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Tax Publishers Payment of compensation for peaceful vacation arising out of an oral sublease *Facts:* One Overseas Impex Pvt. Ltd. (OIPL) had leased out a residential property in 1965 for a period of 5 years. The said property was given for the family of the Directors who were a joint family and resided there in the said premises with no sub-lease agreement in writing. After the expiry of the 5 year period the landlord sought the property back from OIPL which was refused and accordingly an eviction suit was filed by the landlord against OIPL. Rights of tenancy in the property was granted to OIPL by the court against which the landlord went in appeal. Meanwhile after 40 years, the then directors of the Company OIPL happened to be descendants of the erstwhile Directors who had all deceased by then, came to an amicable settlement before the court of small causes in Mumbai. One of the descendant director was the assessee. As part of the amicable compromise and settlement, the company OIPL was to give up all its tenancy rights in the said property to the landlord in return of Rs. 2.01 crores of which they would pay to the current descendant two directors Rs. 75 a piece. The vacation of the property was to be done peacefully within 4 months failing which the Company OIPL will need to return back the Rs. 2.01 crores alongside mesne profits. Accordingly the assessee offered the Rs. 75 lakh compensation from OIPL as a capital gain and deposited it in the capital gains scheme and utilized the same to purchase a new residential property. The cost of acquisition was taken as NIL for the computation of capital gains and deduction under section 54F was claimed by the assessee. This was not found acceptable to revenue, whose plea was that the amount was received by assessee not for alienation/extinguishment of any capital asset as there was no such right with the assessee. Accordingly the amount was taxable under income from other sources and they were in turn ineligible for Section 54F relief as well. CIT(A) voiced views of the AO. On higher appeal by the assessee - Held in favour of the assessee that the receipt was a compensation simplicitor. It was not taxable. There was no capital asset/right which existed with the assessee, thus no capital gains can be read in the hands of the assessee. The amount received by OIPL for giving its tenancy rights was indeed as capital gain. The amount paid Rs. 75 lakhs was an application of income in the hands of OIPL thus cannot be claimed as an expenditure on the capital gain in the hands of OIPL. However the Rs. 75 lakh compensation cannot be taxed as income from other sources in the hands of the assessee as well as it was not "income" in the first place but a capital receipt. *Ed. Note:* The principle behind the judgement is correct as there was no vested right with the assessee. Thus no capital asset existed nor was it relinquished/extinguished. As regards the claim of Rs. 75 in the hands of the Company, Section 48 would entail one to claim any expenditure connected with the transfer of a capital asset as an allowable spend. Removing an encumbrance would also entail a similar claim in the hands of the Company OIPL. The fact that they would be penalized if the vacation was not done within 4 months and be liable to mesne profits and refund of Rs. 2.01 crores would definitely also make the Rs. 75 lakh payment as a claimable expenditure in the hands of OIPL. The ITAT has refrained from addressing this point elaborately as this was not the case in pertinence. +++ *Reference be made to the below case as well -* The Cardboard Material & Printing Co. Private Limited v ITO/I.T .A. No. 1101/KOL/ 2015/AY 2006-07/ITAT Kolkata/Dated 18th March 2016 *Facts:* Assessee private limited company received rental income by sub-leasing a property. The property was leased from one M/s. Martin Burns for 40 years. Original owner of the property was one Petros Hyrapict Crete whose whereabouts were not known. The 40 year tenure expired in 1980. A suit of eviction by Martin Burns for assessees disputed occupation post 1980 was dismissed by the high court. Since the topic was sub judice in dispute on the extension of the lease tenure the assessee paid the rent for the lease post lease period to rent controller. M/s. Martin Burns themselves had also lost their rights as a lessor due to lapse of time. Legal rights of the parties all fell outside limitation law as well. Since assessee earned rental income from sub-lease he had declared it as business income and claimed expenses as well on the same. AO show caused as to why the income should not be treated as income from house property, assessee pleaded that he was not the owner of the property and was neither a tenant nor a sub-lessee post 1980. Above was not accepted by the AO and thus held it as house property income also upheld by the CIT (A). The expenses were also disallowed in the re-characterization of income and instead allowed the statutory deduction applicable for a house property. The contention of the AO was that assessee was the beneficial/de facto owner of the property or more so a deemed to be owner by virtue of its "adverse possession" of the property. Aggrieved by the house property reading the assessee appealed to ITAT. *Decision:* The ITAT discussed briefly what is possession and adverse possession as under Every possession is permissive unless proved to the contrary. Adverse possession is also possession of course due to happening of certain events. Adverse possession in one sense also goes on a presumption that the owner has abandoned the property to the adverse possessor. In the case of S.M. Karim v. Mst . Bibi Sakina AIR 1964 SC 1254 the Supreme Court has laid down that the adverse possession must be adequate in continuity, in publicity and extent and a plea is required at the least to show when possession becomes adverse. But in this case there is no adverse possession but it was possession by holding over. Since in the Transfer of property act, 1882 in the case of holding over the person holding over neither is an owner, nor a lessee but is in a situation called tenant by sufferance, more so a role of a mere trespasser, so the income should be assessed as income from business. Thus held the ITAT applying the above provision from TOP Act, 1882. In the words of the ITAT The provisions of section 116 of the Transfer of Property Act, 1882 deal with the effect of "holding over", which means to retain possession as tenant of property leased, after the end of the term. A distinction is drawn between a tenant continuing in possession after the determination of the lease, without the consent of the landlord, and a tenant doing so with the landlord's consent. The former situation as is obtained in the present case is called a tenant by sufferance, who is no better than a mere trespasser and keeping in view this legal position, I am of the view that the assessee-company in the present case, who is no better than a mere trespasser, cannot be treated as a deemed owner in view of the provisions of section 27(iiib) read with section 269UA(f), which are clearly not applicable. In this case the assessee had let out the sub-lease as a part of his normal business which is why it was assessed as a business income, in any other case it might have been income from other sources. *Case:* Mayank Kishor Tejura v. ITO 2024 TaxPub(DT) 1205 (Mum-Trib)

