Case Law Details
Brief of the Case
ITAT Mumbai held In the case of DCIT vs. J.B. Eng. Works that that the assessee had transferred independent interests in two different assets and therefore the Capital Gains arising on the assignment of leasehold interest in the land being a capital asset was rightly offered for tax as Long Term Capital Gains and the consideration attributable to the transfer of the building was rightly offered for tax as Short Term Capital Gains u/s 50. No interference is called for therein and therefore same are upheld.
Facts of the Case
Addition on account of sale of land
During the course of assessment proceedings it wasfound by the AO that main source of income of the assessee during the year was on account of sale of factory building located at Andheri (E), Mumbai. This amount was credited to the P & L Account. However, in the computation of income filed along with return of income, the assessee showed the income as Long Term Capital Gains and offered it for taxation. The Capital Gain was shown to have arisen from sale of land. The sale consideration was declared at Rs.1,50,00,000/- and the entire amount was offered as Long Term Capital Gains.
Assessee submitted that he had taken a plot of land on lease from M/s Bombay Xaverian Corporation Limited for a period of 98 years at a monthly rent of Rs. 350/- per month, and that the assessee had constructed a factory building on the land taken on lease, which it was using for the purpose of its business. It was further stated that the assessee granted a lease of the first floor of’ the building that it had constructed to a Trust by a Lease Deed dated 16-02-1984. Further submitted that he entered into an Agreement with a company namely M/s Sun Pharmaceuticals Industries Ltd., to which the Trust was also a party. Pursuant to this Agreement, the assessee agreed to transfer to the said company, the factory building, which the assessee had constructed on the land as well as assigned the benefits of their lease hold interest for the unexpired period of the lease for an aggregate consideration of Rs.4,95,00,000/-In terms of the Agreement, the assessee was obliged to hand over vacant possession of the entire building including the area in occupation of the Trust. The Trust had agreed to vacate the premises on suitable alternative accommodation being provided to them or failing which, on a payment of Rs.1,50,00,000/-, being made.
AO was of the view that the land had not been shown in the fixed asset schedule and that it was an integral part on which the factory building was existing. The Assessing Officer was, therefore, of the view that the entire profit arising on account of sale of Depreciable asset, i.e., the factory building on which depreciation has been claimed by the assessee is taxable u/s 50 of the I.T. Act. 1961. It was also pointed out by the Assessing Officer that the purchaser i.e. M/s Sun Pharmaceutical Industries Ltd., has also taken the entire proceeds to be arising out of purchase of building. Considering all these facts and circumstances, the Assessing Officer treated the entire consideration of Rs.4,95,00,000/- as arising out of sale of factory building and held the entire sale consideration as Short Term Capital Gains in terms of Section 50(1).
Addition on account of sale of building in the hands of firm
During the course of assessment proceedings the AO decided the issue with reference to the question whether the payment of Rs.1,50,00,000/- is an application of income or diversion of income. In this context, he found that out of four partners in the assessee firm and out of the four trustees in the Trust, two are common. Based on this, he further found that the control of the property remains with the same person. Referring to clauses D, E & N of the Agreement for sale, the Assessing Officer doubted bonafide in the action of the firm in giving 7,500 sq.ft. area on ownership basis to the Trust. According to him, this is a dubious method developed by the assessee so that the income arising out of the sale can be transferred to the Trust and tax concessions could be availed by treating the assets as Long Term Capital Asset. According to him, this was merely an application and not diversion of income. He also found that the entire exercise was a colorable device used by the assessee to reduce tax burden. The AO also held that merely because the Trust had offered the income for taxation as Long Term Capital Gains, it does not mean that the amount is not taxable in the hands of the assessee.
The Assessing Officer also relied on the decisions of the Hon’ble Supreme Court in the cases of Mcdowell & Co. Ltd 154 ITR 148, CIT vs Meenakshi Mills Ltd 63 ITR 609, Workman of Associated Rubber Industry Ltd vs Associated Rubber Industry Ltd 157 ITR 77 and CIT vs Durga Prasad More 82 ITR 540 and on the decision of the Mumbai bench of ITAT in the case of Bombay Oil Industries Ltd vs DCIT 82 ITD 626, to support his view that the transaction was a colorable device. In light of the above, the sum of Rs, 1,50,00,000/- was also held as taxable in the hands of assessee firm as arising out of sale of factory building and was reduced from the amount shown under the head buildings held by the assessee, and the resulting surplus was treated as Short Term Capital Gain.
