Section 50C is a deeming provision which extends only to land or building or both. Leasehold rights neither‘land or building or both’ as such section 50C cannot be applied to it.

 1,295 total views

Section 50C is a deeming provision which extends only to land or building or both. Leasehold rights neither‘land or building or both’ as such section 50C cannot be applied to it. 

There is an important judgment in the case of Atul G. Puranik Vs. Income Tax Officer by ITAT, Mumbai ‘A’ Bench which by estoppels can be said to be accepted by the  Bombay High Court in the case of Commissioner Of Income Tax Vs. Greenfield Hotels & Estates Pvt. Ltd.

The Tribunal has categorically concluded that firstly, section 50C is a deeming provision and secondly, it extends only to land or building or both. It, therefore, follows that only if a capital asset being land or building or both is transferred and the consideration received or accruing as a result of such transfer is less than the value adopted or assessed or asses sable by the stamp valuation authority, the deeming fiction under sub-s. (1) shall be activated to substitute such adopted or assessed or asses sable value as full value of consideration received or accruing as a result of such transfer in the given situation.

From the facts of this case narrated above, it is seen that the assessee was allotted lease rights in the plot for a period of sixty years, which right was further assigned to PC in the year in question. It is axiomatic that the lease rights in a plot of land are neither ‘land or building or both’ as such nor can be included within the scope of ‘land or building or both’. The distinction between a capital asset being ‘land or building or both’ and any ‘rights in land or building or both’ is well recognized under the IT Act. As s. 50C applies only to a capital asset, being land or building or both, it cannot be made applicable to lease rights in a land. As the assessee transferred lease rights for sixty years in the plot and not land itself, the provisions of s. 50C cannot be invoked.

Therefore, the full value of consideration in the instant case should be taken as Rs. 2.50 crores. To sum up, capital gain on the transaction of assignment of lease rights in the plot is to be computed in the year in question by adopting the full value of consideration on 25th Aug., 2005 at Rs. 2.50 crores and the cost of acquisition shall be worked out afresh as per law by the AO by taking the market value of lease rights for sixty years in the plot as on 16th Aug., 2004.

 

Short overview of the case and observation thereon is summarized as under:

