2018 (7) TMI 1820 - HC - Income Tax

Capital Gains - Short-term capital gain or not - transfer of leasehold rights - Revenue claims that since the acquisition of the full ownership pertaining to the property preceded the transfer thereof by the assessee by a few months - Held that - Since the assessee in this case inherited the relevant immovable property under a Will and the perfection of the title from perpetual leasehold rights to complete ownership did not amount to the acquisition of the property by the assessee; the acquisition took place upon the bequest under the Will being effective. The perfection of the title from perpetual leasehold rights to complete ownership had, in such circumstances, to be regarded as a cost of acquisition within the meaning of such expression in Sections 48 and 55 of the Act. Indeed, the assessee in this case was no longer transferring the leasehold rights to the assessee s transferee; the assessee was transferring complete ownership rights therein. As to the second issue, it will be governed by the same legal principle as in the recognition by the Supreme Court in R.M. Arunachalam 1997 (7) TMI 5 - SUPREME COURT that the discharge of a mortgage debt created by the predecessor-in-interest of the assessee had to be regarded as a part of the cost of acquisition. The encumbrances to the property in this case were created by the Will and the conduct of the assessee s predecessor-in- interest. These encumbrances were got rid of by the assessee by payment. A better title to the property was acquired by the assessee and transferred to the assessee s transferee. For the same principle as recognised in the Supreme Court judgment, the cost of getting rid of such encumbrances in any immovable property has to be accepted as a part of the cost of acquisition of the property, subject, however, to the assessment as to the genuineness and validity of such encumbrances. To spell it out in more clear terms, merely because an assessee seeks deductions by adding to the cost of acquisition upon citing payments to other claimants in respect of the property may not pass muster unless, on facts, the claims are found to be genuine and the transactions discovered to be at arm s length.

Summary

Issues:
1. Whether the sale of property by the assessee attracts short-term capital gains tax due to the conversion of perpetual lease into outright ownership?
2. Whether the payments made by the assessee to others asserting rights over the property qualify for deduction under Section 55(1)(b)(2)(ii) of the Income Tax Act, 1961?

Issue 1:
The Revenue contended that the sale of property by the assessee attracted short-term capital gains tax because the full ownership of the property was acquired a few months before the transfer. The Revenue argued that payments made to the trust, DDA, and the third party did not qualify for deduction under Section 55(1)(b)(2)(ii) as they were not for the improvement of the property. The court analyzed the case and held that the acquisition of full ownership did not amount to the acquisition of the property by the assessee, as the bequest under the Will was the effective acquisition. The court considered the perfection of title from perpetual leasehold rights to complete ownership as a cost of acquisition within Sections 48 and 55 of the Act.

Issue 2:
Regarding the second issue, the court applied the legal principle established in a Supreme Court judgment (R.M. Arunachalam v. CIT) that the discharge of encumbrances, in this case created by the Will and the predecessor-in-interest, should be considered a part of the cost of acquisition. The court emphasized that the genuineness and validity of such encumbrances must be assessed. The court highlighted that deductions for payments to other claimants in respect of the property must be based on genuine claims and arm's length transactions. The court noted that the Commissioner (Appeals) and the Appellate Tribunal were the final fact-finding authorities in determining the veracity of transactions.

In conclusion, the court dismissed the appeal, stating that the order of the Appellate Tribunal stands. The court did not delve into the genuineness of payments made to the trust and the agreement-holder, as factual matters were beyond the scope of the jurisdiction. The court emphasized the importance of assessing the validity of deductions and upheld the decision based on the principles of cost of acquisition.