2013 (2) TMI 231 - AT - Income Tax

Applicability of provision of section 55(2)(a)(ii) - Disallowing indexed Fair Market Value as on 1-4-1981 in respect of the Leasehold Land acquired as the appellant had not incurred any cost for acquiring the said leasehold land i.e. NIL value - Held that - Where the assessee has acquired some land for NIL value prior to a year starting from 1.4.1981, even then the provision of section 48 shall be applicable and the fair value of the land in question as on 1.4.1981 along with indexed cost of acquisition has to be determined in order to arrive at the figure of long term capital gain and the value for which the assessee has acquired the land in question prior to 11.4.1981 is not relevant for determining the fair market value of the land as on 1.4.1981. It is well settled that when certain provision of law has clear language and leaves no room for ambiguity, there should be no violence to the provision as enacted by the Legislature and no words should be added or omitted while reading a specific provision of law. As find that the Legislature has intentionally not added word land in the provision of Section 55(2(a) and therefore, the provision of section 55(2)(a)(ii) of the Act would not be applicable while valuing the cost of acquisition of the land for the purpose of computation of long term capital gain of the assessee. Accordingly, the value of the lease-hold rights in the land in question of the assessee, has to be determined in accordance with the provision of section 48 by valuing fair market value of the land as on 1.4.1981 and the index cost of acquisition has to be determined in order to assess long term capital gains in the hands of the assessee. Fair market value of the land in question as on 1.4.1981 for the lease hold right of the assessee in the land at Ashram Road, Ahmedabad - Held that - Approved valuer s valuation report has one glaring mistake by not making suitable deduction on account of assessee s right in the land being only that of lessee for 98 years and the assessee not being owner thereof. As the approved valuer has recorded that he has taken into consideration surrounding sales and its location, size, frontage, neighbourhood, prospects of developments, distance to the commercial establishments etc. while determining the land rate of Rs. 1200/- per square yard as on 1.4.1981, this value of the land estimated may be reasonable for a free hold land as on 1.4.1981, but the value of a free hold land could not be equated with the value of leasehold rights of lessee in a particular piece of land. Considering the entire factual matrix of the case, and holding that fair market value of the land in question as on 1.4.81 has been reasonably estimated at Rs.1,200/- per square yard by the approved valuer as on 1.4.1981, it shall be fair and justified to value the leasehold rights of the assessee in the land at Ashram Road as on 1.4.1981 at Rs.800/- per square yard after making suitable deduction on account of the land not being free hold and the assessee s right being that of lessee for long period of time - appeal of the assessee partly allowed.

Summary

Issues Involved:
1. Cost of acquisition of leasehold land.
2. Applicability of Section 55(2)(a)(ii) of the Income Tax Act.
3. Determination of fair market value as on 1.4.1981 for leasehold rights.
4. Principles of natural justice.

Detailed Analysis:

1. Cost of Acquisition of Leasehold Land:

The primary issue in this appeal was the cost of acquisition of leasehold land at Ashram Road, Ahmedabad, claimed by the assessee at Rs. 2.99 crores but taken at NIL by the Department. The assessee argued that the cost of acquisition should include the Rs. 4 lakhs spent on constructing a Cinema Hall as per the lease agreement dated 15.9.1966. The Department, however, considered the cost of acquisition as NIL under Section 55(2)(a)(ii) of the Income Tax Act, 1961.

2. Applicability of Section 55(2)(a)(ii) of the Income Tax Act:

The Revenue authorities based their decision on the fact that the assessee did not pay any "cash" at the time of the lease deed execution and only committed to invest in the construction of a Cinema Hall. The Tribunal held that the provision of Section 55(2)(a)(ii) applies to specific capital assets such as goodwill, trademarks, and tenancy rights, and not to leasehold rights in land. Therefore, the cost of acquisition of the leasehold land should be determined based on the fair market value as on 1.4.1981, rather than being taken at NIL.

3. Determination of Fair Market Value as on 1.4.1981 for Leasehold Rights:

The Tribunal emphasized that for assets held before 1.4.1981, the fair market value as on 1.4.1981 should be considered for determining the cost of acquisition. The Tribunal noted that the approved valuer's report estimated the land value at Rs. 1,200 per square yard as on 1.4.1981 but did not account for the fact that the assessee held leasehold rights and not freehold rights. After considering the leasehold nature of the rights and the commercial location of the land, the Tribunal decided that Rs. 800 per square yard would be a fair valuation for the leasehold rights as on 1.4.1981. The AO was directed to determine the long-term capital gain based on this valuation and allow the indexed cost of acquisition.

4. Principles of Natural Justice:

Although the assessee initially raised issues related to the violation of principles of natural justice, such as not being given an opportunity to prove the cost of acquisition during assessment proceedings, these issues were not contested further during the hearing. The Tribunal focused on the main issue of determining the cost of acquisition and fair market value.

Conclusion:

The Tribunal concluded that the value of the leasehold rights in the land should be determined based on the fair market value as on 1.4.1981, at Rs. 800 per square yard, and directed the AO to compute the long-term capital gain accordingly. The appeal of the assessee was partly allowed.