Holding

A lease of 99 years with a premium constitutes a transfer of a capital asset under Section 12‑B, making the premium taxable as capital gains.

Summary

The appellant, a Hindu Undivided Family, owned agricultural land that it developed into building sites and leased on 99‑year terms, receiving a premium (salami) for each lease. The Income‑Tax Officer, the Appellate Assistant Commissioner and the Income‑Tax Appellate Tribunal held that the premiums were chargeable to capital‑gains tax under Section 12‑B, rejecting the appellant's claim that the land was agricultural and that only lease‑hold rights were transferred. The High Court affirmed both that the land constituted a capital asset and that the 99‑year leases amounted to a transfer of a capital asset, but allowed the appellant to appeal only on the second question. The Supreme Court dismissed the appeal, holding that a lease of such long duration with a premium constitutes a transfer of a capital asset within Section 12‑B, and that the appellant could not raise a new question about the land being a gifted Inam not having acquisition cost. Consequently, the appeal was dismissed with costs.

Issues considered

Whether the land leased by the assessee qualified as a capital asset under Section 12‑B of the Indian Income‑Tax Act, 1922.
Whether the grant of 99‑year leases, involving a premium, amounted to a transfer of a capital asset within the meaning of Section 12‑B, thereby attracting capital‑gains tax.
Whether a question not raised before the Tribunal can be taken up on appeal under Section 66(1) of the Act.

Legislation cited

Income Tax Act, 1922s. 12-B, s. 2(4A), s. 66(1), s. 66A(2)

Subjects

capital gains taxSection 12-Bleaseholdtransfer of capital assetincome taxagricultural landcertificate of fitnesshigh court referencequestion of lawtribunal

Judgment

R.K. PALSHIKAR (HUF) A
v.
COMMISSIONER OF INCOME-TAX, MADHYA PRADESH,
NAGPUR, BHANDARA, NAGPUR

MAY 5, 1988
B
[R.S. PATHAK, CJ, AND M.H. KANIA, J.]

Indian Income-tax Act, 1922-Whether grant of leases by assessee

t
amounts to transfer of Capital assets as contemplated under Section
12-B of-Whether capital gains tax is payable by assessee on amounts of
'salami' or premium received by assessee in respect of leases granted by c
assessee.

This was an appeal on a certificate of fitness granted by the High
Court against its judgment on a reference made under Section 66( 1) of
the Indian Income-tax Act ("the said Act").
D
The appellant(assessee owned some agricultural land, which the
assessee developed into building sites. The assessee leased out the build-
ing sites to various parties. The leases were for 99 years. The assessee
received amounts of 'salami' or premium for the said leases.

Question arose whether the assessee was liable to pay capital gains E
tax on the amounts of 'salami' or premium received. The assessee con-
tended before the Incom~-tax Officer that no capital gains tax could be
levied on the said leases as the land was agricultural and that Section
12-B of the said Act did not come into play as only lease-hold rights
had been conveyed by the assessee to the lessees under the leases in
question. Both these contentions were rejected by the Income-tax F
Officer, the Appellate Assistant Commissioner and the. Income-tax
Appellate Tribunal. Arising from the decision of the Tribunal, two
questions were referred to the High Court, viz. (1) Whether the land
sold by the assessee constituted a capital asset within the meaning of
Section 12-B of the said Act· or was agricultural land as defined in
Section 2(4A) of the Act, and (2) Whether the transaction of lease G
effected by the assessee amounted to a transfer within the meaning of
Section 12-B of the said Act so as to attract liability for capital gains tax.
The High Court answered both the questions in the affirmative and
against the assessee .' Leave was granted by the High Court to the asses-
see to ·appeal to this Court only in respect of the second question. · H

989
990 SUPREME COURT REPORTS [1988] 3 S.C.R.

