ivil Appeal No 2717 of 1985
From the Judgment and Order dated 212
1980 of the Madras High Court in TC No 573 of 1976
Harish N Salve AS Chandrashekaran KJ John and Sanjay Grover for the Appellants
Dr V Gauri Shankar Ms A Subhashini and MK Sha shidharan for the Respondent
The Judgment of the Court was delivered by KULDIP SINGH J
The question in this appeal is 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 Income tax Act 1961
599 The assessee a body of individuals purchased two pieces of land in the year 1966 measuring 1455 acres at a price of Rs27260
By an instrument of lease cum licence dated 10th September 1970 they granted a mining lease in favour of Ms Sri Krishna Tiles and Potteries Madras Private Limited hereinafter called the Company  an allied concern of the assessee
The lease was for a period of 10 years and the lessee had to pay a premium or salami of Rs5 lakhs in addition to the payment of royalty of Rs 12 per hundred cubic ft of clay extracted subject to a minimum of Rs60000 per year
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 conclusion that the transfer was assessable to capital gains tax
For the purpose of comput ing the extent of tax the Income tax Officer assessed the market value of the entire land at Rs8 lakhs
Since the lease hold interest was transferred for a sum of Rs5 lakhs he valued the lease hold interest at 58th 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 17040 being 58th of Rs271260
Thereafter deduct ing Rs 17040 from the sale consideration of Rs5 lakhs he treated the sum of Rs482960 as long term capital gains
The assessee preferred an appeal to the Appellate As sistant Commissioner
The Appellate Commissioner held that the value of the right to excavate the land in terms of money is included in the purchase 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 acqui sition 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 gains would be the total price of the land paid by the assessee that is Rs27260
On all other points he upheld the order of the Income tax Officer
The assessee preferred an appeal to the Tribunal
The Tribunal observed that the entire ownership of the property means the ownership of a bundle of rights and a limited interest which can be severed and disposed off for a speci fied period in the form of lease or mortgage 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
600 Arising from the said decision of the Tribunal
the following two
questions were referred to the High Court for determination i Whether on the facts and in the cir cumstances of this case the instrument of lease dated September 10 1970 effected the transfer of a capital asset within the meaning of section 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 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 247 of the Act the High Court held that there was a transfer 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 fight to grant the lease to ex ploit 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
The relevant provisions of sub section 14 of section 2 which defines capital asset and section 451 of the said Act which provides for the levy of tax on capital gains is as under 214 capital asset means property of any kind held by an assessee whether or not connected with his business or profession but does not include 
451 Any profits or gains arising from the transfer of a capital asset effected in the previous year shall save as otherwise provid ed in section be chargeable to income tax 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 of an asset has raised the following two contentions 601 i That conceptually there is no cost of acquisition which is 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
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 sec tion 45 of the Act is not attracted
Reliance for this contention is placed on the judgment of this Court in CITv
BC Srinivas Shetty  As regards the first contention section 214 of the Act defines capital 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 fight directly flows from the ownership of the land
The said right evaluated in terms of money forms part of the cost of acquiring the land
In Traders and Mining Ltd vs CIT  a Division Bench 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 temporary transfer of title to the property in question and lease of mines for any period would fall within the ambit of section 12B 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 mere contractual right was created
We do not think that this argument is correct
A lease of land is transfer of inter est in the land and creates a right in rem and there is a transfer of title in favour of the lessee though the lessor has right of reversion after the period of the lease termi nates
 This decision has been referred to with approval by this Court in RK Palshikar HUF vs Commissioner of Income
Tax MP Nagpur If transfer of capital asset in section 45 of the Act includes grant of Mining Lease for any period then obviously the cost of acquisi tion of the land would include the cost of acquisition Of the Mining right under the lease
Undisputedly the grant of alease being a transfer of an asset there is no escape from the conclusion that 602 there is a live nexus between the cost of acquisition of the land and the rights granted under the lease
The amount of Rs27260 paid by the Assessee was not only the cost of acquiring the land but also of acquiring bundle of fights 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 the fight 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 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 clay 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 vs Inspector of Taxes supp observed valuation is not an exact science
Mathe matical certainty is not demanded nor indeed is it possi ble
 The Income tax Officer in this case worked out the cost of lease hold interest by adopting the 58th ratio though the Appellate Commissioner gave the benefit to the Assessee of the Full Price of the land paid by him
