AMIT BAJAJ ADVOCATE

Section 54EC provides for exemption from tax on long-term capital gain when the capital gain arises from the transfer of long-term capital asset and the whole or any part of the said capital gain is invested in certain bonds within the period of 6 months. Section 54EC speaks of the actual capital gain which arises out of transfer of long-term capital asset and not deeming amount. Whereas section 50C provides for deeming fiction where value of consideration is adopted as per the stamp valuation authorities or any authority of the State Government. Even if the property has been sold at a lesserprice but under the deeming fiction of section 50C, the value adopted by the stamp valuation authorities is to be taken as sale consideration. Such a deeming fiction cannot be imported into section 54EC. Hence, the deemed value cannot be considered for the purpose of exemption under section 54EC. Thus, for the purpose of deduction under section 54EC, the sale value would be taken at Rs. 16 lakhs, which is the actual sale consideration and has been invested in the bond. At the same time, for the working of the long-term capital gain, the sale consideration will be taken up as per the value determined under section 50C, which is at Rs. 24.48. Thus, the sale value for the purpose of computation of long-term capital gain would be taken at Rs. 24.48 lakhs.

 IN THE ITAT MUMBAI BENCH ‘B’

Mrs. Nila V. Shah

v.

Commissioner of Income-tax (Appeals), XXV

IT APPEAL NO. 3745(MUM.) OF 2008

[ASSESSMENT YEAR 2005-06]

MARCH 28, 2012

ORDER

Amit Shukla, Judicial Member – This appeal has been preferred by the appellant against the order dated 17.03.2008, passed by CIT (Appeals) XXV, Mumbai for the quantum of assessment u/s. 143(3) for the Assessment Year 2005-06. The appellant has raised the following grounds of appeals to challenge the addition confirmed on account of capital gain for a sum amounting to Rs. 3,73,128/-.

“1. The learned Commissioner of Income tax Appeals has erred in not considering the market value as on 10.06.1999 as cost of assets. CIT v. Abrar Alvi [2001] 247 ITR 312 (Bom.).

2. The learned Commissioner of Income Tax Appeals has erred in considering the value adopted by the Stamp office instead of agreement value for the purpose of Section 54 EC.

3. The learned Commissioner of Income tax Appeals has rightly upheld the grounds of appeal by application of Section 50 but factually erred in considering the Financial year 2001-02 as the year of completion of construction instead of 10.06.1999 when the tenant assessee become owner (As per the agreement).”

2. The main issue arising in this appeal as culled out of the grounds of appeal and by the orders of the authorities below are as follows:

Firstly, whether the sale of office (situated at 303, Mantri mansion, 3rd floor, 17 Raghunath Dadaji Lane, Fort, Mumbai-400 001) on 17.09.2004 amounts to Long Term Capital Gain or Short Term Capital Gain;

Secondly, whether the cost of acquisition of the said property should be taken at Rs. 4,75,000/- which was the cost incurred for acquiring the property vide agreement dated 10.06.1999 or the market value of the property which as per the appellant on the basis of value given by approved valuer at Rs. 10,04,475/-; and

Lastly, the sale value of the property should be taken as per the value adopted by the Stamp Valuation Authorities u/s.50C at Rs. 24,48,128/- or Rs. 16,00,000/- which was the actual sale value for the purpose of the deduction u/s. 54EC.

3. The facts as elaborated in detail in the appellate order are that the appellant was having an office premises of 225 sq. ft. at 303, Mantri mansion, 3rd floor, 17 Raghunath Dadaji Lane, Fort, Mumbai-400 001 on tenancy basis for the last 30 years. This building belonged to ‘Shree Shyam Sunderlalji Temple Trust’, wherein several tenants occupied the various portion of the building. As the building was 60 yrs old, the owners of the property desired to sell the property. After getting due permission from the Charity Commissioner in June 1997, a notice was published in the daily newspaper, advertising that the property would be sold to the highest bidder. The highest bidder was one Shri Geharilal Harkalal Ranka. This property was actually purchased by the tenants and Shri Geharilal Haraklal Ranka was the confirmed party. This way the property was sold to the tenants through this person. Each of the tenants paid their share of price for purchasing the property. In this manner, the tenants became the owner after long negotiations vide agreement dated 10.06.1999. Later on, this building was demolished completely and new building was constructed. The total cost of purchase in the old property,demolishing charges and the construction of new property in the hands of the appellant came to Rs. 4,75,000/-. The new construction completed in the year relevant to Assessment Year 2002-03 and the possession was given to all the tenants.