The appellant-assessee had contended that Section 12-B of the
A
said Act could have no application as the land in question was loam
land which must have been granted as a pure gift., to the ancestor of the
assessee, and that Section 12-B was applicable only in the case of assets
where there was a cost of acquisition. The respondent had urged that
the assessee could not raise this contention as it did not arise out of the
B decision of the Tribunal and was not reflected in the questions referred
by the Tribunal particularly in the question in respect of which the
certificate of appeal had been granted.
The Court dismissed the appeal upholding the submissions of the
respondent. It was,

c HELD: that the question in respect of which certificate of fitness
had been granted, clearly related to one controversy, namely, whether
the provisions of Section 12-B could be brought into play in this case as
the transfer was of lease-hold interest in inunovable property for 99 years
and not an outright sale or transfer of the complete interest of the trans-
D feror in the .immovable property. The question as to whether Section
12-B could be brought into play where the property sold had not cost
anything to acquire as it was gifted, had not been urged before the
income-tax authorities, the Tribunal or the High Court and was not
covered by the decision of_ the Tribunal or the High Court. This case fell
within the category of cases where the question of law concerned is
E neither raised .before the Tribunal nor considered by it, and in such a
case the question would not be a question arising out of the order of the
Tribunal notwithstanding that it may arise on the findings given by it, as
held by this Court in Commissioner of Income Tax, Bombay v. Scindia
Steam Navigation Co. Ltd., [1961] 42 ITR 589. Merely because a question
of law might arise on the facts found by the Tribunal, this would not ren·
der it a question arising out of the decision of the Tribunal. [995B·C, G]
F
As regards the question whether the provisions of Section 12-B
could be brought into play, although what was transferred was only
lease-hold interest in the lands in question, it was significant that the
leases were for a long period of 99 years and in all the transactions of
lease, premium had been charged by the assessee for the grant of the
G lease concerned •. Under the leases, the assessee had parted with an asset
of an enduring nature, namely, the rights to possession and enjoyment
to the properties leased for 99 years subject to certain conditions re-
garding termination of the leases. It could not be said that the provi-
sions of Section 12·B of the said Act could not ,be brought into play. Tlie
grant of the leases amounted to a transfer of capital assets as contemp·
H lated under Section 12-B of the said Act. [996G-H; 997A-B] ·
R.K. PALSHIKAR v. C.I.T. [KANIA, J.J 991

C.l. T. v. Srinivasa & Setty, [1981] 128 ITR 294; Commissioner of A
Income Tax, Bombay v. Scindia Steam Navigation Co. Ltd., [1961] 42
ITR p. 589 and Traders and Miners Ltd. v. Commissioner of Income
Tax, Bihar and Orissa, [1955] 27 ITR 341, referred to,

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 613-
15of1975. 8

From the Judgment and Order dated 18.8.1973 of the Madhya
Pradesh High Court in M.C.C. No. 248 of 1968.

S.T. Desai, Joel Pares and A.K. Verma for the Appellant.

S.C. Manchanda, K.C. Dua and Miss A. Subhashini for the
c
Respondents.

The Judgment of the Court was delivered by

KANIA, J. This is an appeal against the judgment of a Division D
Bench of the High Court of Madhya Pradesh on a reference made to
the High Court under Section 66(1) of the India'n Income-tax Act,
1922 (referred to hereinafter as "the said Act"). The appeal has been
preferred on a certificate of fitness granted by the High Court under
~- Section 66A(2) of the said Act read with Article 133(1) of the Con-
stitution oflndia. E

The relevant facts are as follows:

The assessee is a Hindu Undivided .Family represented by its
Karta one R.K. Palshikar. The years of assessment with which
we are concerned are the assessment years 1959-60 to 1961-62. F
The assessee is the owner of what is known at present as
'Palshikar Colony' at Indore. This colony covers an area of 36.62
acres. The said land originally belonged to an ancestor of the
present Karta as agricultural land. The land was in the possession
of the tenants and crops like wheat, gram and so on were grown
on the said land by the tenants. The present Karta wished to G
develop the land into a housing colony and took steps to evict the
tenants. For this purpose he filed a suit in the High Court and on
September 24, 1957 that suit was decreed. The assessee got plans
drawn up for the laying out of the said land as a housing colony in
the year 1952 after the assessee was permitted to develop the
land into a housing colony. In 1958, the Executive Engineer of H
992 SUPREME COURT REPORTS [1988] 3 S.C.R.

