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Commissioner of Income-tax Vs. Estate of Omprakash Jhunjhunwala - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 63 of 1995
Judge
Reported in[2002]254ITR152(Cal)
ActsIncome-tax Act, 1961 - Sections 22, 28 and 45
AppellantCommissioner of Income-tax
RespondentEstate of Omprakash Jhunjhunwala
Appellant AdvocateP.K. Mullick, Senior Adv.
Respondent AdvocateN.P. Poddar, Senior Adv., ;D. Mitra and ;P. Chakraborty, Advs.
Excerpt:
- .....the sale of first floor together with the proportionate interest in law (land ?) under the head 'capital gain' and to compute the c. g. in relation to the gain arising from the sale of the first floor of the building at 7, pretoria street, calcutta, as short-term capital gain ?'the assessee is an individual. in the return he has shown the income received from the property at 7, pretoria street, calcutta, and that income he has shown as income from house property. the relevant assessment year is 1989-90. the assessing officer noticed in fact that the property, 7, pretoria street, calcutta, was taken on lease from july 9, 1975, by the assessee and the property was later developed by a partnership firm constituted by his three brothers and father. thereafter, the father of the assessee.....
Judgment:

1. On an application under Section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following questions set out at page 2 of the paper book :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee is the owner of the superstructure at 7, Pretoria Street, Calcutta, though the land over which the superstructures was built was taken on long lease ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in directing to treat the rental income from the property at 7, Pretoria Street, Calcutta, assessable under the head 'Income from house property' and not under the 'Income from business' taken by the Assessing Officer ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in directing to assess the consideration received by the assessee against the sale of first floor together with the proportionate interest in law (land ?) under the head 'Capital gain' and to compute the C. G. in relation to the gain arising from the sale of the first floor of the building at 7, Pretoria Street, Calcutta, as short-term capital gain ?'

The assessee is an individual. In the return he has shown the income received from the property at 7, Pretoria Street, Calcutta, and that income he has shown as income from house property. The relevant assessment year is 1989-90. The Assessing Officer noticed in fact that the property, 7, Pretoria Street, Calcutta, was taken on lease from July 9, 1975, by the assessee and the property was later developed by a partnership firm constituted by his three brothers and father. Thereafter, the father of the assessee retired from the partnership and the assessee and his three brothers reconstituted the partnership and developed the property constructing a multi-storeyed building.

2. The construction of the building was started during the financial year 1988-89. The said partnership was dissolved in 1987 and the assets and liabilities were distributed among the partners. During the relevant previous year, the first floor of the building was sold to one Kailash Bagaria representing Gain-well Holding Pvt. Ltd., along with the proportionate interest in the land.

3. The rent recovered by the assessee from the property which fell to his share was declared under the head 'Income from property'. The Assessing Officer, while framing the assessment, did not accept the contention of the assessee. According to the Assessing Officer, the rental income received by the assessee must be computed under the head 'Income from business' and not under the head 'Income from house property' as claimed by the assessee. Similarly, the Assessing Officer also did not accept the claim of the assessee that the consideration received in respect of the sale of the first floor together with the proportionate interest in the land should be computed under the head 'Capital gain'. It was observed that as the aforesaid income received by the assessee in the course of business activities, the same should be assessed under the head 'Income from business'.

4. In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) has taken the view that the rental income received by the assessee should be assessed under the head 'Income from house property' and for the sale proceeds of the first floor of the premises at 7, Pretoria Street, Calcutta, he directed that the sale proceeds should be considered under the head 'Short-term capital gain'.

5. In appeal before the Tribunal, the Tribunal has confirmed the view taken by the Commissioner of Income-tax (Appeals) so far as the rental income is concerned. But, for the capital gain, the Tribunal has directed that so far as the sale proceeds of the land are concerned that should be assessed as 'long-term capital gain'. In so far as the structure is concerned, the Tribunal directed that the sale proceeds on account of the sale of building that should be assessed as 'short-term capital gains'.

6. Heard learned counsel for the parties.

7. Mr. Mullick, learned counsel for the Revenue, submits that the assessee is not the owner of the land as well as the building, the rental income cannot be assessed as income from the house property. It should be assessed as income from business. He further submits that on the same lines the sale proceeds which are received by the assessee when the assessee is not the owner of the building as well as the land those sale proceeds should be assessed as income from the business. Mr. Mullick further submitted that under the lease contract the assessee was never treated as the owner of the land and under the lease contract the assessee can raise construction on the leasehold land but that leasehold land along with the structure he has to return back to the owner of the land after the expiry of the lease period, i.e., 75 years.

8. Mr. Poddar, learned counsel for the assessee, submits that under the lease deed there is a provision that the assessee as a lessee can demolish the present structure on that leasehold land and without consent of the lessor he can raise the construction. He can sell, assign or mortgage any rights in the structure he raised. Therefore, for the purpose of income-tax during the lease period he is not only as good as the owner but he is the deemed owner. In support of that he placed reliance on the decision of this court in the case of CIT v. Supreme Credit Corporation Ltd. : [1998]230ITR700(Cal) and the decision of this court in S. G. Mercantile Corporation P. Ltd. v. CIT : [1972]83ITR700(SC) ; CIT v. Mumbadevi Mansion Co-owners Housing Co-operative P. Ltd. : [1983]143ITR150(Bom) and D. R. Puttanna Sons P. Ltd. v. CIT : [1986]162ITR468(KAR) . He further submits that in view of the decision of this court in the case of Tinsukia Development Corporation Ltd. v. CIT : [1979]120ITR466(Cal) , if the assessee raises the structure the income received from that structure is assessable as income received from house property. He further brought to our notice the decision of the Rajasthan High Court which has taken the view that in case of sale of land and building they are two different assets and land if it is held by the assessee for more than three years the sale proceeds of that plot of land can be taxed as long-term capital gain and the structure raised on that plot of land and the period of structure is less than three years then the sale proceeds on account of that structure can be taxed as short-term capital gain tax. He further placed reliance on the decision of the Bombay High Court in CIT v. Fazalbhoy Investment Co. Pvt. Ltd. : [1977]109ITR802(Bom) , which clarified that theory of merger of land and building after construction of the building on that plot of land is not applicable in India.

