Capital Gains on sale of land and building thereon can be computed separately for land and building

Introduction with analysis:

      The ITAT, Kolkata in The Statesman Ltd. vs. ACIT [(2007) 112 TTJ Kol 593], after considering the facts and circumstances involved in the case, the ratio of decisions laid down by the various High Courts including the Hon’ble jurisdictional High Courts, decision of the Hon’ble Third Member in the case of Kolkata Tribunal and in the light of discussion in the case, has held that the action of A.O. and CIT(A) in denying the bifurcation of aggregate of sale consideration received by the assessee between the land and building was not correct and the action of assessee company in computing the capital gain by apportioning the sales consideration between land and building was correct.

Manyatimes, situation comes across that a person acquires a land and constructs the house-property after 3 years of acquisition of land and after construction of such house property he sells the property (Consisting of land and building, both), but such house-property is sold within a span of 3 years of its holding. The person selling the property as above may find it advantageous to take separately the cost of land and building so as to make land as long term capital asset and the building as short-term capital asset.

Section 48 provides the mode of computation of capital gains. This section subject to its provisos and Explanation incorporates that 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 capital asset, the following amounts, namely:-

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

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

Some Judicial Rulings In Brief:

In Narayan Das Khettry vs. Jatindra Nath Roy Chowdhry AIR 1927 PC 135: 54 IA 218 it was held as follows (at page 137) :

“……having special regard to the view held in India respecting the separation of the ownership of buildings from the ownership of the land, and to the recognition by the courts in India that there is no rule of law that whatever is affixed or built on the soil becomes a part of it, and is subjected to the same rights or property as the soil itself…….”

In Bishan Das vs. State of Punjab AIR 1961 SC 1570 (at pate 1574) it was stated by Supreme Court as follows:

“It is by now settled that the maxim, ‘what is annexed to the soil goes with the soil, ‘has not been accepted as an absolute rule of law of this country…..a person who bona fide puts up construction on land belonging to others with their permission would not be a trespasser, nor would the buildings so constructed vest in the owner of the land….”

The Madras High Court in Venkatasubbiah Chetty vs. Thirupurasundari AIR 1965 Mad 185 (at page 186) has held:

“….This maxim-whatever is affixed to the soil belongs to the soil is a rule of considerable antiquity and has been held to be inapplicable in this country….”

“In India the view has been uniformly taken that the English doctrine of fixtures as to buildings would not apply, and that the party who builds on another’s land should be allowed to remove the materials.”

Also, the Madras High Court in Part View Enterprises vs. State Govt. of Tamil Nadu (1991) 189 ITR 192 (Mad) has observed (at page 236) that the Transfer or Property Act proceeds on the basis that, in law, ownership of a building is different from ownership of the land, and that land and building could be owned by different persons in the eye of the law. At page 238, the Madras High Court, in the above cited case, has further observed that ownership in land and ownership in superstructure could be with different persons provided there is a legal relationship existing between them as parties to a contract. Entry into the property by the owner of the land. Whether the superstructure is of a temporary or permanent character, it is immaterial relating to its ownership and merely because it gets erected on the land of another, automatically, the owner of the land does not become the owner of the superstructure, it the intention of the parties is otherwise. According to decision of Madras High Court in above case it was possible to compute of capital gains pertaining to land and building, independently. More, Madras High Court in CWT vs. D. Krishna Murthy (2000) 18 DTC 822 (Mad- HC) ” (2000) 243 ITR 509 (Mad), on the facts and circumstances of the case, permitted taking of separate valuations for land and the building(for wealth-tax purposes) by applying the provision of section 7(4) of the Wealth Tax Act, 1957.

Also, the Rajasthan High Court in CIT vs. Vimal Chand Golecha (1993) 201 ITR 442 (Raj) has observed that 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 while from the other is a long-term capital gain and, in such a situation the benefit to the assessee cannot be denied in respect of a gain arising from the sale of an asset which could be considered as a long-term capital gain. Land is a capital asset in terms of section 2(14), and in accordance with the scheme of the Income Tax Act, it is treated a separate asset. Even for the purpose of section 32, a building which is entitled to depreciation would mean only the superstructure and would not include the site.

In the above case before Rajasthan High Court the assessee purchased a plot of land in March 1962 and another plot in July 1968. He constructed a bungalow and the investment shown in the construction during the year 1968-69 was Rs. 16,000 during the year 1969-70 Rs. 50,774 and in 1970-71 Rs. 5,785. The bungalow was sold in June 1970 to M for a sum of Rs. 1,30,000. According to the assessing authority the capital assets in question came into existence in the assessment year 1970-71, the year in which the construction of the bungalow was completed. The capital gains were taken as short-term capital gains. The Tribunal, however, came to the conclusion that the value of land taken by Income Tax Officer and Commissioner (Appeals) was at the figure of Rs. 45,700 and, therefore, the capital gains arising from the sale of land had to be treated as long-term capital gains. On a reference it was held by the Rajasthan High court that the Tribunal was justified in holding that the capital gains arising from the sale of land had to be treated as a long-term capital gain. The Supreme Court also, in CIT vs. Alps Theatre (1967) 65 ITR 377 (SC) has held that depreciation is not allowable on the cost of superstructure on it (land/site). Thus differentiation has been done by Supreme Court in respect of land and building thereon.

Bottomline:

From the above it can be deduced that claim for separate computation of “Capital gain” in respect of land and its building (superstructure) can be put forward by separately taking out the price of land [As in CIT vs. Smt Lakshami B Menon (2004) 178 Taxation 280 (Ker)].The facts and circumstances of a particular case remain the deciding factor but the above topic can be helpful on the issue.