The landlord paid my company to give up its tenancy. Is that taxable, and if it cannot be computed as a capital gain can the officer tax it as a casual receipt instead?
No — he cannot move it to another head. A tenancy right is a capital asset and its surrender is a transfer, so s.45 is the only head that can reach the consideration. For assessment year 1987-88 the Court held the receipt escaped tax altogether because the cost of acquiring the tenancy could not be ascertained and s.48 therefore could not be worked, and it refused to let the department bring the same receipt back under s.10(3) read with s.56. Section 55(2) was amended with effect from 1 April 1995 to supply a cost of acquisition for a tenancy right, so the computation gap this case turned on is closed for later years — the head-of-income holding is what survives.
Decided by the Supreme Court (Supreme Court of India, Ruma Pal, Arijit Pasayat and C.K. Thakker JJ) on 2005-01-31, reported as (2005) 273 ITR 1 / 142 Taxman 713 / 193 CTR 578 / 185 Taxation 471 (SC); 2005 ALL SCR 52; Civil Appeal No. 2335 of 2003. It bears on section 45, section 48, section 2(14), section 2(47), section 55(2), section 10(3), section 56, section 14 of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
This is the authority for the first two propositions any tenancy-rights computation rests on: that the receipt is a capital gain and not income from other sources, and that where a receipt falls within one of the heads in s.14 the residuary head is shut. Practitioners still meet the department's fallback argument — 'if it cannot be computed as a capital gain, tax it under s.56' — and this is the answer to it. It also explains why s.55(2)(a) says what it says: Parliament wrote the nil cost in precisely because the courts had held that an unascertainable cost took the receipt outside the charge.
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The assessee company held premises under a lease entered into in 1959 for a term of fifty years, which would otherwise have run to 2009, at an annual rent payable to the lessor. In March 1986, falling in the previous year relevant to assessment year 1987-88, it prematurely surrendered its tenancy rights to the lessor, who paid it Rs 35 lakhs. The assessee credited the amount to reserves. The Assessing Officer taxed it as income from other sources under s.10(3) read with s.56. The Commissioner (Appeals) held it chargeable under s.45 instead and allowed Rs 7 lakhs as cost of acquisition by reference to the market value of the property as on 1 April 1974, leaving a gain of Rs 28 lakhs. The Tribunal, relying on B.C. Srinivasa Setty and on the amendment to s.55(2) made with effect from 1 April 1995, held that no cost of acquisition of the tenancy could be determined, so the computation provisions failed and nothing was chargeable. The High Court dismissed the department's appeal.
The department's appeal was dismissed. A tenancy right is a capital asset and its surrender is a transfer, so the Rs 35 lakhs was a capital receipt falling under s.45. Because the cost of acquisition could not be ascertained on these facts, s.48 could not be worked and no capital gain was chargeable; and the receipt could not then be taxed under s.10(3) read with s.56 as a casual and non-recurring receipt.
The Court treated s.45 and s.48 as an integrated code: the charge cannot operate where the computation provisions cannot. It applied B.C. Srinivasa Setty, that what is contemplated is an asset in the acquisition of which it is possible to envisage a cost, and accepted that although a tenancy right is not like goodwill in principle, the department had itself accepted before the High Court that the cost of this tenancy could not be ascertained. It then noted that Parliament had amended s.55(2) with effect from 1 April 1995 to deem the cost of a tenancy right to be nil, which was itself recognition that the earlier position kept such receipts outside the charge, but the amendment post-dated the assessment year. On the alternative head, the Court held that the heads of income in s.14 are mutually exclusive and that s.56 is residuary: income chargeable under a specific head has to be computed in the manner provided for that head and cannot be diverted to the residuary head merely because the specific head yields nothing.
There is no dispute that a tenancy right is a capital asset the surrender of which would attract Section 45 so that the value received would be a capital receipt and assessable if at all only under Item E of Section 14.