9. He also drew our attention to various clauses of the lease deed which empowers the assessee lessee to raise the construction on the leasehold plot and after that construction he is at liberty to sub-let, mortgage, assign, sell and otherwise deal with the leasehold interest in the demised premises or building or buildings to be constructed thereon. He further submits that this is the first year and in subsequent years even the Department has itself assessed the rental income as income from the house property. In 1991-92 the Assessing Officer has assessed the rental income as income from other sources. In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) has directed that the rental income should be assessed as income from 'house property'. In 1992-93, again the Assessing Officer has assessed the rental income as income from house property. In all subsequent years, the assessee has disclosed the rental income as income from house property and that has been accepted and an intimation has been communicated under Section 143(1)(a) of the Act.

10. Before we go into the facts, we would prefer to refer to the observations of this court and other courts. In the case of CIT v. Supreme Credit Corporation Ltd. : [1998]230ITR700(Cal) , wherein this court has considered that when the plot is a leasehold property and if the lessee raised the construction he is the owner of the leasehold property. This court has taken the view that if the lessee has not constructed any construction on the leasehold property, he cannot be the owner of the leasehold property.

11. Mr. Poddar, learned counsel for the assessee, has clarified that in the case in hand the lessee, i.e., the assessee has raised the construction. Therefore, if the assessee has raised the construction he is the owner of the property.

12. In the case of S. G. Mercantile Corporation P. Ltd. v. CIT : [1972]83ITR700(SC) , the question before their Lordships was that whether, under the facts and circumstances of the case, the income from sub-letting the stalls of Taltolla Bazar was assessable under Section 10 or Section 12 of the Indian Income-tax Act, 1922. At page 705, their Lordships observed that 'the income received from property and falls under the specific head described in Section 9, the character of that income is not altered because it is received by a company formed with the object of developing and setting up markets.'

13. In CIT v. Vimal Chand Golecha the question before the Rajasthan High Court was whether capital gain arising from the sale of land has to be treated as long-term capital gain. The Rajasthan High Court has held that the land is a capital asset in terms of Section 2(14) of the Act and it is treated as a separate asset. Even for the purpose of Section 32, a building which is entitled for depreciation would be the superstructure and would not include the site under Section 48 of the Act. Therefore, the income chargeable under the head 'Capital gains' had to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset in the manner provided in the Section. If the price of two capital assets has been charged at one consolidated price, then the assessee is entitled to bifurcate the same. A situation may arise where a gain from one of the capital assets is a short-term capital gain, whereas from the other it is long-term capital gain as in the present case and in such a situation, the benefit to the assessee cannot be denied in respect of the gain arising from the sale of an asset which could be considered as a long-term capital gain.

14. In CIT v. Parthas Trust : [2001]249ITR120(Ker) , the Kerala High Court has taken the view that for the purpose of depreciation of land and building, building may be constructed by the assessee but not registered in the name of the assessee. Land may belong to one person and structure may belong to another person. If the assessee has raised the structure he is entitled for depreciation of the building.

15. The admitted facts are that the assessee has received the rental income from the property at 7, Pretoria Street, Calcutta, the leasehold land was taken under the lease deed, dated July 9, 1975, and the assessee/lessee was entitled to raise construction or building in that plot of land. As per Clause A(3) of the lease deed, he can demolish the present existing structure. The assessee lessee as per Clause 13 of the lease deed can sublet, mortgage, assign, sell and otherwise deal with the leasehold interest in the demised premises or building.

16. When the admitted facts are that the assessee has raised the construction and he can sell, mortgage or transfer the leasehold property during the lease period he is the deemed owner of the property and the Tribunal has rightly directed to assess the rental income as income from house property. Not only that, Mr. Poddar has brought to our notice that in all the subsequent years, i.e., from the assessment year 1990-91, the income has been shown as income from house property and that has been taxed as such.

17. Therefore, in these circumstances, there is no scope to interfere with the order of the Tribunal.

18. The next issue whether the sale proceeds of the first floor together with the proportionate interest in the land should be taxed under the head 'Capital gain' or whether the land and building can be taxed as two different assets the sale proceeds on account of the land can be taxed as long-term capital gains and the sale proceeds of structure can be taxed as short-term capital gains.

19. Once we have taken the view that the rental income be taxed as income from house property, thus the house is a capital asset and on sale of that capital asset, the sale proceeds should be taxed as capital gains.

20. We also agree with the decision taken by the Rajasthan High Court in CIT v. Vimal Chand Golecha . When the leasehold interest in the plot of land acquired by the assessee under the lease deed that can be treated as a separate asset than the building raised on that plot by the assessee subsequently. Therefore, if the interest in the leasehold plot or the leasehold plot is held by the assessee for more than three years the sale proceeds of that interest is assessable as long-term capital gain and the structure if sold before the expiry of three years, the sale proceeds received on account of the sale of the structure that can be taxed as short-term capital gains as held by the Tribunal, for taxing capital gains separately for land and building. The burden will be on the assessee to satisfy how much of the sale proceeds should be apportioned for the land and how much of the sale proceeds pertained to the structure.

21. In the result, we answer all the three questions in the affirmative, i.e., in favour of the assessee and against the Revenue.

22. The reference so made stands disposed of accordingly.


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