Case ID: 5960

Judgment:
ivil Appeal No. 2717 of 1985. From the Judgment and Order dated 2.12. 1980 of the Madras High Court in T.C. No. 573 of 1976. Harish N. Salve	 A.S. Chandrashekaran	 K.J. John and Sanjay Grover for the Appellants. Dr. V. Gauri Shankar	 Ms. A. Subhashini and M.K. 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 14.55 acres at a price of Rs.27	260. By an instrument of lease cum licence dated 10th September	 1970 they granted a mining lease in favour of M/s. 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 Rs.5 lakhs in addition to the payment of royalty of Rs. 12 per hundred cubic ft. of clay extracted subject to a minimum of Rs.60	000 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 Rs.8 lakhs. Since the lease hold interest was transferred for a sum of Rs.5 lakhs	 he valued the lease hold interest at 5/8th 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. 17	040	 being 5/8th of Rs.271	260. Thereafter deduct ing Rs. 17	040 from the sale consideration of Rs.5 lakhs	 he treated the sum of Rs.4	82	960 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	 Rs.27	260. 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 2(47) 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 45(1) of the said Act which provides for the levy of tax on capital gains is as under: "2(14) "capital asset" means property of any kind held by an assessee	 whether or not connected with his business or profession	 but does not include . 45(1) 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 C.I.T.v. B.C. Srinivas Shetty; 	 As regards the first contention	 section 2(14) 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 C.I.T.	 	 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 R.K. Palshikar (HUF) vs Commissioner of Income. Tax	 M.P. 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 Rs.27	260 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 5/8th 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. N.V.K. Appeal dis missed. 
2969	Appeal No. 15 of 1968. Appeal from the judgment and decree dated August 11, 1964 of the Allababad High Court in first Appeal No. 11 of 1957. C. B. Agrawala, O. P. Rana and R. Bana, for the appellants. Grover, J. This is an appeal by certificate from the judgment of the Allahabad High Court dacreeing the suit filed by the respondent company for recovery of a sum of Rs. 21,000/ on account of rent or damages in respect of storage charges for 4,000 Maunds of potatoes for which space had been reserved in the cold storage by the company The plaintiff respondent brought a suit against the State of Uttar Pradesh and impleaded three other defendants who were, at the material time. in the service of the State. Defendant No. 3 was a Horticulturist in the Department of Agriculture. He negotiated with the plaintiff for storing Government potatoes in a cold storage which belonged to the plaintiff. It was agreed that the Government potatoes would be sent for storage and the plaintiff would be entitled to charge at a certain rate per maund. It was understood that 4,000 maunds of potatoes would be sent for storage. How ever, no potatoes were sent although the plaintiff had reserved the requisite space in the storage which remained unoccupied during the season. It appears that defendant No. 3 A. P. Gupta was acting on behalf of Srivastava defendant No. 2 who was Deputy Director, Horticulture. Both these defendants were acting upon instructions from Sri Ram Krishna defendant No. 4 who was Assistant Development Commissioner, Planning Lucknow. The suit was therefore filed against the State and the other three defendants to recover the storage charges amounting to Rs. 21,000/ . 3 Although, all the defendants raised a common plea that there was no contract between the parties for the storage of potatoes and that the entire matter remained at the stage of negotiations the real plea taken on behalf ' of the State was that no contract had been entered into in accordance with article 299 (1) of the Constitution. The trial court upheld the objection of the State and dismissed the suit against it but it held the other defendants jointly liable for the storage charges. The High Court on appeal by the defendants set aside the decree against defendants Nos. 2 and 4 but maintained it against defendant No. 3. No appeal, however, was filed by the plaintiff against the State. As the judgment of the High Court proceeded mainly on the provisions of sub section (3) of section 230 of the Contract Act the whole of that section may be set out : section 230. In the absence of any contract to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal	 now is he personally bound by them. Such a contract shall be presumed to exist in the following cases: (1) Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad; (2) Where the agent does not disclose the name	 of his principal; (3) where the principal	though disclosed	cannot be	 sued. According to the High Court the entire transaction had been entered into by the defendant on behalf of the	 Government. As the State Government was not liable by virtue of article 299 of the Constitution section 230 (3) would be applicable and defendant No. 3	 who was apparently acting as an agent of the State Government	 would become personally liable under the contract. Certain observations in Chatturbhuj Vithaldas Jasani vs Moreshwar Parshrain & Others (1) appear to lend support to this view. In that case also no formal contract had been. (1) ; 4 entered into as required by article 299 (1) of the Cons titution. The court observed that the Chairman of the Board of Administration had acted on behalf of the Union Government and his authority to contract in that capacity had not been questioned. Both sides 	acted in the belief and on the assumption that the goods were intended for Government purposes. The only flaw was that the contracts were not in proper form and because of this technical difficulty the principal could not have been sued. But that was just the kind of case that section 230 (3) of the Indian Contract Act was designed to meet. The Government might not be bound by the contract but it was very difficult to say that such contracts were void and of no effect. There would be nothing to prevent ratification especially if that was for the benefit of the Government However	 in a subsequent decision in State of West Bengal vs M/s B. K. Mondal and sons	 (1) Gajendragadkar J.	 delivering the majority judgment of Bench said at page 885 with reference as he then was	 the Constitution to the above observation: "The contract which is void may not be capable of ratification	 but	 since according to the Court the contract in question could have been ratified it was not void in that technical sense. That is all that was intended by the observation in question. We are not prepared to read the said observation or the final decision in the case of Chatturbhuj as supporting the proposition that notwithstand ing the failure of the parties to comply with article 299 (1) the contract would not