2010 (11) TMI 535 - AT - Income Tax

Exemption u/s 54EC - Sale of land - Long term capital gain or not - Find that assessee has produced valuation report at the time of purchase as well as sale. In Remand, Assessing Officer has not pointed out any lacunae in the same - Moreover, the cost of land so bifurcated was being already reflected in the books of accounts and no depreciation was claimed on that account - In the case of C.I.T. vs. D.C. Ramachandra Rao 1997 -TMI - 16361 - MADRAS High Court , Hon ble Madras High Court has held that it is possible to bifurcate the capital gain arising out of sell of land and building, even if, they are sold as one unit - Land is an independent and identifiable capital asset and it continues to remain so, even after construction of building thereon - It was further held that land held by the assessee for a period exceeding 36 months - building constructed later and held by the assessee for a shorter period, land cannot be treated as short term capital assets - Hence, do not find any infirmity in the Ld. Commissioner of Income Tax (Appeals) s order accepting long term capital gain arising out of the sale of land. Hence, there is also no infirmity in Ld. Commissioner of Income Tax (Appeals) s directions to allow exemption u/s 54EC - Thus, the appeal of the revenue is dismissed.

Summary

Issues:
1. Determination of long term capital gain on sale of depreciable assets.
2. Allowance of exemption under sec. 54EC of the Income-tax Act.

Issue 1: Determination of long term capital gain on sale of depreciable assets:
The case involved an appeal by the revenue against the order of the Learned CIT(Appeals) regarding the assessment year 2006-07. The revenue contended that the sale of the asset should be treated as short term capital gain due to the asset being part of depreciable assets, invoking sec. 50(2) of the IT Act. The Assessing Officer rejected the claim of long term capital gain and computed the capital gain as short term capital gain under sec. 50(2) of the Act. The revenue further argued that the assessee's claim of deduction under sec. 54EC was not allowable due to the sale of depreciable assets within three years. However, the CIT(Appeals) disagreed with the revenue's assessment and directed the Assessing Officer to allow exemption under sec. 54EC, based on the assessee's submissions and evidence regarding the purchase and sale of the property.

Issue 2: Allowance of exemption under sec. 54EC of the Income-tax Act:
The assessee, engaged in trading and publishing educational books, showed long term capital gain and claimed exemption under sec. 54EC for investments made in bonds. The Assessing Officer questioned the justification for the long term capital gain and the cost of land, leading to a dispute over the classification of the asset and the computation of capital gains. The CIT(Appeals) examined the valuation reports submitted by the assessee and found no justification for treating the land holding period as less than 36 months, thereby allowing the exemption under sec. 54EC. The Tribunal upheld the CIT(Appeals) decision, emphasizing the possibility of bifurcating the capital gain from the sale of land and building, as supported by legal precedents cited by the assessee, ultimately dismissing the revenue's appeal.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(Appeals) decision to allow exemption under sec. 54EC and accepting the long term capital gain arising from the sale of land based on the bifurcation of the asset's value and the supporting valuation reports submitted by the assessee. The judgment highlighted the importance of proper documentation and valuation in determining capital gains and eligibility for exemptions under the Income-tax Act.