Commissioner of Income Tax vs Smt. Rama Rani Kalia

We have heard Sri Dhananjay Awasthi for the appellant. Sri Shubham Agrawal appears for the respondent-assessee. This income tax appeal u/s 260A of the income tax Act 1961 (the Act), is directed against the order dated October 31, 2012, passed by the income tax Appellate Tribunal, Allahabad Bench, Allahabad in I.T.A. No. 95/Alld/2011, relating to the assessment year 2004-05. The Department-appellant has framed the following substantial questions of law for consideration:

Whether the income tax Appellate Tribunal has erred in law in upholding the order of the Commissioner of income tax (Appeals) without taking into account the fact that after conversion to freehold superior rights accrued to the assessee?

Whether the income tax Appellate Tribunal was justified in law in dismissing the appeal of the Revenue without taking into account the fact that the difference of period of between date of freehold and date of sale is only three days, therefore, short-term capital gains are to be levied?

Whether the income tax Appellate Tribunal was justified in giving relief to the assessee without taking into account the decision of Commissioner of Income Tax Vs. Dr. V.V. Mody, ?

Whether the income tax Appellate Tribunal was justified in law in ignoring the Departmental Valuation Officer''s report regarding the stamp valuation?

We find that only questions Nos. 1 and 2 are relevant, for the purpose of consideration.

Brief facts of the case are that the assessee is a senior citizen. She had never filed income tax return, as her income was below the maximum exemption limit. During the year in question, the assessee sold immovable property, i.e., a shop No. 26/7 M.G. Marg, Civil Lines, Allahabad, built at Nazul Plot No. 30/4 (being a part portion of Nazul Plot No. 30, Civil Station, Allahabad). She did not file return of income on the advice of the then chartered accountant but filed it in compliance with the notice u/s 148 of the income tax 1961, declaring an income of Rs. 70,430. During the assessment proceedings, details were furnished by the assessee, including the valuation report of the Government approved valuer to estimate the fair market value for the purpose of capital gains under the income tax Act. The Assessing Officer proceeded to rely on the market value, for stamp duty purpose, for assessment of capital gains since till the completion of the assessment order, the report was not received from the Departmental Valuation Officer (DVO).

The Assessing Officer found that the assessee had purchased the property on July 7, 1984, for Rs. 46,000. A copy of the agreement was filed on record. The assessee had thereafter applied for freehold rights, which was granted by the Collector, Allahabad, on March 29, 2004, on payment of Rs. 1,34,567. She sold the property on March 31, 2004, for Rs. 20,00,000 including the amount paid for freehold. Rs. 4,60,000 was paid as stamp duty on the sale deed executed declaring the value of the property at Rs. 46,05,840. The assessee filed a copy of certificate regarding investment of Rs. 16,00,000, which was deposited in long-term capital gains account, within six months from the date of sale, i.e., September 24, 2004.

The Assessing Officer found that since the property was acquired by converting the leasehold right into freehold right on March 29, 2004, and was sold within three days on March 31, 2004, capital gains would amount to short-term capital gains. He added the short-term capital gains of Rs. 17,30,866 towards the income of the assessee. The Assessing Officer worked out the capital gains u/s 50C of the Act at Rs. 26,05,840, which was the difference between the total sale consideration as per the stamp authority and the net sale consideration of the property, and thus worked out the total capital gains of Rs. 43,36,706, and assessed the total income of the assessee at Rs. 44,07,140.

The Commissioner of income tax (Appeals) allowed the appeal partly, with the findings that the assessee did not have any short-term capital gains in the property. Relying on several orders of the income tax Appellate Tribunal, the Commissioner of income tax (Appeals) held that the conversion of property into freehold property, is nothing but improvement of the title over the property, as the fact remains that the assessee was the owner, prior to conversion. The relevant paragraphs of the order of the Commissioner of income tax (Appeals) are quoted as under:

5.2 So far as the sole ground of appeal is concerned, which relates to the fact of the matter that the sale made, to be considered as long-term capital gains and not as short-term capital gains, as stated earlier also, I am of the view and as also the appeals decided by me in the cases of--

(1) Usha Mehta (A. No. 45/TTO/R-I(4)Alld/2010-11, dated September 28, 2010).

(2) Malini Malviya (A. No. 47/ITO/R-I(2)Alld/2010-11, dated September 28, 2010)

(3) Vinodini Mehta (A. No. 46/ITO/R-I(4)Alld/2010-11, dated September 28, 2010)

(4) Tribeni Prasad Mehta (A. No. 47/TTO/R-I(4)Alld/2010-11, dated September 28, 2010)

(5) Seema Segal (A No. 67/ACIT/R-I/Alld/08-09, dated November 12, 2010)

