Transferring an immovable property by way of a lease creates an interest in the land. Under section 2(14) of the Income-Tax Act, 1961, the word ?capital asset? means ?property of any kind held by an assessee?. Therefore, it does not necessarily mean that the property, which the assessee holds, must be his own. Any kind of property held by an assessee would come within the definition of ?capital asset?.
From the decisions of the Supreme Court in A Gasper v CIT (192 ITR 382) and the Madras High Court in AR Krishnamurthy & AR Rajagopalan v CIT (133 ITR 922), it is clear that transfer by way of lease is treated as transfer of a capital asset on the principle that the lease creates an interest in the land and, therefore, to that extent, it extinguishes the right of the transferor.
Therefore, when the assessee transfers his leasehold rights in the land in his occupation, by way of a sub-lease to another person, it amounts to extinguishing his rights in the property and since his leasehold rights had created an interest in the land, i.e., enjoyment and possession thereof. Hence, it would definitely come within the definition of ?capital asset? as defined under section 2(14). Whether the owner himself transfers by way of a lease or a lessee transfers by way of sub-lease, the principle remains the same, namely in either action there is extinguishment of rights.
This point was considered by the Madras High Court in CIT v Sujata Jewellers ((2007) 160 Taxman 183. The facts in this case were that the assessee had taken on lease an immovable property under a lease agreement, for which it had to pay Rs 10 lakh to the lessor as interest-free advance. The lease was to be for a period of 22 years. Rent for the first 15 years was fixed at Rs 20,350 per month and for the remaining seven years, the monthly rent payable was Rs 84,428. There was a renewal clause.
The assessee had sub-leased the property by a lease deed in favour of another company for a period of 20 years. Under that sub-lease agreement, the sub-lessee had to pay Rs 10 lakh as interest-free advance to the assessee; the rent payable for the first 15 years was Rs 77,500 per month and for the remaining period, the rent payable was Rs 92,500 per month.
The assessing officer held that transfer of lease by the assessee in favour of sub-lessee would amount to transfer of a capital asset and the consideration received by the assessee under that transaction would partake the character of capital gains and, therefore, liable to tax. On appeal, the commissioner (Appeals) held that no capital gain was involved in the hands of the assessee. On revenue?s appeal, the tribunal agreed with the finding of the commissioner (appeals).
Counsel for the appellant contended that property of any kind in the hands of the assessee, except those provided in that section itself, would be a ?capital asset?. Therefore, the leasehold interest of the assessee is a capital asset. Section 45 of the Income-Tax Act, 1961, enacts that ?any profits or gains arising from the transfer of a capital asset effected in the previous year shall, be chargeable to income-tax under the head ?capital gains?, and shall be deemed to be the income of the previous year in which the transfer took place.? The expression ?transfer? is defined in section 2(47) of the Income-Tax Act, among other things, ??the extinguishment of any rights therein?.
The Madras High Court considered the argument of the assessee that transfer by way of lease must stand excluded from transfer as defined under section 2(47) of the Income-Tax Act. A division bench of this court has ruled out this point. This court held that the right conferred on a lessee under a lease deed is a capital asset in the hands of the lessor.
In A Gasper v CIT (117 I.T.R. 581), the assessee was a tenant, whose rights were protected under the West Bengal Tenancy Act, 1956. However, due to a tripartite agreement entered into by him, the lessor and the proposed sub-lessee, he had extinguished his rights, as a result of which, the proposed party became the lessee of the property.
The Calcutta High Court held that surrender of rights of the assessee would amount to extinguishment of his rights in the land/capital asset and therefore, it attracts capital gains. This judgement was affirmed by the Supreme Court A Gasper v CIT (192 ITR 382).
In RK Palshikar v CIT (172 I.T.R. 311), a Hindu undivided family was the assessee; they had agricultural lands belonging to an ancestor. The property was developed in a residential zone; plots were leased for a period of 99 years and the lease document provided for termination of lease on stated failures by the lessee. For the assessment years mentioned therein, a large sum of money was received as salami. A question arose as to whether the transaction effected by the assessee would amount to transferring a capital asset warranting capital gains tax.
The Supreme Court held that transfer by way of lease would amount to transfer of a capital asset and therefore tax is leviable as capital gains. From a reading of the above referred to judgment, it is clear that transfer by way of lease is treated as transfer of a capital asset on the principle that the lease creates an interest in the land and therefore, to that extent, it extinguishes the right of the transferor.
The Madras High Court held that if the facts of the present case are analysed in the context of the law laid down by the Supreme Court and the various sections of the Income-Tax Act, there would be no difficulty at all in holding that when the assessee transfers his leasehold rights in the land which is in his occupation by way of a sub-lease to another person, it amounts to extinguishing his rights in the property since his leasehold rights had created an interest in the land, i.e., enjoyment and possession. Therefore it would come within the definition of ?capital asset? as defined under section 2(14) of the Income-Tax Act. In such a case, the charge of tax cannot be avoided.
?The author is advocate, Supreme Court