Capital gains on tenancy rights

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CA KRISHNA KUMAR DARUKA (Querist)
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12 February 2011 A person received Rs 500000 for surrendering his tenancy of a godown from the landlord. What will be the tax treatment of this amount received by him. If relevant sections are also quoted it will be of great help.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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12 February 2011 Whether the compensation received on surrender of tenancy rights amounts to transfer giving rise to taxable capital gains or not was under debate for a long time. The High Courts have consistently taken a view that surrender of tenancy rights amounts to transfer of capital assets, but the same does not give rise to any taxable capital gains on the ground that the cost of acquisition of such tenancy rights is not determinable (where such tenancy rights are not purchased for a price), relying on the judgement of the Apex Court in the case of B. C. Srinivasa Setty, (128 ITR 294). Indirectly, this view of the High Courts also gets support from the judgement of the Apex Court in the case of A. Gasper, (192 ITR 382).

To overcome the above-referred judicial view, S. 55(2) of the Income-tax Act, 1961 was amended by the Finance Act, 1994 w.e.f. A.Y. 1995-96, which specifically provides that cost of acquisition of such tenancy rights is the purchase price where such tenancy rights are acquired by the assessee by purchase from the previous owner and in any other cases, the cost of acquisition of the asset is to be taken as NIL. Accordingly, the view of the Courts referred above will not be of any use from A.Y. 1995-96 in the context of taxability of capital gains arising on transfer of such capital asset.

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CA KRISHNA KUMAR DARUKA

CA KRISHNA KUMAR DARUKA (Querist)
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12 February 2011 Thanks for prompt reply. Can you pl give your opinion whether TDS needs to be deducted in case the payer is a company and if yes under which section.

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