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2012 (7) TMI 334 - AT - Income TaxCapital gain from sale of flats - short term or long term - computation of period of holding - The right to acquire the flats and ownership of the flats - held that - The assessee had earlier right to acquire flats which no longer subsisted after flats were acquired by the assessee. The assessee had sold the flats and not its rights to acquire the flat and, therefore, the capital gain in the present case has to be computed in respect of assets being flats. The assessee along with flats had also sold right of the assessee in the land which was an independent asset and which was being held by the assessee since 1962 as an owner. Therefore, following the judgment of Hon ble High Court of Bombay (2010 (10) TMI 16 (HC)), the capital gain in respect of transfer of right of assessee in the land has to be computed separately as long term capital gains and gain in respect of sale of super structure has to be treated as short term capital gain. - Decided partly in favor of revenue.
Issues Involved:
1. Computation of capital gain from the sale of flats. 2. Classification of capital gain as long-term or short-term. 3. Consideration of right to acquire flats as an asset. 4. Bifurcation of capital gain into land and superstructure components. Detailed Analysis: 1. Computation of Capital Gain from Sale of Flats: The assessee, who owned the land since 1962, entered into a development cum sale agreement on 21.2.2001 with a builder, transferring 45% of the land in exchange for Rs. 61.00 lacs and 55% share in the built-up area. The property was released from C.R.Z in 2004, increasing the permissible FSI and the assessee's share to 14322 sq.ft. The assessee sold two flats in 2006 for Rs. 5.38 crores. The assessee treated the income as long-term capital gain, deducting indexed costs of the land and construction. The AO, however, computed it as short-term capital gain, arguing the flats were held from the date of the occupation certificate (24.2.2005). 2. Classification of Capital Gain as Long-Term or Short-Term: The AO contended that the flats were held from 24.2.2005 (date of occupation certificate) and sold in 2006, thus qualifying as short-term capital gain. The assessee argued that the right to acquire the flats existed since the agreement date (21.2.2001), treating it as long-term capital gain. The CIT(A) sided with the assessee, considering the holding period from the agreement date, thus classifying it as long-term capital gain. However, the Tribunal disagreed, stating the right to acquire the flats and ownership of the flats are distinct assets. The flats, not the right to acquire them, were sold, thus the gain should be treated as short-term. 3. Consideration of Right to Acquire Flats as an Asset: The assessee argued that the right to acquire flats was an asset held since 2001, and the construction costs were merely an improvement. The Tribunal, referencing the Bombay High Court's judgment in CIT vs. Dr. D.A. Irani, held that the right to acquire flats extinguished upon taking possession, and the flats themselves were the assets sold. Thus, the capital gain should be computed based on the sale of the flats, not the right to acquire them. 4. Bifurcation of Capital Gain into Land and Superstructure Components: The Tribunal accepted the alternate plea of bifurcating the capital gain into land and superstructure components. The assessee retained 55% interest in the land, making it reasonable to compute separate gains for land and superstructure. Following the Bombay High Court's judgment in CIT vs. Hindustan Hotels Ltd., the Tribunal decided to attribute a 25% profit margin on the construction cost to determine the sale consideration for the superstructure. The remaining sale consideration would pertain to the land. The capital gain from the land would be long-term, and from the superstructure, short-term. The AO was directed to re-compute the capital gain accordingly, allowing the benefit of investment in Rural Electrification Corporation Bonds under section 54EC. Conclusion: The appeal by the revenue was partly allowed. The Tribunal ruled that the capital gain from the sale of flats should be computed as short-term, while the gain from the transfer of land rights should be long-term. The AO was instructed to re-compute the capital gain, considering the bifurcation and allowing appropriate exemptions.
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