ITO, Hyderabad V. Smt Jennifer Dos REis Falcao, Secunderabad

ITA 1077/HYD/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61828 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 04-05-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 04-06-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NIVEDITA BISWAS
• Assessee Lawyers: P PRASAD
• Keywords: Capital asset; Depreciation; Cost of acquisition; Fair market value; Valuation report
• Section: 6; 12; 10; 2; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE CHANDRA POOJARI, ACCOUNTANT MEMBER & SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO.1077 /HYD/2008 ASSESSMENT YEAR 2004-05 THE ITO WARD 11(1), HYDERABAD VS SMT. JENNIFER DOS REIS FALCAO, SECUNDERABAD (PAN AAFXPJ3068H) APPELLANT RESPONDENT ITA NO.1078 /HYD/2008 ASSESSMENT YEAR 2004-05 THE ITO WARD 11(1), HYDERABAD VS SMT. JEANNE D SOUZA, SECUNDERABAD (PAN AHTPD6421E)) APPELLANT RESPONDENT APPELLANT BY : SMT. NIVEDITA BISWAS RESPONDENT BY : SHRI P. PRASAD DATE OF HEARING : 15.2.2012 DATE OF PRONOUNCEMENT : 11.4.2012 ORDER PER ASHA VIJAYARAGHAVAN, JM . THESE TWO APPEALS PREFERRED BY THE REVENU E ARE DIRECTED AGAINST THE ORDERS PASSED BY THE CIT(A) VI, HYDERA BAD DATED 14.3.2008 AND THEY PERTAIN TO THE ASSESSMENT YEAR 2004-05. 2. BRIEF FACTS OF THE CASE ARE THAT WHILE COMPUTI NG THE CAPITAL GAINS, THE ASSESSEE HAD CLAIMED FAIR MARKET VALUE O F THE LAND AT RS.200 PER SQ. YARD AS ON 1.4.1981. THE ASSESSING OFFICER DID NOT ALLOW THE CLAIM ON THE BASIS THAT AS ON 1.4.198 1 THE LAND WAS HELD ON LEASE HOLD BASIS AND THE ASSESSEE DID N OT HAVE ANY ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 2 RIGHT TO ALIENATE THE LAND IN ANY MANNER UNTIL IT W AS CONVERTED INTO FREEHOLD LAND BY THE CONVEYANCE DEED ON 25.3.1 998. AS THE ASSESSEE DID NOT HAVE COMPLETE OWNERSHIP RIGHT AS O N 1.4.1981, THE ASSESSING OFFICER OPINED THAT SHE WAS NOT ENTIT LED TO THE DEDUCTION TOWARDS THE FAIR MARKET VALUE OF THE PLOT AS ON 1.4.1981. FURTHER, THE ASSESSING OFFICER TREATED T HE DATE OF ACQUISITION AS 25.3.1998, THE DAY OF CONVERSION OF THE LAND AS FREEHOLD PROPERTY AND THE AMOUNT OF FEE PAID FOR SU CH CONVERSION AS THE COST OF ACQUISITION. 3. THE ASSESSEE CONTENDED THAT THE LAND IN QUESTIO N WAS ALLOTTED BY THE GOVT. OF AP ON PERPETUAL LEASE TO O NE SRI C. SESHAGIRI RAO ON 11.12.1940. SINCE THE ALLOTTEE PA SSED AWAY IT WAS INHERITED BY HIS SON SRI C. KRISHNA MURTHY AND TRANSFERRED IN HIS NAME IN THE RECORDS OF THE LESSOR ON 30.10.1 950. THE ASSESSEES MOTHER PURCHASED THE LEASE HOLD RIGHTS O N THE PROPERTY ON 15.3.1954 AND GOT THE DOCUMENT REGISTER ED WITH SUB REGISTRAR ON THE SAME DAY. AS PER THE DOCUMENT THE VENDOR OBTAINED NECESSARY PERMISSION FROM THE LESSOR TO TR ANSFER HIS LEASE HOLD RIGHTS IN THE PROPERTY. AS SUCH SHE WAS THE DEEMED OWNER AS ON 1.4.1981 AND THE DEDUCTION OF INDEXED F AIR MARKET VALUE SHOULD BE ALLOWED AT HER OPTION AS PER THE PR OVISIONS OF SECTION 55(2)(B)(II) OF THE IT ACT. SHE