COMMISSIONER OF INCOME-TAX VS D.L. RAMACHANDRA RAO, 2000 PTD-MADRAS-HIGH-COURT-INDIA 2553 (1997)

Income-tax---

----Reference---Capital gains---Bifurcation of capital gains into long-term capital gains and short-term capital gains---Land held for more than prescribed period of 36 months and building constructed on it and held for less than prescribed period---Tribunal justified in holding that land could be considered to be a long-term capital asset---Direction by Tribunal to bifurcate capital gains into long-term capital gain pertaining to land and short-term capital gain pertaining to superstructure---Valid---No question of law arose-- Indian Income Tax Act, 1961, Ss.2, 45, 80T & 256(2).

The definition of capital asset includes property of any kind and land held by the assessee is a capital asset and a building held by the assessee .is also a capital asset and it is possible to bifurcate the capital gain arising with reference to the sale of the land and building even if they are sold as one unit, if the lands are held by the assessee for a period more than that prescribed under section 2(42A) of the Income Tax Act, 1961, namely, 36 months. It is not possible to say that by construction of the building, the land which was a long-term capital asset, has ceased to be a long-term capital asset. The land is an independent and an identifiable capital asset, and it continues to remain as an identifiable capital asset even after construction of the building.

Held, dismissing the application for reference, that the Tribunal was right in law in directing bifurcation of the capital gains into long-term capital gains pertaining to land and short-term capital gains pertaining to superstructure. No question of law arose from its order.

CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj.) fol.

Bishan Das v. State of Punjab AIR 1961 SC 1570; Narayan Das Khetty v. Jatindra Nath Roy Chowdhry AIR 1927 PC 135; Park View Enterprises v. State Government of Tamil Nadu (1991) 189 ITR 192 (Mad.) and State of Kerala v. P. P. Hassan Koya AIR 1968 SC 1201

S.V. Subramanian and C. V. Rajan for Petitioner.

S. Gurunathkrishnan for Respondent.

JUDGMENT

N. V. BALASUBRAMANIAN, J.---This a petition filed by the Commissioner of Income-tax, Tamil Nadu-V, Madras, under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), to direct the Appellate Tribunal to state the case and refer the following question of law:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in directing to bifurcate the terminal gains into long-term capital gains pertaining to land and short-terminal capital gains pertaining to superstructure?"

The assessee is an individual. A plot of land was allotted to him in March 1978, and the assessee started construction of the building during March, 1985, and completed the construction in 1987. The assessee sold the property on September 23, 1987, for a total consideration of Rs.3,50,000. During the assessment year 1988-89, the assessee returned the capital gains arising on the sale 'of the land and building owned by him and claimed exemption under section 80T of the Act with reference to the capital gains arising on sale of the land. He claimed that the building was newly constructed when it was sold and the capital gain accruing to him was solely attributable to the sale of plot of the land in question, and therefore, claimed deduction under section 80T of the Act on the entire capital gains. The Assessing Officer rejected the claim of the assessee on the ground that both house and land are inseparable. He held that what was sold was a house held for a period of less than 36 months. He, therefore, came to' the conclusion that the entire gain was attributable to the house and the entire gain should be regarded as a short-term capital gains.

The assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) following an instruction of the Central Board of Direct Taxes, held that after the Construction of a building on the land, there comes into existence a different asset, i.e., a house property and the new asset was held by the assessee for a period less than 36 months and so the assessee was not entitled to claim exemption under section 80T of the Act on the ground that the property should be regarded as a short-term capital asset.

The assessee preferred an appeal before the Income-tax Appellate Tribunal against the order of the Commissioner (Appeals) and it was held that it is possible to bifurcate terminal gains arising on the sale of house property into long-term capital gains pertaining to the land and short-term capital gains pertaining to superstructure. The Appellate Tribunal following the decision of the Rajasthan High Court in ITO v. K. C. Itty (1993) 201 ITR 442, held that the assessee was entitled to exemption under section 80T of the Act with reference to long-term capital gain attributable to the sale of separate assets and the law is well-settled on the said issue and hence rejected the application on the ground that there was no referable question of law which arises out of its order and the Commissioner of Income-tax has filed the present petition seeking a reference on the question set out in paragraph. l (page 52) above.

Mr. S. V. Subramanian, learned senior counsel appearing for the petitioner, vehemently argued that after the construction of the building on the land, the house property becomes an inseparable asset and is a new asset. According to him, it is not possible to bifurcate the capital gain as relatable to building separately or land separately and since the apportionment is not possible, the view of the Tribunal is not correct in law. According to him, the land and building is not sold separately, but as one unit and it is not possible to bifurcate the building as a separate unit and land as a separate unit. He placed reliance on the decision of the Supreme Court in State of Kerala v. P. P. Hassan Koya, AIR 1968 SC 1201. In the above case, the Supreme Court held that in determining the compensation payable to land and building under the Land Acquisition Act, the compensation cannot be determined by assessing the value of the land and "break-up value" of the building separately. He, therefore, submitted that it is not possible to bifurcate capital gain into two parts, one relating to the land and another to the building.

Mr. S. Gurunathakrishnan, learned counsel appearing for the respondent, submitted that the Indian law recognises separate ownership of the land and building and this position has been recognised by this Court in the case of Park View Enterprises v. State Government of Tamil Nadu (1991) 189 ITR 192, and he submitted that it is possible to. separate capital gains into one relating to the land and one relating to the building separately.