On the same issue and in particular after considering the orders of the Hon''ble income tax Appellate Tribunal, Allahabad, in Dhiraj Shyamji Chauhan, Allahabad v. CIT, Allahabad in I.T.A. No. 134 (Alld)/2007-assessment year 1999-2000 dated November 22, 2007, wherein it was held that the conversion of the property from leasehold to freehold is nothing but the improvement of the title of the property but the fact remains that the assessee was the owner even prior to the said conversion, the plea of the appellant is acceptable. As also submitted by the appellant, in the cases of Sri D.N. Chadha and T.N. Chadha (I.T.A. No. 38 and 45 (Alld)/2008 dated February 28, 2008, the hon''ble income tax Appellate Tribunal, Allahabad, has reiterated the same point of view. In the case of The Commissioner of Income Tax Vs. Sujatha Jewellers, also, the assessee took an immovable property in lease and sub-leased the same to another company. The Assessing Officer held that the transfer of lease by the assessee would amount to transfer of capital asset, viz., lease rights. It was held that the assessee had acquired interest in the property by having a lease in its favour and by sub-leasing the property, it had transferred the interest in property in favour of a third party which is liable to be taxed under the head "Capital gains". By sub-leasing of property, the interest of the transferor, i.e., the lessor is extinguished and this extinguishment of right is covered u/s 2(47) of the Act. Therefore, it was held that the transaction of sub-lease constitutes transfer and the gains arising therefrom were assessable as Capital gains. While deciding this case, the decisions rendered in A.R. Krishnamurthy and A.R. Rajagopalan Vs. Commissioner of Income Tax, Madras, and R.K. Palshikar (HUF) Vs. Commissioner of Income Tax, M.P., Nagpur, were followed by the hon''ble court. Even before the insertion of clause (v) to section 2(47) of the income tax Act, by the Finance Act, 1987, with effect from April 1, 1988, it was held in the case of A.R. Krishnamurthy and A.R. Rajagopalan Vs. Commissioner of Income Tax, Madras, that the word "transfer" u/s 2(47) gave a restricted meaning and it includes grant of lease rights. It was held by the hon''ble apex court regards section 2(47) that this clause contains an "inclusive" definition of transfer. Therefore, other modes of "transfer" are also liable to capital gains subject to fulfilment of other conditions regarding taxability under the head "Capital gain" ( Commissioner of Income Tax, Lucknow Vs. Narang Dairy Products, Lucknow, ). As also decided by the hon''ble income tax Appellate Tribunal, Allahabad, in the case of Dhiraj Shyamji Chauhan v. CIT, Allahabad that it was evident that the assessee was holding the property since 1922 on lease basis. Thus, the assessee was having right may be restricted on the property. The right of the holder of the leasehold property is almost actually as the owner of the property, that for example entire DDA property is sold on leasehold basis. The assessee got the conversion of the property into freehold property, that may be considered as improvement in the title but the fact remains that the assessee was the owner since 1922 on lease basis.

The Commissioner of income tax (Appeals) relied on the definition of "long-term capital gains" which contains an "inclusive" definition of transfer, and does not rule out other modes of transfer subject to fulfilment of the conditions regarding taxability under the head "Capital gains", vide Commissioner of Income Tax, Lucknow Vs. Narang Dairy Products, Lucknow, . He also relied on Commissioner of Income Tax Vs. Dr. V.V. Mody, where the assessee was allotted a site by the Bangalore Development Authority in 1972. He secured a conveyance on payment of the entire sale consideration at the end of 10th year and a sale deed was executed in his favour by the Development Authority registered on May 13, 1982. Thereafter, on November 27, 1982, the assessee sold the site to a third person. In the said case, the Tribunal found that in such case 50 per cent. should be considered as short-term gains and 50 per cent. as long-term capital gains. On a reference it was held by the Karnataka High Court that from the date of sale in favour of the assessee, the assessee had only one capacity of being the absolute owner of the site in question and it was in that capacity alone, the assessee transferred his title over the site in question in favour of the purchaser,

In the appeal filed by the Revenue, the income tax Appellate Tribunal held that it was a case of long-term capital gains, as the assessee was owner of the property, even prior to conversion.

The terms "short-term capital asset'''' and ''''short-term capital gain" and "long-term capital asset" and "long-term capital gain" have been defined in the Act as follows:

2(42A) ''short-term capital asset'' means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer;

2(42B) ''short-term capital gain'' means capital gain arising from transfer of a short-term capital asset;

2(29A) ''long-term capital asset'' means a capital asset which is not a short-term capital asset;

2(29B) ''long-term capital gain'' means capital gain arising from the transfer of a long-term capital asset.

The difference between the "short-term capital asset" and "long-term capital asset" is the period over which the property has been held by the assessee and not the nature of title over the property. The lessee of the property has rights as owner of the property subject to covenants of the lease, for all purposes. He may, subject to covenants of the lease deed, transfer the leasehold rights of the property with the consent of the lessor. The conversion of the rights of the lessee in the property from having leasehold right into freehold is only by way of improvement of her rights over the property, which she enjoyed. It would not have any effect on the taxability of gain from such property, which is related to the period over which the property is held. If the period is less than 36 months, the gain arising from such transfer would be of short-term capital gain.

In the present case, the property was held by the assessee as a lessee since 1984, and the same was transferred on March 31, 2004, after the leasehold rights were converted into freehold rights on the same property which was in her possession, in her favour on March 29, 2004. The conversion was by way of improvement of title, which would not have any effect on the taxability of profits as short-term capital gains.

There is no error of law in the order of the Tribunal. Questions Nos. 1 and 2, framed in the appeal, are thus decided in favour of the assessee and against the Department. The income tax appeal is dismissed.