By TIOL News Service

MUMBAI, JUNE 24, 2015: THE issue before the Bench is - Whether when agreement entered into clearly provides that it has transferred rights only to looms & machinery and use of subject premises was only incidental, such licence to use premises would be construed as sublease in any form. NO is the answer.

Facts of the case

The assessee had entered into an agreement with one M/s. Modern Textiles and Silk Mills Private Limited for use of looms and machinery in the subject premises and also took occupation of the subject premises. M/s. Modern was itself tenant of the subject premises. The agreement provided that assessee was granted use of the subject premises only as a licensee, incidental to its use of the looms. It also provided that the agreement cannot in any manner be construed as a sublease of the subject premises. In the subject AY, assessee under an agreement surrendered its occupation of the subject premises to Pravin and Rajesh Makwana (Makwana) on receipt of consideration. The assessee also offered the consideration received on the surrender of its occupation of the subject premises as long term capital gain, claiming exemption u/s 54EC. AO had not accepted the assessee's contention that surrender of occupation of the subject premises was transfer of capital asset and held that the amount received on account of surrender of tenancy rights would be chargeable to tax under the head 'Income from other sources' and not as 'Capital gains.' On appeal, CIT(A) upheld the order of AO. On further appeal, the Tribunal while allowing the appeal, placed reliance upon the definition of the tenant u/s 5(11) and 15A of the Bombay Rent, Hotel & 13 Lodging and House Rates Control Act, 1947 (the Rent Control Act), providing for deemed tenancy of premises in occupation of any person. On the above basis, the Tribunal concluded that surrender of occupation was surrender of tenancy i.e. capital asset and the amounts received was taxable under the head 'Capital gains' and not under the head 'Income from other sources'. Section 15A of the Rent Control Act provided that a person in occupation of the premises shall be deemed to be a tenant in respect of premises in its occupation.

Held that,

++ the grievance of the Revenue is that the assessee cannot be considered to be a tenant of the subject premises, thus the giving up of occupation by it was not a surrender of capital assets. It is submitted that Sections 5(11) and 15A of the Rent Control Act would not be of any avail to assessee. Consequently, the amounts received on surrender of occupation of the subject premises has to be classified as 'Income from other sources' and not as 'Capital gains'. In the alternative, it was submitted that in any event, tenancy by itself is not a capital asset under Section 2(14) and, therefore, surrender of it will not result in capital gains. Thus, it is submitted that the appeal does raise substantial question of law and requires consideration. The assessee is in occupation of the subject premises consequent to Agreement dated 13th June, 1972 i.e. prior to 1st February, 1973. The impugned order on the basis of the clear provisions found in Section 2(11) and 15A of the Rent Control Act concludes that the assessee is a deemed tenant of the subject premises. In fact, Section 15A of the Rent Control Act, inter alia, provides that notwithstanding anything to the contrary in any contract, where a person is in occupation of the premises on 1st February, 1973, he shall be deemed to have become the tenant of the landlord in respect of the premises or part thereof, in his occupation;

++ thus, it follows that if the owner of the subject premises were to seek eviction of assessee on the basis of the contract, it would fail in view of the clear position in to Section 15A of the Rent Control Act. Thus, assessee is a deemed tenant of the subject premises. Consequently, such tenancy being property would be a capital asset and amounts received on surrender of it would be capital receipts chargeable to tax under the head 'Capital gains.' The issue of tenancy being a capital asset is no longer res integra as SC in CIT v/s. D. P. Sandu Bros. Chembur 2005-TIOL-17-SC-IT-LB has upheld the view of this Court in Union of India v/s. Cadell Weaving Mill Co. 249 ITR 265 wherein it has been held that tenancy right was a capital asset and surrender of the same was a transfer of a capital asset. In view of the self evident and settled position in law, this appeal does not raise any substantial question of law, to be entertained. Accordingly, appeal dismissed.

(See 2015-TIOL-1487-HC-MUM-IT)