JUDGMENT
By The Court
On an application under section 256(1) of the Income Tax Act, 1961, the Tribunal has referred following questions set out at page 2 of the paper book :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee is the owner of the superstructure at 7, Pretoria Street, Calcutta, though the land over which the superstructure was built was taken on long lease ?
2. Whether, on the facts and the circumstances of the case, the Tribunal is justified in law in directing to treat the rental income from the property at 7, Pretoria Street, Calcutta, assessable under the head ‘Income from house property and not under the ‘Income from business’ taken by the assessing officer ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in directing to the assessee the consideration received by the assessee against sale of 1st floor together with the proportionate interest in law under the head ‘Capital gain’ and to compute the capital gain relating to the gain arising from the sale of the 1st floor of the building at 7, Pretoria Street, Calcutta, as short-term capital gain ?”
2. The assessee is an individual. In the return he has shown the income received from the property at 7, Pretoria Street, Calcutta and that income he has shown as income from the house property. The relevant assessment year is 1989-90. The assessing officer noticed in fact that the property 7, Pretoria Street, Calcutta, was taken on lease from 9-7-1975, by the assessee and the property was later developed by a partnership firm constituted by his three brothers and father. Thereafter, the father of the assessee retired from the partnership and the assessee and his three brothers reconstituted the partnership and developed the property constructing a multi-storeyed building.
The construction of the building was started during the financial year 1988-89. The said partnership was dissolved in 1987 and the assets and liabilities were distributed among the partners. During the relevant previous year the first floor of the building was sold to one Kailash Bagaria representing Gainwell Holding (P) Ltd. along with proportionate interest in the land.
The rent recovered by the assessee form the property which fell to his share was declared under the head “income from property”. The assessing officer, while framing the assessment, did not accept the contention of the assessee. According to the assessing officer the rental income received by the assessee must be computed under the head “income from business” and not under the head “income from house property” as claimed by the assessee. Similarly the assessing officer also did not accept the claim of the assessee that the consideration received in respect of the sale of first floor together with the proportionate interest in the land should be computed under the head ‘Capital gain’. It was observed that as the aforesaid income was received by the assessee in course of business activities the same should be assessed under the head ‘Income from business’.
In appeal before the Commissioner (Appeals) the Commissioner (Appeals) has taken the view that the rental income received by the assessee should be assessed under the head ‘Income from house property’ and for sale proceed of the first floor of the premises at 7, Pretoria Street, Calcutta, he directed that the sale proceeds should be considered under the head ‘short-term capital gain’.
In appeal before the Tribunal the Tribunal has confirmed the view taken by the Commissioner (Appeals) so far as the rental income is concerned. But for the capital gain the Tribunal has directed that so far as the sale proceeds of the land are concerned that should be assessed as ‘long-term capital gain’. Insofar as the structure is concerned the Tribunal directed that sale proceeds on account of the sale of building should be assessed as short-term capital gains.’
3. Heard learned counsel for the parties.
4. Mr. Mullick learned counsel for the revenue submits that assessee is not the owner of the land as well as the building, the rental income cannot be assessed as income from the house property. It should be assessed as income from business. He further submits that on the same line the sale proceeds which are received by the assessee when assessee is not the owner of the building as well as the land those sale proceeds should be assessed as income from the business. Mr. Mullick further submitted that under the lease contract the assessee was never treated as the owner of the land and under the lease contract assessee can raise construction of the leasehold land but that leasehold land along with the structure he has to return back to the owner of the land after expiry of the lease period, i.e., 75 years.
5. Mr. Poddar, learned counsel for the assessee, submits that under the lease deed there is a provision that the assessee as a lessee can demolish the present structure on that leasehold land and without consent of the lessor he can raise construction. He can sell, assign or mortgage any rights in the structure he raised. Therefore, for the purpose of income-tax during the lease period he is not only as good as the owner but he is the deemed owner. In support of that he placed reliance on the decision of this court in the case of CIT v. Supreme Credit Corpn. Ltd. (1998) 230 ITR 700 (Cal) and decisions in S. G. Mercantile Corpn. Ltd. v. CIT (1972) 82 ITR 700 (SC), CIT v. Mumbadeo Mansion Co-owners Housing Co-operative (P) Ltd. (1983) 143 ITR 150 (Bom), D.R. Puttanna Sons (P) Ltd. v. CIT (1987) 162 ITR 468 (Karn). He further submits that in view of the decision of this court in case of Tinsukia Dev Corpn. Ltd. v. CIT (1979) 120 ITR 466 (Cal) if assessee raises the structure the income received from that structure is assessable as income received from house property. He further brought to our notice the decision of the Rajasthan High Court which has taken the view that in case of sale of land and building they are two different assets and land if it is held by the assessee for more than three years the sale proceeds of that plot of land can be taxed as long-term capital gain and if the structure raised on that plot of land and the period of structure is less than three years then the sale proceeds on account of that structure can be taxed as short-term capital gain tax. He further placed reliance on the decision of the Bombay High Court in CIT v. Fazalbhoy Investment Co. (P) Ltd. (1977) 109 ITR 802 (Bom) which clarified that merger theory of merger of land and building after construction of the building on that plot of land is not applicable in India.
