Leasehold to freehold conversion does not restart the holding period for capital gains classification.

The period of holding remains the governing test for classifying capital gains as short-term or long-term. Conversion of leasehold rights into freehold rights merely improves the title already held and does not create a fresh holding period from the date of conversion. Where the assessee had acquired the property originally as leasehold and sold it shortly after conversion, the later freehold conversion did not reset ownership for capital gains purposes. The gain was therefore not short-term merely because the sale followed the conversion, and the original holding period controlled the tax classification.

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Issues: Whether conversion of leasehold rights into freehold rights, followed by sale within a few days, changed the character of the capital asset so as to make the gain short-term instead of long-term.

Analysis: The period for which the asset was held is the governing test for distinguishing a short-term capital asset from a long-term capital asset. Conversion of leasehold rights into freehold rights merely improves the title already held by the assessee and does not create a fresh period of holding from the date of conversion. The assessee had held the property in substance since the original leasehold acquisition, and the later conversion did not alter the character of the holding for capital gains purposes.

Conclusion: The gain was not to be treated as short-term merely because the property was converted into freehold shortly before sale; the issue was decided against the Revenue and in favour of the assessee.

Final Conclusion: The appeal failed because the sale was taxable on the basis of the original holding period, and the conversion into freehold did not reset the period of ownership for capital gains classification.

Ratio Decidendi: Conversion of leasehold rights into freehold rights is only an improvement of title and does not interrupt or restart the period of holding for the purpose of determining whether capital gains are short-term or long-term.

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