Holding

The grant of a mining lease is a transfer of a capital asset, its cost of acquisition is determinable, and consequently section 45 of the Income‑Tax Act applies, making the premium taxable as capital gains.

Summary

The appellants, a body of individuals, bought two parcels of land in 1966 and in 1970 granted a ten‑year mining lease to an allied private company for a premium of Rs.5 lakh. The Income‑Tax Officer treated the lease‑hold interest as a transfer of a capital asset and levied long‑term capital gains on the premium, valuing the lease‑hold right at 5/8 of the land’s market value. The Appellate Assistant Commissioner allowed the cost of acquisition to be the full purchase price of the land, but the Tribunal upheld the Officer’s view and dismissed the appeal. The High Court held that the lease right is a capital asset and that a transfer of such right attracts section 45, granting a certificate of appeal. The Supreme Court affirmed that the right to grant a mining lease is part of the land’s bundle of rights, its cost of acquisition is determinable, and therefore section 45 applies, resulting in the dismissal of the appeal with costs.

Issues considered

Whether the grant of a mining lease for ten years constitutes a transfer of a capital asset within the meaning of section 45 of the Income‑Tax Act, 1961.
Whether the cost of acquisition of the lease‑hold right can be valued and apportioned for the purpose of computing capital gains.
Whether section 45 applies when the cost of acquisition of the leased right is indeterminable.

Legislation cited

Income Tax Act, 1961s. 2(14), s. 2(47), s. 261, s. 45

Subjects

capital gainsmining leasetransfer of capital assetcost of acquisitionvaluationsection 45section 2(14)leasehold rightsIncome Tax Act

Judgment

ii-

A A.R. KRISHNAMURTHY & ANR.
v.
C.l.T. MADRAS

FEBRUARY 10, 1989

[R.S. PATHAK, CJ, M.N. VENKATACHALIAH AND
KULDIP SINGH, JJ.]

Income Tax Act, 1961: Sections 2(14), 2(47), 45 and 261-
Capital gains-Taxability of-Piece of Land purchased by assessee-
M ining lease to excavate clay from the land granted-Amounts to trans-
C fer of 'capital asset'-Capital gains arise-Cost of acquisition of right to
grant mining lease is computable-Nexus between 'cost of acquisition'
and 'grant of lease'' exists-Best valuation possible to be made on basis
of evidence. ·

The appellant-assessee, a body of individuals, purchased two
D pieces of land in the year 1966. In 1970 it granted a mining lease to a
private company (an allied concern) to extract clay for a period of ten
years at a premium of Rs. 5 Iakhs in addition to payment of royalty.

The Income-tax Officer construed the lease deed as transferring a \.-
lease-hold interest in the land in favour of the company and came to the
E conclusion that the transfer was assessable to capital gains tax. For the
purpose of computing the extent of tax, the Income-tax Officer valued
the lease-hold interest at 5/8th of the sale price of the entire land,
computed the cost at acquisition of the lease-hold interest say
Rs.17 ,040, and after deducting this sum from the sale consideration of
Rs.5 lakhs, determined a sum of Rs.4,82,960 as long term capital gains. /~ t
F
Bejng aggrieved by the aforesaid order of the Income-tax Officer
the assessee preferred an appeal to the Appellate Assistant Commis-
sioner. The Appellate Assistant Commissioner confirmed the assess-
ment but allowed deduction on the entire price of the land on the
ground that the cost for the purpose of ascertaining the capital gains
G would he the total price of the land paid by assessee.

Not being satisfied, the assessee preferred an appeal to the
Income-tax Appellate Tribunal which confirmed the order of the Appel-
late Commissioner and dismissed the appeal.

H The High Court on a reference held that the right conferred on
596
A.R. KRISHNAMURTHY v. C.I. T. 597

the lessee under the lease deed was also a capital asset in the hands of
A
the assessee-Iessor, and that there was a transfer of capital asset for a
consideration of Rs.5 Iakhs. The High Court accordingly answered the
reference against the assessee, but granted a certificate under section
261 oftheAct to appeal to this Court.

On behalf of the assessee-appellant it was contended: (1) that B
conceptually there.is no 'cost of acquisition' which is attributable to the
right of limited enjoyment transferred ·by the grant of the lease, and (2)
relying on the decision of this Court in C./. T. v. B. C. Srinivas Shetty,
[1981] 128 !TR 294 SC it was submitted that since the cost of acquisition
of the right granted under the lease cannot be determined the computa-
tion provisions under the Act cannot apply at all, and as such section 45 C
of the Act is not attracted.