SUBMITTED THAT THE LEASE HOLD RIGHT ON THE PROPERTY WITH PHYSICAL POSSESSION CONSTITUTED THE MOST IMPORTANT OF THE BUNDLE OF RIGHTS WHICH TO GETHER CONSTITUTE OWNERSHIP AND THE SAME IS CAPABLE OF B EING VALUED SEPARATELY. THE VALUE OF LEASEHOLD RIGHT ON THE LA ND HAS BEEN GOT EVALUATED BY AN INDEPENDENT REGISTERED VALUER AND T HE SAME WAS ADOPTED IN THE COMPUTATION FURNISHED WITH THE RETUR N. 5. IT IS SEEN FROM THE LAND PURCHASE DOCUMENT, THA T INITIALLY THE ENTIRE AREA WAS UNDER GOVT. OF ANDHRA PRADESH A ND THE PLOTS ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 3 OF LAND WERE ALLOTTED TO VARIOUS PERSONS FOR NOMINA L CONSIDERATION ON PERPETUAL LEASE. HAVING TAKEN THE PROPERTIES ON LEASE, THE ALLOTTEES CONSTRUCTED BUILDING AND ST ARTED LIVING THEREON. SOME OF THE ORIGINAL ALLOTTEES SOLD THOSE PROPERTIES AND THE PROPERTIES PASSED THROUGH SEVERAL HANDS ON SUCC ESSIVE SALES TRANSACTIONS AND CONSEQUENT TRANSFERS. THERE WAS N O RESTRICTION TO ALIENATE THE PROPERTY IN THE ALLOTMENT LETTERS. THEREFORE, THE FINDING OF THE ASSESSING OFFICER THAT THE ASSESSEE HAD NO RIGHT TO ALIENATE THE PROPERTY IS INCORRECT THAT THE ASSESS EES MOTHER HERSELF HAD PURCHASED THE LEASEHOLD RIGHTS PROVES T HAT THERE IS NO RESTRICTION ON ALIENATION OF THE PROPERTY. AS P ER THE TERMS OF THE LEASE, THE LESSEE WAS ENTITLED TO CONSTRUCT RES IDENTIAL BUILDING, MAKE ADDITIONS/ALTERNATIONS, TRANSFER, SU B LET MORTGAGE AND /OR ASSIGN THE PROPERTY. THE LEASEHOL DERS CONSTRUCTED HOUSES ON THEIR PLOTS AND THEIR SUCCESS ORS INHERITED THEM. SOME OF THE LEASEHOLDERS RAISED LOANS FROM F INANCIAL INSTITUTIONS MORTGAGING THE PLOTS FOR UNDERTAKING C ONSTRUCTION THEREON. THE FINANCIAL INSTITUTIONS WOULD NOT EXTE ND LOANS ON SUCH MORTGAGES IF THE LEASEHOLDERS HAD NO RIGHT TO ALIENATE THE PLOTS, AS THEY WOULD NOT BE ABLE TO RECOVER THEIR L OANS IN CASE OF DEFAULT IN WHICH CASE RECOVERY LOAN HAS TO BE DONE BY ENFORCING THE MORTGAGE. FOR ALL THE PRACTICAL PURPOSES THE L EASEHOLDERS OF PLOTS ENJOYED ALL THE RIGHTS WHICH THE OWNERS WOULD ENJOY EXCEPT THAT THEY WERE REQUIRED TO TAKE PRIOR APPROVAL FROM THE ESTATE OFFICER REGARDING ANY ISSUE DEVELOPMENT TAKING PLAC E REGARDING THE PLOTS. AS ON 1.4.1981 THE ASSESSEE HAD LEASE H OLD RIGHT ON THE PLOT WHICH OF COURSE WAS LESS THAN FULL OWNERSH IP RIGHT. SUCH LEASEHOLD RIGHT WAS HAVING SOME VALUE AND THE ASSESSEE CONTENDED THAT SHE DESERVES TO GET DEDUCTION IN RES PECT OF FAIR MARKET VALUE OF SUCH LEASE LEASEHOLD RIGHT. 6. THE CIT(A) HELD AS FOLLOWS: ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 4 IN THE PRESENT CASE, THE ASSESSEE CLAIMED THE FAIR MARKET VALUE OF THE PLOT AS ON 1.4.1981 AT RS.200 SQ.FT ON THE BASIS OF INFORMATION GATHERED FROM SRO AND ALSO ON THE RE PORT OF THE REGISTERED VALUER. IT IS SEEN FROM THE CERTIFI CATE FURNISHED BY THE SRO THAT THE MARKET RATE OF THE LA ND IN THAT AREA WAS RS.200/- PER SQ. YD. IN THE YEAR 198 1. AS THE ASSESSEE WAS HAVING ONLY LEASEHOLD RIGHT WHICH IS ONLY A PART