Atul G. Puranik vs. ITO (ITAT Mumbai)

S. 50C does not apply to transfer of “leasehold rights” as it is not “land or building”

The assessee was allotted a plot of land (on lease basis) under the “12.5% Gaothan Expansion Scheme” by CIDCO in lieu of agricultural land owned by the assessee’s father. The assessee assigned the said leasehold rights for Rs. 2.50 crores and claimed that as the original agricultural land was not a capital asset u/s 2(14)(iii), the leasehold rights received from CIDCO was also not a capital asset and so the gains were not taxable. Alternatively, it was argued that the cost of acquisition of the leasehold rights should be taken at its market value on the date of allotment. The AO & CIT (A) rejected the claim on the ground that (i) though the original land allotted was agricultural, the leasehold rights were not, (ii) as the leasehold rights was received by the assessee as legal heir, the cost of acquisition had to be taken to be the cost to the previous owned u/s 49 and (iii) as the stamp duty value was higher than the consideration, s. 50C applied. On appeal to the Tribunal, HELD:

(i) There were two distinct assets & two distinct transactions. The first asset was the agricultural land which was acquired and in lieu of which the lease of the CIDCO plot was given. The gains from this were taxable in the year of allotment of the plot. The second asset was the leasehold rights in the plot which was assigned for Rs. 2.5 crores. The second asset, namely, the leasehold rights, cannot be categorized as agricultural land within the meaning of s. 2(14)(iii) and so the assessee was liable to capital gains;

(ii) U/s 49(1), the cost of acquisition of an asset acquired by inheritance is the cost to the previous owner. It is a sine qua non that the capital asset acquired by the assessee by inheritance should be the subject matter of transfer and not any other asset. Once the inherited capital asset is transferred and another capital asset is acquired, s. 49(1) does not apply to such converted asset. While the assessee had inherited the agricultural land, he had not inherited the right to get the lease of the plot and so the value of the land was not the cost of the right to get lease;

(iii) To determine the cost of acquisition of the lease rights, the market value of the lease rights on the date of allotment has to be taken. This is because the allotment of the lease rights constituted “full value of consideration” for the transfer of the agricultural land and once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically becomes the cost of acquisition at the time when such capital asset is subsequently transferred;

(iv) S. 50C is a deeming provision which extends only to a capital asset which is “land or building or both”. A deeming provision cannot be extended beyond the purpose for which it is enacted. If a capital asset cannot be described as “land or building or both”, s. 50C cannot apply. A lease right in a plot of land is neither “land or building or both”. The distinction between a capital asset being “land or building or both” and any “right in land or building or both” is well recognized. “Land or building’ is distinct from “any right in land or building”. Consequently, s. 50C does not apply to leasehold rights.