Contention of the Assessee
Addition on account of sale of land
The ld counsel of the assessee submitted that period of the lease was for 98 years and therefore, in a view there was clear intention of the lesser to transfer the ownership, and that it was clear from the perusal of this agreement that only lease rent was to be paid by the assessee, and no premium was paid and therefore, under these circumstances there was no question of showing this asset as part to block of assets, since no cost in the form of any premium was paid by the assessee to the lesser.
It has been further submitted that land and building were two separate assets and were sold as such by the assessee, and that different amount of consideration have been decided between the assessee and the purchaser, and therefore, these should be assessed accordingly in the hands of the assessee.
Addition on account of sale of building in the hands of firm
The ld counsel of the assessee submitted that in the year 1984 the lease was granted by the assessee to the family trust on yearly renewable basis. Although, the trusts, in turn, leased out the same to the third parties, but trust only used to pay lease rent to the assessee firm. It was further submitted that in 1984-85, the revenue assessed rental income of the trust in the hands of the assessee firm. This matter reached upto Tribunal, wherein action of the AO was reversed by the Hon’ble Tribunal and it was held that trust was a separate assessee, and therefore, income of the trust cannot be included in the hands of the assessee.
Reliance was also placed on the judgment of CIT vs Shakuntala Kantilal 190 ITR 57 (Bom), in support of the proposition that expenses incurred for transfer of property would be deductible, as an alternate claim to the assessee, on account of expenses incurred for effecting transfer of the property. Further reliance was placed on the judgment of Hon’ble Bombay High Court in the case of Abral Alibi 247 ITR 312 for the proposition that amount paid to the tenant can be deducted from the amount of sales consideration for computing taxable amount of capital gains. Lastly, it has been argued by the Ld. Counsel that amount paid to the trust by the said purchaser has been assessed as income of the trust in its hands. Our attention was drawn on the copy of the return filed by the trust showing that a sum of Rs.1.50 crores has been included by the trust in its return, which has been accepted by the revenue. In nutshell, he requested for upholding the order of CIT (A) on this issue.
Contention of the Revenue
Addition on account of sale of land
The ld counsel of the revenue submitted that only lease rent was being paid by the assessee and that land was not shown as part of the block of assets. He read relevant portion of the assessment order before us and relied upon the same.
Addition on account of sale of building in the hands of firm
The ld counsel of the revenue submitted that no activities have been done by the trust, and that the trust is nothing but family members only. It has been argued by him, in nutshell, that this was a colorable device used by the assessee to reduce its tax liability. It was requested by him that CIT (A) has wrongly deleted the addition made by the AO and therefore, his action should be reversed and addition made by the AO should be restored.
Held by CIT (A)
Addition on account of sale of land
CIT (A) allowed the appeal of the assessee. It was held that the assessee had transferred independent interests in two different assets and therefore, capital gains arising on assignment of lease held interest in the land being a capital asset was rightly offered for tax as long term capital gain and the consideration attributable to transfer of the building was rightly offered for tax as short term capital gains.
Addition on account of sale of building in the hands of firm
CIT (A) deleted the addition made by AO in the hands of firm instead of trust.
Held by ITAT
Addition on account of sale of land
It is noted that the AO’s decision on the issue mainly hinges on his view that land was an integral part of the asset, on which the factory building existed. Accordingly, he held that the entire consideration was on account of sale of a depreciable asset i.e. the factory building. One further reason that prompted him to this decision wasthe fact that the land was not shown in the fixed asset schedule of the balance sheet of the assessee.
As per CIT (A), the Agreement of sale dated 9.05.2002 clearly shows that the appellant had transferred two assets (i) the building and (ii) Lease hold rights on the land on which the building was constructed. It is further noted that this is indicated in many other parts of the Agreement also namely, on pages-8 & 9, where it has been specifically mentioned that what is being transferred includes “all that piece or parcel of land …..” and “entire commercial industrial building comprising ground plus two floors……”. The fact that the lease right did not merge with the factory building and remained an independent interest, is evident from the fact that this lease right continued to exist even after its transfer to M/s Sun Pharmaceuticals Industries Ltd. In fact, by virtue of the Agreement, all obligations attached to the lease right were to be fulfilled by Sun Pharmaceuticals Ltd. after the transfer. It, therefore, transpires that the lease right continues to exist even after the transfer. It never merges with the building as argued by the Assessing Officer.