3.1 Later on, the appellant sold the property on 17.09.2004 on a total consideration of Rs. 16,00,000/-. For determining the cost of acquisition for the purpose of calculating the capital gains, the appellant got the valuation of the property as on 10.06.1999 by an approved valuer who determined the market value of the property at Rs. 10,04,475/- as on 10.06.1999. Accordingly, the appellant claimed the cost of acquisition of the property at Rs. 10,04,475/-.

4. The Assessing Officer held that since the sale in question was of an office, hence it was a depreciable asset and treated the same as a Short Term Capital Gain by virtue of section 50 of the I.T. Act. He did not went to the question of deciding the date of acquisition or the period for which the property was held and rather invoked the provisions of section 50 to come to the conclusion that it was a Short Term Capital Gain. Before the Assessing Officer, the appellant made following calculation of Long Term Capital Gain and the taxability there on, vide letter dated 04.10.2007 (the copy of which is placed at page 9 of the paper book) :

	Market value as per stamp duty			Rs. 24,48,128
	Cost of Premises as on 10.06.99		10,04,475
	As per Valuation Report
	Indexed Cost	480 x 10,04,475	12,39,455
		389
	Cost of reconstruction		4,75,000	17,14,455
		Net Gain		7,33,673
	Investment into Capital gain bond			16,00,000
	Taxable Capital Gain			NIL

4.1 The Assessing Officer rejected the contention of the appellant by concluding firstly, that by virtue of section 50 it is a Short Term Capital Gain and secondly, the cost of acquisition is Rs. 4,75,000/- which was the cost incurred for acquiring the property. After giving deduction u/s.54EC, he calculated the Short Term Capital Gain as under :-

	Sale value u/s. 50C	Rs. 24,48,128/-
	Less : Cost	Rs. 4,75,000/-
		Rs. 19,73,128/-
	Less : Investment in bond u/s. 54EC	Rs. 16,00,000/-
	STCG	Rs. 3,73,128/-
	The Total income is therefore computed as under
	Income from other sources as per statement		Rs. 1,47,263/-
	STCG as discussed above		Rs. 3,73,128/-
		Total income	Rs. 5,20,391/-

5. Before the CIT(Appeals) the appellant contented that as on 10.06.1999, the tenancy right in the said property was exchanged for ownership right and thus the cost of said premises has to be taken at the market value as on 10.06.1999 in view of the judgment of Hon’ble Bombay High Court in the case of CIT v. Abrar Alvi [2001] 247 ITR 312. As for the cost of acquisition, the appellant relied upon the valuation report of the approved valuer who has determined the market value of the property as on 10.06.1999 at Rs. 10,04,475/-.

5.1 The CIT (Appeals) after considering the various clauses of agreement dated 10.06.1999 and the entire facts of the case and also the contention of the appellant held that, first of all, the judgment of Hon’ble Bombay High Court in the case of Abrar Alvi (supra) is not applicable in the appellant’s case, as in that case ownership right was bought instead of the property and while in the case of the appellant the property was purchased through open bidding and not through ownership right. As regards to the cost of acquisition, the CIT (Appeals) held that the same would be at Rs. 4,75,000/-, as the property was purchased through open bidding which was later on demolished and new building was constructed, wherein the appellant’s share of cost for the purchase and construction of the property attributed to Rs. 4,75,000/- which is the actual cost of acquisition. He, therefore, upheld the cost of acquisition at Rs. 4,75,000/-.

5.2 With regard to the year of acquisition for the purpose of determining whether it is a Long Term Capital Gain or Short Term Capital Gain, the CIT (Appeals) held that since the property was constructed in the year relevant to the Assessment Year 2003-04 and possession was given in the same year and was sold during the year relevant to Assessment Year 2005-06, therefore, the period is of less than 36 months. Hence, it was a Short Term Capital Gain. Lastly, he held that the sale consideration would be taken as per the value determined by the Stamp Valuation Authority i.e. Rs. 24,48,128/- instead of Rs. 16,00,000/- and since the appellant has only invested Rs. 16,00,000/- in prescribed bond u/s. 54EC, the deduction would be allowable to the extent of Rs. 16,00,000/-. He, accordingly, taxed the Short Term Capital Gain of Rs. 3,23,128/-.