OF THE FULL RIGHTS, THE FAIR MARKET VALUE IS ADOPTED AT RS.100/- PER SQ. YD. AGAINST RS.200 PER SQ. YD. CLA IMED BY THE ASSESSEE. MOREOVER, THE VALUER IN HIS REPORT D ATED 27.10.2005 HAD ESTIMATED THE VALUE OF LAND AT RS.10 0/- PER SQ. YD. ACCORDINGLY, THE ASSESSEE WOULD BE ENTITLE D TO DEDUCTION OF INDEXED FAIR MARKET VALUE AS ON 1.4.19 81 AT THE RATE OF 100/- PER SQ. YD. IN RESPECT OF 325 SQ. YDS. OF THE LAND TRANSFERRED TO THE DEVELOPER. THE ASSESSING O FFICER IS DIRECTED TO ALLOW DEDUCTION TOWARDS INDEXED FAIR MA RKET VALUE AS MENTIONED ABOVE. 7. WITH RESPECT TO THE INDEXATION OF THE BUILDING WHICH WAS EXISTENCE ON THE PROPERTY, THE FACTS ARE AS FOLLOWS : AS ON 01.04.1981, A BUILDING CONSISTING OF APPROXIM ATELY 6200 SQ.FT WAS IN EXISTENCE ON THE PLOT OF LAND. O N THE BASIS OF REGISTERED VALUERS REPORT, FAIR MARKET V ALUE OF THE BUILDING WAS CLAIMED AS RS.3,72,000/- AT THE RA TE OF ABOUT RS.60/- PER SQ.FT. THE APPELLANT CLAIMED INDEXED FAIR MARKET VALUE OF THE SAID BUILDING AS O N 01.04.1981 IN THE COMPUTATION FILED WITH THE RETURN OF INCOME ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 5 THE ASSESSING OFFICER DID NOT ALLOW THE CLAIM ON TH E GROUND THAT AS ON 01.04.1981 THE APPELLANT DID NOT HAVE OWNERSHIP RIGHT ON THE PLOT OF LAND AND THE RIGHT O VER THE SUPER STRUCTURE MERGED INTO LARGER RIGHT IN THE YEA R198 WHEN THE PLOT WAS CONVERTED FROM LEASEHOLD TO FREEH OLD. TILL THAT TIME EVEN THOUGH PROPERTY WAS IN EXISTENCE AND THE APPELLANT WAS OWNER OF THE BUILDING, HE DID NOT ALL OW DEDUCTION TOWARDS FAIR MARKET VALUE ON THE BUILDING AS ON 01.04.1981. AFTER 1998, ALSO THE ASSESSING OFFICER DID NOT ALLOW ANY DEDUCTION TOWARDS THE COST / VALUE OF THE BUILDING ON THE GROUND THAT THE ASSESSEE GOT HIS SH ARE OF CONSTRUCTED AREA IN LIEU OF LAND ONLY WHICH OCCURRE D IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2005-06. ACCORDING TO HIM, ANY EVENT ANTERIOR TO THIS WILL H AVE NO RELEVANCE FOR THE PURPOSE OF COMPUTATION OF LONG TE RM CAPITAL GAINS. THE LEARNED AR ON APPEAL BEFORE THE CIT(A) RELIED O N THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF MADURA COAS TS VS. CIT (279 ITR 495) AND SUBMITTED THAT AT THE TIME OF EN TERING INTO DEVELOPMENT AGREEMENT, THE APPELLANT HAD CONSIDERED THE MARKET VALUE OF LAND AND BUILDING AND THE VALUE OF THE BUILT UP AREA WHICH HE WOULD GET FROM THE DEVELOPER. HE ENT ERED INTO THE AGREEMENT ONLY AFTER EVALUATING THE PROBABLE GAIN O N THE TOTAL TRANSACTION. HE PLEADED THAT IT IS NOT PROPER TO IGNORE THE VALUE OF THE HOUSE IN COMPUTING CAPITAL GAINS . 