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Issues Involved:
1. Whether the transaction is a transfer of asset that attracts liability for capital gains. 2. Whether the consideration received by way of fully paid up shares amounts to receipt of consideration by the assessee, assessable at its hands. 3. Whether the consideration received is rent received for the whole period of the lease (99 years) in advance. 4. Whether the transaction is assessable to short term capital gains or long term capital gains. Summary: 1. Transfer of Asset and Capital Gains: The first issue raised is whether the transaction is a transfer of asset that attracts liability for capital gains. "Transfer" u/s 2(47)(vi) of the Act, takes in "any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property." Admittedly, the transaction herein is a long term lease leaving complete freedom to the lessee Company to enjoy the immovable property leased out for 99 years. So much so, in our view, the transaction is a transfer of capital asset within the meaning of Section 2(47)(vi) of the Act. 2. Consideration Received by Fully Paid Up Shares: The next question to be considered is whether the consideration received by way of fully paid up shares of the lessee company issued to the partners of the assessee firm amounts to receipt of consideration by the assessee, assessable at its hands. We do not think the contention of the assessee or the findings of the lower authorities on this issue can be sustained because the consideration for the lease of the land and building executed by the firm was advance allotment and later issue of fully paid up shares by the Company to the partners of the respondent assessee in proportion to their shares in the firm. Therefore, consideration by way of fully paid up shares issued by the lessee Company to the partners of the lessor firm constitutes consideration for the lease executed by the firm. We, therefore, reverse the findings of the lower authorities, including the ITAT, by holding that the consideration received by the partners together constitutes consideration received by the assessee firm for executing lease deeds in favour of the lessee Company. 3. Rent Received in Advance: The next question to be considered is whether the consideration received by way of issue of fully paid up shares to the partners of the assessee firm is the rent received for the whole period of the lease i.e. 99 years, in advance. The Supreme Court has in the decision in Commissioner of Income Tax, Assam, Tripura and Manipur v. Panbari Tea Company Ltd. reported in 1965 (LVII) ITR 422 held that the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. The former is a capital income and the latter a revenue receipt. In our view, in substance and reality the consideration received is not rent received in advance as claimed by the assessee but consideration for the lease of land and building for 99 years. The net result of the transfer is non-availability of the land and building to the assessee or to its partners for enjoyment for the next 99 years, during which period the lessee company will hold and enjoy the property. So much so, the consideration received is for the transfer of leasehold rights, which is assessable to capital gain. 4. Short Term vs. Long Term Capital Gains: The next question to be considered is whether the Department's stand that the transaction is assessable to short term capital gains is correct. We do not find any justification for assessment of the transaction as short term capital gains. There is nothing to indicate that the land and building was held by the assessee for a short period of less than 3 years to treat it as short term capital assets. If the assets are held by the Firm for more than 3 years, then the assessment on capital gains also has to be as long term capital gains. Conclusion: We therefore, allow the appeal by setting aside the orders of the first appellate authority and also that of the Tribunal on this issue and remand the case back to the Assessing Officer for assessment of the consideration received by the partners of the assessee Firm in the form of fully paid up shares as long term capital gains received by the assessee Firm. The Assessing Officer should examine whether leases have taken effect based on the original lease deeds and if so, make assessment for 1993-94, and on the other hand, if subsequent lease deeds were the real transactions, then assess the same for the assessment year relevant for the previous year during which revised lease deeds were executed.
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