Leasehold Interest In Land Is An Asset Of Company And Is Capable Of Valuation: Jammu & Kashmir High Court

The Jammu & Kashmir High Court has held that leasehold interest in the land is an asset of the company and is capable of valuation.

The bench of Justice Tashi Rabstan and Justice Puneet Gupta has upheld the order of the Tribunal in which it was held that leasehold interest is to be included in the value of assets of M/s. Jyoti Private Limited so as to determine the fair market value of shares held by the assessee as well as other shareholders.

The assessee/respondent, his wife, and two sons had shares in M/s. Jyoti Pvt. Ltd. Thus, the assessee was one of the shareholders, having 21000 shares in the company. During the financial year of 1997–98, the assessee transferred or sold 7150 shares in the company to M/s. Bharat Hotels Ltd., New Delhi, for a consideration of rupees ten crores. As of April 1, 1981, the assessee had taken the indexed cost of these shares at Rs. 14,48,59,000. However, in the return filed by the assessee on March 8, 1999, the assessee declared a total income of Rs. 16,89,477, i.e., Rs. 12,000 under the head salary and Rs. 16,77,477 as income from other sources. There was a note appended to the computation of income to the effect that the assessee had sold his shares in M/s. Jyoti Pvt. Ltd., and, as per valuation of the company's assets, there was a capital loss, which is not being claimed.

However, the assessing officer disputed the indexed cost of 7150 shares. While calculating the cost of acquisition, the value of land measuring 225.85 kanals was to be excluded as the land was not a part of the sale consideration of shares of M/s. Jyoti Pvt. Ltd. to M/s. Bharat Hotels Ltd. Therefore, the assessing officer took the indexed cost per share at Rs. 3262. Thus, the Assessing Officer adopted the indexed cost of 7150 shares at Rs. 2,33,23,300 instead of Rs. 14,48,59,000. As such, the Assessing Officer was of the view that out of rupees ten crore being the sale price, there was a capital gain of Rs. 7,66,76,700 as having been received by the assessee.

The assessee preferred an appeal before the Commissioner of Income Tax (Appeals), Jammu. The CIT(A) deleted the addition made by the Assessing Officer on the ground that, as of the date of the sale of shares, the lease period beyond 20 years was still left with M/s. Jyoti Pvt. Ltd. Hence, the land value in the hands of the lessor was practically nil or negligible, and for all practical purposes, M/s. Jyoti Pvt. Ltd. was the de facto owner of the underlying land. The value of leasehold land, therefore, cannot be excluded for calculating the fair market value of shares of M/s. Jyoti Pvt. Ltd. The Assessing Officer was, thus, directed to adopt the valuation report submitted by the assessee during the assessment proceedings, resulting in no capital gain.

The department appealed before the Income Tax Appellate Tribunal. The tribunal, while dismissing the appeal, held that reopening the assessment case of the assessee was not in accordance with the law. The Tribunal also allowed the cross-objections filed by the assessee.

The department found that while calculating the cost of acquisition, the value of land measuring 225.85 kanals was to be excluded as the land was not a part of the sale consideration of shares of M/s. Jyoti Pvt. Ltd. to M/s. Bharat Hotels Ltd. Therefore, the dispute is with regard to the quantum of capital gain arising from the transfer of shares in Jyoti Pvt. Ltd.

The assessee contended that no capital gain arose to him as a result of the sale of his shares in M/s. Jyoti Pvt. Ltd. to M/s. Bharat Hotels Ltd., New Delhi, as the fair market value of such shares as of April 1, 1981 had far exceeded the amount of consideration received for such a sale or transfer of shares.

The court noted that the Tribunal, while rejecting the plea of the department to adopt the value of assets as reflected in the balance sheet as provided under Rule 11 of the Wealth Tax Rules, has rightly held that the Assessing Officer had himself applied the fair market value of buildings and other assets while computing capital gain in the assessment order. It is the fair market value, and not book value, of an asset that is relevant for determining the cost of acquisition as envisaged under Section 55(2)(b)(ii) of the Income Tax Act, 1961, and for determining capital gain under Section 45 of the Act. The fair market value is defined under Section 2(22B) as the price that such an asset would ordinarily fetch on sale in the open market on April 1, 1981. Therefore, for the purposes of computation of capital gain, the fair market value has to be determined, not the value of shares; the valuation of shares is to be made under Rule 1D of the Wealth Tax Rules.

The court dismissed the appeal filed by the department and upheld the ITAT's order.

Counsel For Appellant: Suraj Singh Wazir

Counsel For Respondent: C.S. Aggarwal

Case Title: Principal Commissioner of Income Tax Versus Dr. Karan Singh

Citation: 2024 LiveLaw (JKL) 73

Case No.: ITA No.1/2022

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