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Handle my notice → Ask a CA on WhatsAppNo — he cannot move it to another head. A tenancy right is a capital asset and its surrender is a transfer, so s.45 is the only head that can reach the consideration. For assessment year 1987-88 the Court held the receipt escaped tax altogether because the cost of acquiring the tenancy could not be ascertained and s.48 therefore could not be worked, and it refused to let the department bring the same receipt back under s.10(3) read with s.56. Section 55(2) was amended with effect from 1 April 1995 to supply a cost of acquisition for a tenancy right, so the computation gap this case turned on is closed for later years — the head-of-income holding is what survives. This was decided by the Supreme Court (Supreme Court of India, Ruma Pal, Arijit Pasayat and C.K. Thakker JJ) and bears on section 45, section 48, section 2(14), section 2(47), section 55(2), section 10(3), section 56, section 14 of the Income Tax Act 1961. It is reported as (2005) 273 ITR 1 / 142 Taxman 713 / 193 CTR 578 / 185 Taxation 471 (SC); 2005 ALL SCR 52; Civil Appeal No. 2335 of 2003. This is the authority for the first two propositions any tenancy-rights computation rests on: that the receipt is a capital gain and not income from other sources, and that where a receipt falls within one of the heads in s.14 the residuary head is shut. Practitioners still meet the department's fallback argument — 'if it cannot be computed as a capital gain, tax it under s.56' — and this is the answer to it. It also explains why s.55(2)(a) says what it says: Parliament wrote the nil cost in precisely because the courts had held that an unascertainable cost took the receipt outside the charge. If it applies to you, the first step is this: Where the officer has assessed a tenancy surrender under s.56 or as a casual receipt, take the head-of-income point first — the heads in s.14 are mutually exclusive and s.45 occupies the field.
The assessee company held premises under a lease entered into in 1959 for a term of fifty years, which would otherwise have run to 2009, at an annual rent payable to the lessor. In March 1986, falling in the previous year relevant to assessment year 1987-88, it prematurely surrendered its tenancy rights to the lessor, who paid it Rs 35 lakhs. The assessee credited the amount to reserves. The Assessing Officer taxed it as income from other sources under s.10(3) read with s.56. The Commissioner (Appeals) held it chargeable under s.45 instead and allowed Rs 7 lakhs as cost of acquisition by reference to the market value of the property as on 1 April 1974, leaving a gain of Rs 28 lakhs. The Tribunal, relying on B.C. Srinivasa Setty and on the amendment to s.55(2) made with effect from 1 April 1995, held that no cost of acquisition of the tenancy could be determined, so the computation provisions failed and nothing was chargeable. The High Court dismissed the department's appeal. The matter was decided on 2005-01-31 by the Supreme Court (Supreme Court of India, Ruma Pal, Arijit Pasayat and C.K. Thakker JJ). On those facts the Supreme Court held as follows. The department's appeal was dismissed. A tenancy right is a capital asset and its surrender is a transfer, so the Rs 35 lakhs was a capital receipt falling under s.45. Because the cost of acquisition could not be ascertained on these facts, s.48 could not be worked and no capital gain was chargeable; and the receipt could not then be taxed under s.10(3) read with s.56 as a casual and non-recurring receipt.
The Court treated s.45 and s.48 as an integrated code: the charge cannot operate where the computation provisions cannot. It applied B.C. Srinivasa Setty, that what is contemplated is an asset in the acquisition of which it is possible to envisage a cost, and accepted that although a tenancy right is not like goodwill in principle, the department had itself accepted before the High Court that the cost of this tenancy could not be ascertained. It then noted that Parliament had amended s.55(2) with effect from 1 April 1995 to deem the cost of a tenancy right to be nil, which was itself recognition that the earlier position kept such receipts outside the charge, but the amendment post-dated the assessment year. On the alternative head, the Court held that the heads of income in s.14 are mutually exclusive and that s.56 is residuary: income chargeable under a specific head has to be computed in the manner provided for that head and cannot be diverted to the residuary head merely because the specific head yields nothing. In the words reproduced by the source cited on this page: "There is no dispute that a tenancy right is a capital asset the surrender of which would attract Section 45 so that the value received would be a capital receipt and assessable if at all only under Item E of Section 14."