7. THE CIT(A) HELD AS FOLLOWS: IT IS A FACT THAT THE BUILDING CONSISTING OF 6200 S Q.FT. WAS IN EXISTENCE ON THE PLOT AS ON 1.4.1981. FAIR MARKET VALUE OF THE BUILDING WAS ASCERTAINABLE. UNTIL 1998, THE AS SESSING ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 6 OFFICER HELD THAT DEDUCTION CANNOT BE ALLOWED ON TH E VALUE OF THE BUILDING AS THE ASSESSEE WAS NOT THE OWNER O F THE PLOT. AFTER ACCEPTING THAT THE ASSESSEE BECAME THE OWNER IN 1998, HE DID NOT ALLOW DEDUCTION TOWARDS THE VALUE OF THE BUILDING ON THE GROUND THAT AT THE TIME OF RECEIPT OF BUILT UP AREA THE BUILDING WAS NOT IN EXISTENCE. THERE IS A FLAW IN THE STAND TAKEN BY THE ASSESSING OFFICER. THE FACT IS THAT THE BUILDING WAS IN EXISTENCE EVEN BEFORE 1.4.1981. FOR THE PURPOSE OF COMPUTING CAPITAL GAI NS, THE ASSESSEE HAD EXERCISED HIS OPTION U/S 55(B)(II) OF THE ACT, 1961 WHICH GIVES AN OPTION TO THE ASSESSEE TO SUBST ITUTE THE FAIR MARKET VALUE OF THE PROPERTY IN PLACE OF C OST OF ACQUISITION. THE ASSESSEE HAD EXERCISED THE OPTION . THE LAND AND BUILDING WERE GIVEN FOR DEVELOPMENT AND POSSESSION FOR DEVELOPMENT AND POSSESSION OF THE PR OPERTY WAS GIVEN TO THE BUILDER. EVEN THOUGH THE BUILDING WAS MEANT TO BE DEMOLISHED TO MAKE THE DEVELOPMENT AGREEMENT OPERATIONAL, WHAT THE ASSESSEE HAD GOT IN RETURN FOR TRANSFER OF 50% SHARE IN THE LAND AND THE WHOLE BUILDING, THE SHARE OF BUILT UP AREA AS PER THE DEV ELOPMENT AGREEMENT. EVEN THOUGH THE HOUSE PROPERTY WAS NOT IN EXISTENCE AT THE TIME OF RECEIVING THE CONSIDERATIO N, THE ASSESSEE HAD LOST AN ASSET IN THE NATURE OF BUILDIN G EXISTING ON THE PLOT OF THE LAND. BY ENTERING INTO DEVELOPM ENT AGREEMENT, THE ASSESSEE EXTINGUISHED HIS RIGHTS I N THE BUILDING WHICH IS COVERED BY THE DEFINITION OF TRAN SFER AS MENTIONED U/S 2(47)(II) OF THE ACT, 1961. ONCE IT IS AN EXTINGUISHMENT OF RIGHTS IN THE ASSET, THE SAME IS TO BE TREATED AS TRANSFER FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS. HERE THE CONSIDERATION RECEIVED IS IN RELAT ION TO THE LAND AND BUILDING TRANSFERRED TO THE DEVELOPER. TH E ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 7 ANALOGY OF THE DECISION OF THE BOMBAY HC IS APPLICA BLE TO THE FACTS OF THE PRESENT CASE. WHILE COMPUTING CAP ITAL GAINS THE ASSESSEE IS ENTITLED TO DEDUCTION REGARDING THE COST OF FAIR MARKET VALUE AT THE OPTION OF THE ASSESSEE IF THE PROPERTY WAS IN EXISTENCE BEFORE 1.4.1981. AS THE BUILDING WAS IN EXISTENCE MUCH EARLIER TO 1.4.1981 AND THE A SSESSEE EXERCISED HIS OPTION TO ADOPT FAIR MARKET VALUE AS ON 1.4.1981 AS PER SECTION 55(2)(B)(II) OF THE ACT, HE IS ENTITLED TO DEDUCTION OF INDEXED FAIR MARKET VALUE THAT PREV AILED ON THE SAID DATE. AS PER THE VALUATION REPORT DATED 27.10.2005, VALUE OF THE PROPERTY WAS ESTIMATED AT RS.60/- PER SQ.FT. VIDE ANOTHER VALUATION REPORT DATED 27.3.1976, GROUND FLOOR WAS VALUED AT RS.20/- PER SQ.FT. FIRST FLOOR AT RS.15/- PER SQ .FT. AND SECOND FLOOR AT RS.18/- PER SQ.FT. IT IS STATED I N THE REPORT THAT GROUND AND FIRST FLOORS WERE CONSTRUCTED IN TH E HEAR 1955-56 AND SECOND FLOOR WAS CONSTRUCTED IN THE YEA R 1967. BY 1.4.1981 ITSELF MAJOR PORTION OF THE BUIL DING WAS 25 YEAR OLD. THE VALUER ESTIMATED THE BUILDINGS VALUE APPROXIMATELY AT RS.15/- PER SQ.FT. AFTER DEDUCTING DEPRECIATION AT 25%. SUBSEQUENT TO 1976 AND BEFORE 1981 COST OF CONSTRUCTION WENT UP., AT THE SAME TIME HI GHER DEPRECIATION ALSO HAS TO BE PROVIDED CONSIDERING PA SSAGE OF TIME. CONSIDERING ALL THE CIRCUMSTANCES, FAIR MARK ET VALUE OF THE BUILDING AS ON 1.4.1981 IS ESTIMATED AT RS.1 ,55,000/- @ RS.25/- PER SQ.FT. THE ASSESSING OFFICER IS DIRE CTED TO ALLOW DEDUCTION OF INDEXED FAIR MARKET VALUE IN RES PECT OF THE BUILDING AS MENTIONED ABOVE. 8. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVEN UE IS APPEAL AND HAS RAISED THE FOLLOWING GROUNDS: ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 8 1. THE CIT(A) ERRED IN HOLDING THAT THE YEAR OF LE ASEHOLD RIGHT OF THE CAPITAL ASSET AS THE YEAR OF ACQUISITI ON FOR COMPUTING THE LONG TERM CAPITAL GAINS INSTEAD OF TH E YEAR IN WHICH FREEHOLD RIGHTS CONFERRED TO THE ASSESSEE. 2. THE CIT SHOULD NOT HAVE CONSIDERED THE INDEXATI ON OF COST OF CONSTRUCTION AND IMPROVEMENT OF THE BUILDIN G AS THE BUILDING WAS NOT EXISTENT AT THE TIME OF TRANSFER O F THE PROPERTY. 9. THE LEARNED DR RELIED ON THE FOLLOWING DECISION S: 1. HINDUSTAN METAL INDUSTRIES VS. ITO, WARD 10(3), HYDERABAD (ITA NO.1218/H/04) 2. CIT VS, VV MODI (KARNATAKA HIGH COURT.) 10. THE LEARNED AR RELIED ON THE ORDER IN ITA NO.199/HYD/2007, HYDERABAD B BENCH IN THE CASE OF SHRI K. MOHANA PRASAD VS., ITO, THE RELEVANT PORTION OF WHI CH IS EXTRACTED BELOW: WE HAVE ALSO CAREFULLY GONE THROUGH THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF DR.V.V.MODI (SU PRA). IN THAT CASE, BANGALORE DEVELOPMENT AUTHORITY ENTERED INTO AN AGREEMENT FOR LEASE-CUM-SALE OF PROPERTY. AFTER PA YMENT OF THE LAST INSTALMENT BY THE ASSESSEE, A SALE DEED WA S EXECUTED. IN THOSE CIRCUMSTANCES, THE KARNATAKA HIG H COURT HELD THAT AFTER EXECUTION OF SALE DEED, THE ASSESSE E HELD ONLY ONE ESTATE REPRESENTING TITLE IN THE PROPERTY IN QUESTION AND ANY CAPITAL GAIN ARISING FROM THE TRANSFER OF T HE SAID ESTATE HAS TO BE COMPUTED FROM THE DATE ON WHICH TH E ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 9 ASSESSEE ACQUIRED ABSOLUTE TITLE TO THE PROPERTY. THE KARNATAKA HIGH COURT HAD NO OCCASION TO CONSIDER TH E JUDGEMENT OF THE MADRAS HIGH COURT AND THE SUPREME COURT IN THE CASE OF A.R.KRISHNA MURTHY AND ANR.(SUPRA). IN VIEW OF THE JUDGEMENT OF THE APEX COURT IN THE CASE OF T HE A.R.KRISHNA MURTHY (SUPRA), IN OUR OPINION, THE DEC ISION OF THE KARNATAKA HIGH COURT IN THE CASE OF DR.V.V.MODI (SUPRA), MAY NOT BE APPLICABLE TO THE FACTS OF THE CASE. WE HAVE ALSO CAREFULLY GONE THROUGH THE ORDER OF TH IS TRIBUNAL IN THE CASE OF HINDUSTAN METAL INDUSTRIES (SUPRA). THIS TRIBUNAL AFTER REFERRING TO THE DECISION OF TH E KARNATAKA HIGH COURT IN THE CASE OF DR.V.V.MODI (SU PRA) FOUND THAT LEASE HOLD RIGHT IS ALSO A CAPITAL ASSET . THEREFORE WHILE COMPUTING THE CAPITAL GAINS, COST OF ACQUISIT ION OF THE CAPITAL ASSETS,NAMELY LEASEHOLD RIGHT HAS ALSO TO B E TAKEN INTO CONSIDERATION. THIS DECISION OF THIS TRIBUNAL MAY NOT BE OF ANY ASSISTANCE TO THE REVENUE. FURTHERMORE, WHA T KARNATAKA HIGH COURT IN THE CASE OF DR.V.V.MODI (SU PRA) HELD WAS THAT THE LEASEHOLD RIGHT AND ABSOLUTE