Tax Publishers

Payment of compensation for peaceful vacation arising out of an oral sublease

Facts:

One Overseas Impex Pvt. Ltd. (OIPL) had leased out a residential property in 1965 for a period of 5 years. The said property was given for the family of the Directors who were a joint family and resided there in the said premises with no sub-lease agreement in writing. After the expiry of the 5 year period the landlord sought the property back from OIPL which was refused and accordingly an eviction suit was filed by the landlord against OIPL. Rights of tenancy in the property was granted to OIPL by the court against which the landlord went in appeal. Meanwhile after 40 years, the then directors of the Company OIPL happened to be descendants of the erstwhile Directors who had all deceased by then, came to an amicable settlement before the court of small causes in Mumbai. One of the descendant director was the assessee. As part of the amicable compromise and settlement, the company OIPL was to give up all its tenancy rights in the said property to the landlord in return of Rs. 2.01 crores of which they would pay to the current descendant two directors Rs. 75 a piece. The vacation of the property was to be done peacefully within 4 months failing which the Company OIPL will need to return back the Rs. 2.01 crores alongside mesne profits. Accordingly the assessee offered the Rs. 75 lakh compensation from OIPL as a capital gain and deposited it in the capital gains scheme and utilized the same to purchase a new residential property. The cost of acquisition was taken as NIL for the computation of capital gains and deduction under section 54F was claimed by the assessee. This was not found acceptable to revenue, whose plea was that the amount was received by assessee not for alienation/extinguishment of any capital asset as there was no such right with the assessee. Accordingly the amount was taxable under income from other sources and they were in turn ineligible for Section 54F relief as well. CIT(A) voiced views of the AO. On higher appeal by the assessee -

Held in favour of the assessee that the receipt was a compensation simplicitor. It was not taxable. There was no capital asset/right which existed with the assessee, thus no capital gains can be read in the hands of the assessee. The amount received by OIPL for giving its tenancy rights was indeed as capital gain. The amount paid Rs. 75 lakhs was an application of income in the hands of OIPL thus cannot be claimed as an expenditure on the capital gain in the hands of OIPL. However the Rs. 75 lakh compensation cannot be taxed as income from other sources in the hands of the assessee as well as it was not "income" in the first place but a capital receipt.