A Indore approved the revised lay out plan. The assessee then
divided the land into plots and developed the land for making it
suitable as building sites. The assessee also constructed some
roads, sewages and water pipe lines and spent a large amount for
developing the land. This expenditure was incurred in the ac-
counting period 1958-59 and the subsequent years. The assessee
started leasing building sites to various parties from May, 1958.
The first lease was granted by the assessee, demising plot No. 12
on May 24, 1958. That lease was for a period of 99 years. It was
agreed under the lease deed that on the expiration of the said
period of lease, the lessor by his legal heirs will execute a new .
lease deed in favour of the lessee or his legal heirs on tenns and )
conditions as would be settled later. The 'salami' or premium for
c the said lease was fixed at Rs.10,312, out of which amount
Rs.501 was paid in advance and tbe balance amount of Rs.9,811
was agreed to be paid before the grant of lease. The agreement
of lease was executed on September 15, 1959. The annual lease
rent of the plot was fixed at Rs. 75 which was to be paid by the
D lessee in advance. The lessor reserved his right to take back
· possession of the land leased if the rent was not paid for rwo
consecutive'years and to recover the rent. We are not concerned
with the other tenns of the lease. In the years 1959-60, 1960-61
and 1961-62 with which we are concerned, the assessee leased
out respectively 3 .29 acres, 4 .41 acres and 5 .68 acres divided into ·~
E many plots out of the aforesaid land and he received by way of
'salami' or premium Rs.1,45,190, Rs.2,06,475 and Rs.2,54,341
respectively in the said years. The tenns and conditions of the
other leases were in pari materia with the aforesaid lease dated
May 24, 1958 in that the leases were for a period of 99 years and
provided for the payment of premium or 'salami'. The question
F arose whether the assessee was liable to pay capital gains tax on ~
the amounts of 'salami' or premium received as aforesaid. The
contention of the assessee before the Income-tax Officer con-
cerned was that no capital gains tax could be levied in respect of
the said leases as the land was agricultural land and secondly that
Section 12-B of the said Act which provided for the levy of tax on
G the sale, exchange, relinquishment or transfer of a capital asset
did not come into play as only lease-hold rights had been con-
veyed by the assessee to the lessees under the said leases. Both ""··
these contentions were rejected by the Income-tax Officer as
well as by the Appellate Assistant Commissioner. The assessee
preferred an appeal to the Income-tax Appellate Tribunal and
H urged the same contentions, which the Tribunal also rejected.
..
R.K. PALSHIKAR v. C.l.T. [KANIA, J.J 993

Arising from the said decision of the Tribunal, two questions
A
were referred to the High Court for determination. These ques-
tions are as follows:

(1) Whether on the facts and in the circumstances of the case,
the land sold by the assessee constituted a capital asset
within the meaning of Section 12-B of the Indian Income Tax B
Act or was agricultural land as defined in Section 2(4A) of
the Act?

(2) Whether the transaction of lease effected by the assessee
amounted to a tqmsfer within the meaning of Section 12-B so
as to attract liability for capital gains tax?
c
The first contention urged by the assessee before the High Court
was that no capital gains tax could be levied on the said transactions
for the lease of the land as the land was agricultural land, and the
second contention was that Section 12-B of the said Act did not come
into play as only the lease hold rights in the said lands had been D
conveyed. As far as the first contention is concerned, it was conceded
before the High Court that as the land was diverted to non-agricultural
purposes several years ago, that contention could not be pressed and it
~ was not disputed that the lands in question constituted a capital assets
within the meaning of Section 2(4A) of the said Act. In support of the
second contention of the assessee, it was urged on behalf of the asses- E
see that the word "'transfer" under Section 12-B of the said Act must
be interpreted in a limited and restricted sense and the principle of
ejusdim generis should be applied in construing the said word as used
in Section 12-B. This contention was rejected by the High Court which
\..i,_ took the view that, as the lease was for a long period of 99 years, the
' agreement of lease would amount to a transfer of a capital asset within F
the meaning of Section 12-B of the said Act read with Section 2(4A)
thereof. The High Court answered both the questions referred in the
affirmative and against the assessee. On an application made by the
assessee, leave was granted by the High Court, as aforesaitl, to appeal
to this Court but only in respect of second question.
G
).. Before setting out the contentions of the respective parties it will
be useful to take note of \he relevant portion of Section 12(B) of the
said Act which provides for the levy of tax on capital gains runs thus:

