2003 (3) TMI 38 - HC - Income Tax

Transfer of Building on Leased Land: Consideration for Building and Leasehold Right Exempt from Capital Gains Tax

The High Court upheld the Tribunal's decision that the transfer of a building on leased land included both the building and the leasehold right. The Court ... Transfer of leasehold right - composite transfer of building and leasehold interest - capital gains on surrender or transfer of leasehold right - interpretation of sale deed in light of lessor's consent and antecedent agreementsComposite transfer of building and leasehold interest - interpretation of sale deed in light of lessor's consent and antecedent agreements - transfer of leasehold right - capital gains on surrender or transfer of leasehold right - Whether the transfer to the purchaser was a composite transfer of the building together with the leasehold right and, if so, whether the portion of consideration attributable to the leasehold right is subject to capital gains tax. - HELD THAT: - The Tribunal's conclusion that the transaction comprised both the building and the leasehold right is supported by the lease deed, the Cochin Port Trust's communication dated January 11, 1985 (which granted sanction to transfer the lease subject to conditions), and clause (5) of the agreement between the assessee and the transferee which expressly undertook surrender of the land to enable re allotment. Although the sale deed described transfer of structures, the Port Trust's letter required the vendor to transfer structures and surrender the land to enable lease allotment to the transferee; consequently the sale and associated documents show a composite transaction transferring the building together with the lessee's interest in the leasehold premises. The Tribunal reasonably accepted the assessee's allocation of Rs.1 lakh as consideration for the leasehold right. On the legal question of taxability, the Tribunal correctly applied the principle in B.C. Srinivasa Setty that consideration received on surrender or transfer of a leasehold right (where no cost of acquisition is attributable) is not liable to capital gains tax. There is no warrant to interfere with the concurrent factual findings that the transaction was composite and that the apportionment towards the leasehold right was reasonable.The transfer was a composite transfer of the building and the leasehold right; the portion of the consideration attributable to the leasehold right (accepted at Rs.1 lakh by the Tribunal) is not chargeable to capital gains, and the Tribunal was rightly upheld.Final Conclusion: The reference is answered in the affirmative in favour of the assessee: the Tribunal was correct in holding that the transaction was a composite transfer of the building and the leasehold right and in treating the consideration attributable to the leasehold right as not liable to capital gains. Issues:Interference with Commissioner of Income-tax (Appeals) order by Tribunal.Analysis:The case involved a question of law referred by the Income-tax Appellate Tribunal regarding the interference with the order of the Commissioner of Income-tax (Appeals). The assessee, a company, obtained a leasehold right in a piece of land from the Cochin Port Trust and sold the building constructed on it during the relevant accounting period. The Assessing Officer computed capital gains on the transfer, which the assessee contested. The Commissioner of Income-tax (Appeals) directed the Assessing Officer to verify the actual capital gains, leading to further appeals and conflicting views. The Tribunal concluded that the transfer included both the building and the leasehold right, considering various documents and the Supreme Court decision in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, holding that the consideration for the surrender or transfer of the leasehold right was not liable to capital gains.The senior Central Government standing counsel argued that the Tribunal erred in its interpretation, emphasizing that the transfer was solely for the building, not the leasehold right. Conversely, the respondent's counsel contended that the transfer encompassed both the building and the leasehold right, supported by relevant correspondences and documents. The Tribunal extensively analyzed the lease agreement, communications, and sale deed, concluding that the transfer included both the building and the leasehold right based on the terms and conditions stipulated by the Cochin Port Trust.The High Court examined the lease agreement, correspondence, and sale agreement, affirming the Tribunal's decision that the transfer involved both the building and the leasehold right. Emphasizing the value of the leasehold right in relation to the land, the Court upheld the Tribunal's finding that the consideration received was for both components. The Court concurred with the Tribunal's acceptance of Rs. 1 lakh as reasonable consideration for the transfer of the leasehold right. Consequently, the Court ruled in favor of the assessee, affirming that the transfer included both the building and the leasehold right, exempting the consideration from capital gains tax.