2015 (9) TMI 553 - AT - Income Tax

Assessee's Appeal Partially Allowed: Tax on Capital Gains, Deductions Granted

Sri Laxmidas Bapudas Darbar Versus The Income Tax Officer, Ward 1, Bagalkot.

The appeal by the assessee was partly allowed. The sum of Rs. 33 lakhs was to be taxed under 'Capital Gains', and the FMV of the land and building was not ... Income under the head “Long Term Capital Gain” (LTCG) on surrender of tenancy rights - Whether the CIT(Appeals) was right in coming to the conclusion that there was no transfer of leasehold rights by the assessee in favour of the lessors? - Held that:- Admittedly, the compromise decree was registered and a sum of ₹ 8,49,639 was incurred as stamp duty and registration expenses in registering the compromise decree. A further sum of ₹ 5,81,090 had also been incurred to demolish the structure on the area surrendered to the lessors by the Assessee. It may be true that the compromise decree does not refer to the payment of the sum of ₹ 33 lacs as a payment for surrender of leasehold rights by the Assessee, but the circumstances of the case clearly show that the said payment was towards surrender of leasehold rights. The only modification is that the said sum of ₹ 33 lacs was to be taken by the Assessee after incurring expenses for registration of compromise decree and expenses of demolition of structures. The sum of ₹ 33 lakhs is therefore rightly assessable to tax u/s. 45 of the Act and not under the head ‘income from other sources. The fact that the compromise decree does not refer to the payment of ₹ 33 lacs cannot be the basis to hold that the said sum is not towards surrender of leasehold rights. There was no necessity for the lessors to pay the aforesaid sum but for the Assessee relinquishing leasehold rights over part of the property in favour of the lessors. We therefore hold that the sum of ₹ 33 lacs was paid in lieu of the Assessee surrendering his leasehold rights in favour of the lessors subject to certain directions for incurring of certain expenses by the Assessee and therefore the said receipt by the Assessee is attributable to release of leasehold rights in favour of the lessors. Consequently the sum of ₹ 33 lacs is assessable to tax under the head “Capital Gains” subject to the computation provisions of Sec.48 of the Act. We hold accordingly. Tax the FMV of 42 guntas of land & building obtained by the assessee under compromise decree in the form of perpetual leasehold right under the head ‘income from other sources’ - Held that:- As far as the assessment of FMV of 42 guntas of land & building which was given on a permanent lease to the assessee under the compromise decree as income from other sources, we are of the view that the assessee was already having leasehold interest over the said area of the land and the compromise decree only reaffirms the said position. The assessee has not acquired any right whatsoever over this property by virtue of compromise decree. Therefore, conclusion of the CIT(Appeals) to tax the FMV of this property is without any basis. There is no provision under the Act, under which the sum in question can be brought to tax. U/s. 56(2)(vii) which was inserted by the Finance Act, 2009 w.e.f. 1.10.2009, the FMV of immovable property which is transferred without consideration, can be brought to tax in the hands of transferee. Even assuming that there was a transfer of leasehold rights in favour of the assessee by virtue of compromise decree, the provisions of section 56(2)(vii) are not applicable for the assessment year 2006-07 and therefore assessment directed by the CIT(Appeals) cannot be sustained and the same is hereby deleted. Expenses towards dismantling structures of leasehold property - Held that:- U/s. 48 of the Act, there is no requirement that expenditure incurred wholly and exclusively in connection with the transfer, has to be incurred only by the assessee. Since the factum of expenditure having been incurred is not disputed and since, admittedly, this was an expenditure incurred wholly and exclusively in connection with such transfer, the deduction claim, in our view, had to be allowed. We hold and direct accordingly. We also find merit in the contention of the learned counsel for the Assessee that since this expenditure was specifically required to be incurred by the Assessee under the receipt cum acknowledgement dated 27.6.2006, it constitutes a diversion of income at source and cannot be construed as income that accrued to the Assessee. Deduction being the indexed cost of acquisition of the structure - Held that:- We are of the view that the said claim for deduction is unsustainable for the reason that the subject matter of transfer by assessee in favour of the lessors did not include any structure and therefore the claim would fail to satisfy the test as laid down in section 48(ii) of the Act. Cost of acquisition of leasehold rights disallowed - Held that:- The capital asset transferred was a leasehold