Whether transfer of leasehold rights attracts application of provisions of section 50C - YES: ITAT

THE issue before the Bench is - Whether the transfer of leasehold rights attracts application of provisions of section 50C. And the answer goes against the assessee.

Facts of the case

Assessee had taken a plot of land on lease from Maharashtra Industrial Development Corporation (MIDC) in the year 1967 for a lease of 95 years commencing from 1st January, 1967. Assessee had also paid premium to MIDC as per their rules prevalent at that time. In the previous year 2007-08 assessee entered into a MOU for transfer of part of the said land on 9th

April 2007, received an advance of Rs.30 lacs and applied to MIDC for their consent. MIDC gave their consent on 25/1/2008 for two different plots sub divided from the original one and accordingly the transfer of the lease was affected by agreement dated 7th March, 2008. At the time of entering into MOU an advance of Rs.30 lacs was obtained by assessee and subsequently the two plots together with Building thereon were transferred for a total sum of Rs.2,01,57,606. Assessee worked out capital gain of Rs.1,60,38,687 after deducting the value of building at Rs.14,30,220/- and the market value as on 1/4/1981 increased by indexation cost to Rs.26,88,699. The AO applied Sec. 50C of the Income tax Act and considered the market value of the plot of land at Rs.2,39,91,000 and considered this as long term capital gain for the purpose of computation of income. While taking this view the AO did not allow any cost as deduction and also did not exclude the value of building standing on the plots of land which was valued at Rs.14,30,220 and adjusted in the block of assets while computing depreciation under the Income tax. Assessee’s contention was that since this plot of land was a leasehold right only, it was neither a land nor a building and therefore Section 50C would not be applicable to such transaction. The CIT(A) upheld the additions made by the AO.
On further appeal by the assessee, the ITAT held that,

++ undisputed facts in this case are that the company had taken a plot of land from Maharashtra Industrial Development Corporation in the year 1967 on lease for 95 years commencing from 01.01.1967. It is also the fact that the company has paid premium to MIDC as per the rules prevalent at that time and also showed the same as an asset under the head “leasehold assets” in the balance sheet. Assessee has entered into MoU for transfer of part of the land on 09.04.2007 with the consent of MIDC which was obtained on 25.01.2008. The main issue before us is whether assessee is owner of the plot of the land or only having leasehold rights and whether provisions of section 50C are attracted on this transfer;

++ there are Coordinate Bench decisions which states that the transfer of leasehold rights does not attract application of provisions of section 50C. On the other hand, prima facie examination of documents placed on record indicates that AO and CIT (A) have justified their action in invoking provisions of section 50C. As seen from the allotment of plot originally in 1967 assessee has paid premium for the leasehold land subject to fulfillment of conditions stated therein. However, the MIDC has confirmed and registered the said plot in the name of assessee vide the lease deed dated 01.04.1974. Even though the deed is held as lease agreement, the perusal of the terms indicates that substantial rights were transferred to assessee including the rights to construct building. In fact, vide Para 2q of the agreement assessee was assigned limited powers of assignment of the demised premises or any part thereof or any interest thereof with the previous written consent of the Chief Executive Officer of MIDC;

++ further as seen from the deed of assignment between assessee and M/s. Unnati Technology (P) Ltd assessee agreed to alienate a part of the land subject to sub plotting and consent by MIDC. The registered deed dated 17.03.2008 indeed mentions that vide order dated 25.01.2008 the MIDC i.e. lessee has inter alia has further divided the larger property into three separate plots and further the lesser inter alia has granted permission to assign and transfer the land at Plot No.14/1B in favour of the transferee. Likewise Plot No.14/A sub plot was assigned to the said company. There are two deeds for transfer of respective properties. Assessee has substantial right in the property as can be seen from the MoU entered with M/s Unnati Technology (P) Ltd vide agreement dated 09.04.2007;

