Bombay H.C : Received by the assessee as the sale consideration for transfer of incomplete building, would be termed as long term capital gains or short-term capital gains, in the hands of the assessee

High Court Of Bombay

CIT, Panaji, Goa Vs. Hindustan Hotels Ltd.

Assessment Year : 1996-97

Section : 2(29B),2(42B)

D.G. Karnik And F.M. Reis, JJ.

Tax Appeal No. 59 Of 2002

October 29, 2010

JUDGMENT

D.G. Karnik, J. – This appeal is directed against the judgment and order dated 1-10-2001 passed by the Income-tax Appellate Tribunal (for short “the Tribunal”).

2. The respondent is a company incorporated and registered under the Companies Act, 1956. The main object of the company is establishing and running of hotels. By a lease deed dated 17-3-1988 the respondent took on perpetual lease a plot of land (bearing plot No. 18 admeasuring 1992.50 square metres situated at village Morombi-O-Pequeno Goa from the Economic Development Corporation of Goa (for short the EDC) by paying a premium of Rs. 40,16,425 and agreeing to pay yearly rent of Rupee one for the first five years and at the rate of 1 per cent of the amount of premium thereafter. The plot was taken on lease by the respondent for the purpose of establishment of a hotel. The respondent thereafter obtained a building licence for the construction of a hotel building from the local authority as also the necessary permission from the Department of Tourism and commenced the construction of a hotel building in the year 1990. The contract for the construction of the building was given to M/s Likproof India Private Limited. During the period 1990 to 1995 the respondent spent a sum of Rs. 2,78,68,664 towards the construction cost. The money was spent in instalments as the work progressed. The construction of the building however could not be completed for the lack of sufficient funds and inability of the respondent to tie up and secure necessary funds for completing the construction. The respondent therefore desired to sell the incomplete hotel project. In June, 1995 the respondent sold the hotel project consisting of land as also partly constructed building for a consideration of Rs. 11 crores. The respondent filed return of its income for the assessment year 1996-1997 ending on 31-3-1996 in which it is declared the sale transaction. The respondent claimed the profit earned by it by sale of the hotel project was in the nature of a capital gain. The Assessing Officer held that what the assessee had transferred was a land with a building which was incomplete. The hotel building which was under construction was not held by the assessee for a period of more than three years and therefore the profit arising on sale of the incomplete hotel project was a short-term capital gain. After deducting the cost of the acquisition of the land and the cost of construction of the incomplete building from the sale price of Rs. 11 crores, the surplus of Rs. 7,80,05,356 was held to be a short-term capital gain liable for tax. The Assessing Officer rejected the contention of the respondent that it was a long-term capital gain and completed the assessment treating the profit of Rs. 7,80,05,356 as a short-term capital gain.

3. Aggrieved by the decision of the Assessing Officer rejecting the contention of the respondent that the profit arising from the sale of the hotel project was in the nature of a long-term capital gain, the respondent filed an appeal before the Commissioner of Income-tax (Appeals) (for short CIT (Appeals)). The CIT (Appeals) held that the assessee had maintained the accounts properly and therefore it was possible to ascertain how much money was spent by the assessee on the hotel project up to 18-6-1992 i.e., three years prior to the date of the sale and how much amount was spent thereafter. By considering the accounts and taking into the lease premium paid, and the expenses for the construction he held that Rs. 2,01,41,361 were spent by the assessee up to 18-6-1992 and of Rs. 1,18,53,282 were spent between 19-6-1992 to 18-6-1992 i.e. the date of sale. He held that the capital gain therefore should be apportioned in the proportion of the money spent prior to 18-6-1992 and the money spent after 18-6-1992. He further held that the amount of capital gain attributable to the money spent prior to 18-6-1992 should be treated as a long-term capital gain and that attributable to the money spent after 18-6-1992 should be treated as a short-term capital gain. He also allowed indexation on the basis of the actual date of spending of the money. He accordingly directed the Assessing Officer to recompute the capital gain and the tax payable by the respondent.