  1. It was a case of Capital gains vis a vis Cost of acquisition/Computation & applicability of ss. 49 and 50C.
  2. Agricultural land of asses see’s father acquired by Government long ago.
  3. Grant of compensation at Rs. 5 per sq. mtr. was challenged which was enhanced by the Addl. District Judge to Rs. 16 per sq. mtr. vide his order dt. 25th April, 2000
  4. Thereafter, 12.5 per cent scheme was introduced and the said sum at Rs. 16 per sq. mtr. was returned and the assessee was allotted a plot on 16th Aug., 2004 on lease basis for sixty years
  5. Lease agreement was executed on 8th Aug., 2005
  6. Assessee assigned such rights in the plot to PC for a consideration of Rs. 2.50 crores on 25th Aug., 2005
  7. Assessee’s contention was that land was agricultural land and alternatively cost of acquisition was Rs. 2,88,35,000 (i.e. area of the plot 7,300 sq. mtrs. multiplied with the market rate prevalent at Rs. 3,950 per sq. mtr.)
  8. AO contended that the plot was acquired by the assessee as a matter of additional compensation received in lieu of land acquired by the Government belonging to his father and held that s. 49 was attracted and the cost of acquisition was to be taken as the cost at which the land was acquired by the previous owner
  9. From the facts, it becomes manifest that there are two distinct transactions in this case, First is the acquisition of lands of asses see’s father against which the assessee, as legal heir, was given lease of the plot on 16th Aug., 2004. This transaction got completed when the assessee got the leasehold rights in the plot on such date, second transaction is the transferring of such leasehold rights in the plot to PC on 25th Aug., 2005 for a consideration of Rs. 2.50 crores, which event falls in the previous year relevant to the assessment year under consideration.
  10. Sole criteria for considering whether the asset transferred is capital asset under s. 2(14) or not is to consider the nature of the asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired—Once the assessee acquired rights in the plot, which in itself is admittedly not an agricultural land, there is no question of considering it to be an agricultural land on the premise that it was allotted to the assessee against acquisition of agricultural land
  11. Once such capital asset is transferred and another capital asset is acquired, there is no applicability of s. 49(1) to such converted asset—Once the first transaction on the allotment of rights in the plot came to an end, the provisions of s. 49(1) also ceased to operate—It could not have been applied to the second independent transaction on the sale of such rights to PC in the year in question—‘Land or building’ is distinct from ‘any right in land or building’—As s. 50C applies only to a capital asset, being land or building or both, it cannot be made applicable to lease rights in a land—Capital gain on the transaction of assignment of lease rights in the plot is to be computed in the year in question by adopting the full value of consideration on 25th Aug., 2005 at Rs. 2.50 crores—Cost of acquisition shall be worked out afresh by the AO by taking the market value of lease rights for sixty years in the plot as on 16th Aug., 2004
  12. It is held that from the narration of facts, it becomes manifest that there are two distinct transactions in this case. The first is the acquisition of lands of asses see’s father against which the assessee, as legal heir, was given lease of the plot on 16th Aug., 2004. This transaction got completed when the assessee got the leasehold rights in the plot on such date, which falls in the previous year relevant to the asst. yr. 2005-06. Whatever was the amount of profit or gain on this transaction was accordingly chargeable to tax in asst. yr. 2005-06. The second transaction is the transferring of such leasehold rights in the plot to PC on 25th Aug., 2005 for a consideration of Rs. 2.50 crores, which event falls in the previous year relevant to the assessment year under consideration. It is thus evident that out of the above-referred two transactions, the Tribunal is concerned in the present appeal only with the second transaction, which took place in the year under consideration.
  13. The Tribunal is refraining from giving any finding as to whether the original lands of the asses see’s late father acquired by the Government, were agricultural lands or not. It is not in Tribunal’s domain to give any such finding as it is/was for the AO to decide as per law. Suffice to say, one is concerned with the events occurring in the previous year relevant to the assessment year under consideration. Once the first transaction was over on the receipt of rights in the plot, then the ties of such rights in the plot got severed from those of lands which were acquired in the year 1970/1972. A new asset emerged in the shape of rights in the plot. It is this asset, whose nature is required to be determined at the time of its subsequent transfer, which is a second transaction diverse from the first transaction which was completed in the last year. It was fairly admitted and rightly so, that the rights in the plot, in itself, could not be categorized as agricultural land within the meaning of s. 2(14)(iii). It is only the nature of asset transferred in the year which is to be taken into consideration for computing profits or gains chargeable to tax under the head ‘Capital gains’. Only the nature of the capital asset so transferred in the previous year is to be viewed de hors the source from which it was acquired. If a ‘capital asset’ as per s. 2(14) is purchased out of agricultural income, that would not lose its character of capital asset notwithstanding the fact that the income exempt from tax was employed for purchasing such capital asset. Whenever such resulting capital asset is transferred leading to any profit or gain, such amount shall be charged to tax under s. 45. The sole criteria for considering whether the asset transferred is capital asset under s. 2(14) or not is to consider the nature of the asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired. Adverting to the facts of the instant case, once the assessee acquired rights in the plot, which in itself is admittedly not an agricultural land, there is no question of considering it to be an agricultural land on the premise that it was allotted to the assessee against acquisition of agricultural land. Therefore, the assessee’s contention that the rights in the plot should also be considered as agricultural land transferred during the year, is bereft of any force and is jettisoned.
  14. The sum and substance of s. 49(1) is that where a capital asset becomes the property of the assessee by any of the modes specified in cls. (i) to (iv), such as gift or will, succession, inheritance or devolution, etc., the cost of acquisition of such capital asst in the hands of the assessee receiving such capital asset shall be deemed to be the cost for which it was acquired by the person transferring such capital asset in the prescribed modes. However, in order to apply the mandate of s. 49(1), it is sine qua non that the capital asset acquired by the assessee in any of the modes prescribed in cls. (i) to (iv) should become the subject-matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. It is apparent from the language of sub-s. (1) itself which opens with the words “Where the capital asset became the property of the assessee” and after enumerating certain situations, provides that “the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it.” The phrase ‘the asset’ used in the later part of the provision relates to the capital asset which became the property of the assessee in the given circumstances. The natural corollary which, therefore, follows is that the cost to the previous owner is considered as the cost of acquisition only of the capital asset, which becomes the property of the assessee in the modes given in cls. (i) to (iv). But once such capital asset is transferred and another capital asset is acquired, there is no applicability of s. 49(1) to such converted asset. This provision cannot have any application at the stage when the assessee transferred the rights in the plot to a third party in the year in question, because what has been transferred in this year is the right in the plot, which was not inherited by the assessee from his father. The assessee only received the capital asset in the shape of right to receive compensation from the Government on the death of his father. Cost to the previous owner under s. 49(1) would be relevant at the time of computing the capital gain in the preceding year, when compensation was received in the shape of right in the plot. Once the first transaction on the allotment of rights in the plot came to an end, the provisions of s. 49(1) also ceased to operate. It could not have been applied to the second independent transaction on the sale of such rights to PC in the year in question. Therefore, the authorities below were not justified in applying s. 49(1).
  15. From the factual matrix of the case, it is noted that the assessee was allotted rights in the plot on 16th Aug., 2004 as compensation for the acquisition of lands acquired by the Special Land Acquisition Officer way back in the years 1970/1972. The value of rights in the plot is quid pro quo for the acquisition of lands from assessee’s father in the past. In other words, the market value of such rights in the plot was considered by the State Government as compensation for acquisition of land in earlier years. If such rights in the plot had not been allotted, then the assessee would have been given cash equivalent to the market value of such rights as compensation for acquisition of lands. Sec. 48 provides that such income shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition of the asset and the cost of improvement, if any, along with the expenditure incurred wholly and exclusively in connection with such transfer. The full value of the consideration received or accruing as a result of the acquisition by the Government is the amount given as consideration for such acquisition or in the alternative the market value of any other capital asset given to the assessee against such acquisition. As in the instant case the Government has allotted rights in the plot at the full value of consideration on the acquisition of lands by it in the year 1970/1972, the market value of such right is to be considered as full value of consideration at the time of computing capital gain on the first transaction in the preceding year. Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred. Thus, the full value of consideration should mean the market value of the lease rights in the plot for sixty years at the time of the first transaction which was completed on 16th Aug., 2004, and the same amount shall become the cost of acquisition when such rights in the plot became subject-matter of transfer in the current year on 25th Aug., 2004. The market value of such lease rights for sixty years in the plot as on 16th Aug., 2004 shall constitute the cost of acquisition for the purpose of computing capital gain when it was assigned for a consideration of Rs. 2.50 crores on 25th Aug., 2005. The AO is directed to determine the cost of acquisition in terms indicated above after allowing a reasonable opportunity of being heard to the assessee.
  16. From s. 50C. Firstly, it is a deeming provision and secondly, it extends only to land or building or both. It, therefore, follows that only if a capital asset being land or building or both is transferred and the consideration received or accruing as a result of such transfer is less than the value adopted or assessed or asses sable by the stamp valuation authority, the deeming fiction under sub-s. (1) shall be activated to substitute such adopted or assessed or asses sable value as full value of consideration received or accruing as a result of such transfer in the given situation. From the facts of this case narrated above, it is seen that the assessee was allotted lease rights in the plot for a period of sixty years, which right was further assigned to PC in the year in question. It is axiomatic that the lease rights in a plot of land are neither ‘land or building or both’ as such nor can be included within the scope of ‘land or building or both’. The distinction between a capital asset being ‘land or building or both’ and any ‘rights in land or building or both’ is well recognized under the IT Act. As s. 50C applies only to a capital asset, being land or building or both, it cannot be made applicable to lease rights in a land. As the assessee transferred lease rights for sixty years in the plot and not land itself, the provisions of s. 50C cannot be invoked. Therefore, the full value of consideration in the instant case should be taken as Rs. 2.50 crores. To sum up, capital gain on the transaction of assignment of lease rights in the plot is to be computed in the year in question by adopting the full value of consideration on 25th Aug., 2005 at Rs. 2.50 crores and the cost of acquisition shall be worked out afresh as per law by the AO by taking the market value of lease rights for sixty years in the plot as on 16th Aug., 2004.—CIT vs. Amarchand N. Shroff (1963) 48 ITR 59 (SC), CIT vs. Mother India Refrigeration Industries (P) Ltd. (1985) 48 CTR (SC) 176 : (1985) 155 ITR 711 (SC) and CIT vs. Ace Builders (P) Ltd. (2005) 195 CTR (Bom) 1 : (2006) 281 ITR 210 (Bom) relied on.

