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2010 (10) TMI 16 - HC - Income TaxLTCG versus STCG - sale of incomplete building - The Assessing Officer held that what the assessee had transferred was a land with a building which was incomplete. The hotel building which was under construction was not held by the assessee for a period of more than three years and therefore the profit arising on sale of the incomplete hotel project was a short term capital gain. After deducting the cost of the acquisition of the land and the cost of construction of the incomplete building from the sale price of Rs.11 crores, the surplus of Rs.7,80,05,356 was held to be a short term capital gain liable for tax. The Assessing Officer rejected the contention of the respondent that it was a long term capital gain and completed the assessment treating the profit of Rs.7,80,05,356 as a short term capital gain. - Held that - the concept of dual ownership is recognised in the sense that the land may belong to one person and the building standing thereon may belong to another - . Once the concept of dual ownership is accepted it matters not whether the construction of a building is completed or not. It also matters not whether the building is constructed by the owner of the land or by some body else - the capital gain arising out of the sale the lease hold interest in the land in incomplete building will have required to be bifurcated into the gain arising out of a sale of lease hold interest in the land and the sale of the incomplete building
Issues Involved:
1. Classification of the sale consideration for the incomplete building as long-term or short-term capital gains. 2. The validity of the ITAT's adoption of the value of the superstructure and the apportionment of capital gains. 3. The justification of the ITAT's finding regarding the balance capital gains as long-term capital gains. Issue-wise Detailed Analysis: 1. Classification of the Sale Consideration for the Incomplete Building as Long-Term or Short-Term Capital Gains: The respondent, a company engaged in the hotel business, acquired a plot on a perpetual lease and commenced construction of a hotel building. Due to financial constraints, the incomplete hotel project, including the land and partly constructed building, was sold for Rs. 11 crores. The respondent claimed the profit from the sale as a long-term capital gain. The Assessing Officer, however, classified it as a short-term capital gain, reasoning that the incomplete building was not held for more than three years. The CIT (Appeals) apportioned the capital gain based on the expenditure incurred before and after three years from the date of sale. The Tribunal, however, treated the land and the building as separate assets, attributing Rs. 2.15 crores to the building and the remaining to the land, thus classifying the gain from the land as long-term and from the building as short-term. The High Court upheld the Tribunal's view, emphasizing the recognition of dual ownership in India and the necessity of bifurcating the capital gain arising from the sale of land and the incomplete building. 2. The Validity of the ITAT's Adoption of the Value of the Superstructure and the Apportionment of Capital Gains: The Tribunal's decision to value the superstructure at Rs. 2.15 crores, with a capital gain of Rs. 30 lakhs after deducting the construction cost, was challenged. The High Court supported the Tribunal's valuation, noting that the land appreciates significantly over time, while buildings may depreciate due to maintenance requirements. The Tribunal's 15% appreciation for the incomplete building was deemed reasonable in the absence of contrary evidence. Thus, the High Court affirmed the Tribunal's method of apportioning the capital gains between long-term and short-term based on the expenditure incurred. 3. The Justification of the ITAT's Finding Regarding the Balance Capital Gains as Long-Term Capital Gains: The High Court addressed the third issue by reiterating its stance on the bifurcation of assets and capital gains. Given the answers to the first two issues, the Court found no merit in the argument against the ITAT's classification of the balance capital gains as long-term. Consequently, the appeal was dismissed, affirming the Tribunal's decision that the gain from the land sale was long-term, while the gain from the incomplete building was short-term. Conclusion: The High Court's judgment upheld the Tribunal's bifurcation of the sale consideration into separate assets, treating the land as a long-term capital asset and the incomplete building as a short-term capital asset. The valuation and apportionment of capital gains by the Tribunal were deemed reasonable and consistent with the provisions of the Income Tax Act. The appeal was dismissed, favoring the respondent's classification of capital gains.
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