Immovable property lease transfer under IT hammer

Updated: Apr 29 2006, 05:30am hrs
The question before the high court was whether the transaction of lease and sub-lease is a transfer falling within the definition under section 2(47) of the Income Tax Act The assessee had taken on lease an immovable property under a lease agreement. The assessee had sub-leased the same property by lease deed in favour of another company for a period of 20 years.

So, the question before the Income Tax department was - whether transfer of leasehold rights in favour of the sub-lessee would amount to transfer of a capital asset at the hands of the assessee and if so, the consideration paid by the sub-lessee to the assessee would part-take the character of capital gains and assessable to tax as such

The assessing officer(AO) held that transfer of lease by the assessee would amount to transfer of a capital asset.

But the Commissioner (Appeals) and the Income Tax Appellate Tribunal ( ITAT) both did not agree with the AO and the matter finally landed before the high court which held that transfer of an immovable property by way of a lease creates an interest in the land.

According to section 2(14) of the Income Tax Act, the word capital asset means, property of any kind held by an assessee. Therefore it does not necessarily mean that the property, which the assessee holds, must be his own.

The definition of capital assets need not be read in a restrictive manner to mean that the property which the assessee owned by himself alone would come within the meaning of capital asset.

It is already settled law that the right conferred on a lessee under a lease deed is a capital asset in the hands of the lessor.

The Supreme Court has already held that transfer by way of lease would amount to transfer of a capital asset and therefore tax is leviable as capital gains.

Rental income

Income from house property has always been a subject matter of battles royale . What makes it more interesting is the involvement of a historical property owned by a royal family.

The building in dispute is the Scindia House located at Connaught Place in Delhi. And the dispute is whether the rental from this building is business income or income from house property.

If it is business income it would be eligible for many deductions of expenditure incurred on its upkeep and management. If it is pure rental income the incidence of taxation will be higher.

So when the matter went before the ITAT it was referred to a Special Bench. The dispute started way back in 1979 when the assessee -- Atma Ram Properties (P) Ltd -- executed an agreement for getting the possession of the building.

However, the full ownership was not transferred to the assessee at that time. So the tribunal agreed with the assessee company that the investment made by it was not merely to earn a meagre rental income but to exploit the said property acquired as stock-in-trade commercially in the course of its business. Accordingly, the tribunal held that the the rental income earned by the assessee was assessable to tax under Section 28 as income from business.

This is not the end of the story as the same ghost of income from business started haunting Atma Ram Properties (P) Ltd when a sale deed for Scindia House was registered in 1980 and the assessee thereby became the owner of the said property.

In 1992-93 it was noted by the tribunal that there has been a material change in the facts involved in the assessees case. In assessment year ( AY) 1980-81,the assessee was not the owner of the property in the previous year relevant to AY 1980-81 whereas as a result of execution and registration of sale deed on May 31, 1980, he had become the owner thereof in the subsequent years. This material change in the factual position, however, escaped the attention of the tribunal, which resulted in inadvertently categorising the rental income chargeable under the head income from business.

Entry of goods

The constitutional validity of the Haryana Local Area Development Tax Act (Entry Tax), 2000 was challenged on two grounds: The Act is violative of Article 301 and is not saved by Article 304; the Act in fact seeks to levy sales tax on inter-state sales, which is outside the competence of the state legislature.

The matter under reference to the constitutional bench was limited to the first question. Jindal Strips Ltd is an industry manufacturing products within the state of Haryana. The raw material is purchased from outside the state. The finished products are sent to other states on consignment basis or stock transfer basis. No sales tax is paid on the input. The impugned Act came into force with effect from May 5, 2000 to provide for levy and collection of tax on the entry of goods into the local areas of the state for consumption or use therein.

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