 1997. No
third person, who had come into possession of the property during the
period and it is not a case of the Revenue that respondent-assessee did
not hold the property during the entire period of over 14 years.
10. We would like to elucidate and explain the expression, "held by
the assessee" in some detail. General words should normally receive
plain and ordinary construction but this principle is subject to the
context in which the words are used as the words reflect the intention
of the Legislature. The words have to be construed and interpreted to
effectuate the object and purpose of the provision, when they are
ITA 146/2002 Page 6 of 10
capable of multiple meanings or are ambiguous. Isolated reading of
words can on occasions negate the very purpose. Lord Diplock had
referred to the term, "business" as an ,,etymological chameleon, which
suits its meaning to the context in which it is found. The background,
therefore, has to be given due regard and not to be ignored, to avoid
absurdities. This principle is applicable when we interpret the word,
"held" in Section 2(42A) of the Act, for the said word is capable of
divergent and different connotations and understanding.
11. The word, ,,held as used in Section 2(42A) of the Act is with
reference to a capital asset and the term, ,,capital asset is not confined
and restricted to ownership of a property or an asset. Capital assets can
consist of rights other than ownership right in an asset, like leasehold
rights, allotment rights, etc. The sequitur, therefore, is that the word
,,held or ,,hold is not synonymous with right over the asset as an
owner and has to be given a broader and wider meaning. In Blacks
Law Dictionary, Sixth Edition, the word ,,hold has been given a
variety of meanings under nine different headings. Four of them, i.e, 1,
4, 8 and 9 read as under:
"1. To possess in virtue of a lawful title; as in the
expression, common in grants, "to have and to hold,"
or in that applied to notes, "the owner and holder."
xxx
4. To maintain or sustain; to be under the necessity or
duty of sustaining or proving; as when it is said that a
party "holds the affirmative" or negative of an issue
ITA 146/2002 Page 7 of 10
in a cause.
xxx
8. To possess; to occupy; to be in possession and
administration of; as to hold office.
9. To keep; to retain; to maintain possession of or
authority over."
As per clause 8, the word ,,hold means to possesss or occupy, to
be in possession and would also include to keep, retain and maintain
possession or authority over an asset.
12. The word ,,held thus can be interpreted to embrace the idea of
actual possession of the assessee. In Budhan Singh versus Babi Bux,
AIR 1970 SC 1880 (at page 1884) the word ,,held was interpreted to
mean "lawfully held, to possess by legal title". The term ,,legal title
here not only includes ownership, but also title or right of a tenant,
which will mean actual possession of the land and a right to hold the
same and claim possession thereof as a tenant (we are not examining
rights of a rank trespasser in the present decision and we express no
opinion in that regard).
13. The Tribunal in our opinion has rightly relied upon the decision
of the Punjab and Haryana High Court in CIT versus Ved Prakash &
Sons (HUF), (1994) 207 ITR 148 (P&H) in which it has been held as
under:-
"As is clear from a bare reading of Section 2(42A) of
the Act, the word "owner" has designedly not been
used by the Legislature. The word "hold", as per
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dictionary meaning, means to possess, be the owner,
holder or tenant of (property, stock, land.). Thus, a
person can be said to be holding the property as an
owner, as a lessee, as a mortgagee or on account of
part performance of an agreement, etc. Conversely,
all such other persons who may be termed as lessees,
mortgagees with possession or persons in possession
as part performance of the contract would not in strict
parlance come within the purview of "owner". As per
the Shorter Oxford Dictionary. Edition 1985, "owner"
means one who owns or holds something; one who
has the right to claim title to a thing"
(emphasis supplied)
14. The said decision was followed by the Punjab and Haryana High
Court subsequently in Madhu Kaul versus CIT & Another, (2014) 363
ITR 54 (P&H). The Delhi High Court in Commissioner of Income
Tax versus K. Ramakrishnan, (2014) 209 DLT 14 has held that for the
purpose of calculating period of holding we have to look and take into
account the date since the assessee got ,,beneficial interest in the
property. The Allahabad High Court in CIT versus Rama Rani Kalia,
(2013) 358 ITR 499 (All) has drawn distinction between holding of an
asset and the nature of title over the property and it has been observed
that period of holding will determine whether the consideration should
be taxed as a short-term capital gains or long-term capital gains. Thus,
conversion of leasehold right into freehold by way of improving the
title over the property would not affect the taxability of the gain from
such property, which is relatable to the period over which the property
is held. Thus the asset, i.e. the tenancy rights were held for nearly 14
ITA 146/2002 Page 9 of 10
years and consideration received on surrender has been rightly treated
as a long term capital gain.
15. In view of the aforesaid discussion, the question of law is
answered in favour of the assessee and against the appellant-Revenue.
Costs will be payable by the appellant as per the Delhi High Court
Rules.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
SEPTEMBER 2, 2014
NA
ITA 146/2002 Page 10 of 10
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