RIGH T CANNOT BE VALUED SEPARATELY FOR THE PURPOSES OF DETERMININ G LONG TERM AND SHORT TERM CAPITAL GAINS. WHAT IT SAID WAS THAT IT HAS TO BE VALUED TOGETHER AND ASSESSED AS CAPITAL G AIN. SINCE RIGHT TO POSSESSION AND ENJOYMENT OF THE PROP ERTY IS 99% OF THE TITLE, THE CONVERSION INTO FREE HOLD RIG HT GIVES A FURTHER INTEREST OF ABSOLUTE RIGHT. THAT FURTHER IN TEREST OF CONVERSION OF LEASEHOLD RIGHT INTO FREEHOLD RIGHT A DDS 1% TO THE 99% ALREADY HELD BY THE ASSESSEE AND THUS CONFE RS. 100% TITLE TO THE LAND IN FAVOUR OF THE ASSESSEE. I N VIEW OF THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF A.R.KRISHNA MURTHY (SUPRA) COST OF ACQUISITION HAS TO BE COMPUTED FROM THE DATE ON WHICH THE ASSESSEE ACQUIR ED THE ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 10 RIGHT TO BE IN POSSESSION AND ENJOYMENT OF THE PROP ERTY. THEREFORE, IN OUR OPINION, THE VALUE AS ON 01.04.19 81 HAS TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF COMP UTATION OF CAPITAL GAINS. BY RESPECTFULLY FOLLOWING THE DECISION OF THE APEX COURT IN THE CASE OF A.R.KRISHNA MURTHY (SUPRA), WE HOLD THA T LEASE OF LAND ALSO A TRANSFER OF INTEREST IN LAND AND THE REFORE, A TRANSFER IN TITLE IN FAVOUR OF THE LESSEE, THOUGH S UCH A TITLE WOULD STAND REVERTED TO THE LESSOR, AFTER LEASE PER IOD WAS TERMINATED. THE APEX COURT FURTHER OBSERVED THAT T HE DATE OF ACQUISITION OF RIGHT TO GRANT LEASE HAS TO BE VI EWED AS DATE OF ACQUSITON OF THE FREEHOLD RIGHT. IN VIEW OF THE JUDGEMENT OF THE APEX COURT IN OUR OPINION, THE ASS ESSEE HAS RIGHTLY VALUED THE PROPERTY BY TAKING INTO CONS IDERATION, THE INDEXED COST OF THE VALUE OF THE PROPERTY AS ON 01.04.1981. 11. WE HEARD BOTH THE PARTIES AND PERUSED THE MATER IALS AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE RECORDS. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF I N THE CASE OF CIT VS. MANJULA J. SHAH, THE RELEVANT PORTION IS EXTRAC TED BELOW: APART FROM THE ABOVE, SECTION 55(1)(B)(2)(II) OF TH E ACT PROVIDES THAT WHERE THE CAPITAL ASSETS BECAME THE P ROPERTY OF THE ASSESSEE BY ANY OF THE MODES SPECIFIED UNDER SECTION 49(1) OF THE ACT, NOT ONLY THE COST OF IMPROVEMENT INCURRED BY THE ASSESSEE BUT ALSO THE COST OF IMPROVEMENT IN CURRED BY THE PREVIOUS OWNER SHALL BE DEDUCTED FROM THE TO TAL CONSIDERATION RECEIVED BY THE ASSESSEE WHILE COMPUT ING THE CAPITAL GAINS UNDER SECTION 48 OF THE ACT THE QUES TION OF DEDUCTING THE COST OF IMPROVEMENT INCURRED BY THE P REVIOUS OWNER IN THE CASE OF AN ASSESSEE COVERED UNDER SECT ION ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 11 49(1) OF THE ACT WOULD ARISE ONLY IF THE PERIOD FOR WHICH THE ASSETS WAS HELD BY THE PREVIOUS OWNER IS INCLUDED I N DETERMINING THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER IS INCLUDED IN DETERMINING THE PERIO D FOR WHICH THE ASSET WAS HELD BY THE ASSESSEE. THEREFORE , IT IS REASONABLE TO HOLD THAT IN THE CASE OF AN ASSESSEE COVERED UNDER SECTION 49(1) OF THE ACT, THE CAPITAL GAINS