2003 (4) TMI 92 - HC - Income Tax

Sale of land with later-built house: must split land vs building for capital gains; land LTCG, building STCG.

Whether gains on sale of a residential property comprising land and a subsequently constructed building must be bifurcated for capital gains purposes was ... Computation of capital gains - profits arising from the sale of land - construction of a bungalow as a residence - Whether, the Tribunal was right in law in holding that the surplus realised on the sale of land shall be treated as long-term capital gains and the surplus on the sale of building shall be treated as short-term capital gain ? - HELD THAT:- In this case, we are concerned with the assessment year 1979-80. Under section 32(1)(ii), the assessee was entitled to deduction for depreciation in case of buildings, machinery, plant or furniture, etc. That deduction was to consist of a certain percentage on the written down value. Therefore, under section 32, the assessee was entitled to depreciation only in respect of the buildings and not the land. It is well-settled that in the matter of capital gains, the charging section 45 and the computation provisions under sections 48 and 50, constitute one integrated code. That, the character of computation provisions bear direct relationship to the nature of the charge under section 45 of the Income-tax Act. This point is important to decide the point at issue in this case because, without the computation provisions, the charge by itself under section 45 cannot stand. Hence, bifurcation is necessary between the site and the building for the purposes of capital gains. Therefore, profits arising from the sale of site are required to be treated separately from profits arising from the sale of building. In the present case, on the sale of land carried to the building vide conveyance dated August 7, 1978, the gain which accrued to the assessee was long-term capital gain and the Department was wrong in treating such gain as short-term capital gain. Our view is supported by the judgment of the Madras High Court in the case of CIT v. Dr. D. L. Ramachandra Rao [1997 (2) TMI 28 - MADRAS HIGH COURT], which has taken the view that if the lands are held by the assessee for a period more than the period prescribed under section 2(42A) of the Income-tax Act, 1961, viz., 36 months, then, it is not possible to say that by construction of the building thereon, the land which was a long term capital asset ceases to be such long-term capital asset. This is because, the land is an independent and identifiable capital asset, and it continues to remain so even after construction of the building thereon. We respectfully agree with the view taken by the Madras High Court in the above judgment. Accordingly, we answer the above question in the affirmative, i.e., in favour of the assessee and against the Department. Accordingly, the reference is disposed of with no order as to costs. Issues:Interpretation of capital gains on the sale of land and building for assessment year 1979-80.Analysis:For the assessment year 1979-80, the High Court of Bombay was tasked with determining whether the surplus realized on the sale of land should be treated as long-term capital gains and the surplus on the sale of building as short-term capital gain. The case involved an assessee who purchased a plot of land and constructed a building on it before selling the entire property. The Department disagreed with the assessee's classification of capital gains, arguing that the land and building should be considered as one inseparable asset. The Tribunal, on the other hand, viewed the land and building as distinct assets, with profits from the sale of land to be treated as long-term capital gain and profits from the building as short-term capital gain.Facts:The assessee, a non-resident company engaged in banking business in India, sold a property comprising land and a building. The Department contested the assessee's classification of capital gains, asserting that the land and building should be treated as a single unit. The assessee, however, argued that Indian law recognizes separate ownership of land and building, allowing for the differentiation of capital gains related to each component. The High Court examined relevant provisions of the Income-tax Act, including sections 32, 45, 48, and 50, to determine the treatment of capital gains in the case.Arguments:The Department contended that the land and building should be considered an inseparable asset after construction, making it impossible to bifurcate capital gains. Conversely, the assessee argued that separate ownership of land and building in Indian law allows for the distinct treatment of capital gains related to each component. Legal precedents, including judgments from the Supreme Court and the Madras High Court, were cited to support the respective arguments.Findings:The High Court analyzed provisions of the Income-tax Act related to depreciation, cost of acquisition, and computation of capital gains. It emphasized that depreciation under section 32 is allowable only on the cost of the superstructure and not on the land. The Court highlighted the importance of distinguishing between the site and the building for capital gains purposes, citing the integrated nature of sections 45, 48, and 50. Ultimately, the Court held that the gain from the sale of land, even after construction of a building, should be treated as long-term capital gain, contrary to the Department's assertion of it being short-term capital gain.Conclusion:In conclusion, the High Court ruled in favor of the assessee, determining that the surplus realized on the sale of land should be treated as long-term capital gains, and the surplus on the sale of the building as short-term capital gain. The reference was disposed of with no order as to costs.