2013 (9) TMI 962 - HC - Income Tax

Long Term Capital Gains (LTCG) or Short Term Capital Gains (STCG) - Taxability on conversion was by way of improvement of title on capital assets Held that - The difference between the short-term capital asset and long-term capital asset is the period over which the property has been held by the assessee and not the nature of tittle over the property. - The lessee of the property has rights as owner of the property subject to covenants of the lease, for all purposes. He may, subject to covenants of the lease deed, transfer the lease hold rights of the property with the consent of the lessor. The conversion of the rights of the lessee in the property from having lease hold right into free hold is only by way of improvement of her rights over the property - It would not have any effect on the taxability of gain from such property, which is related to the period over which the property is held. If the period is less than 36 months, the gain arising from such transfer would be of short-term capital gain. In the present case, the property was held by the assessee as a lessee since 1984, and the same was transferred on 31.03.2004, after the lease hold rights were converted into free hold rights on the same property which was in her possession, in her favour on 29.03.2004. The conversion was by way of improvement of title, which would not have any effect on the taxability of profits as short term capital gain it is long term capital gains - Decided against the Revenue.

Summary

Issues:
1. Interpretation of capital gains in the context of property conversion from leasehold to freehold.
2. Determination of short-term or long-term capital gains based on property holding period.

Analysis:

Issue 1: Interpretation of capital gains in property conversion
The case involved the conversion of a property from leasehold to freehold and the subsequent sale of the property. The Assessing Officer (AO) treated the transaction as a short-term capital gain due to the quick sale after conversion. However, the CIT (Appeal) disagreed, emphasizing that the conversion merely improved the title over the property without changing the ownership status. The CIT (A) referred to various precedents and rulings to support the view that the conversion did not alter the taxability of the gain based on the holding period. The Tribunal upheld this interpretation, stating that the assessee remained the owner of the property even before the conversion.

Issue 2: Determination of short-term or long-term capital gains
The AO calculated the capital gains as short-term due to the conversion and subsequent sale within a short period. However, the CIT (A) and the Tribunal considered the property's holding period rather than the nature of title as crucial in determining capital gains. The Tribunal highlighted that the difference between short-term and long-term capital assets lies in the holding period, not the ownership rights. In this case, the property was held by the assessee as a lessee since 1984, and the conversion to freehold in 2004 did not change the taxability of the gain. As the property was transferred after the conversion, the Tribunal concluded that it constituted long-term capital gain.

In conclusion, the Tribunal dismissed the Income Tax Appeal, affirming that the conversion of the property from leasehold to freehold did not impact the taxability of the gain, which was rightly classified as long-term capital gain based on the holding period. The judgment clarified the distinction between short-term and long-term capital assets, emphasizing the significance of the holding period in determining capital gains.