++ in the recitals, it is also clearly mentioned that vide order dated 22/01/1982 under section 20 of the urban land (Ceiling & Regulation Act) 1976 (ULC) the competent authority has granted exemption to the Assignor to hold the excess vacant land admeasuring 10536.53 sq. meters on the terms and conditions therein. Further MIDC is not even a confirming party in the transaction of assignment. This indicate that assessee has substantial and absolute powers as far as the property in question is concerned and the fact that the property has got exemption from ULC and was sub divided as per the request of assessee do indicate that the MIDC has only limited powers whereas assessee has absolute powers over the property. Moreover as seen from the recitals from the MoU, assessee also has developmental rights which it had intended to utilize. This also indicate that the development rights which are attached to the property are with assessee;

++ not only the above, as seen from deeds of assignment, assessee transferred the rights in the plots as well as rights in the building, since there is building involved in this assignment, the transfer of property in question do attract provisions of section 50C and therefore, assessee’s contention on this cannot be accepted. As seen from the marking given in the ‘scheduled property’ in the deed of transfer substantial portion was covered by the building thereon and as seen from the MoU, assessee seems to be developing the property by utilizing the development rights. In view of this, since both land and building were assigned by these deeds, provisions of section 50C are attracted in this case. As seen from the report of the valuation placed on record from page Nos.95 to 99 the valuation report also indicates that the valuation was undertaken as plot of land and not as ‘leasehold rights’. This also supports our opinion that assessee has more than leasehold rights on the plot of land;

++ legal proposition on the transfer of leasehold rights has already been discussed above with which we are in agreement. However, we cannot completely come to a conclusion whether assessee had complete rights over the land and to what extent the valuation has to be determined u/s 50C, in the absence of complete details like the application made to ULC, the copy of the ULC order and further the agreements entered by M/s Unnati Technology Pvt. Ltd subsequent to construction of building with third parties if any, for sale or assignment of rights therein. Nothing was brought on record either by assessee or by the Revenue to examine whether the said M/s Unnati Technology Pvt. Ltd has only constructed the building for development or has transferred further rights to some other parties. As pointed out by the DR even after entering into MoU, assessee has further developed the building and therefore to what extent the rights in the buildings were transferred and whether the cost attributed by assessee is correct or not can not examined. Therefore, without coming to a conclusion on the above issue, AO was directed to obtain the complete information and examine whether assessee has only leasehold right or complete rights over the property so that provisions of section 50C are attracted. After examining the relevant documents and establishing the rights over the plot, AO is free to determine whether assessee has transferred the plot of land or only leasehold rights. Since assessee had also transferred the building, provisions of section 50C may attract to that extent;

++ coming to the other issue of reduction of value of the building and adjusting in the block of assets, AO was not correct in excluding the value altogether. He has not examined the issue in its entirety. Since it has already been observed that the building was also transferred, it is necessary for AO to examine how much property was transferred and whether the same has to be adjusted under the provisions of section 50 or under section 43(6) in the block of assets. As pointed out by DR there seems to be construction after the agreement, the details of which are not on record. Since this aspect of valuation of building was not examined by AO, in the interest of justice, the matter was restored to the file of AO to examine this and do accordingly;

++ as seen from the record, AO has not taken in to consideration the objections of assessee, while invoking the provisions of section 50C. Under section 50C(2), AO has to give an opportunity to assessee to make submissions. This exercise has not been done by AO. AO has to follow the provisions of 50C(2) when the provisions of section 50C are made applicable. In order to fulfill this legal requirement also, we have set aside the order of AO and the CIT (A) on this issue;

++ the contention of cost of acquisition is also restored to the file of AO. Just because assessee has not claimed at the time of filing the return, statutory obligation of deducting the cost of acquisition cannot be brushed aside. There is information on record that assessee did pay premium at the time of acquiring property by way of lease and assessee has filed a valuation report before the AO claiming the value as on 01.04.1981 and subsequent indexation as per the provisions of law. AO is directed to examine this claim and allow the cost of acquisition as per the facts and law. The other contention about date of adopting valuation (whether date of MOU or date of Registration) has become academic as the application of Section 50C itself was restored to AO in its entirety. Assessee is free to raise relevant objections before AO. With these directions, the matters are restored to the file of AO for fresh adjudication on computation of long term capital gain. Assessee should be given due opportunity in the proceedings to furnish the documents and make submissions. Accordingly, the grounds are considered allowed for statistical purposes.