|COURT:||Delhi High Court|
|CORAM:||S. Muralidhar J, Vibhu Bakhru J|
|SECTION(S):||2(14), 2(47), 45, 48|
|CATCH WORDS:||capital gains, long-term capital asset, transfer|
|COUNSEL:||Ajay Vohra, Kavita Jha|
|DATE:||September 24, 2015 (Date of pronouncement)|
|DATE:||October 8, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Entire law on whether leasehold rights constitute a "capital asset" u/s 2(14), whether there is a "transfer" u/s 2(47) of such rights and whether "capital gains" u/s 45 can arise explained in detail|
Q1: Is the leasehold right a capital asset under Section 2 (14)?
(i) The first issue that is required to be considered is whether the leasehold rights in the plant and machinery, land and buildings is a ‘capital asset’ within the meaning of Section 2 (14) of the Act. 33. Section 2 (14) (a) of the Act defines ‘capital asset’ to mean “property of any kind held by an Assessee, whether or not connected with his business or profession.” The exceptions are set out in sub-clauses (i) to (vi). It is not the case of even the Assessee that the property in question falls within any of those exceptions. The words “any kind” which follow the word “property’ in Section 2 (47) (a) reflects the legislative intent to bring within its fold even a lease of immovable property. However, the duration of the lease would be a critical factor in determining whether the property in question, viz., leasehold rights would be a capital asset.
(ii) For a lease of an immovable property defined as such in Section 105 of the TP Act to be a capital asset within the meaning of Section 2 (14) (a) of the Act, the nature of the leasehold right granted to the lessee under the lease deed will have to be examined. For e.g., the Patna High Court in Traders and Miners Ltd. (supra) held that lease of land for a period of 99 years was a transfer of interest in the land and creates a right in rem. It was held that there is a transfer of interest in favour of the lessee notwithstanding that the property leased reverts to the lessor. This decision was approved by the Supreme Court in A.R. Krishnamurthy (supra). The grant of leasehold rights in a mining lease grants the lessee not only the right to possess and enjoy the property but also exploit it for the minerals. The lessee in a mining lease can, therefore, exploit the property and change its essential features and substratum with the permission of the lessor. This right, which is more than a mere right to possess a property to the exclusion of everyone else for a limited period, could partake the character of a capital asset.
(iii) However, in the present case, where the question arises in the context of the next question whether the lease deed results in a transfer of a ‘capital asset’, the answer will have to be found from a careful reading of the causes of the lease agreement itself. While de hors the context, it might be possible in theory for a leasehold right to be construed as a capital asset since the words used in Section 2 (14) (a) are indeed of a wide amplitude, in the context of the present case, where under the lease agreement dated 24th February 1994 what is given to SGL is a limited right to hold and possess the facilities leased to it for a limited period of ten years, with further restriction on sub-letting it or transferring any right or interest therein to anyone without the per-mission of the lessor and with the lease agreement making it explicit that at the end of the lease period the facilities leased it SGL would revert to the Assessee, it is difficult to hold that the leasehold rights given to the Assessee under the lease agreement is a ‘capital asset’.
(iv) Consequently, question (1) is answered by holding that the leasehold right, given to SGL for a period of ten years, of the plant and machinery along with land and building, is not a ‘capital asset’ within the meaning of Section 2 (14) (a) of the Act.
Q2: Was there a ‘transfer’ of a capital asset?
(v) Assuming that that the leasehold rights under the lease agreement dated 24th February 1994 is a capital asset, the next question is whether in the facts and cir-cumstances the lease of the plant and machinery along with the land and building would amount to a ‘transfer in relation to a capital asset’ within the meaning of Sec-tion 2 (47) of the Act?
(vi) Section 2 (47) (vi) of the Act defines transfer to mean any transaction, whether “by way of any agreement or any arrangement or in any other manner whatsoever”, which has the effect of “transferring, or enabling the enjoyment of, any immovable property.” Explanation 1 to Section 2 (47) states that for the purposes of sub-clause (vi), “immovable property” shall have the same meaning as in clause (d) of Section 269UA. This insertion is given retrospective effect from 1st April, 1962.
(vii) The case of the Assessee is that by virtue of Explanation (1) to Section 2 (47), Section 269UA (d) (i) is attracted. Section 269UA(f)(i) describes ‘transfer’ for the purposes of Section 269 UA (d) (i) to mean the transfer of property, including by way of lease, “for a term not less than twelve years.” Therefore, in the present case the Assessee is right in contending that since the lease is for a period of ten years, there is no ‘transfer’ of a capital asset within the meaning of Section 2 (47) (vi) of the Act read with Explanation 1 thereto.
(viii) The ITAT rejected the above contention since according to it the transaction of lease fell within the general meaning of ‘transfer’. According to the ITAT Explanation 1 could be invoked only where the transaction did not fall under the general meaning of the word “transfer” or the items listed at sub-clauses (i) to (v). It further pointed out that while the legislature had incorporated Section 269UA(d) “it would be illegal to further incorporate the meaning of the words ‘transfer’ as defined in Section 269UA(f).” It was held that the meaning of transfer in Section 269UA(f) had to be restricted only for the purposes of Chapter XXC.