In short, it is concluded that once the assessee acquired leasehold rights in the plot in the preceding year, which in itself is admittedly not an agricultural land, which had been acquired by the Government there is no question of considering it to be an agricultural land; capital gain on the transaction of assignment of lease rights in the plot in the year under consideration is to be computed by adopting the full value of consideration on 25th Aug., 2005 at Rs. 2.50 crores and the cost of acquisition had to be worked out afresh by the AO by taking the market value of lease rights for sixty years in the plot as on 16th Aug., 2004.

COMPLETE ORDER

ATUL G. PURANIK vs. INCOME TAX OFFICER

ITAT, ITAT, MUMBAI ‘A’ BENCH

R.S. Syal, A.M. & R.S. Padvekar, J.M.

ITA No. 3051/Mum/2010; Asst. yr. 2006-07

13th May, 2011

(2011) 30 CCH 0239 MumTrib

(2011) 141 TTJ 0069 : (2011) 58 DTR 0208 : (2011) 132 ITD 0499 : (2011) 11 ITR 0120

Legislation Referred to

Section 2(14)(iii), 45, 48, 49, 50C

Case pertains to

Asst. Year 2006-07

ORDER

R.S. SYAL, A.M. :

ORDER

This appeal by the assessee arises out of the order passed by the CIT(A) on 10th March, 2010 in relation to the asst. yr. 2006-07. Various grounds raised in this appeal deal with a solitary issue about the chargeability of the income under the head ‘Capital gains’.

  1. Briefly stated, the facts of the case, as stated by the AO, are that the assessee received a sum of Rs. 2.50 crores in the year under consideration on account of sale of land known as plot No. 83, Sector-18, in Village Site Kamothe-II of 12.5 per cent (erstwhile Gaothan Expansion Scheme) measuring 7,299.41 sq. mtrs. (hereinafter called ‘the plot’). The plot was sold by the assessee to M/s Pathik Construction vide agreement dt. 25th Aug., 2005. In the return filed for the assessment year under consideration, the assessee did not offer any income under the head ‘Capital gain’ on account of such transfer of the Plot. A note was appended along with the computation of income, reading as under :

“The asses see’s father owned a plot of agricultural land which was acquired by the Government of Maharashtra in February, 1970 for CIDCO. The assessee was allotted a plot of land under the 12.5 per cent Gaothan Expansion Scheme by CIDCO at Village Kamothe-II, Distt. Raigad. The same has been assigned for Rs. 2,50,00,000. The said original agricultural land was not a capital asset under s. 2(14)(iii) of the IT Act. The said plot from CIDCO also does not become capital asset under s. 2(14)(iii) and hence the s. 45 does not apply to assignment of said plot.”