4. Aggrieved by the decision of the CIT (Appeals) the respondent as well as the appellant filed separate appeals before the Tribunal. Before the Tribunal the respondent contended that the land was a different asset than the building (under construction). Though the sale deed mentioned a composite consideration for the land and building it would have to be bifurcated into two viz. the consideration attributable for the land and the consideration attributable for the building on sound legal principles. Since the land was held for more than three years the entire profit attributable to and arising out of the sale of the land should be treated as a long-term capital gain. The revenue which is the appellant before us contended before the Tribunal that the lease of the land was surrendered by the assessee to EDC and thereafter the lease was granted by EDC in favour of the purchaser – Peerless by entering into a tripartite agreement. What was sold by the respondent was the building under construction. The building being incomplete, it could not be said to have been held by the assessee for more than 36 months and therefore the entire profit arising out of the sale of the building should be treated as a short-term capital gain. The revenue contended that no part of the profit would be attributable towards the sale of the leasehold right in the land and the entire capital gain should be construed as a short-term capital gain arising out of the sale of the building. The Tribunal held that out of the consideration of Rs. 11 crores, a consideration of Rs. 2.15 crores only could be attributable to the sale of the superstructure and the balance consideration was attributable to the sale of the land. The Tribunal held that after deducting Rs. 1.85 crores being the cost of the incomplete building capital gain of Rs. 30 lakhs was attributable to the sale of a incomplete building and the rest of the capital gain was attributable to the Transfer of the land. The Tribunal held that the land was a different asset than the superstructure and therefore the profit arising out of the sale of land, which was an independent capital asset, should be treated as a long-term capital gain while-only a sum of Rs. 30 lakh being the profit arising out of sale of the incomplete building should be treated as a short-term capital gain. It accordingly partly allowed the appeal of the respondent. Being aggrieved by the decision of the Tribunal, the revenue is in appeal.

5. By order dated 12-8-2002 this Court while admitting the appeal framed the following substantial questions of law :

(A) Whether on the facts and in the circumstances of the case, the amount of Rs. 11 crores, received by the assessee as the sale consideration for transfer of incomplete building, would be termed as long term capital gains or short-term capital gains, in the hands of the assessee ?

(B) Whether the finding of the ITAT based on the approved valuer’s estimate, that the value of the superstructure as on the date of transfer is to be adopted at Rs. 2.15 crores, out of which after deducting Rs. 1.85 crores being actual cost of construction, capital gain of Rs. 30,00,000 has to be apportioned between long-term capital gain and short-term capital gain in the ratio of expenditure incurred by the assessee within three years or beyond three years, is contrary to the provision of the Income-tax Act ?

(C) Whether the finding of the ITAT that the balance capital gains of Rs. 8.85 crores, as long-term capital gain, is unjustifiable in law ?

6. Ms. Asha Dessai, the learned Counsel appearing for the appellant submitted that it was the case of the respondent that it intended to implement the hotel project and accordingly acquired the leasehold land and commenced the construction of the hotel building thereon. The building was incomplete and even before the completion of the hotel project the respondent sold the entire hotel project. The consideration paid by the purchaser was a composite consideration paid for the hotel project and there was no bifurcation between the consideration for the land and consideration for the incomplete building. It was the case of the respondent before the Assessing Officer that the incomplete hotel project itself was sold. As such, the Tribunal ought not to have treated the land as a separate asset and the building under construction as a distinct asset. Only one asset namely the incomplete hotel project was sold by the respondent. The hotel project constructed was a single and indivisible asset. The asset, namely the incomplete hotel project, was not held for more than 36 months, as the project was still under implementation. The entire profit was therefore liable to tax as a short-term capital gain.

7. Per contra, Mr. Pardiwalla, the learned Senior Counsel appearing for the respondent submitted that the Tribunal had rightly held that the land to be distinct and separate asset and the building under construction to be a different asset. Though the consideration was single and indivisible it was required to be bifurcated between two different separate and distinct assets namely the land and the building. In support of his contention he referred to and relied upon a decision of this Court in CIT v. Citibank N.A. [2003] 261 ITR 570 1, a decision of the Madras High Court in CIT v. Dr. D.L. Ramachandra Rao [1999] 236 ITR 51, and a decision of the Punjab and Haryana High Court in CIT v. A.S. Aulakh [2008] 304 ITR 27 .

8. In Citibank N.A.’s case (supra) the assessee had purchased a plot of land in the year 1975 for constructing a bungalow for residence of its manager in New Delhi. Next year the building construction was started and completed sometime thereafter. On 7-8-1978 the assessee sold the entire property consisting of land and building together with air-conditioning plant, equipment, installations and fixtures for a sum of Rs. 30 lakh. In the conveyance the price was allocated : for the land Rs. 14,00,000; for the building Rs. 9,00,000 and for the air-conditioning plant, equipment, installations and fixtures Rs. 7,00,000. The assessee claimed the short-term capital gain of Rs. 26,242 on the sale of house property and a long-term capital gain of Rs. 4,87,913 on the sale of land. This working was not accepted by the Assessing Officer who took the view that the house had been constructed on the land and the gain arising on a transfer of this house which was not held for a period of three years was a short-term capital gain. The Tribunal however held that the profit arising out of sale of a land be computed as a long-term capital gain and profit arising out of sale of a building be computed as a short-term capital gain. Confirming the decision of the Tribunal, this Court held that the land was an independent and identifiable capital asset and would continue to so even after the construction of the building thereon. If the land was held by the assessee for a period of more than the period prescribed under section 2(42A) of the Income-tax Act i.e., 36 months then it was not possible to say that by construction of a building thereon, the land which was a long-term capital asset ceased to be such long-term capital asset.