"The tax shall be payable by an assessee under the head
"Capital gains" in respect of any profit or gains arising H
994 SUPREME COURT REPORTS [1988) 3 S.C.R.

from the sale, exchange, relinquishment or transfer of a
A
capital asset effected after the 31st day of March, 1956, and
such profits and gains shall be deemed to be income of the
previous year in which the sale, exchange, relinquishment
or transfer took place."

B There are two provisos to the aforesaid sub-section, but they are
not relevant for our purposes. Rest of the provisions of Section 12-B
are also not relevant for our purposes. The term "Capital asset" has
been defined in Sub-section (4A) of Section 2 of the said Act, as
follows:

"capital asset" means property of any kind held by an as-
c sessee, whether or not connected with his business, profes-
sion or vocation,,but does not include:

(i) any stock-in-trade, consumable stores or raw
materials held for the purposes of his business,
D profession or vocation;

(ii) personal effects, that is to say, movable property
(including wearing apparel, jewellery and furni-
ture) held for personal use by the assessee or any ~.
member of his family dependent on him.
E
(iii) any !'and from which the income derived is
agricultural income; ..
The first contention which was urged before us by Mr. Desai,
learned counsel for the appellant-assessee is that, in the present case, ~
•F Section U-B of the said Act can have no application as the land in ·
question was Inam land which must have been granted as a pure gift to
the ancestor of the assessee. It was submitted by him that the facts on
record show that the land was granted by the Maharaja of Indore as
Inam to the concen1ed ancestor of the present Karta and it was urged
by him that in accordance with the usual practice, the Maharaja must
G have given it free. It was submitted that Section 12-B of the said Act is
applicable only in case of assets where there was a cost of acquisition. "'·
In support of this contention Mr. Desai cited some judgments includ-
ing the decision of this Court in C.J. T. v. Srinivasa & Setty, [1981) 128
ITR 294 which was a case pertaining to goodwill. It was, on the other
hand, submitted by Mr. Manchanda, that it was not open to Mr. Desai
H to raise this ~ontention at all as it did not arise out of the decision of
R.K. PALSHIKAR v. C.I.T. [KANIA, J.1 995
~t
the Tribunal and was not reflected in tbe questions referred by the
A
Tribunal, and particularly in the question in respect of which certifi-
cate of appeal has been granted. In our view, the submission of Mr .
.Manchanda must be upheld. The question in respect of which certifi-
cate of fitness has been granted, clearly relates to one controversy,
namely, whether the provisions of Section 12-B of the said Act can be r- '
~ brought to play in this case as the transfer is of lease hold interest in B
(
immovable property for 99 years and not an outright sale of transfer of
the complete interest of the transferor in the immovable property. The \
question as to whether Section 12-B can be brought into play where

r
the property sold has not cost anything to acquire as it was gifted :>r
was not urged before any of the Income-tax authorities nor before the
Tribunal or even before the High Court. That question has not in any
way been covered by the decision of the Tribunal or the High Court. In c
Commissioner of Income Tax, Bombay v. Scindia Steam Navigation
Co. Ltd., [1961] 42 ITR p. 589 four prepositions have been laid down
by this Court in this connection and they are as follows:

(1) When a question is raised before the Tribunal and is dealt D
with by it, it is clearly one arising out of its order.

