S.C. Tiwari, Accountant Member - (1.) AS common issues are involved in these four appeals, the same were argued together by the learned authorised representative of the assessee and the learned Departmental Representative and are being decided by this consolidated order for convenience.
(2.) Appeal in I.T.A. No. 85/PNJ/98 is an appeal filed by the assessee in relation to order under section 143(1)(a) whereas appeal in I.T.A. No. 213/PNJ/98 is an appeal filed by revenue in relation to order u/s 154. These appeals are concerned with levy of interest u/s 234C on the amount of tax-determined u/s 143(1)(a). Appeals in I.T.A. No. 10/PNJ/99 and I.T.A. No. 86/PNJ/99 are appeals filed by revenue and assesses respectively in relation to the amount of capital gains chargeable to tax. We shall first take up the quantum appeals, being ITA Nos 10/PNJ/99 and 86/PNJ/99. The controversy in these appeals relates to as to whether the amount of capital gains is chargeable to tax as short-term capital gain or long-term capital gain or both. Facts of the case leading to these appeals briefly are that the assessee was incorporated as company on 4.3.87 for the purpose of establishing and running hotels etc as per main objects clause of the Memorandum of Association of the Company. Pursuant to this clause assessee took land on these from Economic Development Co-operation of Goa Daman & Diu Ltd. (Herein after referred to as "EDC") on 17.3.88. After entering in to various financial arrangements with the EDC and Maharastra State Financial Corporation and also obtaining permission of the local authorities and also tourist departments for the proposed hotel project on the land taken on lease, the assessee commenced construction of the hotel in 1990. The assessee spent a sum of Rs. 41, 25, 980 on the leasehold land and spent Rs. 2, 78, 68, 664 on construction of buildings thereupon. It is accepted position that the assessee could not muster sufficient funds to complete the hotel and finally the assessee sold the entire project comprising the land and the incomplete building to Peerless General Finance & Investment Ltd. for a lump sum of Rs. 11 Crores. The assessee considered the gains on sale of hotel project charageble to tax as long term capital gains. The Assessing Officer found out that there was no adventure on the part of the assessee to trade or make profit on sale of completed structure of hotels. It was a case of capital asset, though partly completed, which would have been used by the assessee for earning income but the circumstances beyond assessee's control. The question was whether the asset was long term or short term. Under the provisions of section 2 (42A) of the Act, an asset would be long-term capital asset if the same was held by the assessee for more than 36 months immediately preceding the date of its transfer. According to the Assessing officer, from the facts of the case it was evident that the assessee did not transfer any asset in the nature of land, which was held by it for more than 36 months. The land in question was taken by the assessee on lease from the EDC. The assessee did not purchase this land. By the lease agreement an interest in the leasehold land was created in favour of the assessee perpetually. However, on going through the lease agreement and agreement to sell the project, the Assessing Officer held the view that what was sold by the assessee was incomplete building with all the approvals and licences on "As in where is" condition. So far as leasehold rights were concerned, as per the lease agreement dated 17.3.88 the assessee was not entitled to sell leasehold rights without the prior permission of the lessor and in the event of such permission being granted, 50% of the unearned increase was payable to the EDC. The assessee neither took such permission nor paid any amount to the EDC. On the contrary, the assessee surrenderd its lease in favour of the EDC and sold the partly constructed building to Peerless. In the books of EDC, the premium paid by the assessee was transferred in the name of M/s . Peerless without refunding the same to the assessee on surrender of its leasehold rights. The Assessing Officer therefore concluded that the assessee did not transfer any right in the leasehold land to the purchaser of the building but surrendered the same to the EDC who in turn released the same to the purchaser, i.e., M/s . Peerless. Thus, what the assessee purported to transfer to Peerless was a building that was incomplete. The building was constructed to start a hotel in it. On completion if it would have been put to use as hotel, the assessee would have got depreciation from such date. If such asset would have been sold, the gains would have been either long term capital gains or short term capital gains depending upon the period it was held. Since the asset in the form of a completed building was not held by the assessee prior to the transfer for more than 36 months, the gains on transfer were clearly taxable as short term capital gains. In short, the leasehold rights in land were not sold by the assessee to Peerless but surrendered to the original owner, EDC, and received back the premium paid for acquiring such lease from M/s . Peerless. The assessee sold only the incomplete building along with the approvals and license for a consideration of Rs. 11 crores which represented the present true and correct value of the same (clause 4 on page 19 of agreement dated 19.6. 95). Since the asset in the form of the building was not held by the assessee for more than 36 months, according to the Assessing Officer, the gains on transfer of incomplete building was chargeable to tax as short term capital gains. The Assessing Officer accordingly assessed short-term capital gains amounting to Rs. 7.80.05, 356/- after deducting from total consideration of Rs. 11 crores lease premium amounting to Rs. 40, 16, 25/- and cost of construction of building and other expenses amounting to Rs. 2, 79, 78, 219/-.
(3.) AGGRIEVED by assessment order, the assessee preferred appeal before the learned CIT (A), Belgaum. The learned CIT (A) took the view that both the Assessing Officer as well as the assessee had taken the extreme view. The assessee's contention that the investment made in the construction of building was in the nature of improvement on the project did not have legs to stand. Project in itself was an amorphous concept and should be taken as "asset" in legal sense of the term. The hotel project started with the acquisition of land but what was sold was not merely an improved land. Even if the asset so sold was taken as a project under implementation, its state of acquisition could not be equated with the date of acquisition of land. It was a running project beginning with the acquisition of land but it went on changing its character with successive grants of approvals and licences as well as progress in the construction of the building. At the same time, the Assessing Officer's which was built contention that the entire incomplete structure which was built over a period of five years was a short term capital asset because the asset in the form of completed building was not held by the assessee for more than 36 months, was not correct. If the building was incomplete, the date of its beginning was as important as the date as the date on which the last item of expenditure was incurred. The Assessing Officer's position also was therefore not acceptable. The learned CIT(A) held the view that in case of composite sale involving the assets acquired prior to three years and within three years, only way out was to bifurcate the capital gains. For this purpose the learned CIT(A) relied upon the judgements reported in 201 ITR (Raj.) and 236 ITR 51 (Mad.). Since the building in the instant case was incomplete, what was sold was a structure acquired before 36 months as well as within as 36 months. The learned CIT(A) therefore further held that the sale price was to be allocated in the ratio of expenditure incurred upto 18.6.92 on the one hand and on or after 19.6.92 on the other. Since proper accounts had been maintained, such figures were readily available.;