L IABILITY HAS TO BE COMPUTED BY CONSIDERING THAT THE ASSESSEE HEL D THE SAID ASSET FROM THE DATE IT WAS HELD BY THE PREVIOU S OWNER AND THE SAME ANALOGY HAS ALSO TO BE APPLIED IN DETE RMINING THE INDEXED COST OF ACQUISITION. THE OBJECT OF GIVING RELIEF TO AN ASSESSEE BY ALLOW ING INDEXATION IS WITH A VIEW TO OFF SET THE EFFECT OF INFLATION. AS PER THE CBDT CIRCULAR NO.636 DATED 31.08.1992 A FAI R METHOD OF ALLOWING RELIEF BY WAY OF INDEXATION IS T O LINK IT TO THE PERIOD OF HOLDING THE ASSETS. THE SAID CIRCULA R FURTHER PROVIDES THAT THE COST OF ACQUISITION AND THE COST OF IMPROVEMENT HAVE TO BE INFLATED TO ARRIVE AT THE IN DEXED COST OF ACQUISITION AND THE INDEXED COST OF IMPROVE MENT AND THEN DEDUCT THE SAME FROM THE SALE CONSIDERATION TO ARRIVE AT THE LONG TERM CAPITAL GAINS. IF INDEXATION IS L INKED TO THE PERIOD OF HOLDING THE ASSET AND IN THE CASE OF AN A SSESSEE COVERED UNDER SECTION 49(1) OF THE ACT, THE PERIOD OF HOLDING THE ASSET HAS TO BE DETERMINED BY INCLUDING THE PER IOD FOR WHICH THE SAID ASSET WAS HELD BY THE PREVIOUS OWNER , THEN OBVIOUSLY IN ARRIVING AT THE INDEXATION, THE FIRST YEAR IN WHICH THE SAID ASSET WAS HELD BY THE PREVIOUS OWNER WOULD BE THE FIRST YEAR FOR WHICH THE SAID ASSET WAS HELD BY THE ASSESSEE. SINCE THE ASSESSEE IN THE PRESENT CASE IS HELD LIAB LE FOR LONG TERM CAPITAL GAINS TAX BY TREATING THE PERIOD FOR W HICH THE ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 12 CAPITAL ASSET IN QUESTION WAS HELD BY THE PREVIOUS OWNER AS THE PERIOD FOR WHICH THE SAID ASSET WAS HELD BY THE ASSESSEE, THE INDEXED COST OF ACQUISITION HAS ALSO TO BE DETERMINED ON THE VERY SAME BASIS. 12. HENCE, WE ARE OF THE OPINION THAT THE INDEX COS T OF THE ACQUISITION HAS TO BE COMPUTED WITH REFERENCE TO TH E YEAR IN WHICH THE PREVIOUS OWNER FIRST HELD THE ASSET AND N OT THE YEAR IN WHICH THE ASSESSEE BECAME THE OWNER OF THE ASSET. THEREFORE WE DIRECT THE AO TO DECIDE THE ISSUE IN ACCORDANCE WIT H THE DECISION OF THE SPECIAL BENCH OF THE MUM TRIBUNAL IN THE CAS E OF DCIT VS. MANJULA J. SHAH (2010) (MUM). (35 SOT 105) (MU M). 13. AS REGARDS GROUND NO.2 RAISED BY THE REVENUE, WE FIND THAT AN IDENTICAL ISSUE CAME UP BEFORE THE HONBLE ITAT A BENCH, HYDERABAD IN THE CASE OF SHRI PRABHANANDAM P RAKASH VS ITO, WARD 13(2) (ITA NO 147/HYD/2007, AY 2001- 02), RELEVANT PORTION OF THE DECISION IS REPRODUCED BELO W:- COST OF SUPERSTRUCTURE THE STAND OF THE REVENUE IS THAT SINCE THE SUPERSTR UCTURE WAS TO BE DEMOLISHED BY THE PROMOTER, IT CANNOT BE SAID TH AT THE EXISTING HOUSE WAS ALSO TRANSFERRED AND SINCE ONLY LAND WAS TRANSFERRED THE COST OF THE HOUSE CANNOT BE ALLOWED AS DEDUCTIO N. ON THE OTHER HAND, THE STAND OF THE ASSESSEE IS THAT AS PER THE AGREEMENT BOTH WERE TO BE TRANSFERRED AND IN ANY CASE THE BUILDING OR THE HOUSE ON THE AND AMOUNTS TO IMPROVEMENT OF LAND, AND HENC E THE COST THEREFORE SHOULD BE ALLOWED AS DEDUCTION. IN ORDER TO APPRECIATE THE RIVAL CONTENTIONS, IT WOULD BE NECESSARY TO REF ER