2015 (10) TMI 2298 - AT - Income Tax

Transfer of the property by way of distribution of assets on retirement of two partners - LTCG or STCG - assessee contended that what has been transferred to the retiring partner is 50% of the FSI retained by the assessee firm which would naturally result into a LTCG to the firm - Held that - What was available with the assessee after transfer of land under DA is only 50% of the land along with FSI available on the said 50% of the land. Accordingly, we find that the AO was not justified in considering FSI available on the entire land comprising of 50% portion which was already transferred under the DA and has already been subjected to capital gains for the assessment year 2006-07. As decided in the case of Citibank (2003 (4) TMI 92 - BOMBAY High Court) the land is an independent and identifiable asset and it continues to remain so even after construction of the building thereupon. Therefore, the land even if it is owned by the assessee for more than 36 months, it will be a long term capital asset and the gain arising there-from it will be a LTCG. Thus, the Hon ble High Court has held that if there is a construction on the land which is a depreciable asset then the land and building has to be bifurcated and the super structure has to be treated as STCG and the land will be treated as LTCG. Similar view has been taken in the case of Hindustan Hotel Ltd. (2010 (10) TMI 16 - Bombay High Court). Accordingly, in view of the above facts and circumstances as well as the judgments of the Hon ble jurisdictional High Court, we do not find any error or illegality in the order of the CIT(A) in allowing the claim of the assessee regarding capital gain as long term capital gain u/s 45(4) arising from the land retained by the assessee which was purchased in the year 1960. - Decided against revenue.

Summary

Issues:
1. Treatment of income from transfer of property on retirement of partners as long-term capital gain.
2. Computation of capital gain based on disclosed area of land and property under transfer.

Issue 1: Treatment of income from transfer of property on retirement of partners as long-term capital gain

The appellant, a partnership firm, entered into a development agreement in 2005 with a developer for a plot of land. Two partners retired in 2006 and were given 50% of the land and future developed property. The firm treated this as long-term capital gain (LTCG) under section 45(2). The Assessing Officer (AO) reclassified it as short-term capital gain (STCG) and computed capital gain on the entire land. The CIT(A) agreed with the firm, stating that only the 50% land retained by the firm was transferred, resulting in LTCG. The CIT(A) allowed indexation of cost and rejected the AO's increase in area valuation. The revenue appealed, arguing that the firm only had a right to receive developed property post-agreement, and FSI on the entire land should be considered. The firm contended that only 50% of the land was transferred, and the entire capital gain was LTCG. The tribunal found in favor of the firm, stating that the asset distributed on retirement was the 50% land retained, resulting in LTCG. Citing relevant case law, the tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

Issue 2: Computation of capital gain based on disclosed area of land and property under transfer

The dispute centered on whether the capital gain should be computed based on the disclosed area of land and property under transfer. The AO considered FSI on the entire land, while the firm argued that only 50% of the land was transferred. The tribunal agreed with the firm, stating that the capital gain should be based on the 50% land retained by the firm post-agreement. Citing relevant case law and the independent nature of land as an asset, the tribunal upheld the CIT(A)'s decision to allow the claim of LTCG on the land retained by the firm since 1960. The tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order.

This detailed analysis of the judgment highlights the key issues, arguments presented, and the tribunal's decision in each aspect of the case, ensuring a comprehensive understanding of the legal nuances involved.