(ix) The Court is unable to agree with the above approach of the ITAT to interpreting what appear to be plain and unambiguous provisions of the Act. It is useful to recall that this entire discussion is in the backdrop of what constitutes “transfer” in relation to a capital asset. Further, the entire exercise is for ultimately determining if there has been any capital gains arising from the transaction. Under Section 45(1) ‘capital gains’ are any profits or gains arising from the transfer of a capital asset effected in the previous year. When the word “transfer” itself has been defined under Section 2(47) (vi) and by virtue of Explanation 1 “shall” have the same meaning as Section 269UA(d) then it is not possible to ‘restrict’ Explanation 1 to only those transactions described in Chapter XXC. Explanation 1 is a deeming fiction and incorporates by way of reference the provisions of Section 269 UA (d) in order to understand the meaning of the word ‘transfer’ for the purposes of Section 2 (47) (vi). Therefore, that entire scheme has to be given effect to. In other words, it is not possible to omit the reference to Section 269UA(d) (i) which in turn brings in Section 269UA(f) (i). The ITAT has therefore erred in conveniently choosing to not apply the Explanation 1 to Section 2 (47) in order to arrive at the conclusion there was indeed a ‘transfer’ of a capital asset brought about by the lease agreement in question.
(x) The mere fact that the Assessee may have applied under Section 230A of the Act to seek permission of the Department cannot be held against it as far as the correct legal position is concerned. In other words the fact that certain columns in the con-cerned form were filled by the Assessee to imply that there was a transfer of lease-hold/ownership rights cannot be read to constitute a waiver by the Assessee of the legal defences that flow from a correct interpretation of the clauses of the lease agreement and from a correct reading of Section 2 (47) with Section 45 of the Act.
(xi) The Court is also unable to agree with the contention of the learned counsel for the Revenue that the lease of the plant and machinery can be separated from the lease of the land and buildings and the former transaction held to be valid and the latter a sham transaction. The Court is of the view that the context in which the decision in Shin Satellite Public Co. Ltd. v. Jain Studios Ltd. (supra) was rendered was entirely different from the present case and that decision is of no assistance to the Revenue here.
Q3: Was there a ‘sale’ of leasehold rights?
(xiii) This brings us to the question whether a transaction pertaining to land and building or of plant and machinery could be treated as sale of either the leasehold rights in respect of the land or the sale of the plant and machinery itself?
(xiv) There seems to be a contradiction in the order of the ITAT where in para 46 it states that in the present case the land is not a depreciable asset and that as far as the building and plant and machinery were concerned, the ownership thereof remained in the Assessee and, therefore, it could not be said that either the asset itself have been sold or the block of assets ceased to be in existence.” The ITAT appears to aknowledge that the ownership of the assets continued with the Assessee. However, the ITAT proceeded to hold that the “leasehold rights” and “not the asset itself” was sold. It is not understood how the ITAT has arrived at the concept of sale of leasehold rights because a sale connotes absolute transfer of rights with no reversion of any part thereof to the original owner. There has to be an extinguishment of ownership rights in order that a transaction can be said to be a ‘sale’. Here, as noted earlier, the lessee does not even have the right of sub-letting the facilities. The leasehold right is only for a period of ten years and at the end of that period the leased facilities revert to the owner. Consequently, the Court is unable to agree with the conclusion of the ITAT that in the present case there was a “sale” of leasehold rights by virtue of the lease agreement in question.
(xv) What appears to have weighed with the ITAT is the valuation of the business as a going concern and the said valuation forming the basis for determining the con-sideration for the grant of the lease and fixing of the yearly lease rentals. The explanation offered by the Assessee that the fact that it was not going to be in control of the assets or use them for its business, that there was going to be a loss of business opportunity which, therefore, had to be compensated and this weighed with the CAs in fixing the valuation appears to be a plausible one. While there is a non-compete in the agreement between the TEL and SGL, that by itself does not lead to the conclu-sion that the transaction of lease was in fact one of sale.
(xvi) In any event this whole hypothesis stands disproved by the fact that on the ex-piry of the lease period, the land, building and plant and machinery reverted to the Assessee. The land and the building were sold by the Assessee to an unrelated third party. The said transactions formed the subject matter of the Assessment order for the AY 2006-07. The order of the CIT (A) dated 30th August 2011 has been perused by the Court. It holds that the sale of the land by the Assessee to an unrelated third party, M/s. Blossom Automotives, for a consideration of Rs. 4.01 crores took place on 8th September 2005 and after accepting the Assessee’s valuation of the said land the CIT (A) has directed that the Assessee be taxed on long term capital gains arising out of the said sale of the land. The said order also shows that for the building, which was also sold as part of the sale of land, the Assessee has continued to claim depreciation till the date of such sale. The fact that the Assessee continued to claim depreciation on the plant and machinery and building is another indication that the Assessee continued to assert ownership of the assets in question during the relevant AYs. The above order of the CIT (A) forms part of the records of the Department and has naturally not been disputed by it. Although this development could not have been anticipated at the time the AO or the CIT (A) decided the issue in the present case, it completely vindicates the Assessee’s stand in relation to the nature of the transaction forming the subject matter of the lease agreement.
Q4: Was there a capital gain under Section 45?
(xvii) The last question that requires to be addressed whether there could be said to be any capital gains under Section 45 of the Act? In light of the above discussion, the question will have to be answered in favour of the Assessee and against the Revenue. The Court is of the view that the transaction in question was nothing more than a transaction of lease and has been acted upon by the parties as such. This was not a device adopted by the Assessee for tax avoidance.
(A.R. Krishnamurthy v. CIT (1989) 176 ITR 417 (SC), Palshikhar HUF v. CIT 172 ITR 311(SC), Traders and Miners Ltd. v. CIT (1955) 27 ITR 341 (Patna) and CIT v. Narang Diary Products (1996) 219 ITR 478 (SC) referred).