In Traders and Mines Ltd vs Commissioner of Income tax supra the Income tax Officer had also determined the cost of the lease hold fights on proportionate basis
Once the cost of the lease hold fights is determined then there is no difficulty in making apportionment
We therefore do not find any force in the first contention of Mr Salve and reject the same
In view of our finding on the first contention the second contention does not survive
The value of lease hold fights in the cost of acquisition of land being determinable the computation provisions under the Act are applicable and section 45 would be attracted
In Shetty s case the question was whether the transfer of the goodwill of a newly com menced business can give rise to a capital gain taxable under section 45 of the Act
This Court answered the ques tion in the negative
Referring to the charging section 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 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 acquisition of the asset is a material factor in applying the computation provisions pertaining to capital gains and in the case of self generated good will it is not possible to determine the same
The third reason for holding that the good will generated in a newly commenced business cannot be described as an asset  within the terms of section 45 of the 603 Act was that it is impossible to determine its cost of acquisition
None 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 attract ed to the question involved in the present case
We there fore do not find any force in the second contention also
Accordingly the appeal is dismissed with costs
NVK Appeal dis missed


Summary:
In respect of assessment year 1965 66 the Income tax Officer issued notices to the assessee under section 148 read with sections 1421 and 1432 of the Act on the ground that income has escaped assessment in respect of three cash credit entries totaling Rs 1 lakh
The assessee challenged the notices by way of writ petitions before the High Court
The High Court gave a finding that the notice was within jurisdiction only in respect of an entry of Rs30000 and in respect of the other two entries viz Rs40000 and Rs30000 it directed the Income tax Officer not to reopen the assessment
These two appeals are against the High Court s judgment
The appeal by ReVenue by certificate is in respect of the two entries of Rs40000 and Rs30000 and the other appeal of the assessee by special leave is in respect of the entry of Rs30000
On behalf of the Revenue it was contended that once the High Court sustained the notice in respect of a sum of Rs30000 that gave full jurisdiction to the Income tax Officer to reopen the assessment and that the High Court should not have examined time tenability of the assessee s contention in regard to the two transactions of Rs30000 and Rs40000 and that aspect should have been left to be considered by the Income tax Officer while making the reas sessment
The contention of the assessee was that the notice was issued more than 7 years after the assessment was completed and was also beyond the period of limitation viz four years that the escapement of the income from assessment had not resulted from failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment
605 Allowing the appeal of the assessee and dismissing the appeal by the Revenue
HELD 1
The notice issued under section 148 of the Act is quashed
It was not for the High Court to examine the valid ity of the notice under section 148 in regard to the two items if the High Court came to the conclusion that the notice was valid at least in respect of the remaining item
Whether the Income tax Officer while making the reassessment would take into account the other two items should have been left to be considered by the Income tax Officer in the fresh assess ment proceeding
610C D CIT
Punjab HP  Bilaspur Simla vs Jagan Nath Ma heshwary 32 AIR 418 and Pulavarthi Viswanadham vs CIT
AP approved
V Jagan Mohan Rao  Ors
vs CIT  Excess Profits Tax AP and Parimisetti Seetharamamma vs CIT referred to
21 The three amounts mentioned in the notice under section 148 of the Act were found in the assessee s account by the Income tax Officer when he examined the same in course of the assessment proceedings
He had called upon the assessee to substantiate the genuineness of the transactions and the assessee had produced material to support the same
The Income tax Officer accepted the documents produced and treated all the three transactions to be genuine and on that footing completed the assessment
The primary facts were before the Incometax Officer at the time of the regular assessment and he called upon the assessee to explain to his satisfaction that the entries were genuine and on the basis of materials provided by the assessee satisfaction was reached
It was then open to the Income Tax Officer to make further probe before completing the assessment if he was of the view that the material provided by the assessee was not sufficient for him to be satisfied that the assessee s contention was correct
610E H 22 The expression material facts  used in section 147a referred only to primary facts and the duty of the assessee was confined to disclosure of primary facts and he had not to indicate what factual or legal inferences should properly be drawn from primary facts and this clause did apply to the facts of the present case as the alleged escapement of income for assessment had not resulted from failure on the part of the assessee to disclose fully and truly all materi al facts necessary for its assessment for that year
The notice in the instant case did not indicate 606 Whether it was a case covered by cl
a or cl
On the finding of this Court that cl
a was not invokable the power under cl
b could be called in aid under section 1491b of the Act within four years from the end of the relevant assessment year
Admittedly the notice has been issued beyond a period of four years and therefore the notice itself was beyond the time provided under the law
The High Court overlooked to consider this aspect of the matter
610H 611A C Calcutta Discount Company Ltd vs ITO  followed