2006 (11) TMI 371 - AT - Income Tax

Sale of the industrial shed - Profit arising from the transfer - Short-term Or a long-term capital gain/loss - holding period of asset - Capital Assets in section 2(14) - Principle of merger - HELD THAT - In the instant case wherein by a draw of lots the assessee was declared successful for the allotment of a shed subject to payment of all outstanding dues and interests and in lieu thereof the assessee paid an instalment on 28-12-1994 and thereafter continued paying the remaining instalments to DSIDC on account of which a particular Shed No. D-13 was allotted to the assessee and ultimately the possession of the same was handed over to the assessee on 28-5-1998 and thereafter the assessee sold the same on 15-12-2000. It means that when in a draw of lots an allotment of a shed was made to the assessee on instalment basis after a payment of instalment on 28-12-1994 as per the wider meaning of the word property used in the definition of capital asset in section 2(14) of the Act the property/shed was held by the assessee for bringing the shed within the meaning of definition of the words capital asset on 28-12-1994 on payment of instalment hence the sale of the shed by the assessee on 15-12-2000 after holding the same for a period of more than 36 months is to be treated as long-term capital asset and the sale of the same resulting into loss/gain also amounted to long-term capital loss/gain. Thus the tax authorities below without considering the proper meaning of the words capital asset held by the assessee and property used in section 2(14) of the Act have wrongly applied the decision of Bombay High Court in Smt. R.R. Sood s 1985 (10) TMI 79 - BOMBAY HIGH COURT while concluding that only when the assessee paid the final instalment on 19-12-1997 and got the possession on 18-5-1998 the assessee held the asset/shed on 18-5-1998 and the sale of the same by the assessee on 15-12-2000 has to be treated as short-term capital asset in the hands of the assessee resulting into short-term capital gain. Hence we set aside the orders of tax authorities below and allow the grounds of appeal taken by the assessee. In the result the appeal filed by the assessee is allowed.

Summary

Issues Involved:

1. Calculation of long-term capital loss and confirmation of short-term capital gains.
2. Determination of whether the allotment letter and the shed constitute "Capital Assets" under section 2(14).
3. Determination of the material date for computing long-term capital gains.

Detailed Analysis:

1. Calculation of Long-Term Capital Loss and Confirmation of Short-Term Capital Gains:

The assessee challenged the CIT(A)'s decision that the long-term capital loss was incorrectly calculated at Rs. 2,50,000/- and the short-term capital gains were confirmed at Rs. 2,95,807/-. The core issue revolved around whether the profit/loss from the sale of the industrial shed was a long-term or short-term capital gain/loss. The assessee argued that the industrial shed should be considered as held from 8-7-1994, the date of allotment by DSIDC. However, the Assessing Officer contended that the shed was held for less than 36 months, making it a short-term capital gain. The CIT(A) upheld this view, noting that the shed was provisionally allotted and possession was granted only after all conditions were met and instalments paid.

2. Determination of Whether the Allotment Letter and the Shed Constitute "Capital Assets" Under Section 2(14):

The assessee received an allotment letter on 8-7-1994, and Shed No. D-13 was allotted on 27-8-1996, subject to payment of dues. The Assessing Officer and CIT(A) concluded that the shed was held from the date of possession (18-5-1998), not from the allotment date, thus treating it as a short-term asset. The Tribunal examined sections 2(14), 2(42A), 2(42B), and 2(47) of the Income-tax Act, 1961, and relevant case laws. It was determined that the word "property" in section 2(14) has a broad meaning, including any right that can be considered property. Therefore, the right to the shed, acquired through instalment payments starting from 28-12-1994, constituted a "capital asset."

3. Determination of the Material Date for Computing Long-Term Capital Gains:

The Tribunal considered whether the assessee held any property right in the shed on the allotment date (8-7-1994) or when the first significant instalment was paid (28-12-1994). The assessee argued that the property right was held from 28-12-1994, making it a long-term capital asset. The Tribunal agreed, referencing various case laws, including the Supreme Court's definition of "property" as any possible interest a person holds or enjoys. The Tribunal concluded that the shed was held from 28-12-1994, when the first instalment was paid, thus qualifying as a long-term capital asset. Consequently, the sale on 15-12-2000, after more than 36 months, resulted in a long-term capital loss/gain.

Conclusion:

The Tribunal set aside the orders of the tax authorities, allowing the appeal by the assessee. The industrial shed was deemed a long-term capital asset held from 28-12-1994, and the resulting loss/gain from its sale was treated as long-term capital loss/gain. The appeal filed by the assessee was allowed.