(2) When a question of law is raised before-the Tribunal but the
Tribunal fails to deal with it, it must be deemed to have been
dealt with by it, and is, therefore, one arising out of its order.
E
(3) When a question is not raised before the Tribunal and the
Tribunal deals with it, that will also be a"luestion arising out
• of its order.
I
(4) When a question of law is neither raised before the Tribunal
~ nor considered by it, it will not be a question arising out of its F
order notwithstanding that it may aris~ on the findings given
by it.

In our view, the present case falls squarely within the fourth
category, namely, of cases where a question of law is neither raised
before the Tribunal nor considered by it and the aforesaid decision G
).. clearly lays down that in such a case, the question would not be a
question arising out of the order of the Tribunal notwithstanding that
it may arise on the findings given by it. Mr. Desai sought to rely on the
observations in that judgment to the effect tbat a question of law might
be a simple one, having its impact at one point or it may be a complex
one, trenching over an area with approaches leading to different points H
996 SUPREME COURT REPORTS [1988) 3 S.C.R. 1
A therein and that such a question might involve more than one aspect
but that would not. by itself. be sufficient to prevent the party con-
cerned from raising it under Section 66(1) of the said Act. In our view,
these observations are of no relevance in the case before us, as the
question sought to be raised by Mr. Desai was neither raised before
the Tribunal nor considered by it nor does it arise on the judgment of
B the Tribunal. Merely because a question of law might arise on the facts
found by the Tribunal this would not render it a question arising out of
the decision of the Tribunal. Moreover, it is interesting to note that in
the present case, there is no finding of fact that the Inam was originally
given without consideration, although, we agree that it must almost
certainly have been so. However, what the assessee sold was not the
agricultural land which was given to the assessee's ancestor under the
c Inam but land which was developed as housing sites on which develop-
ment the·assessee had spent considerable amounts of money. In our
view, therefore, it is not open to Mr. Desai to raise this question at all.

The next question which we have to consider is whether the
D provisions of Section 12-B of the said Act can be brought into play,
although, what was transferred was only lease hold interests in the
lands in question. In this connection, it is significant that the leases are
for a long period of 99 years and in all the transactions of lease pre-
mium has been charged by the assessee for the grant of the lease
concerned. In Traders and Miners Ltd. v. Commissioner of Income
E Tax, Bihar and Orissa, [1955) 27 ITR p. 341 a case decided by a
Division Bench of the Patna High Court, the assessee let on lease for
99 years a portion of a Zamindari acquired by it. The lease related to
the surface right together with nine mica mines located in that area.
The consideration for the lease was the payment of a 'salami' and a ,
reserve rent per year. The Income-tax Officer determined the cost to y
F the assessee of the mineral rights and after deducting this amount from
the salami,he assessed the balance to tax as capital gains under Section
12-B of the said Act. It was held by the Patna High Court that the gains
arising from the said transaction were rightly taxed. This decision has
been cited without comment by Kanga and Palkhivala in their com-
mentary on the Law of Income-tax (7th Edition) at page 550 and no
G contrary case has been cited in the said text book or has been brought
to our attention. It is true that the decision of the Patna High Court
relates to a case of mining lease, but to our mind, the principle laid
down in that case 'can well be applied to the case before us. In the first
place, the lease is for a long period, namely, 99 years, hence it would
appear held that under the leases in question the assessee has parted
H with an asset of an enduring nature, namely, the rights to possession
R.K. PALSHIKAR v. C.l.T. !KANIA, J.] 997

and enjoyment to the properties leased for a period of 99 years subject A
to certain conditions on which the respective leases could be termina-
ted. A premium has been charged by the assessee in all the leases. In
these circumstances, we fail to see how it could be said that the provi-
sions of Section 12-B of the said Act cannot be brought into play. The
grant of the leases in question, in our view, amounts to a transfer of
B
capital assets as contemplated under Section 12-B of the said Act.

In the result, we find that there is no substance in the appeal and
dismiss the same with costs.

Appeal dismissed.
' S.L.