  1. The facts leading to the above referred transaction are that certain lands belonging to the asses see’s father, late Shri Gangadhar Vishnu Puranik, were acquired by the Government of Maharashtra vide Notification dt. 3rd Feb., 1970 and subsequent Notification dt. 28th Dec., 1972 issued under s. 6 of the Land Acquisition Act, 1884. Compensation was paid to Shri Gangadhar Vishnu Puranik in the period between 1973 to 1975 by the Special Land Acquisition Officer @ Rs. 5 per sq. mtr. The asses see’s father expired in the year 1980. A further claim for additional compensation was made before the Addl. Distt. Judge, Raigad, Alibag. On an examination of witness Shri Ashok Puranik, also one of the co-owners from Puranik family and an engineer himself, the Addl. Distt. Judge, vide his order dt. 25th April, 2000 awarded compensation @ Rs. 16 per sq. mtr. for the reason that the lands acquired by the Government from Shri Gangadhar Vishnu Puranik, were acquired by the Puranik family for industrial purposes. It was also noticed that the lands under reference were situated within the extended limits of Panvel Municipal Council. Shri Ashok Puranik deposed before the Addl. Distt. Judge that Puranik family had prepared plans to develop the lands for industrial estate and the lands abutting Village Aeudgaon were intended for the establishment of Dhutpapeshwar Industrial Estate and those were already converted into N.A. use prior to 1965. The matter was still further agitated by the legal heirs of the deceased Shri Gangadhar Vishnu Puranik. The plot under CIDCO 12.5 per cent scheme was allotted to the assessee in the capacity of legal heir vide agreement dt. 8th Aug., 2005 on lease basis. The assessee transferred the leasehold rights of said plot to M/s Pathik Construction vide agreement dt. 25th Aug., 2005 for a sum of Rs. 2.50 crores. In the opinion of the AO, the assessee got the plot as revised compensation because the original lands acquired by the Government had N.A. potential and further such lands were within the extended limits of Panvel Municipal Council. He relied on certain judgments to form an opinion that the original lands acquired were not agricultural lands. Further, since the assessee sold the plot allotted to him under the 12.5 per cent scheme for a consideration of Rs. 2.50 crores, in the view of the AO, this land was a capital asset and its transfer attracted the provisions of s. 45.
  2. During the course of assessment proceedings, the assessee came out with another reason for not offering any capital gain, by claiming that the cost of acquisition of the plot was Rs. 2,88,35,000 (i.e. area of the plot 7,300 sq. mtr. multiplied with the market rate prevalent at Rs. 3,950 per sq. mtr.). The AO did not accept this contention as well, because in his opinion the plot was acquired by the assessee as a matter of additional compensation received in lieu of land acquired by the Government belonging to his father in 1972. He held that s. 49 was attracted and the cost of acquisition was to be taken as the cost at which the land was acquired by the previous owner. In this regard, he noted that the value of the original lands acquired by the Special Land Acquisition Officer was fixed at Rs. 10,69,006, by valuing it at Rs. 6 per sq. mtr. or Rs. 4 per sq. mtr. or Rs. 3.50 per sq. mtr. depending on the survey numbers. By order of Addl. Distt. Judge dt. 25th April, 2000, the market value of land was revised at Rs. 16 per sq. mtr. For the sake of convenience, the average rate of Rs. 5 per sq. mtr. was taken by him for original compensation of Rs. 10,69,006 and accordingly revised compensation was worked out at Rs. 11 per sq. mtr. at Rs. 23,51,813. Deducing 1/5th as assessee’s share, the AO determined the cost of acquisition of the plot at Rs. 4,70,362 (i.e. Rs. 23,51,813 divided by Rs. 5). As the assessee got possession of the plot from CIDCO vide agreement dt. 8th Aug., 2005 and sold the same to M/s Pathik Construction for a consideration of Rs. 2.50 crores, the AO held that capital gain was to be charged as short-term capital gain. It was noticed by him that since the assessee had submitted market rates prevailing for lands at Kamothe-II published by Panvel Nagar Palika from 1st April, 2004 to 31st Dec., 2004 at Rs. 3,950 per sq. mtr. the AO computed the market value of the plot at Rs. 2,88,35,000 (Rs. 3,950 X 7,300 sq. mtrs.) as per the provisions of s. 50C of the IT Act. The amount of capital gain was thus worked out as under :
“Value of the asset sold on 25.8.2005
(i.e. land at Village Kamothe sold to M/s Pathik Construction on 25.8.2005) 2,88,35,000
Less : Cost of acquisition as worked out in para 5(ii) 4,70,362
Short-term capital gains 2,83,64,638″
  1. The assessee preferred appeal before the learned first appellant authority, inter alia, contending that the lands acquired by the Land Acquisition Officer were agricultural land and hence the plot of land allotted under 12.5 per cent scheme at Village Kamothe-II would also retain the same character as that of agricultural land. This contention did not find favour with the learned CIT(A). It was also argued that the cost of the plot allotted should be considered as the market value of the land at the time of allotment and hence the provisions of s. 49 were not applicable. The learned CIT(A) was unconvinced with this argument also, as in his opinion, the Tribunal order relied by the assessee in Asst. CIT vs. Nirmal Bhogilal (ITA No. 2942/Mum/2002) dt. 23rd Nov., 2005, was not applicable because in that case it was only if the land was allotted without any financial criteria that the market value of similar plot in the locality was held to be taken as representing the cost of acquisition. The last major contention put forth on behalf of the assessee on non-applicability of s. 50C was also found untenable. Resultant, the assessment order was upheld on this point.
  2. Before we proceed to deal with the rival contentions, it is necessary to set the record straight inasmuch as there are certain factual inconsistencies recorded in the assessment order. The first being that the assessee was not allotted the plot on ownership basis for perpetuity but only on lease basis, as stated by the learned Authorised Representative to be for sixty years. The second very crucial fact is that the lease rights in the plot were allotted to the assessee on 18th Aug., 2004 and not on 8th Aug., 2005 as noted by the AO. In fact, 8th Aug., 2005 is the date on which the lease agreement between the assessee and the Government was executed. These facts are clear from the statement of facts and grounds taken before the learned CIT(A). It has been mentioned in para 1.3 of the statement of facts before the learned first appellate authority that the assessee furnished several documents to the AO vide his letter dt. 19th Nov., 2008, inter alia, : ‘(vi) CIDCO’s letter dt. 18th Aug., 2004 allotting plot of land on lease basis admeasuring around 7,300 sq. mtrs. at Village Kamothe, Taluka Panvel, Distt. Raigadh.’ Further ground No. 1.4 (iii) taken before the learned CIT(A) states the date of allotment as 16th Aug., 2004. These facts were available both before the AO as well as the CIT(A). None of the authorities below has chosen to controvert them. Now we will decide the controversy before us in the light of correct and complete facts as afforested.
  3. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the asses see’s father late Shri Gangadhar Vishni Puranik was owner of certain lands which were acquired by the Government of Maharashtra by Notification dt. 3rd Feb., 1970 and subsequent Notification dt. 28th Dec., 1972. The possession of the lands was taken over by the Government in March, 1973 by awarding original compensation @ Rs. 5 per sq. mtr. somewhere in the financial year 1973-74. The asses see’s father passed away in 1980. The assessee, along with other co-owners, became the legal heir of his father. The grant of compensation at Rs. 5 per sq. mtr. was challenged which was enhanced by the Addl. District Judge to Rs. 16 per sq. mtr. vide his order dt. 25th April, 2000. Thereafter, 12.5 per cent scheme was introduced and according to the learned Authorized Representative, the said sum at Rs. 16 per sq. mtr. was returned and the assessee was allotted the plot on 16th Aug., 2004 on lease basis for sixty years. The lease agreement was executed on 8th Aug., 2005. The assessee assigned such rights in the plot to M/s Pathik Construction for a consideration of Rs. 2.50 crores on 25th Aug., 2005. On a specific query, the learned Authorised Representative submitted that when the assessee received additional compensation at Rs. 11 per sq. mtr. (Rs. 16 per sq. mtr. as ordered by the Addl. Distt. Judge minus Rs. 5 per sq. mtr. as the original compensation allotted to the asses see’s late father), the said sum was duly offered for taxation in the relevant year and it was also stated that when a sum @ Rs. 16 per sq. mtr. was returned to the Government in lieu of the plot, no adjustment on account of capital gain tax paid at the time of receipt of Rs. 11 per sq. mtr. as additional compensation, was claimed. There is no material on record to show that the assessee, in fact, offered any sum for taxation @ Rs. 11 per sq. mtr. As will be seen infra, the fact that whether or not the assessee offered this sum for taxation in an earlier year is not germane to the issue under consideration. From the narration of facts, it becomes manifest that there are two distinct transactions in this case. The first, is the acquisition of lands of asses see’s father against which the assessee, as legal heir, was given lease of the plot on 16th Aug., 2004. This transaction got completed when the assessee got the leasehold rights in the plot on such date, which falls in the previous year relevant to the asst. yr. 2005-06. Whatever was the amount of profit or gain on this transaction was accordingly chargeable to tax in asst. yr. 2005-06. The second transaction is the transferring of such leasehold rights in the plot to M/s Pathik Construction on 25th Aug., 2005 for a consideration of Rs. 2.50 crores, which event falls in the previous year relevant to the assessment year under consideration. It is thus evident that out of the above-referred two transactions, we are concerned in the present appeal only with the second transaction, which took place in the year under consideration.
  4. Now, we will take up the arguments raised by the learned Authorised Representative, one by one.
  5. The plot would retain character of agricultural land
  6. The learned Authorized Representative contended that the Government acquired original lands of asses see’s father in 1972 which were agricultural in nature. He submitted that the lease rights in the plot would retain the same character as that of the original lands acquired by the Land Acquisition Officer, being the agricultural land. Developing this argument, it was put forth that since the assessee transferred agricultural lands (being rights in the plot assuming to have the character of original agricultural lands acquired by the Government), in this year, there will not arise any liability to pay tax under the head ‘Capital gain’ because the agricultural land is excluded from the definition of ‘capital assets’ given in s. 2(14) of the Act. In the opposition, the learned Departmental Representative relied on the impugned order in this regard.

