Sale of land which was leased for a very longer period- Capital gains or Income from other sources ?

Where assessee had transferred land owned by it to lessee for a long period but subsequently when the lessee company went into liquidation had transferred lease right, the same was taxable under the head “Capital gains” instead of “Income from other sources” because even though the land was transferred for a long period, the actual ownership of the land remained with assessee.

Assessee had leased out a land owned by it to a company for a period of 98 years. The lessee company had created various charges by mortgaging the said land with banks and financial institutions. However, the lessee company became sick company and went into liquidation. Consequently, liquidator appointed by High Court transferred the said land to another company. Assessee agreed to release, relinquish and renounce ownership rights that it had in the said land against consideration and computed long-term capital gains on such consideration, whereas AO alleged that the same was taxable as income from other sources and disallowed the indexed cost of acquisition claimed by assessee.

Held: Transfer of land for such a long period to lessee could not be construed as actual transfer of the said land because by giving of lease, assessee did not lose its ownership right over the land. Since the land which was leased out to lessee did not cease to belong to the assessee, therefore, the ownership remained with assessee and accordingly the amount received for transfer of lease right held by assessee (lessee) was taxable under the head “Capital gains”.

Decision: In assessee’s favour.

Followed: CIT v. M/s. Textool Co. Ltd. Appeal in (447 of 2003, dt. 9-9-2009), Shree Sajjan Mills Ltd. v. CIT, MP & Anr. (1985) 156 ITR 585 (SC), Calcutta Discount Company Ltd. v. ITO (1961) 41 ITR 191 (SC), Simka Hotels & Resorts v. DCIT & Anr. in (W.P.(C) 4350/2012, C.M. APPL. 9016/2012, dt. 17-1-2013) and J.K. Kashyap v. A. CIT (2008) 302 ITR 255 (Delhi).

IN THE ITAT, AHMEDABAD BENCH

N.K. BILLAIYA, A.M. & MAHAVIR PRASAD, J.M.

Asstt. CIT v. Punjab Steel Rolling Mills (Baroda) (P) Ltd. & Vice-Versa

ITA. No. 1876/AHD/2014

C.O. No. 251/AHD/14

12 February, 2018

Appellant by: Rajesh Meena, Sr. Departmental Representative

Respondent by: S.N. Soparkar & Parin Shah

N.K. Billaiya, A.M.

This appeal by the Revenue and cross objection of the assessee are directed against the order of the learned Commissioner (Appeals)-III, Baroda dated 31-3-2014 pertaining to assessment year 2010-11.

2. The substantive grievance of the revenue read as under :–

1. On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) erred in deleting the addition of Rs. 3.11 crores, treated by the assessing officer as income from other sources and directing to consider the same as Mong term capital gain’ and to allow the cost of acquisition without appreciating the fact that the assessee company had transferred the ownership rights of the property in 1972 to M/s. Star Steel Limited itself by handing over the possession of the property under lease of 98 years and the receipt of Rs. 3.11 crores was a lump sum receipt received by the assessee for no litigation and to refrain from causing delay and creating legal complications.

2. On the facts and in the circumstances of the case and in law the learned Commissioner (Appeals) erred in deleting the addition of Rs. 59,48,904 without appreciating the fact that the scheme for gratuity approval was approved with effect from 7-1-2010 by the Commissioner (i.e. from the date of application made by the assessee), whereas the payment made by the assessee was on 31-12-2009 i.e. prior to the approval of the scheme.

3. Briefly stated the facts of the case are that the assessee is in the business of manufacturing and sale of steel bars. The return for the year was filed on 28-9-2010 declaring total income at Rs. 6.12 crores. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee.

4. The assessing officer found that the assessee has shown long term capital gains as under :–

5. The assessee was asked to furnish the details and on perusal of the same, the assessing officer noticed that the assessee was the owner of a plot of land which was given on a long term lease of 98 years to M/s. Star Steel Limited (SSL). The assessing officer further noticed that SSL who had the possession of the land, created a charge on the said plot of land as security for availing various credit facilities from banks, financial institutions, etc. SSL suffered heavy losses in its business and was referred to the BIFR. It was subsequently recommended for the winding up of SSL. The Official Liquidator was appointed. In accordance with the directions/order of the Hon’ble High Court of Gujarat, the Official Liquidator went through the necessary procedures to effect the sale of said plot of land for which leasehold rights were held by SSL. In respect to the public notices issued by the Official Liquidator, M/s. Silver Heights Builders (P) Ltd. offered to purchase the said plot of land which was accepted by the Hon’ble High Court of Gujarat and accordingly the said plot of land was conveyed vide conveyance deed dated 9-1-2008 in favour of the purchaser.