Ed. Note: The principle behind the judgement is correct as there was no vested right with the assessee. Thus no capital asset existed nor was it relinquished/extinguished. As regards the claim of Rs. 75 in the hands of the Company, Section 48 would entail one to claim any expenditure connected with the transfer of a capital asset as an allowable spend. Removing an encumbrance would also entail a similar claim in the hands of the Company OIPL. The fact that they would be penalized if the vacation was not done within 4 months and be liable to mesne profits and refund of Rs. 2.01 crores would definitely also make the Rs. 75 lakh payment as a claimable expenditure in the hands of OIPL. The ITAT has refrained from addressing this point elaborately as this was not the case in pertinence.

+++

Reference be made to the below case as well -

The Cardboard Material & Printing Co. Private Limited v ITO/I.T .A. No. 1101/KOL/ 2015/AY 2006-07/ITAT Kolkata/Dated 18th March 2016

Facts:

Assessee private limited company received rental income by sub-leasing a property.

The property was leased from one M/s. Martin Burns for 40 years.

Original owner of the property was one Petros Hyrapict Crete whose whereabouts were not known.

The 40 year tenure expired in 1980. A suit of eviction by Martin Burns for assessees disputed occupation post 1980 was dismissed by the high court.

Since the topic was sub judice in dispute on the extension of the lease tenure the assessee paid the rent for the lease post lease period to rent controller.

M/s. Martin Burns themselves had also lost their rights as a lessor due to lapse of time.

Legal rights of the parties all fell outside limitation law as well.

Since assessee earned rental income from sub-lease he had declared it as business income and claimed expenses as well on the same.

AO show caused as to why the income should not be treated as income from house property, assessee pleaded that he was not the owner of the property and was neither a tenant nor a sub-lessee post 1980.

Above was not accepted by the AO and thus held it as house property income also upheld by the CIT (A). The expenses were also disallowed in the re-characterization of income and instead allowed the statutory deduction applicable for a house property. The contention of the AO was that assessee was the beneficial/de facto owner of the property or more so a deemed to be owner by virtue of its "adverse possession" of the property.

Aggrieved by the house property reading the assessee appealed to ITAT.

Decision:

The ITAT discussed briefly what is possession and adverse possession as under

Every possession is permissive unless proved to the contrary.

Adverse possession is also possession of course due to happening of certain events.

Adverse possession in one sense also goes on a presumption that the owner has abandoned the property to the adverse possessor.

In the case of S.M. Karim v. Mst . Bibi Sakina AIR 1964 SC 1254 the Supreme Court has laid down that the adverse possession must be adequate in continuity, in publicity and extent and a plea is required at the least to show when possession becomes adverse.

But in this case there is no adverse possession but it was possession by holding over. Since in the Transfer of property act, 1882 in the case of holding over the person holding over neither is an owner, nor a lessee but is in a situation called tenant by sufferance, more so a role of a mere trespasser, so the income should be assessed as income from business. Thus held the ITAT applying the above provision from TOP Act, 1882.

In the words of the ITAT

The provisions of section 116 of the Transfer of Property Act, 1882 deal with the effect of "holding over", which means to retain possession as tenant of property leased, after the end of the term. A distinction is drawn between a tenant continuing in possession after the determination of the lease, without the consent of the landlord, and a tenant doing so with the landlord's consent. The former situation as is obtained in the present case is called a tenant by sufferance, who is no better than a mere trespasser and keeping in view this legal position, I am of the view that the assessee-company in the present case, who is no better than a mere trespasser, cannot be treated as a deemed owner in view of the provisions of section 27(iiib) read with section 269UA(f), which are clearly not applicable.

In this case the assessee had let out the sub-lease as a part of his normal business which is why it was assessed as a business income, in any other case it might have been income from other sources.

Case: Mayank Kishor Tejura v. ITO 2024 TaxPub(DT) 1205 (Mum-Trib)