2015 (3) TMI 1016 - AT - Income Tax

Sale of land and building - short term capital gain as per CIT(A) OR sale of land and building has to be bifurcated inasmuch as sale of land has to be considered as giving rise to long term capital gain and sale of building as giving rise to short term capital gain as per assessee - Held that - From a perusal of agreement dated 4.10.2004 between the assessee and Concorde Shelters, it is clear that Concorde Shelters agreed to construct a Villa on the plot sold by Concorde Housing. The land was sold by Concorde Housing to the assessee by a registered sale deed dated 21.10.2004. In the said sale deed, Concorde Hosing has affirmed that possession of the site sold to the assessee has been delivered and that the assessee will be in legal possession of the property from the date of sale deed. It is thus clear that the assessee acquired title to the land as early as on 21.10.2004. The possession of Concorde Shelters under agreement dated 4.10.2004, was only a license to carry out construction which cannot be equated to possession as understood in legal parlance. The assessee having acquired title to the land as early as on 21.10.2004 and having sold the land together with Villa under an agreement dated 5.5.2008, it is to be held that the transaction of sale has to be bifurcated as one relating to land and the other relating to building. As far as the transaction of sale of land is concerned, the gain on such sale should be construed as long term capital gain because the assessee held the land for a period of more than 36 months. The conclusions of the CIT(Appeals) that the expression held as used in the definition of long term capital asset in the Act means physical possession, in our view, is erroneous and is not contemplated by the provisions of section 2(42A) of the Act. The law is well settled that when there is a transfer of capital asset being land together with building and where the land is held for a period of more than 36 months and the building held for less than 36 months, the capital gain on land and building has to be bifurcated as one relating to land and the other relating to building. If the land is held for more than 36 months, then capital gain on sale of land has to be treated as long term capital gain. Thus bifurcation of capital gain as made by the assessee should be accepted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in concluding that the sale of land and building by the assessee gave rise to short-term capital gain.
2. Whether the sale of land and building should be bifurcated into long-term capital gain for the land and short-term capital gain for the building.
3. Whether the interest paid on loans borrowed for acquiring the property can be allowed as a deduction while computing capital gain.

Detailed Analysis:

Issue 1: Justification of CIT(A) in concluding short-term capital gain:
The CIT(A) concluded that the transaction for the purchase of land and building was a single integrated transaction. Therefore, the AO should not have accepted the bifurcation of capital gain into long-term and short-term. The CIT(A) referenced the agreement dated 4.10.2004, which indicated that the sale of land and construction of the villa was a single transaction. The CIT(A) emphasized that the effective possession and control of the property remained with Concorde Group until the villa was completed and handed over to the assessee in FY 2008-09. Consequently, the CIT(A) directed the AO to assess the entire gain as short-term capital gain.

Issue 2: Bifurcation of capital gain:
The Tribunal analyzed the agreement dated 4.10.2004 and the registered sale deed dated 21.10.2004, which confirmed that the assessee acquired title to the land on 21.10.2004. The Tribunal noted that the possession of Concorde Shelters was only a license to carry out construction and not possession in a legal sense. The Tribunal held that the transaction of sale should be bifurcated into land and building, with the land held for more than 36 months qualifying for long-term capital gain. The Tribunal referenced the Madras High Court decision in CIT Vs. Ramachandra Rao, which supported bifurcation of capital gain when land and building are sold as one unit.

Issue 3: Deduction of interest on loans:
The AO disallowed the deduction of Rs. 7,82,394 claimed by the assessee as interest paid on borrowing while computing long-term capital gain on the sale of land. The AO reasoned that Section 48 of the Income Tax Act does not allow such a deduction as it is neither the cost of acquisition or improvement of the land nor wholly and exclusively incurred in connection with the transfer. The Tribunal did not make any observations on this claim as it was not the subject matter of the appeal before them.

Conclusion:
The Tribunal allowed the appeal of the assessee, accepting the bifurcation of capital gain into long-term capital gain for the land and short-term capital gain for the building. The Tribunal emphasized that the expression "held" in the definition of long-term capital asset does not mean physical possession but legal ownership. The Tribunal refrained from commenting on the deduction of interest paid on borrowings, as it was not under appeal. The appeal was pronounced in favor of the assessee on 20th March 2015.