CIT (A) also analysed position of law on the basis of judicial decisions. In the case of CIT vs Vimal Chand Golecha, supra, Hon’ble Rajasthan High Court has clearly held that the land is a capital asset in terms of section 2(14) and it treated as a separate asset and that a building which is entitled for depreciation would be the superstructure and would not include the site. Similarly, in the case CIT vs. Estate of Omprakash Jhunjhunwala, supra, Hon’ble Court held that if the interest in the leasehold plot was held by an assessee for more than three years, the sale proceeds of that interest would be assessable as Long Term Capital Gains while the sale proceeds of the structure would be taxable as Short Term Capital Gains if it was sold before the expiry of three years. It is further noted that decision of the Honourable Bombay High Court in the case CIT vs City bank NA 261 ITR 570 also supports the assessee’s stand. It is further noted by us that this view has been reiterated by Hon’ble Bombay High Court in the case of Hindustan Hospitals 335 ITR 60.
We find that from above facts, it is clear that the assessee had transferred two rights, namely the lease right which is a capital asset and the factory building which was offered to tax in terms of section 50. In our considered view, treatment of the assets in the purchaser’s account does not have any material bearing on taxability of the receipt in the hands of the assessee, since purchaser’s treatment of the transaction in its accounts is not determinative of the true nature of the transaction. Further, with regard to contention of the AO that assessee had never shown the land in its fixed assets schedule, we find force in argument of the assessee that as it had not paid any sum by way of premium for acquisition of land, there was no question of reflecting the land as an asset in the balance sheet. Important point to be noted is that the land was held by the assessee on lease, on payment of monthly rent. There was no purchase price paid.
In the light of the above facts and circumstances, we concur with the findings of CIT (A) that the assessee had transferred independent interests in two different assets and therefore the Capital Gains arising on the assignment of leasehold interest in the land being a capital asset was rightly offered for tax as Long Term Capital Gains and the consideration attributable to the transfer of the building was rightly offered for tax as Short Term Capital Gains. No interference is called for therein and therefore same are upheld
Addition on account of sale of building in the hands of firm
It is noted that CIT (A) has passed a detailed and well reasoned order and gave detailed findings, while allowing claim of the assessee firm. We find that he has rightly held that there were two issues which were to be examined for deciding this ground i.e. (i) whether the payment of Rs.1,50,00,000/- to the Trust was an application of income or diversion of income by overriding title, and (ii) whether the transaction was a colorable device.
With regard to the first issue, it was found by CIT(A) that the payment to the Trust was a ‘diversion of income’. He made a specific reference to Clause-P of the said Agreement in which it was clearly mentioned that the purchaser had agreed to pay a sum of Rs.1.50 crores to the Confirming Parties, i.e. the Trust and that the Confirming Parties have agreed to hand over vacant and peaceful possession of the first floor premises of the building to the vendors, i.e. the assessee firm, which made it clear that right at the inception the payment was made to the Trust by M/s. Sun Pharmaceutical Industries Ltd, and that at no stage, the consideration was received or receivable by the assessee. This amount was never received by the assessee. In view of these facts and circumstances, we do not find substance in the contention of the AO that this was application of income.
With regard to the second issue i.e. whether the transaction was a colorable device or not, it was held by CIT (A) that the Assessing Officer’s findings in this context were based on presumptions. It was noted that in the past, the income earned by the Trust was held as the assessee’s income. However, the Hon’ble ITAT vide its order dated 23.04.1996, supra, had rejected this contention. Thus, this issue had already passed through judicial scrutiny. In these circumstances, it cannot be held, only on the basis of presumptions, that the transaction was a colorable device. Thus, in view of the above discussion, we find that CIT(A) has rightly held that the Assessing Officer was not justified in taxing the sum of Rs.1.50 crores in the hands of the assessee and treating it as part of short term capital gain, and therefore no interference is called for in the well reasoned and detailed findings of CIT(A), and therefore these are upheld. Thus, Ground No 2 of appeal of the revenue is dismissed.
Accordingly appeal of the revenue dismissed.