9.1 The assessee acquired lease rights in the plot in consideration of acquisition of original lands owned by the asses see’s father in the earlier years. A lot of discussion has been made by the authorities below on the question of determination of the character of such lands as agricultural lands or otherwise. In our considered opinion, it is only an academic exercise insofar as the issue in question is concerned, being the assignment of lease rights in the plot. It is obvious for the reason that when the assessee was allotted the lease rights in the plot in the preceding year on 16th Aug., 2004, that transaction got completed. The amount of capital gain, if chargeable, should have been included in the total income of the assessee on account of such first transaction in the preceding year. We are refraining from giving any finding as to whether the original lands of the asses see’s late father acquired by the Government, were agricultural lands or not. It is not in our domain to give any such finding as it is/was for the AO to decide as per law. Suffice to say, we are concerned with the events occurring in the previous year relevant to the assessment year under consideration.

9.2 Once the first transaction was over on the receipt of rights in the plot, then the ties of such rights in the plot got severed from those of lands which were acquired in the years 1970/1972. A new asset emerged in the shape of rights in the plot. It is this asset, whose nature is required to be determined at the time of its subsequent transfer, which is a second transaction diverse from the first transaction which was completed in the last year. It was fairly admitted and rightly so, that the rights in the Plot, in itself, could not be categorized as agricultural land within the meaning of s. 2(14)(iii).

