1. The departmental appeal relates to the assessment year 1974-75. The question is whether in a sale of house property the AAC was right in saying that profit on land shall be treated as long-term capital gains and on building as short-term capital gains, where the ITO has treated the entire thing as short-term capital gains. The cross-objection is to the effect that no capital gains have accrued and that the assessment is time-barred.
2. IT APPEAL NO. 346 (MAD.) 81 [DEPARTMENTAL APPEAL] - A house property was sold for Rs. 1,30,000. The land had been purchased in 1968, by the wife of the assessee at a cost of Rs. 16,065, which funds were supplied by the assessee-husband. Then a building was put up in 1972 at a cost of Rs. 73,220 out of which Rs. 43,220 were contributed by the assessee.
The aggregate of the contribution for house property was Rs. 59,285 made up of Rs. 16,065 for land and Rs. 43,220 for house construction.
The total cost of construction worked out to Rs. 89,285 made up of Rs. 16,065 for land and Rs. 73,220 for superstructure. In the assessment of the wife, which we are made to believe is mostly a protective measure because of the return furnished by the wife, the ITO made an assessment to capital gains on Rs. 22,050 as short-term capital gains for buildings and Rs. 18,665 as long-term capital gains for land, the aggregate capital gains being Rs. 40,715. In the assessment of the assessee-husband, the ITO, after overruling the objections of the assessee, invoked Section 64 of the Income-tax Act, 1961 ('the Act') and brought out of the total capital gains of Rs. 40,715 (same figure as in the case of the wife) a sum of Rs. 27,035 worked out in proportion to the contribution of Rs. 59,285 by the assessee to the total cost of Rs. 89,285 to assessment on capital gains as short-term capital gains (sic).
3. In appeal the AAC upheld the invocation of Section 64. But he followed the pattern of assessment of the wife, directing the land to be assessed as long-term and superstructure building as short-term. He found that the officer assessing the wife has taken 46 per cent for land and 54 per cent for building. So he followed the same pattern and proportion and directed that Rs. 12,400 shall be assessed as long-term capital gains for land and Rs. 14,635 as short-term capital gains for superstructure. The department appeals for assessment of the total as short-term capital gains.
4. We found no merit in the departmental appeal. The assessee could have argued that the whole thing is long-term because what is sold is the land (which is long-term) with building thereon, which is only an improvement to the land. But the assessee has not taken that stand before us. The case of the department is that what is sold is the building with land bought much earlier as appendage. The argument of the departmental representative is based on departmental ground Nos. 4 and 5 which are as follows : 4. The AAC failed to note that the land on which the superstructure was built was only appurtement to the building now sold and it cannot be transferred separately from the building.
5. The AAC should have seen that the land on which the superstructure was built forms an integral part of the building and its existence is essential for necessary use of the building.
5. There is nothing wrong in law in treating the land as a separate asset and building as another separate asset. It all depends on the context. Even in the Transfer of Property Act, the provision which provides for treating building as an improvement is made subject to the context and to the intentions of the parties. In fact, the department itself in the case of the wife of the assessee has treated the land as a separate asset and building as another separate asset. In India it is permissible to own land as a separate asset and building by another person as separate asset. So we uphold the decision of the AAC in treating the land as long-term and superstructure as short-term.
7. CROSS OBJECTION 4 (MAD.) 82-(1) No CAPITAL GAIN ACCRUES -This plea was given up by the assessee. In fact it was agreed before us that Section 64 can be invoked. But the assessee argued for a lesser relief, which is permissible within the framework of the grounds raised in cross-objection. It was pointed out that apportionment of long-term and short-term on the basis of 46 per cent and 54 per cent is not appropriate, particularly when exact separate figures of capital gains for land and separate figures for building are available. And more so when the whole of the land has been financed by the assessee-husband.
We agree with that submission. So we direct that Rs. 18,665 which is the capital gains for land shall be assessed as long-term capital gains and the balance of Rs. 27,035 less Rs. 18,665 equal to Rs. 8,370 shall be assessed as short-term capital gains. Ground allowed in part accordingly.
8. WHETHER TIME-BARRED - We found no substance. We agree with the AAC that the assessment is within time.
9. Departmental appeal dismissed. The cross objection is allowed in part on ground No. 1.