On the question: whether the grant of a mining lease for a· period
of ten years by the assessee can give rise to a.capital gain taxable under
section 45 of the Income-tax Act, 1961. "
D
Dismissing the appeal, the Court, ,

HELD: l(a) Section 2(14) of the Income Tax Act defines "capital
asset" as "property of any kind held by an assessee." What is parted
with in the instant case, under the terms of the deed is the right to
exploit the land by extracting clay which right directly flows from the E
ownership of the land. The said right evaluated in terms of money forms
part of the cost of acquiring the land. [60IC-D]

I (b). If a transfer of a capital asset in section 45 of the Act in-·
eludes grant·of a mining lease for any period, then obviously, the "cost
..-; ...... of acquisition" of the land would include the "cost of acquisition" of F
the mining right under the lease. The grant of a lease being a transfer of
an asset, there is no escape from the conclusion that there is a live'tlexus
between the "cost of acquisition" of the land and the right granted
under the lease. [601G-H; 602A]

In the instant case,. the amount of Rs.27 ,260 paid by the assessee G
was not only the cost of acquiring the land but also acquiring a bundle
of rights in the said land including the right to grant lease. [602A]

1(c) The apportionment of the cost of acquisition is a question of·
fact to be determined by the Income-tax Officer in each case on the
basis of evidence. The determination of the cost of the right to excavate H
598 SUPREME COURT REPORTS [1989] 1 S.C.R.

A clay in the iand in terms of money may be difficult but is nonetheless of
a money value and the best valuation possible must be made, In the
instant case, the .Income-tax Officer worked out the cost of the lease
hold interest by adopting the 5/8th ratio, though the Appellate Assistant
Commissioner gave the benefit to the assessee of the full price of the
B land paid hy him. [6028-D]

I(df.Once the cost of lease hold right is determined than there is
no difficulty in making apportionment. [602E]
' '
Gold Coast Selection Trust.Ltd: v. Inspector of Taxes, 17 ITR 19 ~ ~
C (supp); Traders and Mining Ltd: v. C./. T., 27 ITR341; R:K. Palshikar • -"1·. ~
(HUF) v.,Commissioner of Income Tax, M.P. Nagpur, [1988] 3 SCC
594, referred to.

2(a) •The value of lease hold rights in the cost of acquisition of
land being determinable the computation provision under the Act are
D applicable, and section 45 would be attracted. [602E-F]

2(b) The date of acquisition of the right to grant lease has to be
the same as the date of acquiring the free-hold rights. [6038]

· C./. T. v. B. C. Srinivas Shetty, 128 !TR 294 distinguished.
E
" CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2717
of·1985.

From the Judgment and Order dated 2. 12.1980 of the Madras
High Court in T.C. No. 573of1976.
F
Harish N. Salve, A.S. Chandrashekaran, K.J. John and Sanjay ~. t
Grover for the Appellants.

Dr. V·. Gauri Shankar, Ms. A. Subhashini and M.K. Shashidha-
ran for the Respondent.
G
The Judgment of the Court was delivered by

KULDIP SINGH, J. The question in this appeal is whether the ;k'
grant of a mining lease for a period of ten years by the assessee can
give rise to a.capital gain taxable under section 45 of Income-tax Act,
H 1961.• •
A.R. KRISHNAMURTHY v. C.I.T. [SINGH, J.] 599

The assessee, a body of individuals, purchased two pieces of
A
land in the year 1966 measuring 14.55 acres at a price of Rs.27,260. By
an instrument of lease-cum-licence dated 10th September, 1970 they
granted a mining lease in favour of M/s. Sri Krishna Tiles and Potteries
(Madras) Private Limited (hereinafter cailed the·'Company'), an allied
concern of the assessee. The lease \\las for a period of 10 years and the
lessee .had to pay a. premium or salami of Rs.5 lakhs in addition to the · B,
~ payment of royalty of Rs.12 per hundred cubic ft. of clay extracted
subject to a minimum of Rs.60,000 per year.
., ,
... ' . The .Income-tax Officer construed the lease deed as transferring
t - a lease-hold interest in the land in favour of the company and came to
1
the conclusion that the transfer was assessable to capital gains tax. For
the purpose of computing the extent of tax the Income-tax Officer c
assessed the market value of the entire land at Rs.8 lakhs. Since .the
lease-hold interest was transferred for a sum of Rs.5 lakhs, he valued
the lease-hold interest at 5/8th of the sale price of the entire land. On
that basis the Income-tax Officer computed the cost of acquisition of
the lease-hold interest at Rs.17,040, being 5/8th of Rs.27,260. There- D
after deducting Rs.17 ,040 frpm the sale consideration of Rs.5 lakhs, he
treated the sum of Rs.4,82.,960 as long-term capital gains.

