2010 (1) TMI 739 - HC - Income Tax

Capital gains on sale of Land- Acquisition of Land & Building in 1948- Land having insignificant value at time of acquisition- Cost of acquisition to be taken or fair market value as on 1st April 1981- Held that -In terms of Section 55(2)(b)(1) the assessee had an option to adopt fair market value as on 1st April 1981 since the asset was acquired before that date as its cost of acquisition and to adjust it by the capital gains indexation factor. It is a statutory right which could not be declined to the assessee. Decided in favor of the assessee.

Summary

Issues:
1. Adjustment of cost of land by cost inflation index for capital gains computation.
2. Treatment of asset differently for depreciation and capital gain claims.

Issue 1: Adjustment of cost of land by cost inflation index for capital gains computation

The case involved an appeal by the Revenue against the Income Tax Appellate Tribunal's judgment allowing the adjustment of the cost of land by cost inflation index for treating the sale of land as a long-term capital gain. The property in question was purchased in 1948, with the land being considered relatively insignificant compared to the building. The Tribunal held that the assessee was entitled to bifurcate the sale consideration, attributing Rs. 20 lacs to the land. The assessee had the statutory right to adopt the fair market value as of April 1, 1981, adjusted by the indexation factor as the cost of acquisition for computing long-term capital gains. The Tribunal directed the assessing officer to recompute the capital gains based on these findings.

Issue 2: Treatment of asset differently for depreciation and capital gain claims

The second issue revolved around the treatment of the asset differently for depreciation and capital gain claims. The assessing officer contended that since the assessee claimed depreciation on the entire cost of the property, including the land, it could not later argue that a part of the consideration from the property's sale was for the land value. The Commissioner of Income Tax (Appeals) held that the cost of acquisition of the land should be regarded as nil since depreciation was claimed on both land and building. The Tribunal, however, upheld the assessee's right to consider the fair market value as of April 1, 1981, adjusted for indexation, as the cost of acquisition for computing capital gains. The Tribunal dismissed the appeal by the Revenue, stating that assessments were final, and there was no substantial question of law raised.

This detailed analysis of the judgment from the Bombay High Court highlights the key issues of adjustment of land cost for capital gains computation and the treatment of assets for depreciation and capital gain claims. The Tribunal's decision to allow the adjustment by cost inflation index and the assessee's right to bifurcate the sale consideration were upheld, emphasizing the statutory provisions and factual findings in the case.