Premium Received by landlord on transfer of tenancy

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Dhruv Gaglani (Querist)
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05 September 2009 I have inherited a property in Mumbai. The property consists of a building which has 10 flats. All the flats are rented out on monthly tenancy basis since 1971. One of the tenants wants to surrender his tenancy rights and also introduce another tenant to me for which the new tenant is willing to pay me a premium and also the old tenant is to receive some amount. Kindly let me know how the transaction would be treated for its taxability in my hands after considering the following:
1. The whole building was valued on 1/4/1981 at Rs. 2, 00,000/- and all the 10 flats were in occupation of the tenants and each of them were paying a monthly rent of Rs. 240/- on that date and continue to pay the same till today;
2. The new incoming tenant is going to pay me a premium of Rs. 60,000/- and a deposit of Rs. 900/- with a monthly rent of Rs. 300/-. The outgoing tenant has a deposit with me of Rs. 720/- which the outgoing tenant does not want to claim as refund.

Kindly Advice and give case laws in support of the advice.

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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06 September 2009 Salami/premium/nazrana

Substance of transaction should prevail over its form - When the interest of the lessor is parted with for a price the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties - CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC)/Maharaja Chintamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC).

Mere fact of lump sum payment is not conclusive - To treat salami as capital receipt, the fact that the payment was made in a single lump sum is not a conclusive test, for salami can be paid in a single payment or by instalments. The real test is whether the said amount paid in a lump sum or in instalments is the consideration paid by the tenant for being let into possession - CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC).

Intention of parties, as gathered from documents and surrounding circumstances is decisive- The nomenclature given to the document may not be decisive or conclusive. What is to be gathered is the intention of the parties. The probe must be full and attempt must be sincere to ascertain the true intention of the parties that is material and shall determine the nature of the transaction. - Nagasuri Raghaveswara Rao v. CIT [1967] 66 ITR 496 (AP).

Onus is on revenue to prove revenue nature - Prima facie premium or salami is not an income and it is for the income-tax authorities to show that facts existed which would make it a revenue payment - Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC)/Promode Ch. Roy Chowdhury v. CIT [1962] 46 ITR 1064 (Cal.)/Maharaja Chintamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC).

Broad principles which are relevant - The broad principles relating to the term â€˜salamiâ€™ are as follows :

(1) Prima facie salami or premium is not income; it is for the taxing authorities to prove that the facts exist which would make the same as income, if they seek to tax it.

(2) Where the premium represents payment of rent in advance, it is income. But if it represents the whole or part of the price of the land or the sale price of the leasehold interest, it is not income but capital.

(3) Salami to be income should be a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources.

(4) Salami or premium paid at the beginning of a mining lease for a long period ordinarily represents the purchase price of an out-and-out sale of the property and the sum received is capital and not income but rent or royalty paid periodically is income. The principle is the same, whether the premium is for a simple lease of land or for a lease of mineral rights. But royalty payable under the mining lease stands on a different footing from premium or salami.

(5) When a premium is received merely as an incident in the possession of property (even if leasehold) and there is no finding that the letting out of the property is the business of the assessee, the premium receipt is capital.

(6) Salami or premium paid as advance of rent once for all at the outset, the period of tenancy being uncertain and the chances of resettlement of the same land to some other tenant being remote, is capital.

(7) Premium (salami) is a single payment made for the acquisition by the lessee of the right to enjoy the benefits granted to him by the lease. Money paid to purchase the said general right is a payment on capital account.

(8) Salami is the amount of money which a landlord insists on receiving as a condition precedent for parting with the land in favour of the lessee and it was received by the landlord, not because of the use of the land but before the land was put into use by the assessee.

(9) The question of salami should not be decided on the length of the period of the lease, but on the nature of the right conveyed. The characteristics of the payment should be decided without reference to the nature of the lease including the wasting nature of the assets under the lease.

The question whether a particular receipt like salami can be regarded as revenue or capital cannot be decided in the abstract and each case has to be decided on its facts - Bharat Steel Tubes Ltd. v. CIT [2001] 252 ITR 622 (Delhi).