1998 (8) TMI 118 - AT - Income Tax

Summary

Issues Involved:

1. Deletion of inclusion of capital gains in the total income.
2. Identification of the capital asset transferred.
3. Assumption of taxation based on the decision in A. Gasper v. CIT.
4. Determination of the cost of maintenance of the right to possess the floor space.
5. Levy of capital gains tax on the transfer of 15,000 sq. ft. of floor space.

Issue-wise Detailed Analysis:

1. Deletion of Inclusion of Capital Gains in the Total Income:

The Department appealed against the CIT(A)'s order for the assessment year 1986-87, challenging the deletion of the inclusion of capital gains in the total income. The CIT(A) had concluded that no cost of acquisition was incurred by the assessee for acquiring the 15,000 sq.ft. floor space and thus, capital gains tax could not be levied on its transfer. The Tribunal found that the CIT(A) erred in law and on facts by deleting the capital gains included in the total income of the assessee.

2. Identification of the Capital Asset Transferred:

The Assessing Officer identified the right to possess 15,000 sq.ft. of floor space as the capital asset transferred. The CIT(A) disagreed, stating that the right to possess floor space was not a capital asset with an ascertainable cost of acquisition. However, the Tribunal concluded that the right to possess the floor space was indeed a capital asset under section 2(14) of the Income-tax Act, 1961, and its transfer attracted capital gains tax.

3. Assumption of Taxation Based on the Decision in A. Gasper v. CIT:

The CIT(A) held that the decision in A. Gasper v. CIT was not applicable, as the main issues were different. The CIT(A) relied on the Supreme Court's decision in B.C. Srinivasa Setty and subsequent Calcutta High Court decisions, which held that no capital gains tax could be assessed on assets with no ascertainable cost of acquisition. The Tribunal, however, found that the CIT(A) misdirected himself and that the right to possess the floor space had a cost of acquisition, making the decision in A. Gasper applicable.

4. Determination of the Cost of Maintenance of the Right to Possess the Floor Space:

The Assessing Officer computed the cost of acquisition of the right to possess the floor space at Rs. 24,000, based on the rent paid by the assessee. The CIT(A) disagreed, stating that the rent paid was for keeping the tenancy alive and could not be considered as the cost of acquisition. The Tribunal concluded that the rent paid was for nurturing, protecting, and maintaining the right to possess the floor space, and thus, it was a legitimate cost of acquisition.

5. Levy of Capital Gains Tax on the Transfer of 15,000 sq. ft. of Floor Space:

The CIT(A) held that no capital gains tax could be levied on the transfer of the 15,000 sq.ft. floor space, as there was no cost of acquisition. The Tribunal disagreed, stating that the transfer of the right to possess the floor space for Rs. 45,50,000 was taxable under section 45 of the Income-tax Act. The Tribunal restored the Assessing Officer's order, which included the capital gains in the total income of the assessee.

Conclusion:

The Tribunal concluded that the CIT(A) erred in deleting the capital gains included in the total income of the assessee. The right to possess the floor space was a capital asset with a legitimate cost of acquisition, and its transfer for Rs. 45,50,000 attracted capital gains tax. The Tribunal quashed the CIT(A)'s order and restored the Assessing Officer's order, allowing the Department's appeal.