2010 (2) TMI 1332 - AT - Income Tax

Leasehold Land Fair Market Value Can Be Substituted for Capital Gains Under Section 55(2)(b)

The Tribunal upheld the CIT(A)'s order allowing the assessee to substitute the fair market value of leasehold land as on 01.04.1981 for capital gains ... - ISSUES: Whether the benefit of substituting the fair market value as on 1-4-1981 under section 55(2)(a)(ii) is available in respect of leasehold land held under a perpetual lease.Whether a perpetual leasehold interest in land is to be treated as tenancy rights under section 55(2)(a)(ii) or as an 'other capital asset' under section 55(2)(b) for the purpose of capital gains computation.Proper method of computing capital gains on transfer of leasehold land and building when the lease is for 999 years with nominal annual rent and premium paid. RULINGS / HOLDINGS: The Court held that 'the perpetual lease is equivalent to the ownership right' and therefore, 'equating the same with the tenancy rights by the A.O. is not correct.'The benefit of substituting the fair market value as on 1-4-1981 is available for leasehold land held under a perpetual lease, as it falls under 'any other capital asset' as per section 55(2)(b), not under tenancy rights in section 55(2)(a)(ii).The Assessing Officer erred in denying the benefit of substitution of fair market value and treating the leasehold land akin to tenancy rights, leading to incorrect capital gains computation.The appellate authority's direction to compute capital gain by substituting the market value of land as on 1-4-1981 was upheld as a correct finding of fact and law. RATIONALE: The Court applied the provisions of section 55(2) of the Income Tax Act, distinguishing between 'tenancy rights' under section 55(2)(a)(ii) and 'any other capital asset' under section 55(2)(b).The Court relied on the nature of the leasehold interest, specifically a 'perpetual lease' granted for 999 years with a nominal annual rent and a premium, to conclude it is equivalent to ownership rather than tenancy rights.The Court rejected the Assessing Officer's classification of the leasehold land as tenancy rights, emphasizing the legal effect of the lease deed and the 'Lease in Perpetuity' granted by the municipal corporation.The appellate tribunal's factual findings regarding the nature of the leasehold interest and valuation approach were affirmed as not requiring interference.