9.3 Sec. 45 clearly provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ss. 54 to 54H, 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. What is relevant for applicability of s. 45 is the profits or gains arising from the transfer of a capital asset effected in the previous year. It is only the nature of asset transferred in the year which is to be taken into consideration for computing profits or gains chargeable to tax under the head ‘Capital gains’. Only the nature of the capital asset so transferred in the previous year is to be viewed de hors the source from which it was acquired. If a ‘capital asset’ as per s. 2(14) is purchased out of agricultural income, that would not lose its character of capital asset notwithstanding the fact that the income exempt from tax was employed for purchasing such capital asset. Whenever such resulting capital asset is transferred leading to any profit or gain, such amount shall be charged to tax under s. 45 of the Act. The sole criteria for considering whether the asset transferred is capital asset under s. 2(14) or not is to consider the nature of the asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired.

9.4 Adverting to the facts of the instant case, once the assessee acquired rights in the plot, which in itself is admittedly not an agricultural land, there is no question of considering it to be an agricultural land on the premise that it was allotted to the assessee against acquisition of agricultural land. Further the question whether the lands acquired by the Government in the years 1970/1972 were agricultural lands or not is beyond our purview as we are concerned only with the second transaction of transfer of rights in the plot, which event took place in the year under consideration. We, therefore, hold that the assessee’s contention that the rights in the plot should also be considered as agricultural land transferred during the year, is bereft of any force and is jettisoned. As such, we advance further to determine the amount of capital gain arising to the assessee in the year in question on the transfer of rights in the plot.

  1. Cost of acquisition of rights in the plot and s. 49(1)
  2. During the course of assessment proceedings, the assessee contended that the cost of acquisition of the plot was Rs. 2,88,35,000, being the amount determined by applying market rate of the plot at Rs. 3,950 per sq. mtr. on the date of transfer. The AO, on the other hand, came to the conclusion that the cost of acquisition was liable to be taken at Rs. 4,70,362 as the cost at which the asset was acquired by the previous owner under s. 49. Such amount was determined by considering the rate of revised compensation at Rs. 11 per sq. mtr. The learned CIT(A) echoed the assessment order on this point. The learned counsel for the assessee contended that the authorities below were not justified in upholding the application of s. 49(1) as such a provision was not applicable to the present facts. Per contra, the learned Departmental Representative reiterated the reasoning given by the AO in this regard.

10.1 In order to ascertain whether or not s. 49(1) is applicable to the facts of the instant case, it is imperative to have a look at the language of the section, which is reproduced as under :

“49 (1) Where the capital asset became the property of the assessee—

(i) on any distribution of assets on the total or partial partition of an HUF;

(ii) under a gift or will;

(iii) (a) by succession, inheritance or devolution, or

(b) on any distribution of assets on the dissolution of a firm, BOI, or other AOP, where such dissolution had taken place at any time before the 1st day of April, 1987, or

(c) on any distribution of assets on the liquidation of a company, or

(d) under a transfer to a revocable or an irrevocable trust, or

(e) under any such transfer as is referred to in cl. (iv) or cl. (v) or cl. (vi) or cl. (via) or cl. (viaa) or cl. (vica) or cl. (vicb) of s. 47;

(iv) such assessee being an HUF, by the mode referred to in sub-s. (2) of s. 64 at any time after the 31st day of December, 1969,

the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.”

10.2 A bare perusal of the provision indicates that where the capital asset became the property of the assessee in any of the situations contemplated in cls. (i) to (iv), the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of improvements, etc. The Explanation below sub-s. (1) defines the expression “previous owner of the property” to mean the last previous owner who acquired it by a mode of acquisition other than those referred to in cls. (i) to (iv) of this sub-section. The sum and substance of s. 49(1) is that where a capital asset becomes the property of the assessee by any of the modes specified in cls. (i) to (iv), such as gift or will, succession, inheritance or devolution, etc., the cost of acquisition of such capital asset in the hands of the assessee receiving such capital asset shall be deemed to be the cost for which it was acquired by the person transferring such capital asset in the prescribed modes. The rationale behind this provision is that the transfer of such asset by the person receiving in any of the modes prescribed, should not go tax-free. In order to compute capital gain on the transfer of any capital asset, the existence of cost of acquisition is an essential element. If there is no cost of acquisition and the case is not covered under s. 55(2), then the computation provisions shall fail and no liability to tax shall arise under s. 45. As no cost is actually incurred by the assessee in acquiring the assets under such modes, and on the further transfer of such assets, the capital gain is contemplated by the legislature, the mechanism of s. 49 has been put in place to remedy the situation. This provision deems the cost of acquisition of the assessee as the cost for which it was acquired by the previous owner as increased by the cost of any improvements incurred by the previous owner.

10.3 However, in order to apply the mandate of s. 49(1), it is sine qua non that the capital asset acquired by the assessee in any of the modes prescribed in cls. (i) to (iv) should become the subject-matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. It is apparent from the language of sub-s. (1) itself which opens with the words “Where the capital asset became the property of the assessee” and after enumerating certain situations, provides that “the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it.” The phrase `the asset’ used in the later part of the provision relates to the capital asset which became the property of the assessee in the given circumstances. The natural corollary which, therefore, follows is that the cost to the previous owner is considered as the cost of acquisition only of the capital asset, which becomes the property of the assessee in the modes given in cls. (i) to (iv). But once such capital asset is transferred and another capital asset is acquired, there is no applicability of s. 49(1) to such converted asset.

