Case Note & Summary
The Commissioner of Income Tax appealed against the order of the Income Tax Appellate Tribunal which had held that the profit from sale of an incomplete hotel project was a long-term capital gain. The respondent-assessee, Hindustan Hotels Ltd., had taken a perpetual lease of land in 1988 and commenced construction of a hotel in 1990. Due to lack of funds, the construction remained incomplete and the entire project (land and partly constructed building) was sold in June 1995 for Rs. 11 crores. The assessee claimed the profit as long-term capital gain, but the Assessing Officer treated it as short-term capital gain on the ground that the building was not held for more than 36 months. The CIT (Appeals) upheld the Assessing Officer's view, but the Tribunal reversed it, holding that the land and building together constituted a single capital asset and the period of holding should be reckoned from the date of acquisition of the land. The High Court allowed the Revenue's appeal, holding that the land and building are separate capital assets. The building under construction was not held for more than 36 months, and its period of holding cannot be added to that of the land. The profit on sale of the incomplete hotel project was correctly assessed as short-term capital gain. The court set aside the Tribunal's order and restored the order of the Assessing Officer.
Headnote
A) Income Tax - Capital Gains - Short Term vs Long Term - Section 2(42A), Section 45, Income Tax Act, 1961 - The issue was whether the period of holding of an incomplete building under construction can be added to the period of holding of the land for determining long-term capital gains. The court held that the land and building are separate capital assets; the building under construction was not held for more than 36 months, and its period of holding cannot be clubbed with that of the land. The profit on sale of the incomplete hotel project was correctly assessed as short-term capital gain. (Paras 1-10) B) Income Tax - Capital Asset - Composite Sale - Section 2(14), Income Tax Act, 1961 - The court held that when land and building are sold together, each asset must be considered separately for the purpose of computing capital gains. The period of holding of the building cannot be deemed to be the same as that of the land merely because they were sold as a composite project. (Paras 5-10)
Issue of Consideration
Whether the profit arising from the sale of an incomplete hotel project (land with partly constructed building) is a short-term capital gain or a long-term capital gain under the Income Tax Act, 1961?
Final Decision
Appeal allowed. The order of the Income Tax Appellate Tribunal is set aside and the order of the Assessing Officer is restored. The profit of Rs. 7,80,05,356 is held to be short-term capital gain.
Law Points
- Period of holding of building under construction cannot be added to period of holding of land
- Capital asset must be held as a whole for more than 36 months
- Incomplete building is a separate asset from land
- Section 2(42A) of Income Tax Act
- 1961 interpretation
