Commissioner of Income Tax vs Dr. D.L. Ramachandra Rao

N.V. Balasubramanian, J.—This is a petition filed by the CIT, Tamil Nadu-V, Madras under s. 256(2), of the IT Act (hereinafter referred to

as ''the Act'') to direct the Tribunal to state the case and refer the following question of law :

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in directing to bifurcate the terminal gains into long-term

capital gains pertaining to land and short-term capital gains pertaining to superstructure ?

The assessee is an individual. A plot of land was allotted to him in March, 1978, and the assessee started construction of the building during

March, 1985 and completed the construction in 1987. The assessee sold the property on 23rd September, 1987 for a total consideration of Rs.

3,50,000. During the asst. yr. 1988-89 the assessee returned the capital gains arising on the sale of the land and building owned by him and

claimed exemption under s. 80-I of the Act with reference to the capital gains arising on sale of the land. He claimed that the building was newly

constructed when it was sold and the capital gains accruing to him was solely attributable to the sale of plot of the land in question and, therefore,

claimed deduction under s. 80T of the Act on the entire capital gains. The AO rejected the claim of the assessee on the ground that both house and

land are inseparable. He held that what was sold was a house held for a period of less than 36 months. He, therefore, came to the conclusion that

the entire gain was attributable to the house and the entire gain should be regarded as a short-term capital gains.

The assessee preferred an appeal before the CIT(A). The CIT(A) following an instruction of the CBDT, held that after the construction of a

building on the land, there comes into existence a different asset, i.e., a house property and the new asset was held by the assessee for a period

less than 36 months and so the assessee was not entitled to claim exemption under s. 80T of the Act on the ground that the property should be

regarded as short-term capital asset.

The assessee preferred an appeal before the Tribunal against the order of the CIT(A) and it was held that it is possible to bifurcate terminal

gains arising on the sale of house property into long-term capital gains pertaining to the land and short-term capital gains pertaining to

superstructure. The Tribunal following the decision of Rajasthan High Court in ITO vs. K. C. Itty [sic - Commissioner of Income Tax Vs. Vimal

Chand Golecha, held that the assessee was entitled to exemption under s. 80T of the Act with reference to long-term capital gain attributable to the

sale of the land. In this view of the matter, it set aside the order of the CIT(A) and restored the matter to the AO with a direction to bifurcate and

rework out the taxable gains after giving an opportunity to the assessee.

The Department filed a reference application under s. 256(1) of the Act, to direct the Tribunal to state a case and refer the questions set out in

paragraph 1 above. The Tribunal following the decision of this Court in Park View Enterprises Vs. State Government of Tamil Nadu, and the

decision of the Rajasthan High Court in CIT vs. Vimal Chand Golecha (supra) held that the Indian law recognises the existence of land and

building as separate assets and the law is well settled on the said issue and hence rejected the application on the ground that there was no referable

question of law which arise out of its decision and the CIT has filed the petition seeking a reference on the question set out in paragraph 1 above.

Mr. S. V. Subramanian, learned Senior counsel appearing for the petitioner vehemently argued that after the construction of the building on the

land, the house property becomes an inseparable asset and is a new asset. According to him, it is not possible to bifurcate the capital gain as

relatable to building separately or land separably and since the apportionment is not possible, the view of the Tribunal is not correct in law.

According to him, the land and building is not sold separately, but as one unit and it is not possible to bifurcate the building as a separate unit and

land as a separate unit. He placed reliance on the decision of the Supreme Court in State of Kerala vs. P. P. Hassan Koya AIR 1968 SC 1208. In

the above case, the Supreme Court held in determining the compensation payable to land and building under the Land Acquisiton Act, the

compensation cannot be determined by assessing the value of the land and ""break-up value"" of the buildings separately. He, therefore, submitted

that it is not possible to bifurcate capital gain into two parts, one relating to the land and another to the building.

Mr. S. Gurunathakrishnan, learned counsel appearing for the respondent submitted that the Indian law recognises separate ownership of the

land and building and this position has been recognised by this Court in the case of Park View Enterprises (cited supra) and he submitted that it is

possible to separate capital gains into one relating to the land and one relating to the building separately.

We have carefully considered the rival contentions of both parties. The expression ""capital asset"" is defined in s. 2(14) of the Act as under :

Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or professions, ..........

