By TIOL News Service

MUMBAI, DEC 22, 2015: THE issue is - Whether if assessee had only leasehold rights for a long time, he can be treated as owner of property so as to compute capital gains by adopting market value as per provisions of Sec 50C. NO is the answer.

Facts of the case

The assessee, an individual, filed his return of income for AY under consideration declaring total income of Rs. 28,24,185. Subsequently, he filed a revised return of income on 4th February 2011, declaring total income of Rs. 28,77,839. During assessment, AO noticed that the assessee had sold a property during the relevant previous year for a consideration of Rs. 2,35,07,298. AO therefore, called upon the assessee to furnish the details relating to the property sold. After verifying the details furnished by the assessee, AO found that in the computation of capital gain, the assessee had worked out short term capital gain of Rs. 14,47,029, on sale of factory premise and lease hold land. AO further noted that for computing the short term capital gain, the assessee had taken sale consideration of Rs. 1 crore. However, the market value of the property was Rs. 2,35,07,298. AO, therefore, proposed to compute capital gain by invoking the provisions of section 50C. Objecting to such action of AO, it was submitted by the assessee that provisions of section 50C will not be applicable as the land transferred was by way of a deed of assignment and the assessee was not the owner of and and further the land was a lease hold land. It was submitted by the assessee that the lease hold land was assigned to M/s. Scan Orbit, along with factory shed having constructed area of 2,205 sq.ft. The assessee also bifurcated the sale consideration of Rs. 1 crore between the building and land by apportioning an amount of Rs. 22,05,000, towards building by taking the cost of construction at Rs. 1,000 per sq.ft. The balance amount of Rs. 77,95,000, was apportioned towards assignment of lease hold land. AO, however, did not find merit in the submissions of the assessee and observed that the assessee was allowed the plot of land on lease basis for a period of 60 years on fixed ground rent and on deposit of certain amounts. Though, AO agreed that no sale consideration was paid by the assessee for getting allotted the plot, however, it had observed that the assessee had not shown the land in block of assets in the Balance Sheet, whereas AO had only shown the factory premise at Rs. 3,50,464 and observed that when the assessee had shown an asset forming part of block of asset on which the depreciation had been allowed, the income arising from sale of such capital asset had to be treated as short term capital gain. AO observed that the lease for 60 years was a very long period and the lease was also not revocable for all practical purpose. Thus, in essence, the assessee had become owner of the subject land. On the aforesaid basis, AO proceeded to compute the short term capital gain on sale of factory premises and long term capital gain on sale of plot of Rs. 213,02,298. On appeal, CIT(A) deleted the addition made by AO by invoking provisions of section 50C by holding that section 50C cannot be applied in respect of lease hold rights. In this context, CIT(A) relied upon the decision of the Tribunal, Mumbai Bench, in Atul G. Puranik v/s ITO, 132 ITD 499 (Mum.). CIT(A) held that the assessee was not the owner of the land was only having lease hold rights, hence, for transfer of such lease hold rights, provisions of section 50C cannot be invoked.

Having heard the matter, the Tribunal held that,

++ it is evident from the assessment order where AO has computed long term capital gain on assignment of lease hold rights of the plot by taking the market value as per section 50C only for the reason that the lease hold rights are for 60 years, hence, for all practical purpose, the assessee should be held to be the owner of the property. However, as could be seen from the terms of the allotment letter, the lease hold rights conferred on the assessee is on certain terms and conditions attached thereto. Therefore, it cannot be said that the assessee has absolute rights of an owner. In this context, a reference can be made to the decision of the Tribunal, Pune Bench, in Kancast Pvt. Ltd. v/s ITO 2015-TIOL-151-ITAT-PUNE, wherein the co-ordinate bench, while considering the application of provisions of section 50C, in respect of transfer of lease hold rights of 99 years, held that as the assessee is only having lease hold rights, the provisions of section 50C would not apply. It will be pertinent to observe while so deciding, the co-ordinate bench also took note of the decision of the Tribunal, Mumbai Bench in Shavo Norgren Pvt. Ltd. The other decisions relied upon by the Counsel for the assessee also express similar view. Therefore, as the assessee was having only lease hold rights for a period of 60 years, he cannot be considered to be the owner of the property so as to compute capital gain by adopting the market value as per the provisions of section 50C. In the aforesaid view of the matter, we agree with the decisions of the CIT(A) in deleting the additions made on account of long term capital gain. Thus, ground no.1 raised by the Revenue is dismissed. The CIT(A) has violated provisions of rule 46A by considering additional evidence produced by the assessee without affording an opportunity to AO to examine the same. That being the case, without entering into the merits of legality / validity of computation of short term capital gain, we restore the matter back to the file of the AO for deciding afresh after considering all the evidences produced by the assessee and only after due opportunity of hearing to him. Ground no.3, is allowed for statistical purposes. In the result, Revenue's appeal stands partly allowed for statistical purposes. As far as assessee's cross objection no.42/Mum./2014, is concerned, the learned Counsel for the assessee did not press the grounds raised therein. Hence, assessee's cross objection is dismissed as "not pressed". To sum up, while Revenue's appeal stands partly allowed for statistical purposes, the assessee's cross objection stands dismissed.

(See 2015-TIOL-2109-ITAT-MUM)