(2005) 273 ITR 1 (SC)
Capital gains — charging section; meaning of cost of acquisition
A tenancy right is a capital asset, so the consideration falls to be dealt with under the capital gains provisions. If it is not chargeable there, it cannot be assessed under the residuary head instead.
Is a payment received for surrendering tenancy rights taxable as capital gains, or can it be assessed as income from other sources?
The assessee company was the tenant of premises. It surrendered its tenancy rights and received a substantial sum from the landlord as consideration for giving up possession. On the law as it then stood, the tenancy had been acquired without any identifiable cost, so following the reasoning in B.C. Srinivasa Setty the receipt escaped the charge to capital gains because the computation provisions could not be applied. The Revenue, faced with that difficulty, sought instead to bring the amount to tax under the residuary head as income from other sources.
The Tribunal held in favour of the assessee. The High Court agreed that the amount was not assessable, and the Revenue appealed to the Supreme Court.
For the assessee
A tenancy right is a capital asset and its surrender is a transfer. The receipt therefore belongs to the head of capital gains. Since no cost of acquisition could be identified, the charge failed on the Srinivasa Setty principle, and the Revenue cannot fall back on the residuary head to tax what a specific head has failed to reach.
For the Revenue
If the amount is not chargeable as capital gains, it remains a receipt of an income nature in the assessee's hands and is squarely within the residuary head, which exists precisely to bring to tax income not chargeable under any other head.
The Court confirmed that a tenancy right is a capital asset and that its surrender for consideration is a transfer, so the receipt falls to be considered under the head of capital gains. It then addressed the Revenue's alternative case. The heads of income, it held, are mutually exclusive: income that is appropriate to a specific head must be considered under that head alone, and the residuary head applies only to income that does not fall under any of the preceding heads at all. The residuary head is not a safety net permitting the Revenue to tax under a general provision what a specific provision has failed to capture. Because the receipt was in its nature a capital gain, the fact that the computation machinery could not be worked meant it escaped tax altogether; it did not thereby become income from other sources. The Court accordingly upheld the High Court and dismissed the Revenue's appeal.
The head-exclusivity principle is the lasting value of this case and applies generally under the IT Act 2025. The specific outcome no longer follows, however — Section 90 now prescribes a nil cost of acquisition for tenancy rights, so the computation machinery works and such receipts are today chargeable as capital gains under Section 67. Cite it for the structural proposition, not for the conclusion on taxability.