Thursday, April 21, 2016

Upfront premium received for grant of perpetual tenancy rights in a property is taxable as capital gain

a) Assessee-HUF received one time premium for grant of tenancy rights in a property. It offered the amount so received as capital gain and claimed exemption under section 54EC in respect of investment made in Rural Electrification Corporation Bond.

b) Assessing Officer (AO) allowed exemption to assessee. However, Commissioner by invoking section 263 held that said amount was chargeable as income from house property and, thus, passed revisional order directing the AO to disallow exemption under section 54EC.

c) Aggrieved assessee filed the instant appeal before the tribunal.

The tribunal held in favour of assessee as under:

1) One time premium charged for allotment of tenancy rights could not be equated to be receipt of advance rent as the tenancy right granted by the assessee in favour of tenant was perpetual with protection to tenant under the Maharashtra Rent Control Act, 2000 under a registered agreement.

2) As per the agreement, assessee had right to evict the tenant but that was only in the case where tenant made default in making payment of monthly rent and that too with a notice of six months to tenant whereby the tenant could always rectify the default and continue enjoying the tenancy perpetually.

3) A property constitutes a bundle of rights and transfer by way of allotment of perpetual tenancy with right of occupancy and enjoyment of property perpetually in favour of tenant is also transfer of one of the rights out of the bundle of rights which property carries with it and shall be chargeable to tax under section 55(2)(a), read with section 45 as income from capital gains.

4) Therefore, one time premium received by the assessee for allotment of tenancy right perpetually in favour of tenant was a capital receipt and liable for tax under the head capital gains. Hence, assessee was entitled to claim exemption under Section 54EC. - [2016] 68 161 (Mumbai - Trib.)

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