Section 50C doesn't apply to leasehold rights transfer; long-term capital gains with indexation allowed

The ITAT Delhi held that Section 50C does not apply to transfer of leasehold rights in land and buildings, following Green Hotels precedent. The tribunal accepted sale consideration of Rs. 75 lakhs for leasehold transfer. Land held for over three years qualified for long-term capital gains with indexation benefits, while building depreciation was governed by Section 50. The tribunal allowed cost of construction claims supported by financial statements and permitted business expense deductions, ruling that absence of transactions in one year doesn't establish business abandonment per Mokul Finance precedent. Assessee's appeal was allowed.

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Issues Involved:
1. Application of Section 50C of the Income Tax Act, 1961 for transfer of leasehold rights.
2. Disallowance of business expenses due to no business activity.

Summary:

Issue 1: Application of Section 50C of the Income Tax Act, 1961 for transfer of leasehold rights

The assessee challenged the addition of Rs. 81,81,507/- under the head of short-term capital gains, arguing against the application of Section 50C of the Income Tax Act, 1961. The assessee contended that the stamp duty value does not represent the true fair value of the property, citing financial distress and the nature of the sale as a distress sale. The Assessing Officer (AO) treated the transfer of leasehold rights as a sale, applying Section 50C, and determined the short-term capital gain based on the stamp duty value of Rs. 1,14,06,000/-.

The Tribunal referred to the Hon'ble Bombay High Court's decision in CIT Vs. M/s. Green Hotels and Estate Pvt. Ltd, which held that Section 50C is not applicable to the transfer of leasehold rights. Consequently, the Tribunal concluded that the sale consideration should be Rs. 75 lakhs and not the stamp duty value. Furthermore, the Tribunal acknowledged that the industrial plot was held for more than three years, making it eligible for long-term capital gain treatment with indexation benefits. The Tribunal also recognized the cost of construction incurred by the assessee, allowing the claim for cost of construction.

Issue 2: Disallowance of business expenses due to no business activity

The assessee contested the disallowance of Rs. 16,08,268/- in business expenses, which the AO disallowed on the grounds that no business was conducted during the year. The Tribunal found that the expenses were genuine and necessary for the company's existence and potential future business activities, even if no active business was conducted during the year. The Tribunal relied on judicial precedents, including CIT Vs. Rampur Timber and Tannery Co Ltd and ITO Vs. Mokul Finance Pvt. Ltd, which supported the allowance of such expenses for maintaining the company's status and meeting its obligations.

Conclusion:

The Tribunal partly allowed the appeal, holding that:
1. The sale consideration for the transfer of leasehold rights should be Rs. 75 lakhs, and the resultant gain should be treated as long-term capital gain.
2. The disallowance of business expenses of Rs. 16,08,268/- was not justified and should be allowed.

The appeal was thus partly allowed, with the order pronounced in the open court on 29/09/2023.

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