10.4 Coming back to the facts of the instant case, the view point of the AO that the cost of acquisition in this case on the assigning of rights in the plot to M/s Pathik Construction should be considered as the amount of compensation originally awarded on the acquisition of lands from asses see’s father, relying on s. 49(1), does not appear to be sound. This provision cannot have any application at the stage when the assessee transferred the rights in the plot to a third party in the year in question, because what has been transferred in this year is the right in the plot, which was not inherited by the assessee from his father. The assessee only received the capital asset in the shape of right to receive compensation from the Government on the death of his father. Cost to the previous owner under s. 49(1) would be relevant at the time of computing the capital gain in the preceding year, when compensation was received in the shape of right in the plot. Once the first transaction on the allotment of rights in the plot came to an end, the provisions of s. 49(1) also ceased to operate. It could not have been applied to the second independent transaction on the sale of such rights to M/s Pathik Construction in the year in question. We, therefore, hold that the authorities below were not justified in applying s. 49(1).

10.5 Having held that s. 49(1) is not applicable, the immediate question which arises for consideration then is that what is the cost of acquisition of rights in the plot transferred on 25th Aug., 2005 to M/s Pathik Construction. The learned Authorized Representative argued that the market value of the plot of land on the date of allotment should be taken as the cost of acquisition, as has been held by the Tribunal in Asstt. CIT vs. Nirmal Bhogilal (supra). From the factual matrix of the case, it is noted that the assessee was allotted rights in the plot on 16th Aug., 2004 as compensation for the acquisition of lands acquired by the Special Land Acquisition Officer way back in the years 1970/1972. The value of rights in the plot is quid pro quo for the acquisition of lands from asses see’s father in the past. In other words, the market value of such rights in the plot was considered by the State Government as compensation for acquisition of land in earlier years. If such rights in the plot had not been allotted, then the assessee would have been given cash equivalent to the market value of such rights as compensation for acquisition of lands. As it is a transaction with the Government, the question of any under-hand payment also stands ruled out. Sec. 48 deals with the mode of computation of income chargeable under the head ‘Capital gains’. It provides that such income shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition of the asset and the cost of improvement, if any, along with the expenditure incurred wholly and exclusively in connection with such transfer. The full value of the consideration received or accruing as a result of the acquisition by the Government is the amount given as consideration for such acquisition or in the alternative the market value of any other capital asset given to the assessee against such acquisition. As in the instant case the Government has allotted rights in the plot as the full value of consideration on the acquisition of lands by it in the years 1970/1972, the market value of such right is to be considered as full value of consideration at the time of computing capital gain on the first transaction in the preceding year. Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred. Thus, the full value of consideration should mean the market value of the lease rights in the plot for sixty years at the time of the first transaction which was completed on 16th Aug., 2004, and the same amount shall become the cost of acquisition when such rights in the plot became subject-matter of transfer in the current year on 25th Aug., 2004. We, therefore, set aside the view taken by the learned CIT(A) on this issue and hold that the market value of such lease rights for sixty years in the plot as on 16th Aug., 2004 shall constitute the cost of acquisition for the purpose of computing capital gain when it was assigned for a consideration of Rs. 2.50 crores on 25th Aug., 2005. The AO is directed to determine the cost of acquisition in terms indicated above after allowing a reasonable opportunity of being heard to the assessee.

III. Full value of consideration and s. 50C

  1. The AO adopted the value of asset sold on 25th Aug., 2005 at Rs. 2.88 crores by applying the provisions of s. 50C for the purposes of computing capital gain. His view was based on the assessee’s submission that the market rate prevailing for land at Village Kamothe-II published by Panvel Nagar Palika during 1st April, 2004 to 31st Dec., 2004 was Rs. 3,950 per sq. mtr. The learned CIT(A) upheld the action of the AO on this score. The learned counsel for the assessee contended that the authorities below were unjustified in applying s. 50C. Per contra, the learned Departmental Representative supported the impugned order on this issue.

11.1 In order to appreciate the rival contentions on this issue, it would be apt to consider the prescription of s. 50C(1), which is as under :

“50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or asses sable by any authority of a State Government (hereinafter in this section referred to as the ‘stamp valuation authority’) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or asses sable shall, for the purposes of s. 48, be deemed to be full value of the consideration received or accruing as a result of such transfer.”

11.2 On going through the above provision, it transpires that where the full value of consideration shown to have been received or accruing on the transfer of an asset, being land or building of both, is less than the value adopted or assessed or asses sable by stamp valuation authority, the value so adopted etc. shall, for the purposes of s. 48, be deemed to be full value of consideration received or accruing as a result of such transfer. This section has been inserted by the Finance Act, 2002 w.e.f. 1st April, 2003 with a view to substitute the declared full value of consideration in respect of land or building or both transferred by the assessee with the value adopted or assessed or asses sable by stamp valuation authority. But for this provision, there is nothing in the Act, by which the full value of a consideration received or accruing as a result of transfer of land or building or both is deemed to be any amount other than that actually received. From the language of sub-s. (1), it is clear that the value of land or building or both adopted or assessed or asses sable by the stamp valuation authority shall, for the purpose of s. 48, be deemed to be the full value of the consideration received or accruing as a result of such a transfer. Two things are noticeable from this provision. Firstly, it is a deeming provision and secondly, it extends only to land or building or both. It is manifest that a deeming provision has been incorporated to substitute the value adopted or assessed or assessable by stamp valuation authority in place of consideration received or accruing as a result of transfer, in case the latter is lower than the former. It is further relevant to note that the mandate of s. 50C extends only to a capital asset which is “land or building or both”. It, therefore, follows that only if a capital asset being land or building or both is transferred and the consideration received or accruing as a result of such transfer is less than the value adopted or assessed or asses sable by the stamp valuation authority, the deeming fiction under sub-s. (1) shall be activated to substitute such adopted or assessed or asses sable value as full value of consideration received or accruing as a result of such transfer in the given situation.