TO THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH THE PRO MOTER. THE ASSESSEE OWNS A PIECE OF LAND ADMEASURING 500 S Q.YD AT SRI KRISHNANAGAR, HYDERABAD. THE ASSESSEE IS THE ABSOL UTE OWNER ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 13 AND POSSESSORS OF THE IMPUGNED LAND. IT FURTHER ME NTIONS THAT THE ASSESSEE IS DESIROUS OF DEVELOPING THE SAID PROPERT Y AND FOR THIS PURPOSE HE HAS APPROACHED THE PROMOTER. IN THE PRE AMBLE ITSELF IT IS DECLARED THAT THE PROMOTER SHALL DEMOLISH THE EX ISTING STRUCTURE AND CONSTRUCT THEREON A NEW COMPLEX. THIS WILL BE A T THE COST OF THE PROMOTER ONLY. THIS CLEARLY INDICATES THAT UNLE SS THE SUPERSTRUCTURE IS ALSO TRANSFERRED, THE PROMOTER CA NNOT TAKE POSSESSION AND DEMOLISH THE SAME. THE VIEW OF THE C IT(A) THAT IT IS NOT AN ASSET BUT A LIABILITY FOR THE PROMOTER HA S NO BASIS. IN FACT, IT IS MORE A RHETORIC THAN AN ARGUMENT. HE MA Y DEMOLISH THE SAME BUT THE FACT REMAINS THAT THE TRANSFEROR, IE., THE ASSESSEE IS PARTING AWAY WITH HIS HOUSE ALONG WITH THE LAND. TH E QUESTION OF NOT ALLOWING THE COST OF THE HOUSE WOULD ARISE ONLY IF IT IS RETAINED BY THE ASSESSEE HIMSELF. THIS IS NOT THE CASE IN T HE PRESENT TRANSACTION. WHAT THE TRANSFEREE DOES TO THAT ASSE T IS NOT THE CONCERN OF THE TRANSFEROR. IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE INCOME GENERATED, IF ANY, FROM THE SALE OF SCRAP IS THAT THE SUPERSTRUCTURE HAS NOT VALUE FOR THE PROMOTER, IT CANNOT BE DENIED THAT THE LAND BELOW THAT STRUCTURE IS CERTAI NLY OF VALUE AND USE TO THE PROMOTER. THIS IS BECAUSE, IT HE HAS NO BUILD A NEW COMPLEX, HE WILL HAVE TO MAKE USE OF THAT LAND. THE REFORE, IN ORDER TO USE THE LAND WHICH IS BENEATH THE STRUCTURE, HE HAS TO ACQUIRE THE STRUCTURE ALSO AND THEN HE MAY DEMOLISH IT. TH EREFORE, THERE IS NO GAIN SAYING THAT THE SUPERSTRUCTURE IS NOT TR ANSFERRED TO THE PROMOTER. CONSIDERING THE ISSUE FROM THE VIEW POIN T OF THE TRANSFEROR, SINCE HIS IS PARTING WITH AN ASSET, FOR WHICH HE HAS INCURRED COST, THAT COST HAS TO BE ALLOWED AS DEDUC TION WHILE COMPUTING CAPITAL GAINS. IN THE LIGHT OF THE FOREG OING DISCUSSION, WE HOLD THAT THE SUPERSTRUCTURE IS ALSO TRANSFERRED BY THE ASSESSEE TO THE PROMOTER AND THE COST OF CONSTRUCT ION THEREOF MAY BE ALLOWED TO THE ASSESSEE ITA NOS.1077 & 1078/H/2008 SMT. JENNIFIER DOIS REIS FALCAO, SECUNDERABAD 14 14. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH, WE CONFIRM THE ORDER OF THE CIT(A), AND INDE XATION OF THE COST OF CONSTRUCTION AND IMPROVEMENT OF THE BUILDIN G IS TO BE ALLOWED TO THE ASSESSEE WHILE COMPUTING THE CAPITAL GAINS. 15. IN THE RESULT, THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON: 11. 4.2012 SD/- SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER DATED THE 11 TH APRIL, 2012 COPY FORWARDED TO: 1. THE ITO, WARD 11(1), HYDERABAD 2. SMT. JENNIFIER DOS REIS FALCO, 10-2-349, WEST MARED PALLY, SECUNDERABAD 3. THE CIT(A)-VI, HYDERABAD 4. THE CIT, HYDERABAD 5. THE DR, ITAT, HYDERABAD NP/