2008 (4) TMI 449 - HC - Income Tax

Capital gains - Whether capital value of such deemed interest to the extent it has been charged lesser than the market rate can be considered as consideration for grant of lease in respect of which the capital gains has to be computed? - Commissioner (Appeals) has allowed the appeal of the assessee and set aside the order of the learned Assessing Officer assessing capital gain at an amount of Rs. 51, 39, 366 on the ground of treating it to be the income derived by the assessee by way of capital gain as the difference in the rate of interest on the security amount deposited with the assessee which interest was stipulated to at the rate of 9 per cent. while according to the assessing authority interest rate was 18 per cent. therefore this difference between 9 and 18 per cent. has been taken to be capital gain. There is no evidence to show that market rate of interest more than 9 percent Differential interest cannot be considered as capital gains -

Summary

Issues:
1. Interpretation of capital gain assessment on interest rate difference.
2. Consideration for grant of lease in capital gain computation.

Analysis:
1. The appeal challenged the Tribunal's decision allowing the assessee's appeal and setting aside the assessing officer's order assessing capital gain based on the difference in interest rates on a security deposit. The assessing authority considered the interest rate to be 18%, while the actual rate was stipulated at 9%. The main issue was whether the difference between these rates could be treated as capital gain. The Commissioner (Appeals) found that the assessing officer did not provide evidence to support the assumption that the interest rate should be 18%, and there was no basis to assume and compute consideration for transfer and cost of acquisition without evidence. The Tribunal held that all conditions for charging capital gains under sections 45 and 48 were not fulfilled, as no consideration was received in lieu of the transfer of the capital asset, resulting in the dismissal of the appeal.

2. The court considered whether the capital value of the deemed interest charged at a rate lower than the market value could be considered as consideration for the grant of a lease in the computation of capital gain. Sections 45(1) and 48 were analyzed, emphasizing that no provision deems profit or gain to be taxable as capital gain unless specifically included by the Legislature. The court referred to a judgment stating that unless a benefit is made taxable, it cannot be regarded as income. It was concluded that the mere difference in interest rates could not render the assessee liable for being taxed on the amount as capital gain. Additionally, a Division Bench judgment highlighted the relevance of the market rate of interest on deposits for determining adequacy, not the rate on borrowings. The court found no grounds to interfere with the impugned order in favor of the Revenue, dismissing the appeal.