Merger of leasehold into ownership barred bifurcation of capital gains, leaving the transfer taxable as short-term gain.

The transfer of a site was treated as a transfer of absolute title acquired on execution of the sale deed, not as a separable transfer of leasehold and ownership interests for capital gains purposes. Any earlier lesser leasehold interest merged into the larger ownership estate on conveyance, so no distinct leasehold right survived for separate taxation. Although leasehold rights can be capital assets, the merger doctrine prevented their independent transfer once title vested. The resulting gain was therefore short-term capital gain, and bifurcation of consideration or cost between short-term and long-term components was not permissible.

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Issues: Whether the transfer of the site gave rise to short-term capital gains alone or required bifurcation between leasehold rights and ownership rights for the purposes of capital gains taxation.

Analysis: The asset transferred was the absolute title in the site, acquired by the assessee on execution of the sale deed in his favour. Any lesser interest held earlier under the lease-cum-sale arrangement merged into the larger estate on the conveyance, and the assessee thereafter held only the full ownership in the property. The doctrine of merger, as recognised in section 111(d) of the Transfer of Property Act, prevented the leasehold interest from subsisting separately after the vesting of title. Although leasehold rights may constitute a capital asset within section 2(14) of the Income-tax Act, 1961, no separate leasehold interest remained capable of transfer once it had merged in the ownership estate.

Conclusion: The transfer was of the absolute title held only from the date of the sale deed, and the resulting gain was a short-term capital gain; bifurcation of consideration or cost between short-term and long-term components was not permissible.

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