S.N. Rotho, Accountant Member -
(1.) THIS appeal has been filed by the assessee against the order dated 5-12-1979 of the Commissioner (Appeals) relating to the assessment year 1975-76, the previous year of which ended on 13-11-1974. The assessee is a partnership firm, deriving income from business in the manufacture and sale of rubber balloons. It was the occupant-cum-tenant of one factory premises situated at Sonawala Cross Road, Goregaon, Bombay, since the year 1945 or thereabout. On 16-2-1973, the assessee purchased the said property from the owner-landlord at a price of Rs. 21,806. The case of the assessee was that it had already acquired tenancy rights in the premises and so it was able to get the property from the landlord at a price which was considerably less than the ruling market price. On 14-3-1974, the assessee sold the said property for Rs. 80,000. The question arose as to what capital gains, if any, was earned by the assessee on the sale of the premises on 14-3-1974 for Rs. 80,000. The case of the assessee before the ITO was that the value of the tenancy rights which it acquired because of long occupation could be valued at Rs. 60,000 which should be added to the sum of Rs. 21,806 paid to the landlord in cash, so that the total cost of the property to the assessee came to Rs. 81,806. As the property was sold for only Rs. 80,000 there was no capital gains. Alternatively, it was argued that the tenancy rights were acquired by the assessee much before 1-1-1954 and so it had the option to substitute the fair market value as on 1-1-1954 of the tenancy rights in place of its cost under Section 55(2) of the Income-tax Act, 1961 ('the Act'). He got the value of the said tenancy rights as on 1-1-1954 valued at Rs. 41,680 by R.W. Gudal & Associates, Architects, Engineers and Valuers, The claim of the assessee was that the fair market value of the tenancy rights as on 1-1-1954 valued at Rs. 41,680 should be added to the sum of Rs. 21,806 paid in cash to the landlord, so that the total cost of acquisition of the asset sold later, came to Rs. 63,486. Thus, the alternative case of the assessee before the ITO was that the difference between Rs. 80,000 and Rs. 63,486, amounting to Rs. 16,514, alone could be treated as capital gains arising out of the sale of the asset.
(2.) The ITO did not agree with the claim of the assessee. The assessee had placed before him a copy of the order dated 7-1-1972 of the Tribunal in IT Appeal No. 1076 (Bom.) of 1970-71 in support of its contention. The ITO, however, observed that the said Tribunal decision was not conclusive and in any case the facts in that case were different. According to the ITO, the assessee had the tenancy rights in the premises before it purchased it but, when it purchased the asset, its tenancy right was converted into full ownership rights. He observed that the assessee could not be regarded both as a tenant as well as an owner at the same time. As the assessee had paid only Rs. 21,806, the ITO refused to add the estimated value of the tenancy rights at Rs. 60,000 to the said amount in order to increase the cost of acquisition. Regarding the alternative claim of the assessee for substituting the market value as on 1-1-1954 for the cost of the acquisition of the tenancy rights under Section 55(2), he rejected the same on the ground that the assessee became the owner and ceased to be a tenant, prior to the date of sale of the asset. On the above reasoning, the ITO calculated the capital gains at Rs. 52,594 though the difference between Rs. 80,000 and Rs. 21,608 came to Rs. 58,392. Further, he treated this capital gains as short-term capital gains and completed the assessment accordingly.
The assessee appealed to the Commissioner (Appeals) and contended that the action of the ITO was erroneous. It was explained that the assessee was able to purchase the property cheaply only because it was already a tenant of the property, having vested tenancy rights therein. It could not have been evicted from the premises. The tenancy right was obviously acquired by it long before 1-1-1954 and so the assessee had the option to substitute the market value of the said right as on 1-1-1954 in place of its cost. The Commissioner (Appeals) rejected the claim of the assessee on the ground that the assessee paid only Rs. 19,805 to the landlord and taking into account the other incidental expenses, the total amount spent in cash by the assessee amounted to Rs. 21,806 only. According to him, only the sum of Rs. 21,608 could be taken as the cost of acquisition of the asset. He rejected the alternative contention of the assessee on the ground that the assessee was not the owner of the property as on 1-1-1954. Regarding the decision dated 1-11-1972 of the Tribunal relied on by the assessee, he observed that the facts therein were totally different and also no finality was reached therein because the matter was sent back to the ITO.
(3.) SHRI N.R. Mulla, the learned representative for the assessee, urged before us that the revenue authorities erred in their decisions. At the outset, SHRI Mulla referred to the decision of the Supreme Court in the case of Damadilal v. Panhram AIR 1976 SC 2279, for the proposition that the tenancy right acquired by the assessee by virtue of its occupation of the premises since 1945 was a valuable and independent right which was acquired prior to 1-1-1954. He stated that the tenancy right acquired by the assessee was an estate in itself. He also referred to the decision in the case of A. Gasper v. CIT  117 ITR 581 (Cal.) wherein it has been held that the monthly tenancy or leasehold right is a capital asset which was capable of being transferred for the purpose of capital gains. Again, he referred to the decision of the Tribunal in the case of Mrs. M.D. Dudha v. Sixth ITO in IT Appeal No. 1076 (Bom.) of 1970-71 dated 7-1-1972, wherein it has been held that the right of a tenant not to be evicted from the premises occupied by him, is a valuable right and it has to be valued for the purpose of ascertaining the net capital gains. He contended that the cost of acquiring that estate or property might be nil to the assessee but Section 55(2) gives an option to the assessee to substitute the market value of the asset as on 1-1-1954 for its cost. He urged that the assessee could not be prevented from exercising the option given to it under the law provided the conditions for exercising the option are satisfied. These conditions are that the thing acquired must be an asset capable of being transferred and that the said asset must have been acquired prior to 1-1-1954. He stated that in the instant case both these conditions are satisfied in respect of the tenancy right acquired by the assessee and so the claim of the assessee should have been accepted. As a logical consequence, he urged that the asset having been acquired long before its sale on 14-3-1974, the capital gains arising therefrom should be treated as long-term capital gains.;