The assessee preferred an appeal to the Appellate Assistant
'1Commissioner. The Appellate Commissioner held that the value of the,
right to excavate the land in terms of money is included in the purchase E
price paid by the assessee for the land. He rejected the argument of the
assessee that the cost of acquisition of the said assets could not be
determined. He then proceeded to consider the cost of acquisition of
such right and differing with the Income Tax Officer held that on the
, facts of the case the cost for the purpose of ascertaining the capital
~ ·~ains would be the total price of the land paid by the assessee, that is, F
' Rs.27,260. On all other points he uphled the order of the Income-tax
Officer.

The assessee preferred an appeal to the Trll)unaL The Tribunal
observed that the entire ownership of the prope·rty mea11s the owner-
ship of a bundle of rights and a limited interest which can be severed · G ,
and disposed off. for.a specified period in the form of lease or mortgage
-)I" or the like is part of that bundle. According to the Tribunal the
purchase price paid by the assessee for the land includes therein a
component of purchase price attributable to various kinds of interests
embedded in the said land. The Tribunal confirmed the order of the
Appellate Commissioner and dismissed the appeal. H
600 SUPREME COURT REPORTS 11989) 1 S.C.R.

Arising from the said decision of the Tribunal, the following two
A
questions were referred to the High Court for determination:

(i) Whether, on the facts and in the circumstances of this case,
the instrument of lea_se dated September 10, 1970 effected
the transfer of a capital asset within the meaning of section
B 45 of the Income-tax Act, 1961 and, accordingly, liable to
capital gains tax?

(ii) Whether, on the facts and in the circumstances of the case
the Tribunal is right in law in holding that the cost of lease
hold right is capable of valuation and, as such, capital gains
can be computed?
c
The High Court opined that the right conferred on the lessee
under the lease _deed was also a capital asset in the hands of the
assessee-lessor. By giving a liberal meaning to the word "transfer" in
section 2( 47) of the Act the High Court held that there was a transfer
D of capital asset for a consideration of Rs. 5 lakhs under the instrument
dated 10th September, 1970. It was further held that the rights of
owner of a land include a right to grant th~ lease to exv,oit the land. The.
High Court answered the two questions in the affirmative and against
the assessee. The High Court granted a certificate under section 261 of
the Act to appeal to this Court.
E
The relevant provisions of sub-section 14 of section 2 which
defines "capital asset" and section 45( 1) of the said Act which provides ,.
for the levy of tax on capital gains is as under:

"2(14) "capital asset" means property of any kind held by
F· an assessee, whether or not connected with his business or ~--~
I ·.
profession, but does not include-.

45( 1) Any profits or gains arising from the transfer of a
capital asset effected in the previous year shall, save as
otherwise provided in section be chargeable to income-tax
G under the head "Capital gains", and shall be deemed to be
the income of the previous year in which the transfer took
place."

Mr. Harish Salve, learned counsel appearing for the appellant,
without disputing that the grant of a lease would constitute a transfer
H of an asset, has raised the following two contentions:
>:

A.R. KRISHNAMURTHY '· C.IT [SINGH . .I.I 601

(i) That conceptually there is no "cost of acquisition" which is
A
attributable to the right of limited enjoyment transferred by
the grant of the lease. There is no nexus between the "cost of
acquisition" of the free-hold land and the right granted
under the lease. For the same reason it is contended that
there is no question of apportionment of such "cost of
acquisition". B
(ii) That since the cost of acquisition of the right granted under
the lease cannot be determined the computation provisions
under the Act cannot apply at all and as such section 45 of
the Act is not attracted. Reliance for this contention is
placed on the judgment of this Court in C.I. T. v. B.C.
Srinivas Shetty, 128 ITR 294. C
-""'! As regards the first contention, section 2( 14) of the Act defines "capi-
tal asset" as "property of any kind held by an assessee". What is
parted with under the terms of the lease-deed is the right to exploit the
land by extracting clay which right directly flows from the ownership of
the land. The said right evaluated in terms of money forms part of the · D
cost of acquiring the land. In Tr~ders and Mining Ltd. v. C.l. T .. 27
ITR 341, a Division Ben.ch of the Patna High Court, interpreting the
expression "transfer of a capital asset" held as under:

