Ruma Pal, J. - (1.) The primary question involved in this appeal is whether the amount received by the respondent-assessee on surrender of tenancy rights is liable to capital gains tax under Section 45 of the Income-tax Act, 1961. The assessment year in question is 1987-88. The lease agreement was entered in 1959 for 50 years under which an annual rent was paid by the lessee to the lessor. The lessee would have continued till 2009. During the relevant previous years, in March, 1986, the respondent surrendered its tenancy right to its lessor prematurely. In consideration for such premature termination, the lessor paid the lessee a sum of Rs. 35 lakhs.
(2.) In the assessees return the sum of Rs. 35 lakhs had been credited to its reserve and surplus account. This was disallowed by the Assessing Officer who held that the amount of Rs. 35 lakhs was taxable as "income from other sources under Section 10(3) read with Section 56. The assessee appealed to the Commissioner of Income-tax (Appeals) who came to the conclusion that the assessee was liable to pay capital gains on the amount of Rs. 35 lakh after deducting an amount of Rs. 7 lakhs as the cost of acquisition. The Commissioner had determined the cost of acquisition at Rs. 7 lakhs on the basis of the market value of the property as on 1-4-1974. Both the Department and the assessee challenged the decision of the Commissioner before the Tribunal.
(3.) The Tribunal relied upon the decision of this Court in Commissioner of Income-tax vs. Srinivasa Setty, (1981) 2 SCC 460 as well as the amendment to Section 55(2) of the Act in 1995 and held that the assessee did not incur any cost to acquire the leasehold rights and that if at all any cost had been incurred it was incapable of being ascertained. It was therefore held that since the capital gains could not be computed as envisaged in Section 48 of the Income-tax Act, therefore capital gains earned by the assessee if any was not exigible to tax.;