2011 (7) TMI 1101 - AT - Income Tax

Capital gains on account of transfer of leasehold rights in a plot of land - Assessee s contention was section 50C would apply only to a capital asset being land or building or both and that it did not apply to any leasehold rights - AO held that the word land included freehold as well as leasehold land and since the assessee held leasehold rights they were also covered by the section - Such decision was based on Section 27(iiib) - CIT(A) held that section 50C cannot be invoked because what the assessee transferred was only the leasehold rights in the land and the building and not the land or building per se HELD THAT - We are unable to find fault with the decision of the CIT(A) that section 50C cannot be invoked to a transfer of leasehold rights. The section applies only to capital assets being land or building or both. It does not in terms include leasehold rights in the land or building within its scope. AO s decision was based on Section 27(iiib) this provision has been expressly limited in its application to sections 22 to 26 which deal with the computation of the income under the head Income from house property . It has not been made applicable to the computation of capital gains. Also the rights mentioned in the provision are rights over the building and any rights over the land have not been included in the section. In any case since the section 27(iiib) has not been extended to the computation of capital gains u/s 45 and is limited to the computation of the income under the head Income from house property the conclusion of the CIT(A) that section 50C cannot be invoked where leasehold rights in land or building are transferred seems to us to be correct. We accordingly affirm the decision of the CIT(A) - Decision in favour of Assessee.

Summary

Issues involved:
Appeal by the department regarding assessment year 2003-04, deletion of additions made under section 50C, disallowance of LTCG and STCG without appreciating the facts of the case.

Analysis:
The appeal involved the department disputing the deletion of additions made under section 50C and subsequent disallowance of Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) by the Ld. CIT(A). The assessee, a private limited company, did not declare any capital gains on transferring leasehold rights in a land plot to an individual under a compromise settlement. The Assessing Officer invoked section 50C of the Income Tax Act, which deals with special provisions for ascertaining the full value of consideration for computing capital gains on the transfer of land or building. The department argued that the section applied to leasehold rights as well, but the CIT(A) disagreed, citing that section 50C only pertains to land or building, not leasehold rights. The CIT(A) directed the Assessing Officer to adopt the capital gains amount as per the entries in the assessee's books of account, which the revenue appealed.

The CIT(A) based the decision on the fact that the assessee only transferred leasehold rights, not the land or building itself, and the remaining lease period was only 6 to 7 years. The CIT(A) referenced a Tribunal order to support the conclusion that section 50C does not apply to leasehold rights. The revenue's argument relied on section 27(iiib) of the Act, which deems a person acquiring rights in a building to be the owner, but this provision is limited to income from house property and not capital gains. The Tribunal affirmed the CIT(A)'s decision, stating that section 50C does not cover leasehold rights in land or building transfers, ultimately dismissing the revenue's appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decision that section 50C does not apply to the transfer of leasehold rights, emphasizing that the section is specific to land or building transfers and does not extend to leasehold rights. The judgment highlights the distinction between ownership of land/building and leasehold rights, clarifying the scope of section 50C in computing capital gains.