right. Evidence on record goes to show that leasehold rights have been acquired by the assessee’s predecessors in interest in the year 1907 i.e., 07.12.1907 by paying a sum of ₹ 8,500. The assessee would therefore be entitled to claim deduction of cost of acquisition of leasehold interest as on 1.4.1981. The assessee will also be entitled to benefit of indexation of this cost upto the date of transfer of the leasehold rights. The assessee has not quantified this sum and therefore, in our view, it would be just and proper to direct the assessee to make a claim before the AO in this regard. The AO is directed to examine such a claim and allow deduction in accordance with law. - Decided partly in favour of assessee. Issues Involved:1. Whether the CIT(Appeals) was right in concluding that there was no transfer of leasehold rights by the assessee in favor of the lessors.2. Whether the receipt of Rs. 33 lakhs by the assessee can be attributed to such transfer (relinquishment) of leasehold rights in favor of lessors.3. Whether the action of the CIT(Appeals) in bringing to tax the FMV of 42 guntas of land & building obtained by the assessee under the compromise decree in the form of perpetual leasehold right under the head 'income from other sources' can be sustained.4. Whether the claim of assessee for computation of capital gains tax as made in the return of income should be accepted.5. Whether the assessee is not liable to tax on the capital gain in question by reason of the family arrangement dated 4.11.1972 and therefore the income in question was rightly assessable to tax only in the hands of the assessee's wife.6. Whether the claim of the assessee that in the event of assessee not being allowed deduction of a sum of Rs. 10,19,446, which was the indexed cost of acquisition of the structure, then whether assessee is entitled to a deduction on account of cost of acquisition of the leasehold rights as indexed while computing capital gain, especially in the light of provisions of section 48 of the Act.Detailed Analysis:Issue 1: Transfer of Leasehold RightsThe CIT(Appeals) concluded that there was no transfer of leasehold rights by the assessee in favor of the lessors. However, the Tribunal found that the sum of Rs. 33 lakhs was indeed given for the assessee and his wife relinquishing their leasehold interest in the property. The receipt-cum-acknowledgement dated 27.6.2005 confirmed this. Thus, the Tribunal held that the Rs. 33 lakhs were received for surrendering leasehold rights and should be taxed under 'Capital Gains' rather than 'Income from Other Sources'.Issue 2: Receipt of Rs. 33 LakhsThe Tribunal determined that the Rs. 33 lakhs received by the assessee was attributable to the surrender of leasehold rights. The fact that the compromise decree did not mention this amount explicitly did not change its nature. The sum was paid in lieu of the assessee relinquishing leasehold rights, thus it should be taxed under 'Capital Gains'.Issue 3: FMV of 42 Guntas of Land & BuildingThe CIT(Appeals) assessed the FMV of 42 guntas of land and building as 'income from other sources'. The Tribunal disagreed, stating that the assessee already had leasehold interest over this land, and the compromise decree only reaffirmed this. Therefore, the FMV could not be taxed under 'income from other sources'.Issue 4: Computation of Capital Gains TaxThe Tribunal upheld the assessee's computation of capital gains tax, allowing the deduction of expenses incurred for dismantling structures and registration of the compromise decree. These expenses were deemed necessary and directly related to the transfer of the leasehold rights.Issue 5: Tax Liability Due to Family ArrangementThe assessee argued that the capital gain should be taxed in the hands of his wife due to the family arrangement dated 4.11.1972. The Tribunal found that the provisions of section 64(1) of the Income Tax Act were applicable, as both the assessee and his wife were living in the same premises. Thus, the capital gain was rightly assessable in the hands of the assessee.Issue 6: Deduction of Indexed Cost of AcquisitionThe Tribunal found that the claim for deduction of Rs. 10,19,446 as the indexed cost of acquisition of the structure was unsustainable since the structure was not part of the transfer. However, the assessee was entitled to claim the cost of acquisition of leasehold rights as of 1.4.1981, and the benefit of indexation up to the date of transfer. The assessee was directed to make a claim before the AO for this deduction.Conclusion:The appeal by the assessee was partly allowed. The sum of Rs. 33 lakhs was to be taxed under 'Capital Gains', and the FMV of the land and building was not to be taxed under 'income from other sources'. The assessee was entitled to deductions for expenses incurred in connection with the transfer and the cost of acquisition of leasehold rights. The Tribunal directed the AO to examine and allow the deduction claim accordingly.