6. The assessee company agreed to release, relinquish and renounce ownership rights that it may have in the said plot of land for consideration of Rs. 3.11 crores. The assessee computed long term capital gains on this consideration of Rs. 3.11 crores and the computation is exhibited elsewhere.

7. On the afore-stated facts, the assessing officer was of the firm belief that the assessee had no ownership rights on the said plot of land since the transfer of the said plot of land had already taken place in the year 1972 when the said plot of land was leased for a period of 98 years to SSL. The assessing officer further observed that even if it is treated as long term capital gain then also the assessee is not entitled for any deduction of cost against the said property since the assessee has already transferred the property in the year 1972. The assessing officer concluded by taxing the entire consideration of Rs. 3.11 crores under the head “income from other sources”.

8. Assessee agitated the matter before the learned Commissioner (Appeals) and vehemently stated that the assessee had only leased the said plot of land to SSL and the ownership always remained with the assessee.

9. After considering the facts and the submissions, the learned Commissioner (Appeals) was convinced that the receipt of Rs. 3.11 croress cannot be taxed as income from other sources.

10. Aggrieved by this, the revenue is before us. The learned Departmental Representative strongly supported the findings of the assessing officer Per contra, the learned counsel for the assessee reiterated what has been stated before the lower authorities.

11. We have given a thoughtful consideration to the orders of the authorities below and with the assistance of the learned counsel we have gone through the related documentary evidences brought on record in the form of a paper book in the light of rule 18(6) of the ITAT Rules. There is not dispute that by the lease deed dated 11-7-1972 lease of the land in question was granted to SSL. The contention of the assessing officer that transfer of land for such a long period is nothing but actual transfer of the said land cannot be accepted because by giving of lease, the said plot of land, the assessee has not lost its ownership right over the said plot of land. In our considered opinion, the land which had been leased out to SSL did not seize to belong to the assessee. The ownership remained with the assessee.

12. When the Official Liquidator appointed by the Hon’ble High Court of Gujarat sold the land held by SSL on lease, the assessee filed application before the Hon’ble High Court for recovery of possession of land in question. The Hon’ble High Court of Gujarat held that lease right are intangible asset and therefore what Official Liquidator has transferred was the lease right held by the lessee company. Moreover, the Official Liquidator has sold the land on “as is where is and whatever there is basis”. The law is very clear on this issue–”no one can transfer a better title then what it has”. The purchaser would have got a lease held right over the said plot of land and to get the ownership right Rs. 3.11 crores was paid to the assessee and vide agreement dated 4-9-2009 deed of confirmation and release was executed for release of ownership rights of the land under reference.

13. On identical set of facts, the Hon’ble High Court of Delhi in the case of Simka Hotels & Resorts (2013) 213 Taxman 482 (Delhi) had the occasion to consider the following facts and held as under :–

Facts

–The assessee entered into a memorandum of understanding (MoU) with ‘D’ Ltd. and ‘E’ Ltd. for the purchase of 500 sq. mtrs of a land or a residential flat not exceeding 300 sq. ml for a sale consideration of Rs. 4,28,00,000.

–At the time of entering into the MoU a sum of Rs. 68,00,000 was paid by the assessee and the balance amount was to be paid in two instalments; the first instalment when the layout plan was sanctioned by the competent authority and the second instalment at the time of possession of the plot.

–On 22-5-1998 the assessee entered into a supplementary MoU by which plot No. A-1 measuring 500 sq. mtrs was allotted to the assessee. On 27-8-1998 appropriate authority issued a no objection certificate in respect of the said plot, for an apparent consideration of Rs. 4,28,00,000.

–On 28-12-2005 the assessee relinquished its ownership rights in the said plot for a total sale consideration of Rs. 5,05,00,000 (including Rs. 68,00,000 paid at the time of entering into the MoU). In terms of the relinquishment agreement the assessee released and discharged the vendors from all obligations and also relinquished and released all its claims, ownership, right, title and interest in the said plot.