be invalid. Indeed	 Bose	 J.	 has expressly stated that such a contract cannot be enforced against the Government and is not binding on it. " The effect of the reference to section 230 (3) of the Contract Act in Chatturbhui"s case(2)was not directly considered 'but in a large number of Subsequent decisions this Court has taken the view that the provisions of article 299 (1) (corresponding to section 175 (3) of the Government of India ' Act (1935) are mandatory and contain a prohibition against a contract being entered into (1) [1962] Supp. 1 S.C.R. 876. (2) ; 	 5 except in the manner prescribed by the aforesaid provisions. We need only refer to the recent judgment in Mulamchand vs State of Madhya Pradesh (1). After referring to the earlier decisions Ramaswami	 J. observed at page 221 : "The principle is that the provisions of section 175 (3) of the Government of India Act	 1935 or the corresponding provisions of article 299 (1) of the Constitution of India are mandatory in character and the contravention of these provisions nullifies the contracts and makes them void. There is no question of estoppel or ratification in such a case. " It is clear that the observations in Chatturbhuj 's case(2) have been regarded either as not laying down the law correctly or as being confined to facts of that case. The consensus of opinion is that a contract entered into without complying with the conditions laid down in article 299 (1) is void. If there is no contract in the eye of the law it is difficult to see how section 230 (3) of the Contract Act would become applicable. Although the High Court did not rely on section 235 of the Contract Act the trial court bad held that the defendants had no authority to enter into a contract on behalf of the State Government but still they purported to do so. There was an implied warranty of authority which had to be presumed and the plaintiff was entitled to receive compensation for breach of that warranty under section 235 of the Contract Act. Section 235 provides that a person untruly representing himself to be the authorised agent of another	 and thereby inducing a third person to deal with him as such agent	 is liable	 if his alleged employer does not ratify his acts	 to make compensation	 to the other in respect of any loss or damage which he has incurred by so dealing. The High Court did not base its decision on the above section. But it seems that section 235 also can become applicable only if there is a valid contract in existence. This appears to follow from the words "if his alleged employer does not ratify his acts." ' The contract should thus be such that it is (1) ; (2) ; 6 capable of ratification. ;In the present case where the con tract was entered into 'Without complying with the re quirements of article 299 (1) of the Constitution the question of ratification could not arise because on the view which has already been followed such a contract is void and is not capable of ratification. However	 we do not wish to express any final opinion on the applicability of section 235 of the Contract Act to cases where the contract suffers from the infirmity that the requirements of article 299 (1) of the Constitution have not been complied with. The reason is that before the High Court no contention appears to have been advanced on behalf of the plaintiff based on section 235 of the Contract Act nor has the plaintiff 's counsel chosen to satisfy us that even if section 230 (3) was not applicable the decree should be sustained on the ground that relief could be granted by virtue of section 235 of the Contract Act. The appeal thus succeeds and the judgment and decree of the courts below are hereby set aside and the suit of the plaintiff is dismissed. In the circumstances of the case the parties are left to bear their own costs throughout.

Summary:
The appellant assessee	 a body of individuals	 purchased two 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 lakhs 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 conclusion that the transfer was assessable to capital gains tax. For the purpose of comput ing 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. Being aggrieved by the aforesaid order of the Income tax Officer the assessee preferred an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the assessment but allowed deduction on the entire price of the land on the ground that the cost for the pur pose of ascertaining the capital gains would be 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 Appellate Commissioner and dismissed the appeal. The High Court on a reference held that the right conferred on 597 the lessee under the lease deed was also a capital asset in the hands of the assessee lessor	 and that there was a transfer of capital asset for a consideration of Rs.5 lakhs. The High Court accordingly answered the reference against the assessee	 .but granted a certificate under section 261 of the Act to appeal to this Court. On behalf of the assessee appellant it was contended: (1) that 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.I. T. vs B.C. Srinivas Sherry	 ; SC it was submitted 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 section 45 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	 HELD: 1(a) Section 2(14) of the Income Tax Act defines "capital asset" as "property of any kind held by an asses see. " What is parted with in the instant case	 under the terms of the deed is the right to exploit the land by ex tracting clay which right 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. [601C D] 1(b). If a transfer of a capital asset in section 45 of the Act includes grant of a mining lease for any period	 then obviously	 the "cost of acquisition" of the land would include the "cost of acquisition" of 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 nexus 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 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 determination of the cost of the right to excavate 598 clay in the land in terms of money may be difficult but is nonetheless of a money value and the best valuation possible must be made. In the instant came	 the Income tax Officer worked out the cost of the lease held interest by adopting the 5/8th ratio	 though the Appellate Assistant Commissioner gave the benefit to the assessee of the full price of the land paid by him. [602B D] 1(d) Once the cost of lease hold right is determined than there is no difficulty in making apportionment. [602E] Gold Coast Selection Trust. Ltd. vs Inspector of Taxes	 (supp); Traders and Mining Ltd. vs C.I.T.	 ; R.K. Palshikar (HUF) vs Commissioner of Income Tax	 M.P. Nagpur	 ; 	 referred to. 2(a) The value of lease hold rights in the cost of acquisition of land being determinable the computation provision under the Act are applicable	 and section 45 would he attracted. [602E F] 2(b) The date of acquisition of the right to grant lease has to be the same as the date of acquiring the free hold rights. [603B] C.I.T. vs B.C. Srinivas Shetty	 ; distinguished.