Wednesday, April 10, 2013

Receipts by landlord for transfer of tenancy right from one tenant to another isn’t taxable as capital gain

Where landlord merely gives consent for transfer of tenancy rights from old tenant to new tenant, such act does not result in transfer of any capital asset

In the instant case, assessee-landlord gave his consent to transfer of tenancy rights from old tenant (‘O) to new tenant (‘N’).  N made payment to O as well as to the assessee. Assessee treated said sum to be a capital receipt and claimed exemption under section 54EC by investing it in NABARD bonds. The AO rejected the assessee's claim by holding that the same was not a capital receipt and, consequently, the claim of exemption under section 54EC wouldn’t arise, instead the amount was chargeable to tax under the head 'Income from other sources'. On appeal, the CIT (A) confirmed the order of AO. Aggrieved by the order of CIT(A), assessee appealed to the ITAT. So, the moot question before Mumbai ITAT was as under:

Whether consent given by assessee-landlord for transfer of tenancy rights would result in transfer of any capital asset or whether amount received was taxable as income from other sources?

The Tribunal held in favour of revenue as under:

1) Generally, in matters of the tenancy right disputes, it is the tenant who gets the financial benefit and the same flows from the pockets of the landlord in lieu of the surrender of the said tenancy rights by the tenant and certainly the landlord does not receive same, but in the instant case benefit was received by landlord. Therefore, the taxation principles relating to the tenancy rights could not apply to this case;

2) The consideration for consent implied no transfer of any capital asset by the landlord to N. Further, the agreement rule out that the impugned consideration for consent was for the rent or towards the rental advance;

3) Therefore, sum received was neither a capital receipt nor a rental receipt. In that sense, the argument of the assessee, that some of the capital rights, out of the bundle of rights relating to the immovable property, were transferred to the new tenant wouldn’t hold water;

4) Therefore, the views of the AO as well as of the CIT(A) on this issue required to be sustained as the consideration for consent, didn’t involve any transfer of capital rights and the amount constituted a windfall gain to the assessee. Thus, the order of the CIT(A) didn’t call for any interference. Therefore the amount received was taxable as income from other sources and not as capital gains - Vinod V. Chhapia v. ITO [2013] 31 415 (Mumbai - Trib.)

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