2010 (8) TMI 682 - AT - Income Tax

Capital Gain Whether Sec. 50 is applicable - The AO is of the opinion that after construction of building on the land, it became integral part of the cold storage building and the land value could not be separated from the cold storage building unless the building structure is removed - Section 50 is a special provision for computation of capital gains in the case of depreciable assets - Therefore, sec. 50 has no application at all on the land because it is not a depreciable asset - Therefore, the appeal filed by the revenue to that extent is dismissed The assessee has sold land, building and equipments vide sale deed dated 28th August, 1996 for a consolidated amount of Rs. 30,50,000 in which the price assigned to building and equipment is stated at Rs. 50,000 - In the said valuation the value of super structure has been arrived at by valuer at Rs. 5,22,310 and after allowing the benefit of depreciation of Rs. 2,08,924, the depreciated value as on 01.04.1981/- has been arrived at Rs. 3,13,386 - It was fairly conceded by ld. Counsel appearing on behalf of assessee that assessee in the proceeding years has no long term capital gain - even if the long - term capital loss arises to the assessee during the year, no benefit accrues to the assessee in the proceeding years as long term capital loss can be adjusted against long term capital gain only - Revenue appeal is dismissed and assessee s appeal is partly allowed

Issues Involved:
1. Applicability of Section 50 of the Income Tax Act on the sale of land and building.
2. Separation of land and building for the purposes of computation of capital gains.
3. Computation of short-term and long-term capital gains/losses.

Issue-wise Detailed Analysis:

1. Applicability of Section 50 of the Income Tax Act on the sale of land and building:

The primary issue was whether Section 50, which deals with the computation of capital gains on depreciable assets, applies to the sale of land associated with a building. The Assessing Officer (AO) argued that once a building is constructed on land, the land loses its separate identity and becomes part of the building, thus subject to Section 50. However, the CIT(A) held that only the portion of land occupied by the building should be considered part of the building for the purposes of Section 50. The Tribunal referred to the Supreme Court's decision in CIT Vs. Alps Theatre, which stated that land does not depreciate and thus cannot be considered a depreciable asset. Consequently, the Tribunal concluded that Section 50 does not apply to land, even if it is occupied by a building. Therefore, the appeal by the revenue on this ground was dismissed.

2. Separation of land and building for the purposes of computation of capital gains:

The assessee contended that land and building should be treated as separate assets for the computation of capital gains. The CIT(A) partially agreed, excluding 8,175 sq. yds. of land from the computation of short-term capital gains but including 1,640 sq. yds. as part of the building. The Tribunal supported the CIT(A)'s approach, citing the Rajasthan High Court's decision in CIT Vs. Vimal Chand Golecha, which held that land is a separate capital asset and can be bifurcated from the building for capital gains purposes. The Tribunal reiterated that land is not entitled to depreciation and thus should not be subject to Section 50. Therefore, the Tribunal upheld the CIT(A)'s decision to exclude the majority of the land from short-term capital gains computation.

3. Computation of short-term and long-term capital gains/losses:

The assessee had allocated only Rs. 50,000 out of the total sale consideration of Rs. 30,50,000 towards the building and equipment, claiming the rest as consideration for the land. The AO rejected this allocation, computing a short-term capital gain of Rs. 29,13,978. The CIT(A) partially accepted the assessee's allocation but included the land occupied by the building in the short-term capital gains computation. The Tribunal, however, found that the allocation of Rs. 50,000 was insufficient. Based on the valuation report and the age of the assets, the Tribunal estimated the sale consideration for the building and equipment at Rs. 4,50,000. This amount was to be used for computing short-term capital gains under Section 50. The remaining Rs. 26,00,000 was attributed to the land, resulting in a long-term capital loss due to the indexed cost of acquisition being higher than the sale consideration. The Tribunal concluded that the assessee was entitled to compute long-term capital gains/losses on the land, leading to a long-term capital loss, which could not be adjusted against short-term capital gains.

Conclusion:

The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal. It held that Section 50 does not apply to land, and the land and building should be treated as separate assets for the purposes of capital gains computation. The Tribunal also revised the allocation of the sale consideration, resulting in a short-term capital gain for the building and equipment and a long-term capital loss for the land.

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