"We think that the .expression "transfer" in the section
includes not only a permanent transfer but also a tempor- E
ary transfer of title to:the property in question and lease of
mines for any period would fall within the ambit of section
128 of the Act. It was also contended by Mr. Dutt that· a
transaction of a lease was not tantamount to a transfer of a
title but that a me.re contractual right was created. ·We do
not think that this argument is correct. A lease of land is F
transfer of interest in the land and creates a right in rem:
and there is a transfer of title in favour ofthe lessee though
the lessor has right of reversion after the period of the lease
terminates." ·

This decision has been referred to with approval by this Court in R. K. G
Palshikar (HUF) v. Commissioner of Income. Tax, M.P. Nagpur,
[ 1988) 3 SCC 549. If transfer of capital asset in section 45 of the Act
includes grant of Mining Lease for any period then obviously the "cost
of acquisition" of the land would include th_e ."cost of acquisition" of
the Mining right under the lease. Undisputedly the grant of a lease
· _being a transfer of an asset there is no escape from the conclusion that H

•
602 SUPREME COURT REPORTS I1989] 1 S.C.R.
there is a live nexus between the "cost of acquisition" of the land and
A
the rights granted under the lease. The amount of Rs.27 ,260 paid by the
Assessee was not only the cost of acquiring the land but also of acquir-
ing bundle of rights in the said land including the right to.grant lease.
There is, thus no force in the contention of the learned counsel that
conceptually there is no "cost of acquisition" which is attributable to
B the right of limited enjoyment transferred by the grant of the lease. So
far as the apportionment of the cost of acquisition is concerned it is a
questioi:i of fact to be determined by the Income-Tax Officer in each
case on the basis of evidence. The determination of the cost of the
right to excavate day in the land in terms of money may be difficult but
is none-the· less of a money value and the best valuation possible must
be made. Viscount Simon in Gold Coast Selection Trust Ltd. v.
c Inspector of Taxes, 17 ITR 19 (supp) observed "valuation is not an
exact science. Mathematical certainty is not demanded, nor indeed is it
possible." The Income-tax Officer in this case worked out the cost of
lease hold interest by adopting the 5/8th ratio, though the Appellate
Commissioner gave the benefit to the Assessee of the Full Price of the
D land paid by him. In Traders and Mines Ltd. v. Commissioner of
Income-tax, (supra) the Income-tax Officer had also determined the
cost of the lease hold rights on proportionate basis. Once the cost of
the lease-hold rights is determined then there is no difficulty in making
apportionment. We, therefore, do not find any force in the first con-
tention of Mr. Salve and reject the same.
E
In view of our finding on the first contention the second conten-
tion does not survive. The value of lease hold rights in the cost of
acquisition of land being determinable the computation provisions
under the Act are applicable and section 45 would be attracted. In
She tty's case the question was whether the transfer of the .goodwill of a ,l
F newly commenced business can give rise to a capital gain taxable under 1 '"
section .45 of the Act. This Court answered the question in the nega- ·,
tive. Referring to the charging sectibn and the computation provisions
under the Act this Court held that none of those provisions suggest the
inclusion of an asset under the Head "Capital Gain," in the acquisition
of which no cost at all can be conceived. Good will generated in an
G individual's business was held to be an asset in which no cost element
can be identified or envisaged. It was also held that the date of acquisi-
lion of the asset is a material factor in applying the computation provi- ~·.
sions pertaining to capital gains and in the case of self-generated good
will it is not possible to dete·rmine the same. The third reason for
holding that the good will generated in a .newly commenced business
H cannot· be described as an 'asset' within the terms of section 45 of the
A.R. KRISHNAMURTHY v. C.I.T. [SINGH, J.J 603

Act was that it is impossible to detennine its cost of acquisition. None A
of the three reasons given by this Court in Shetty's case are applicable
in the present case. We have held that the cost of acquisition of lease
hold rights can be determined. The date of acquisition of the right to
grant lease has to be the same as the date of acquiring the free hold
rights. The ratio of Shetty's case is thus not attracted to the question
involved in the present case. We, therefore, do not find any force in
B
·ff the second contention also.

Accordingly the appeal is dismissed with costs.

-:"' t· N.V.K. Appeal dismissed.
c
I

.,

1·