11.3 It is a settled legal proposition that a deeming provision cannot be extended beyond the purpose for which it is enacted. The Hon’ble apex Court in CIT vs. Amarchand N. Shroff (1963) 48 ITR 59 (SC) has considered the scope of a deeming provision and came to hold that it cannot be extended beyond the object for which it is enacted. Similar view has been reiterated by the Hon’ble Supreme Court in CIT vs. Mother India Refrigeration Industries (P) Ltd. (1985) 48 CTR (SC) 176 : (1985) 155 ITR 711 (SC) by laying down that “legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond their legitimate field”. In CIT vs. Ace Builders (P) Ltd. (2005) 195 CTR (Bom) 1 : (2006) 281 ITR 210 (Bom) the Hon’ble jurisdictional High Court considered the facts of a case in which the assessee was a partner in a firm which was dissolved in the year 1984 and the assessee was allotted a flat towards the credit in the capital asset with the firm. The assessee showed the flat as capital asset in its books of account and depreciation was claimed and allowed from year to year. In the previous year relevant to asst. yr. 1992-93, the assessee sold the flat and invested the net sale proceeds in a scheme eligible under s. 54E of the Act and accordingly declared nil income under the head ‘Capital gains’. The AO formed the view that since the block of building ceased to exist on account of sale of flat during the year, the WDV of the flat was liable to be taken as cost of acquisition under s. 54E of the Act. He further held that since the assessee had availed depreciation on such asset, which was otherwise a long-term capital asset, the deeming provision under s. 50 would apply and it would be treated as capital gain on the sale of short-term capital asset and hence no benefit under s. 54E could be allowed. When the matter came up before the Hon’ble Bombay High Court, it was noticed that sub-ss. (1) and (2) of s. 50 contained a deeming provision and such fiction was restricted only to the mode of computation of capital gain contained in ss. 48 and 49 and hence it did not apply to other provisions. The assessee was held to be eligible for exemption under s. 54E in respect of capital gain arising out of the capital asset on which depreciation was allowed.

11.4 In view of the afforested judgments rendered by the Hon’ble apex Court and that of the Hon’ble jurisdictional High Court, it is clear that a deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. Turning to s. 50C, it is seen that the deeming fiction of substituting adopted or assessed or assessable value by the stamp valuation authority as full value of consideration is applicable only in respect of “land or building or both”. If the capital asset under transfer cannot be described as ‘land or building or both’, then s. 50C will cease to apply. From the facts of this case narrated above, it is seen that the assessee was allotted lease rights in the plot for a period of sixty years, which right was further assigned to M/s Pathik Construction in the year in question. It is axiomatic that the lease rights in a plot of land are neither ‘land or building or both’ as such nor can be included within the scope of ‘land or building or both’. The distinction between a capital asset being `land or building or both’ and any ‘right in land or building or both’ is well recognized under the IT Act. Sec. 54D deals with certain cases in which capital gain on compulsory acquisition of land and building is charged. Sub-s.(1) of s. 54D opens with ‘Subject to the provisions of sub-s. (2), where the capital gain arises from the transfer by way of compulsory acquisition under any law of a capital asset, being land or building or any right in land or building, forming part of an industrial undertaking…”. It is palpable from s. 54D that ‘land or building’ is distinct from ‘any right in land or building’. Similar position prevails under the WT Act, 1957 also. Sec. 5(1) at the material time provided for exemption in respect of certain assets. Clause (xxxii) of s. 5(1) provided that “the value, as determined in the prescribed manner, of the interest of the assessee in the assets (not being any land or building or any rights in land or building or any asset referred to in any other clauses of this sub-section) forming part of an industrial undertaking” shall be exempt from tax. Here also it is worth noting that a distinction has been drawn between ‘land or building’ on one hand and ‘or any rights in land or building’ on the other. Considering the fact that we are dealing with special provision for full value of consideration in certain cases under s. 50C, which is a deeming provision, the fiction created in this section cannot be extended to any asset other than those specifically provided therein. As s. 50C applies only to a capital asset, being land or building or both, it cannot be made applicable to lease rights in a land. As the assessee transferred lease rights for sixty years in the plot and not land itself, the provisions of s. 50C cannot be invoked. We, therefore, hold that the full value of consideration in the instant case be taken as Rs. 2.50 crores.

  1. To sum up, we hold that capital gain on the transaction of assignment of lease rights in the plot is to be computed in the year in question by adopting the full value of consideration on 25th Aug., 2005 at Rs. 2.50 crores and the cost of acquisition shall be worked out afresh as per law by the AO by taking the market value of lease rights for sixty years in the plot as on 16th Aug., 2004.
  2. In the result, the appeal is allowed for statistical

***********************************************

Income Tax Act on Your Mobile Now Android Application For Income Tax Act – 1961 with Cost Inflation Index and other tools on Mobile now at following link:

https://play.google.com/store/apps/details?id=com.thetaxtalk&hl

***********************************************

Whatsapp Group at

  1. https://chat.whatsapp.com/DDhj9CR6qSMLMZQSEOA06o
  1. https://chat.whatsapp.com/LmzMXJ5HeM6IAEfpbZYooK

***********************************************

Leave a Comment

Your email address will not be published.

the taxtalk

online portal for tax news, update, judgment, article, circular, income tax, gst, notification Simplifying the tax and tax laws is the main motto of the team tax talk, solving