QUESTION: My client had been a tenant running a shop for the past several years. Since the owner wanted to sell the property, my client agreed to vacate the property on payment of an agreed amount of Rs.20 lakh.
He wants to claim that it is not liable to tax, since it is a capital receipt. I have advised him that it should be liable for capital gains tax at a flat rate of 20 per cent, subject to relief under Sec. 54EC or 54F. It appears that he had consulted an Income-tax Officer, who told him that since what is surrendered is commercial property, the compensation received will be business income under one of the deeming provisions under Sec. 2(24) and/or Sec. 28 and that, therefore, no relief under Sec. 54EC or 54F will be available. Advise.
ANSWER: None of the deeming provisions under Sec. 2(24) or Sec. 28 would have application, because what is received is not consideration for transfer of business run by the assessee, but only compensation for vacating the premises. Since right of occupation as a tenant is a capital asset, it makes no difference, whether it is a commercial asset or otherwise. Since no depreciation had been claimed, the question of application of Sec. 50 applicable for depreciable capital assets, cannot arise.
The fact that no cost was incurred could not also avoid liability, since Sec. 55(2)(a) specifically lists tenancy right as one of the items, which would give rise to tax on capital gains, even if the cost is nil. As advised by the reader, the entire amount would be liable to tax at 20 per cent with eligibility for the benefits of Sec. 54F or 54EC, if it is possible to reinvest the amount either in a residential house property or bonds, subject to the conditions thereunder.