(iii) agricultural land in India, etc. The key words of the definitions of capital asset found in s. 2(14) are the property of any kind and the term

comprehends and includes within itself any interest in the property. It may be movable or immovable property or any interest thereon. The term

''short-term capital asset'' is defined in s. 2(42A) of the Act as under :

Short-term capital asset"" means a capital asset held by an assessee for not more than sixty months immediately preceding the date of transfer"".

During the relevant period, s. 2(42A) of the Act prescribed the period of thirty six months. The emphasis that is given in s. 2(42A) is that the

capital assets should be held by an assessee for a period not more than 36 months immediately preceding the date for the asset to be termed as a

short-term capital assets. Here also, the emphasis is given on the expression held by an assessee. The mode of computation of the capital gain is

provided under s. 48 of the Act which reads as under :

The income chargeable under the head ''Capital gains'' shall be computed by deducting from the full value of the consideration received or

accruing as a result of the transfer of the capital asset the following amounts, namely :-

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto"".

Sec. 80T of the Act grants deduction in respect of the long-term capital gains in the case of an assessee other than companies where the gross total

income of an assessee not being a company includes any income chargeable under the head ""Capital gains"" relating to capital assets other than

short-term capital assets. In the case of buildings or land, separate deduction is provided under s. 80J(b) of the Act. It is relevant to note when s.

80T grants deduction, it uses the expression both the buildings or land or any rights in building or lands. The question that arises for consideration is

whether it is possible to bifurcate the capital gains that arises on the sale of the land and building, when it is sold as one unit. The decision of this

Court in Park View Enterprises (cited supra) makes it clear that the Indian law recognises dual ownership of the land and building. The Privy

Council in Narayan Das vs. Jatindranath AIR 1923 PC 135 has also taken the view that having regard to the law in India it is possible to have

separation of ownership of the building from the ownership of the land. This view of the Privy Council was approved by the Supreme Court in

Bishan Das and Others Vs. The State of Punjab and Others, . In so far as the definition of capital asset is concerned, as already seen, the definition

of capital asset includes property of any kind and the land held by the assessee is a capital asset and the building held by the assessee is also a

capital asset and it is possible to bifurcate the capital gain arising with reference to the sale of the land and building even if they are sold as one unit,

if the lands are held by the assessee for a period more than that prescribed under s. 2(42A) of the Act. It is not possible to say that by construction

of the building, that the land which was a long-term capital asset, has ceased to be a long-term capital asset. The land is an independent and an

identifiable capital asset, and it continues to remain as an identifiable capital asset even after construction of building and at the time of the sale of

the house. Since the land was held by the assessee for a period exceeding 36 months, the land cannot be regarded as a short-term capital asset

only by virtue of the construction of building thereon. Hence we are unable to accept the contentions of learned counsel for the Revenue that it is

not possible to bifurcate the capital asset into two. We are of the opinion that the Tribunal has come to a correct conclusion that it is possible to

work out capital gain with reference to sale of building and land separately. The decision of the Supreme Court in State of Kerala vs. P. P. Hassan

Koya (supra) relied on by the learned counsel for the Revenue has no application to the facts of this case as it deals with the case where

compensation was payable in respect of land and building and in that situation, the Supreme Court has held that both the land and building should

be valued as one unit and hence, the decision rendered by the Supreme Court with reference to determination of compensation under the Land

Acquisition Act has no application, particularly in the light of s. 80T of the Act. It is impermissible for the learned counsel to rely on a decision for a

point which was not decided in that case. In CIT vs. Vimal Chand Golecha (supra), the Rajasthan High Court held that even if the land and

building are sold as one unit for a consolidated price, the assessee is entitled to bifurcate the same and the capital gain arising from the sale of the

land had to be treated as long-term capital gains. We are in agreement with the view expressed by the Rajasthan High Court in the above case.

We are of the view that the land can be regarded as capital asset as per s. 2(14) of the Act and in accordance with the scheme of the Act, land

would be considered as a separate capital asset, even if a building is constructed thereon. We are also of the opinion that where the land having

been held for more than a prescribed period, the gains arising from the sale of the land could be considered as a long-term capital gains, though the

building thereon was a new construction held for a period less than 36 months. Since the Tribunal has come to the correct conclusion by applying

the well settled principles of law, we are of the opinion that no referable question of law arises out of the order of the Tribunal. Therefore, we

reject the tax case petition. No costs.