5.3 On the issue of applicability of section 50, the CIT (Appeals) categorically held that the same would not be applicable in the case of the appellant and, therefore, the view taken by the Assessing Officer for the purpose of determining the Short Term Capital Gain is not correct, even though on the facts that it was a Short Term Capital Gain only.

6. The learned Sr. Counsel on behalf of the appellant submitted that once the CIT (Appeals) has held that the provisions of section 50 are not applicable, then the issue of Short Term Capital Gain does not arise at all. He contented that the date of agreement i.e. 10.06.1999 by which there was a conversion from a tenancy to ownership was the date from which the issue of acquisition and the cost of acquisition should be determined. If, the said date is taken into consideration, then the sale made in the Assessment Year 2005-06 will amount to Long Term Capital Gain. Regarding the cost of acquisition determined at Rs. 4,25,000/-, he submitted that since the appellant was a tenant for the last 30 years in the erstwhile property, he had a tenancy right which ultimately got converted into ownership and it has to be determined as per the market value. In support of this contention, he relied heavily upon the judgment of ITAT Mumbai Bench in the case of Balmukund P. Acharya v. ITO [2011] 48 SOT 385  . He also relied upon the judgment of Hon’ble Bombay High Court in the case of Abrar Alvi ( supra). In short, his main contention are that firstly, it is a Long Term Capital Gain and secondly, the cost of acquisition should be taken at Rs. 10,04,475/- as per the value determined by the approved valuer. In the last, he made an alternate claim that if the value of the property is taken as per section 50C, then the same should be allowed for the purpose of deduction u/s.54EC.

7. On the other hand, the learned Sr. DR relied heavily upon the findings of the CIT (Appeals) and contented that it is Short Term Capital Gain as the possession in the newly constructed property was acquired in the Assessment Year 2003-04. He also placed reliance on the judgment of Bombay High Court in the case of CIT v. Dr. D.A. Irani[2000] 111 Taxman 600 for the proposition that even if the assessee was tenant before its purchase it was wholly irrelevant because at the time of purchase tenancy was extinguished and, hence, it has to be assessed from the date of acquisition of the property that was in the year relevant to Assessment Year 2003-04.

8. We have heard the rival contentions of the parties and also carefully gone through the orders of the CIT (Appeals) as well as the Assessing Officer. The first issue for adjudication before us is, whether the transaction of sale of property in question amounts to ‘Long Term Capital Gain’ or ‘Short Term Capital Gain’. The facts which are borne out from the records are that the appellant was a tenant for the last 30 years as a proprietor of M/s. Teja Enterprises, having office space admeasuring 225 sq. ft. in the building situated at 303, Mantri mansion, 3rd floor, 17 Raghunath Dadaji Lane, Fort, Mumbai. This building belonged to a trust ‘Shree Shyam Sunderlalji Temple Trust’. The trust desired to sell the property and after getting due permission from the Charity Commissioner, the said property was sold to all the tenants with one Shri Geharilal Harkalal Ranka, who was the confirmed party. All the tenants entered into an agreement on 10.06.1999, by which all the tenants formed cooperative society and purchased the property on the same space. The said building was demolished and new building was constructed thereafter. The total cost of purchase and consideration for the new property in the hands of the appellant was determined at Rs. 4,75,000/-. The possession was given to all the tenants in the Assessment Year 2002-03 when the building was completed with the same space as was existing with the tenants in the old building. From a perusal of agreement dated 10.06.1999 (a copy of which is appearing at page no. 26 and 43 of the paper book), it is seen that, all the tenants themselves were the promoters and also proposed a Co-operating Housing Society in the name of Maruti Co-operating Housing Ltd., wherein all the tenants become the members and were promoted as purchasers. Thus, this agreement (dated 10.06.1999) itself gave interest and right in the said property to the appellant also.

8.1 The word “property” is of widest amplitude which also includes the right and interest of a person in a particular asset. Every possible interest which a person can clearly hold or enjoy in an asset can be termed as ‘property’ within the definition of capital asset. The transfer of property connotes the passing of the rights in the said property. In this case, the agreement dated 10.06.1999 clearly gives the interest and the right to the appellant in the property admeasuring 225 sq. ft. to which she was entitled to in the new building which was to come up after demolition of the old building. Thus, the date of acquisition in the said property can safely be held to be on 10.06.1999. It is also an undisputed fact that the sale was made on 17.09.2004, which fell into Assessment Year 2005-06. Thus from the date of 10.06.1999 till 17.09.2004, the period is of more than 36 months, hence the transaction in question is clearly a ‘Long Term Capital Gain’. Thus the first issue is decided in the favour of the appellant and the finding given by the Assessing Officer as well as the CIT (Appeals) that it is a Short Term Capital Gain is reversed. We accordingly, hold that the transaction of sale of asset was ‘Long Term Capital Gain’.