We have carefully considered the rival contentions of both parties The expression "capital asset" is defined in section 2(14) of the Act as under:

"capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include---

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his, business or profession .....

(iii) agricultural land in India, etc."

The key words of the definition of "capital asset" found in section 2(14) are "property of any kind" and the term comprehends and includes within itself any interest in property. It may be movable or immovable property or any interest therein. The term "short-term capital asset" is defined in section 2(42A) of the Act as under:

"short-term capital asset' means a capital asset held by an assessee for not more than sixty months immediately preceding the date of transfer. "

During the relevant period section 2(42A) of the Act prescribed the period of thirty-six months. The emphasis that is given in section 2(42A) is that the capital asset should be held by an assessee for a period not more than 36 months immediately preceding the date of transfer for the asset to be termed a short-term capital asset. Here also, the emphasis is given on the expression "held by an assessee". The mode of computation of the capital, gain is provided under section 48 of the Act which reads as under:

"The income chargeable under the head Capital gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:---

(i) expenditure incurred wholly and exclusively in connection with suchtransfer;

(ii) the cost of acquisition of the capital asset and cost of any improvement thereto. "

Section 80T of the Act grants deduction in respect of long-term capital gains in the case of an assessee other than a company where the gross total income of an assessee not being a company includes any income chargeable under the head "Capital gains" relating to capital assets other than short-term capital assets. In the case of buildings or land, separate deduction is provided under section 80T(b) of the Act. It is relevant to note that when section 80T grants deduction, it uses the expression both "buildings or lands or any rights in buildings or lands". The question that arises for consideration is whether it is Possible to bifurcate the capital gains that arise on the sale of the land and building, when it is sold as one unit. The decision of this Court in Park View Enterprises' case (1991) 189 ITR 192, makes it clear that the Indian law recognises dual ownership of the land and building. The Privy Council in Narayan Das Khetty v. Jatindra Nath Roy Chowdhry. AIR 1927 PC 135, has also taken the view that having regard to the law in India it is possible to have separation of ownership of the building from the ownership of the land. This view of the Privy Council was approved by the Supreme Court in Bishan Das v. State of Punjab, AIR 1961 SC 1570. In so far as the definition of capital asset is concerned, as already seen the definition of capital asset includes property of any kind and the land held by the assessee is a capital asset and the building held by the assessee is also a the land. In this view of the matter, it set aside the order of the Commissioner of Income-tax (Appeals) and restored the matter to the Assessing Officer with a direction to bifurcate and rework out the taxable gains after giving an opportunity to the assessee.

The Department filed a reference application under section 256(1) of the Act, to direct the Income-tax Appellate Tribunal to state a case and refer the question set out in paragraph 1 (page 52) above. The Appellate Tribunal following the decision of this Court in Park View .Enterprises v. State Government of Tamil Nadu (1991) 189 ITR 192, and the decision of the Rajasthan High Court in CIT v. Vimal Chand Golecha (1993) 201 ITR 442, held that the Indian law recognises the existence of land and building as capital asset and it is possible to bifurcate the capital gain arising with reference to the sale of the land and building even if they are sold as one unit, if the land was held by the assessee for a period more than that prescribed under section 2(42A) of the Act. It is not possible to say that by construction of the building the land which was a long-term capital asset, has ceased to be a long-term capital asset. The land is an independent and an identifiable capital asset, and it continues to remain an identifiable capital asset even after construction of the building and at the time of the sale of the house. Since the land was held by the assessee for a period exceeding 36 months, the land cannot be regarded as a short-term capital asset only by virtue of the construction of building thereon. Hence, we are unable to accept the contentions of learned counsel for the Revenue that it is not possible to bifurcate the capital asset into two, we are of the opinion that the Tribunal has come to a correct conclusion that it is possible to work out capital gain with reference to sale of building and land separately. The decision of the Supreme Court in State of Kerala v. P. P. Hassan Koya, AIR 1968 SC 1201, relied on by learned counsel for -the Revenue has no application to the facts of this case as it deals with a case where compensation was payable in respect of land and building and in that situation, the Supreme Court, has held that both the land and building should be valued as one unit and hence, the decision rendered by the Supreme Court with reference to determination of compensation under the Land Acquisition Act has no application, particularly in the light of section 80T of the Act. It is impermissible for learned counsel to rely on a decision for a point which was not decided in that case. In CIT v. Vimal Chand Golecha (1993) 201 ITR 442, the Rajasthan High Court held that even if the land and building are sold as one unit for a consolidated price, the assessee is entitled to bifurcate the same and the capital gain arising from the sale of the land had to be treated as long-term capital gains. We are in agreement with the view expressed by the Rajasthan High Court in the above case. We are of the view that the land can be regarded as capital asset as per section 2(14) of the Act and in accordance with the scheme of the Act, land would be considered as a separate capital asset, even if a building is constructed thereon. We are also of the opinion that where the land has been held for more than the prescribed period, the gains arising from the sale of the land could be considered as long-term capital gains, though the building thereon was a new construction held for a period less than 36 months. Since the Tribunal has come to the correct conclusion by applying the well-settled principles of law, we are of the opinion that no referable question of law arises out of the order of the Appellate Tribunal. Therefore, we reject the tax case petition. No costs.

M.B.A./4117/FCPetition rejected.