–On 28-3-2007 it filed its income-tax return for the assessment year 2006-07 and declared capital gain of Rs. 3,94,19,345 on account of receipt of Rs. 5,05,00,000 for sale of its rights/title in the said plot.

–On 11-9-2009 the Deputy Commissioner issued a notice under section 148 and held that the income for Rs. 5,05,00,000 earned by the assessee on account of transfer of capital asset was ‘Income from other sources’ and not ‘capital gains’ and accordingly, income had escaped assessment.

Issue for consideration

–Whether the amount received and declared by the assessee was a capital gain or income from other sources, which it wrongly reported, as to warrant reassessment proceedings under section 148?

Held

Factual aspects of case

–In the present case, the undeniable facts are that the assessee paid Rs. 68 lakhs, at the time of entering into the MoU, i.e., the agreement for sale. The transaction was reported to the revenue; a no objection certificate was issued. No doubt, the MoU did not assign a particular defined plot of land. A supplementary deed was later entered into, and the assessee was consequently allotted a plot. (Para 12)

Income from relinquishment of right in a property has to be assessed as capital gain

–The decision in J.K. Kashyap v. Asstt. CIT (2008) 302 ITR 255/171 Taxman 390 (Delhi) is an authority for the proposition that even when an assessee becomes entitled to an undefined and undivided share in a property, through an agreement, which he later relinquishes, the gain has to be assessed as income from capital gain, and not as income from other sources. (Para 13)

–The High Court agreed with the above reasoning. That apart, in the present case, the assessee had acquired right to a specific plot; furthermore, the interest was in the nature of an actionable claim, which could be asserted in legal proceeding. The tax authorities had issued a no objection certificate in respect of the transaction. In these circumstances, the reporting of the amount received as capital gains was correct. Moreover, Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC) is an authority for the proposition that as long as the assessee makes a full and true disclosure of the income, the fact that it might claim that as falling under one head which is ultimately not accepted, would not make it a wrong disclosure, or suppression. The question as to the proper assessability of any amount, to income tax falls within the domain of the tax adjudicator. (Para 14)

Conclusion

–In view of the above discussion, the reassessment proceedings are hereby quashed. (Para 15)

14. In another case of J.K. Kashyap in (2008) 302 ITR 255 (Delhi) Hon’ble Delhi High Court has decided a similar issue holding that consideration received for relinquishing the rights in property attracted provisions of section 45(1) making it liable to capital gains tax.

15. Considering the facts in totality in the light of the decision of the Hon’ble High Court of Delhi (supra), we do not find any reason to interfere with the findings of learned Commissioner (Appeals). Ground no. 1 is accordingly dismissed.

16. Grievance raised vide ground no. 2 is squarely covered in favour of the assessee and against the revenue by the decision of the Hon’ble Supreme Court in the case of Textool Company Ltd. (2013) 263 CTR 257 (SC). The Hon’ble Supreme Court was seized with the following question of law :–

“…Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in allowing the deduction of Rs. 55,84,754 being the payment made by the assessee company directly to Life Insurance Corporation towards Group Gratuity Fund under section 36 (l)(v) of the Income Tax Act, 1961?”

17. And the Hon’ble Suprme Court held as under :–

8. Having considered the matter in the light of the background facts, we are of the opinion that there is no merit in the appeal. True that a fiscal statute is to be construed strictly and nothing should be added or subtracted to the language employed in the Section, yet a strict construction of a provision does not rule out the application of the principles of reasonable construction to give effect to the purpose and intention of any particular provision of the Act. (See : Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585/23 Taxman 37 (SC). From a bare reading of section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees. In the instant case, it is evident from the findings recorded by the Commissioner and affirmed by the Tribunal that the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and further all the contribution made by the assessee in the said fund ultimately came back to the Textool Employees Gratuity Fund, approved by the Commissioner with effect from the following previous year. Thus, the conditions stipulated in section 36(1)(v) of the Act were satisfied. Having regard to the facts found by the Commissioner and affirmed by the Tribunal, no fault can be found with the opinion expressed by the High Court, warranting our interference.

9. Resultantly, the appeal is dismissed with no order as to coasts.

18. Respectfully following the afore-stated ratio laid down by the Hon’ble Supreme Court, we decline to interfere with the findings of the learned Commissioner (Appeals). Ground no. 2 is also dismissed.

19. In the result, the appeal filed by the Revenue is dismissed.

20. The learned counsel did not press the cross objection raised by the assessee and the same is dismissed as not pressed.

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