He also drew our attention to various clauses of lease deed which empowers the assessee-lessee to raise the construction on the leasehold plot and after that construction he is at liberty to sublet, mortgage, assign, sell and otherwise deal with the leasehold interest in the demised premises or building or buildings to be constructed thereon. He further submits that this is the first year and in subsequent years even department has himself assessed the rental income as income from the house property. In 1991-92 assessing officer has assessed the rental income as income from other sources. In appeal before the Commissioner (Appeals), Commissioner (Appeals) has directed that rental income should be assessed as income from the ‘house property’. In 1992-93 again assessing officer has assessed rental income as income from the house property. On all subsequent years, assessee has disclosed the rental income as income from the house property and that has been accepted and an intimation has been communicated under section 143(1)(a) of the Act.
6. Before we go into the facts, we would prefer to refer the observations of this court and other courts. In case of CIT v. Supreme Court Corporation Ltd. (supra) wherein this court has considered that when the plot is a leasehold property and if the lessee raised the construction he is the owner of the leasehold property. This court has taken the view if lessee has not constructed any construction on the leasehold property, he cannot be the owner of the leasehold property.
7. Mr. Poddar, learned counsel for the assessee has clarified that in the case in hand the lessee, i.e., assessee has raised the construction. Therefore, if the assessee has raised the construction he is the owner of the property.
8. In case of A.G. Mercantile Corporation Ltd v. CIT (supra) the question before their Lordships was that whether ‘under the facts and circumstances of the case the income from subletting the stalls of Taltala Bazar was assessable under section 10 or section 12 of the Income Tax Act, 1922. At page 705 their Lordships observed the income received from property and falls under the specific head described in section 9, the character of that land is not altered because it is received by a company formed with the object of developing and setting up markets.
9. In CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj) the question before the Rajasthan High Court was whether capital gain arising from the sale of land has to be treated as long-term capital gain, the Rajasthan High Court has held that land is a capital asset in terms of section 2(14) of the Act and is treated as a separate assets. Even for the purpose of section 32, a building which is entitled for depreciation would be the superstructure and would not include the site under section 48 of the Act. Therefore, the income chargeable under the head ‘capital gains’ has to be computed by deducting from the full value of the consideration received or accruing as a result of transfer of the capital asset in the manner provided in the section. 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, whereas from the other it is long-term capital gain as in the present case and in such a situation, the benefit to the assessee cannot be denied in respect of gain arising from the sale of asset which could be considered as a long-term capital gain.
10. In CIT v. Parthas Trust (2000) 249 ITR 120 (Ker) the Kerala High Court has taken the view that for the purpose of depreciation of land and building, building may be constructed by the assessee but not registered in the name of the assessee. Land may belong to one person and structure may belong to another person. If assessee has raised the structure he is entitled for depreciation of building.
11. The admitted facts are that assessee has received the rental income from the property at 7, Pretoria Street, Calcutta, the leasehold land was taken under the lease deed dated 9-7-1975, and the assessee/lessee was entitled to raise construction or building in that plot of land as per clause A(3) of the lease deed, he can demolish the present existing structure. The assessee-lessee as per clause 13 of the lease deed can sublet, mortgage, assign sell and otherwise deal with the leasehold interest in the demised premises or building.
When the admitted facts are that the assessee has raised the construction and he can sell, mortgage or transfer the leasehold property during the lease period he is the deemed owner of the property and the Tribunal has rightly directed to assess the rental income as income from the house property.
Not only that, Mr. Poddar has brought to our notice that in all the subsequent years, i.e., from assessment year 1990-91, the income has been shown as income from the house property and that has been taxed as such.
Therefore, in these circumstances, there is no scope to interfere with the order of Tribunal.
12. The next issue whether the sale proceeds of the first floor together with the proportionate interest in the land should be taxed under the head ‘capital gain’ or whether the land and building can be taxed as two different assets, the sale proceeds on account of the land can be taxed as long-term capital gain tax and the sale proceeds of structure can be taxed as short-term capital gain tax.
13. Once we have taken the view that rental income be taxed as income from house property, thus house is a capital asset and on sale of that capital asset, the sale proceeds should be taxed as capital gain.
14. We also agree with the decision taken by Rajasthan High Court in (1993) 201 ITR 442 (Raj) (supra). When the leasehold interest in the plot of land is acquired by the assessee under the lease deed that can be treated as a separate asset than the building raised on that plot by the assessee subsequently. Therefore, if the interest in the leasehold plot or the leasehold plot was held by the assessee for more than 3 years the sale proceeds of that interest is assessable as long-term capital gain and the structure if sold before expiry of three years, the sale proceeds received on account of the sale of the structure can be taxed as short-term capital gain as held by the Tribunal. For taxing capital gain tax separately for land and building, the burden will be on assessee to satisfy how much sale proceed should be apportioned for land and how much sale proceed is pertained to structure.
In the result, we answer all the three questions in affirmative, i.e., in favour of the assessee and against the revenue.
The reference so made stands disposed of accordingly.