9. In Dr. D.L. Ramachandra Rao’s case (supra) a plot of land was allotted by a housing society to the assessee in March, 1978. The assessee commenced the construction of the building on the plot in March, 1985 and completed the construction in 1987. He sold the property on 23-9-1987 for a total consideration of Rs. 3,50,000. The assessee claimed that the building was newly constructed and as it was sold immediately and the entire capital gain that accrued to him was solely attributable to the sale of the land in question. The Assessing Officer rejected the claim of the assessee on the ground that both the land and house were inseparable. He held that since the house was held for a period of less than 36 months, it was a short-term capital gain. The Tribunal held that the assessee was entitled to treat the capital gain that arose or attributable to the sale of land as long-term capital gain. Affirming the decision of the Tribunal the High Court held that it was not possible to say that by construction of a building, the land which was a long-term capital asset had ceased to be a long term capital asset. The land was an independent and an identifiable capital asset and it continued to remain an identifiable capital asset even after the construction of a building. Since the land was held by the assessee for a period exceeding 36 months, the land cannot be regarded as a short-term capital asset only by virtue of the construction of a building thereon.

10. The decision in CIT  v. Vimal Chand Golecha [1993] 201 ITR 442 Rajasthan High Court cited by Ms. Dessai does not help the revenue at all. In fact therein the Rajasthan High Court has followed the decision of the Madras High Court in Dr. D.L. Ramachandra Rao’s case (supra) and has held that if the price for two capital assets has been charged as one consolidated price, then the assessee is entitled to bifurcate the same. As the situation may arise, where a gain from one of the capital assets is a short-term capital gain while from the other it is a long-term capital gain, the benefit to the assessee cannot be denied in respect of the gain arising out of the sale of long-term asset.

11. In our view whether the construction of the building has been completed or not would also not make any difference. It is well settled by now that, unlike in England, in India, the concept of dual ownership is recognised in the sense that the land may belong to one person and the building standing thereon may belong to another. Reference may be made in that connection to the decision of the Supreme Court in Dr. K.A. Dhairyawan v. J.R. Thakur AIR 1958 SC 789 and a decision of the Division Bench of this Court in CIT v. Fazalbhoy Investment Co. (P.) Ltd. [1997] 109 ITR 802 . Once the concept of dual ownership is accepted it matters not whether the construction of a building is completed or not. It also matters not whether the building is constructed by the owner of the land or by somebody else. In case of a leasehold land, the lease hold right would also be a capital asset under section 2(14) of the Income-tax Act in the hands of the lessee. In a given case the owner of the land and the owner of the building may be same person but that does not mean that two assets merge merely because they are owned by the same person. The capital gain arising out of sale of the land of the building can and would be required to be bifurcated, a gain arising out of the sale of land and a gain arising out of superstructure whether the building is complete or not. Consequently we are of the view that the Tribunal was right in holding that the capital gain arising out of the sale the leasehold interest in the land in incomplete building will have required to be bifurcated into the gain arising out of a sale of lease hold interest in the land and the sale of the incomplete building. Question (A) is therefore answered in favour of the assessee and against the revenue.

12. The Tribunal has bifurcated the consideration of Rs. 11 crores received by the assessee into two parts. It held that the consideration for the building was Rs. 2.15 crores while remaining consideration was for the land. It is matter of a common knowledge that with the passage of time the value of the building may not appreciate much and in fact may depreciate with the passage of time. The land does not require repairs or maintenance while the building require repairs and maintenance. If not maintained properly the value of the building can depreciate which is not the case in respect of a land. The rate of rise in the prices for land far exceeds the rate of increase in cost of construction and or value of a superstructure. Therefore, even if there may be some appreciation in the value of a building due to rise in the cost of the construction, deducting therefrom the depreciation arising out of maintenance the net appreciation often is small. In the present case, the building was still under construction. The Tribunal has held that the value of the building would be Rs. 2.15 crores as against the construction cost of Rs. 1.85 crores. The Tribunal has accepted the appreciation to the extent of approximately 15 per cent for the building under construction. In the absence of any material brought on record that this was an erroneous, we cannot hold that the decision of the Tribunal on the second question in anyway to be perverse or contrary to the provisions of Income-tax Act. The question No. (B) is therefore answered in the negative i.e., in favour of the assessee and against the revenue.

13. In view of the answer to the questions (A) and (B) given above, the third question does not survive and if at all it survives is answered in favour of the respondent and against the revenue.

14. For these reasons, there is no merit in the appeal which is hereby dismissed.

[Citation : 335 ITR 60]

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