Capital Gains on Transfer of Leasehold Rights: Section 50C Applies Even Without Absolute Ownership
One of the most common misconceptions among industrialists and companies holding plots from MIDC or similar authorities is this: “We are only lessees, not owners. So Section 50C should not apply to us.” The Bombay High Court has now firmly laid this debate to rest. In a significant and far-reaching ruling, the Court has held that Section 50C applies even to the transfer of leasehold rights in land, thereby exposing such transfers to stamp duty valuation for capital gains purposes-even where the assessee does not hold absolute ownership.
The controversy revolves around a deceptively simple question: does Section 50C apply when only leasehold rights in land are transferred and not the land itself? Taxpayers have traditionally argued that Section 50C applies only to transfer of “land or building” and leasehold rights are merely rights in land, not land itself. The Revenue, on the other hand, contended that leasehold rights are a form of “property”, the definition of “capital asset” is wide enough to include such rights, and Section 50C should therefore apply.
In the present case, the assessee company had acquired leasehold rights over certain industrial plots from MIDC. The original lease was granted by MIDC in 1979. The assessee acquired the rights by way of a Deed of Assignment dated 30-08-2004. Subsequently, the assessee transferred these leasehold rights. While computing capital gains, the Assessing Officer invoked Section 50C and adopted the stamp duty valuation instead of the declared consideration. The assessee objected, claiming that Section 50C applies only to land or building owned by the assessee and not to mere leasehold rights.
The dispute required interpretation of the definition of “capital asset” under Section 2(14) of the Income-tax Act, which defines capital asset as “property of any kind held by an assessee”. The Court laid particular emphasis on the word “held”. It noted that the legislature consciously used the term “held” and not “owned”. The expression “held” is of wide import and is capable of covering all forms of rights in property, including leasehold rights.
The Court further observed that leasehold rights are not vague or illusory rights. They confer upon the holder the right to possess the land, enjoy it, transfer it subject to conditions, and derive economic benefit from it. Such rights constitute a valuable interest in land. Therefore, leasehold rights in land clearly amount to “property” held by the assessee and fall within the definition of capital asset.
On this reasoning, the Bombay High Court held that leasehold rights over land constitute a capital asset being “land” held by the assessee. Once the capital asset transferred is land, even in the form of leasehold rights, the deeming fiction of Section 50C automatically comes into operation. The Assessing Officer was therefore justified in adopting the stamp duty value for computing capital gains arising from the transfer of such leasehold rights.
The assessee sought support from earlier decisions such as Atul G. Puranik v. ITO and CIT v. Greenfield Hotels & Estates Pvt. Ltd. However, the Court distinguished these rulings on facts and legal context. It was noted that those decisions did not examine the width of the expression “held” under Section 2(14) in the same manner and were rendered in different factual settings. Consequently, they did not assist the assessee in the present case.
In Vidarbha Veneer Industries Ltd. v. ITO, decided on 1 April 2025, the Bombay High Court conclusively held that Section 50C is applicable to the transfer of leasehold rights in land, even where the assessee does not have absolute ownership of the land.
This ruling has far-reaching implications, particularly for MIDC plot holders, industrial estates, SEZ allottees, and entities holding long-term leasehold industrial land. The long-standing belief that Section 50C can be avoided merely because the land is held on lease now stands decisively rejected. Stamp duty valuation can override the actual consideration even in such cases.
Taxpayers entering into transactions involving transfer of leasehold rights must now carefully factor in prevailing stamp duty values while computing capital gains. Where the stamp duty valuation is excessive, recourse may be taken to a valuation reference mechanism, but outright exclusion of Section 50C is no longer tenable.
The judgment reinforces a fundamental principle of tax law: what matters is not the label of ownership, but the nature of the right held and transferred. For taxpayers dealing with leasehold industrial land, the message is loud and clear-Section 50C applies, and ignoring it can prove costly.
[ Vidarbha Veneere Industries Ltd. v. ITO (2026) 201 TR (A) 189 (Bom-HC) : 2025 TaxPub (DT) 2285 (Bom-HC)]
The copy of the order is as under:
