1998 (9) TMI 81 - HC - Income Tax

High Court Upholds Correct Capital Gains Tax Treatment in Property Sale Dispute

The High Court held that the capital gains tax treatment was correct in a case where the assessee sold a flat shortly after purchasing it, leading to a ... Capital Gains, Lease, Ownership, Transfer, Acquisition Issues involved: The judgment involves the question of whether the value of the assessee's right of occupation as a tenant should be treated as part of the cost of the flat for computing capital gains tax.Summary:The case pertains to the assessment year 1977-78 where the assessee jointly held a flat in Bombay with his mother. The flat was originally leased in 1962-63 and later purchased by the assessee and his mother in January 1976. Subsequently, the flat was sold in May 1976, leading to a dispute over the treatment of capital gains tax. The Income-tax Officer assessed the capital gains as short-term, considering the sale within a few months of purchase. The assessee contended that the consideration should be apportioned between the occupancy right and ownership right, with only the latter being subject to short-term capital gains tax. The Commissioner of Income-tax (Appeals) disagreed, leading to an appeal to the Income-tax Appellate Tribunal.The Special Bench of the Tribunal accepted the assessee's contention, viewing the sale as a transfer of a composite asset formed by the merger of the smaller estate (tenancy right) and the bigger estate (ownership right). The Tribunal held that the cost of the composite estate should be computed based on the market value of the smaller estate at the time of acquiring the bigger estate. The Revenue challenged this decision, arguing that the flat was solely an ownership right after purchase, and the capital gains were correctly assessed as short-term.The High Court agreed with the Revenue, stating that upon purchase, the tenancy right merged with the ownership right, extinguishing the tenancy. The doctrine of merger applied, leading to a complete union of interests between lessor and lessee. The Court emphasized that the asset transferred was the flat acquired by the assessee, making the tenancy right irrelevant post-purchase. Consequently, the capital gains were rightly treated as short-term, as determined by the Income-tax Officer.Therefore, the High Court ruled in favor of the Revenue, holding that the capital gains tax treatment was appropriate, and disposed of the reference accordingly.