A.R. KRISHNAMURTHY & ANR versus C.L.T. MADRAS

Citation: [1989] 1 S.C.R. 596 · Decided: 10-02-1989 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Dismissed

Judgment (excerpt)

A 
ii-
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 
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. 
A 
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. 
" 
Dismissing the appeal, the Court, , 
D 
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 

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