8.2 After holding that the sale of office amounted to Long Term Capital Gain, the second issue which comes for our consideration is to what would be the cost of acquisition of the said property. The appellant’s claim is that, since she was a tenant for the last 30 years, therefore, she had a tenancy right which was exchanged for the ownership right vide agreement dated 10.06.1999 and therefore, the cost of the premises has to be taken by including the tenancy right in the cost of acquisition. Accordingly, the appellant took the market value as on 10.06.1999 as the cost of acquisition, which has been estimated by the approved valuer at Rs. 10,04,475/-. In support of this, heavy reliance has been placed on the judgment of Hon’ble Jurisdictional High Court in the case ofAbrar Alvi (supra). First of all, the said judgment cannot be held to be applicable as that was a case where the ownership right was itself bought instead of the property and in the case of the appellant, the property itself was purchased through open bidding and not through ownership right. To this extent, the finding of the CIT (Appeals) are correct. As already stated above, the appellant had purchased the said property for a sum of Rs. 4,75,000/- which included the proportionate cost of new building. In such a situation, the cost of tenancy right cannot be taken into consideration, firstly, there was no surrender of tenancy rights and secondly, as per the sub section 2 of section 55, the cost of acquisition of tenancy right has to be taken at Nil. Even from the plain reading of the agreement dated 10.06.1999, it is evident that the appellant had bought the property and not the ownership right and once this is a factual position, then it cannot be held that the some cost should be assigned on the tenancy right also. The judgment of Hon’ble Jurisdictional High Court in the case of Dr. D.A. Irani (supra) also gets squarely applicable, wherein it has been held that even if the assessee was tenant before its purchase, it becomes wholly irrelevant because at the time of purchase, tenancy gets extinguished and hence the value has to be assessed from the date of acquisition of the property. Therefore, the cost of acquisition for the purpose of indexation has to be taken at Rs. 4,75,000/- and not Rs. 10,04,475/- as has been contented by the appellant. Thus, the finding of the CIT (Appeals) on this issue is upheld. We accordingly hold that the cost of acquisition should be taken at Rs. 4,75,000/-.

8.3 Lastly, for the purpose of deduction u/s. 54EC where the sale value should be taken at Rs. 16,00,000/- which is the actual value or Rs. 24,48,128/- which has been adopted by the Stamp Valuation Authorities u/s. 50C. Section 54EC provides for exemption from tax on Long Term Capital Gain when the capital gain arise from the transfer of Long Term Capital Asset and the whole or any part of the said capital gain is invested in certain bonds within the period of 6 months. Section 54EC speaks of the actual capital gain which arises out of transfer of Long Term Capital Gain and not deeming amount. Whereas section 50C provides for deeming fiction where value of consideration is adopted as per the Stamp Valuation Authorities or any Authority of the State Government. Even if the property has been sold at a lesser price but under the deeming fiction of section 50C, the value adopted by the Stamp Valuation Authorities is taken as sale consideration. Such a deeming fiction cannot be imported into section 54EC and hence the deemed value cannot be considered for the purpose of exemption u/s 54EC. Thus the claim of the appellant u/s. 54EC would be only Rs. 16,00,000/- which is the actual investment in the specified bonds. At the same time, for the working of the Long Term Capital Gain, the sale consideration will be taken up as per the value determined u/s. 50C which here in this case is at Rs. 24,48,128/-. To summarise our above findings, we hold that :-

i. The transaction of sale will amount to Long Term Capital Gain and not Short Term Capital Gain.

ii. Cost of the acquisition of the said property would be taken at Rs. 4,75,000/-.

iii. The sale value for the purpose of computation of Long Term Capital Gain would be taken at Rs. 24,48,128/-.

iv. For the purpose of deduction u/s.54EC, the sale value would be taken at Rs. 16,00,000/- which is the actual sale consideration which has been invested in the bond.

8.4 On the above guidelines, the Assessing Officer is directed to recompute the Long Term Capital Gain.

9. In the result, the appeal filed by the appellant is partly allowed.