2016 (1) TMI 448 - AT - Income Tax

Long term capital gain in respect of leasehold rights - Held that - The statutory definitions in other legislations explained that tenancy right includes lease right. Thus tenancy right is a wider and broader term capable of conceiving similar and such rights. Accordingly, we do not find any infirmity in the order of lower authorities for taxing the capital gains earned on transfer of leasehold rights. So far as expenses incurred on improvement is concerned, we direct the A.O. to consider the same as claimed by the assessee while computing capital gains u/s.45 of the Act. Penalty u/s.271(1)(c) - treatment to the leasehold rights as different from tenancy rights - Held that - There was full disclosure and no suppression of fact. The bonafide explanations supported by judicial pronouncements were also furnished by the assessee for treating the leasehold rights as different from tenancy rights so as to exclude the same from the taxable capital gains. Accordingly, we are of the opinion that it is not a fit case for impose the penalty u/s 271(1)(c) of the Act.

Summary

Issues Involved:
1. Taxability of long-term capital gains on surrender of leasehold rights.
2. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Long-Term Capital Gains on Surrender of Leasehold Rights:

The primary issue revolved around whether the long-term capital gains arising from the surrender of leasehold rights were taxable. The assessee argued that the gains were not taxable, relying on the Supreme Court's decision in CIT vs. B.C. Srinivasan Shetty, which held that capital gains are not leviable on self-generated assets with no ascertainable cost of acquisition. The assessee contended that leasehold rights were not explicitly mentioned in Section 55(2)(a) of the Income Tax Act, which deems the cost of certain self-generated assets as NIL for capital gains computation.

The Assessing Officer (A.O.) disagreed, stating that amendments in Section 55(2)(a) nullified the Supreme Court's decision in Srinivasan Shetty's case. The A.O. argued that leasehold rights are akin to tenancy rights, which are taxable under Section 55(2)(a). The A.O. further contended that the legislative intent was to include all self-generated assets within the ambit of capital gains tax.

The Tribunal examined the arguments and found that although the terms "tenancy rights" and "leasehold rights" are not explicitly defined in the Income Tax Act, they are often used interchangeably in common and legal parlance. The Tribunal concluded that leasehold rights fall within the broader term "tenancy rights" and upheld the A.O.'s decision to tax the capital gains on the surrender of leasehold rights. However, the Tribunal directed the A.O. to consider the expenses incurred on improvement while computing the capital gains.

2. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:

The second issue concerned the imposition of a penalty under Section 271(1)(c) for furnishing inaccurate particulars of income. The assessee had disclosed the transaction in a letter filed with the return of income and paid advance tax on the gains, arguing that the gains were not taxable based on legal advice. The A.O. imposed the penalty, asserting that the assessee's claim was incorrect and that the advance tax payment indicated awareness of the taxability.

The Tribunal noted that penalty proceedings are distinct from assessment proceedings and that the mere disallowance of a claim does not automatically justify a penalty. The Tribunal emphasized that penalties must be strictly construed and that making an incorrect claim does not equate to furnishing inaccurate particulars of income. The Tribunal found that the assessee had acted in good faith, disclosed all relevant facts, and relied on a bona fide legal opinion.

The Tribunal cited the Supreme Court's decision in Reliance Petroproducts Ltd., which held that merely making an unsustainable claim does not attract penalty under Section 271(1)(c). The Tribunal also referred to various judicial precedents supporting the view that penalties should not be imposed when two views are possible, or when the assessee acts on professional advice. Consequently, the Tribunal deleted the penalty imposed on the assessee.

Conclusion:

The Tribunal upheld the taxability of long-term capital gains on the surrender of leasehold rights, considering them akin to tenancy rights under Section 55(2)(a). However, it directed the A.O. to account for improvement expenses in computing the gains. On the issue of penalty under Section 271(1)(c), the Tribunal ruled in favor of the assessee, concluding that the penalty was not warranted as the assessee had acted in good faith and disclosed all relevant facts. The appeals of the assessee were allowed in part, and the appeals of the Revenue were dismissed.