It was decided by the Supreme Court on 2005-01-31 and is reported as (2005) 273 ITR 1 / 142 Taxman 713 / 193 CTR 578 / 185 Taxation 471 (SC); 2005 ALL SCR 52; Civil Appeal No. 2335 of 2003. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 45, section 48, section 2(14), section 2(47), section 55(2), section 10(3), section 56, section 14, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The department's appeal was dismissed. A tenancy right is a capital asset and its surrender is a transfer, so the Rs 35 lakhs was a capital receipt falling under s.45. Because the cost of acquisition could not be ascertained on these facts, s.48 could not be worked and no capital gain was chargeable; and the receipt could not then be taxed under s.10(3) read with s.56 as a casual and non-recurring receipt. It arises in Capital Gains and How Tax Law Is Read matters, on section 45, section 48, section 2(14), section 2(47), section 55(2), section 10(3), section 56, section 14 of the Income Tax Act 1961, and was decided by Supreme Court of India, Ruma Pal, Arijit Pasayat and C.K. Thakker JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the assessment year before relying on the no-tax result: for a transfer in a year from AY 1995-96 onwards s.55(2)(a) supplies a cost and the computation works, so the gain is chargeable. Ask who paid for the tenancy, not only whether the client did. Section 55(2)(a) gives the assessee's purchase price where he bought it, the previous owner's purchase price where it came to him under one of the s.49(1) modes and that owner had bought it, and nil only in any other case. Put whichever price applies, and its proof, on the file. Do not read this as authority that a tenancy surrender is never taxable; the department's own concession on unascertainable cost drove the result on the facts.
Superseded by amendment. No court has overruled, reversed or doubted any part of this decision. What moved was the statute. Section 55(2)(a) was amended with effect from 1 April 1995, that is from assessment year 1995-96, to supply a cost of acquisition for a tenancy right, and the Court itself records the amendment. The clause as it now stands has three limbs: the purchase price where the assessee bought the tenancy; the previous owner's purchase price where it came to him under one of the modes in sub-clauses (i) to (iv) of s.49(1) and that owner had bought it; and nil in any other case. So the computation gap on which this assessee won no longer exists — a surrender of tenancy in a current year is chargeable under s.45 on a cost fixed by whichever of those three limbs the facts fall in. That is why the status here is "superseded by amendment" and not "partly overruled": the reasoning stands untouched, the provision it was applied to changed. What survives without qualification is the holding that a tenancy right is a capital asset, that its surrender is a transfer, and that a receipt falling under a specific head in s.14 cannot be taxed under the residuary head in s.56. The decision continues to be cited for that proposition by the Tribunal. That finding was checked against a published source, which is linked on this page, on 2026-08-22. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The facts, the procedural history and the reasoning here are taken from the full judgment text on nearlaw.com, read through a fetch tool that returns a summary with a cap on quotation length; the key quote was verified as an exact string by a separate exact-phrase web search, which returned it on nearlaw.com and taxmanagementindia.com. The reporter citation was taken from an ITAT order on itat.gov.in that cites the decision as [2005] 273 ITR 1 (SC), and from the itatonline digest heading, which gives the parallel citations. The Court did not lay down that the cost of a tenancy right can never be ascertained: it recorded that the department had itself taken that position before the High Court on these facts, and it distinguished goodwill, where no cost can be conceived at all, from a tenancy right, where a cost can be. Nothing in this entry should be read as deciding what happens where the tenancy was purchased. The entry does not say how the cost of a tenancy right is to be computed where it was purchased, or how the landlord's side of the same transaction is taxed. It does not deal with a tenant who receives a flat rather than money, and it says nothing about the period of holding or indexation, both of which have moved since 2005. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The department's appeal was dismissed. A tenancy right is a capital asset and its surrender is a transfer, so the Rs 35 lakhs was a capital receipt falling under s.45. Because the cost of acquisition could not be ascertained on these facts, s.48 could not be worked and no capital gain was chargeable; and the receipt could not then be taxed under s.10(3) read with s.56 as a casual and non-recurring receipt.
TaxSphere, “CIT v D.P. Sandu Bros. Chembur (P) Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-dp-sandu-bros-chembur-tenancy-right/ (validity last checked 2026-08-22)
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