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Volume X Part 3 February 10, 2015 3 Business Advisor
How capital gain is to be computed when
superstructure (building) less than 3
years old and constructed on an old land
owned for more than 3 years is sold
T. N. Pandey
Case details
„A‟ owned a land, acquired by purchase, since the year
2008. In the year 2012, he started putting up a
superstructure (building), which was completed in 2013
and sold the same along-with the land beneath it in the
year 2014. How the capital gain in such situation shall
be computed and worked out for taxation purpose is
being considered in later discussion.
2. Legal provisions concerning taxation of capital gain
„Income‟ and „capital gain‟ have the same impact on a person‟s financial
capacity/ stability. Income comes in a „flow‟ from almost in a regular way
while capital gains come sporadically by disposal of capital assets, which, in
many cases, by and large, have been generating income. Distinct
methodology for taxing the same have been prescribed under the Income
Tax Act, 1951 (Act).
3. Taxation of capital gain under the Act
Taxation of capital gains is a part of the taxation of income tax. Any receipt,
in order to be taxed under the Act, should bear income character. The word
„income‟ is defined in the section 2(24) of the Act by an inclusive definition,
which gives it a very wide scope. According to the sub-clause (vi) of section
2(24), „income‟ includes inter alia any capital gains chargeable u/s 45.
Thus, it is provided in the statute that capital gain, which is chargeable u/s
45 of the Act will constitute income within the meaning of section 2(24),
which provides statutory legitimacy to the charging of capital gains to tax
under the Act.
3.1 Capital gain is not, however, defined in the Act. The language of section
45 of the Act, which is the charging section for the purposes of capital gains,
has some indication as to what is capital gains or what is chargeable under
the head capital gains. Shorn of avoidable details, section 45 says that any
Volume X Part 3 February 10, 2015 4 Business Advisor
profits and gains arising from the transfer of a capital asset shall be
chargeable to income-tax under the head „capital gains‟. Two very important
terms are there in this sentence, for they constitute the base from which
capital gains may spring up. They are „capital asset‟ and „transfer‟. In order
that chargeable capital gain gets generated, there has to be a capital asset
and then there has to be a transfer of the capital asset.
4. Capital assets – short-term and long-term
Capital asset is defined in section 2(14) of the Act to be property to any kind
but specifically excluding certain items enumerated in sub-clauses (i) to (vi).
Then the capital assets may be of two types, short-term capital asset and
long-term capital asset. Whether a capital asset is the former or latter type
depends on the period for which that particular asset is held by the
assessee before its transfer. If the holding period exceeds 36 months [12
months in case of shares and units of UTI, mutual funds specified u/s
10(23D) and zero coupon bonds], the asset will be a long-term capital asset.
These two different types of capital assets are given different tax-treatments
under the Act vis-à-vis their transfer. Short-term capital asset defined in
section 2(42A) of the Act and short-term capital gain is defined in section
2(42B). Section 2(29A) defines the term long-term capital asset and section
2(29B) defines the term long-term capital gain.
5. Transfer
The Act gives definition of transfer of capital asset. The definition is not of
the word „transfer‟ simpliciter but of the words „transfer in relation to a
capital asset‟. The definition is an inclusive one implying that its scope is
very wide. In other words, „transfer‟ within the meaning of section 2(47) will
encompass all transactions, which may, in common parlance, be regarded
as transfer. Apart from such transactions, it will necessarily encompass
within its scope also transactions, which are specified in the seven sub-
clauses of the section 2(47) being –
[i] the sale, exchange or relinquishment of the asset; or
[ii] the extinguishment of any rights therein; or
[iii] the compulsory acquisition thereof under any law; or
[iv] in a case where the asset is converted by the owner thereof into, or is
treated by him as, stock-in-trade of a business carried on by him, such
conversion or treatment; or
[v] maturity or redemption of a zero coupon bond; or
Volume X Part 3 February 10, 2015 5 Business Advisor
[vi] any transaction involving the allowing of the possession of any
immovable property to be taken or retained in part performance of a
contract of the nature referred to in section 53A of the Transfer of Property
Act, 1882; or
[vii] any transaction (whether by way of becoming a member of, or acquiring
shares in a cooperative society, company or other association of persons or
by way of any agreement or any arrangement or in any other manner
whatsoever) has the effect of transferring, or enabling the enjoyment of, any
immovable property.
6. Capital gain constitutes a separate head of income for taxation of income
Capital gains constitutes one of the five heads of income enumerated in the
section 14 of the Act. This is presently the fourth head and is identified by
the head E – Capital gains.
7. Long-term and short-term capital gain
Long-term capital gain arises from the transfer of a long-term capital asset,
and short-term, from a transfer of short-term capital asset. Section 2(29A)
provides a negative definition of long-term capital asset. Accordingly, long-
term capital asset means a capital asset which is not a short-term capital
asset. In order to arrive at a definition of long-term capital asset, therefore,
the definition of short-term capital is to be reversed. So done, a long-term
capital asset means an asset, which is held for a period of more than 36
months immediately preceding the date of its transfer.
7.1 In the following table, the minimum period of holding an asset is
indicated to categorise it as long-term capital asset (and consequently the
gain arising on its transfer as long-term capital gain).
Name of capital asset Min holding period
Share in a company 12 months
Any other security listed in a recognised stock
exchange in India
12 months
Units of UTI 12 months
Units of a mutual fund specified u/s 10(23D) 12 months
Any other capital asset 36 months
Zero coupon bond 12 months
Volume X Part 3 February 10, 2015 6 Business Advisor
7.2 In the case of shares of companies, or any other security listed in a
recognised stock exchange in India or a unit of the Unit Trust of India
established under the Unit Trust of India Act, 1963, or a unit of mutual
fund specified under clause (23D) of section 10 or a zero coupon bond it is
provided that if they are held for more than 12 months immediately
preceding the date of their transfer, they will be long-term capital assets.
8. Charge of tax
A short-term capital gain is charged to tax at the rate applicable to the total
income of an assessee, treating the same as normal income; long-term
capital gain is taxable at rates prescribed by section 112 of the Act.
Generally, the tax rate is 20% with applicable cess and surcharge.
9. Examination of the issue posed
With the aforesaid background, the problem/ issue posed in the beginning
of the article, including in the title of the article, can be examined.
The illustration given shows that the land comprised in the transaction is
long-term capital asset while the superstructure (building on it) is a short-
term capital asset. Hence, when the composite property is sold, the land
would generate long-term capital gain while superstructure short-term
capital gain.
In CIT v. Citibank N.A. (2003) 261 ITR 570 (Bom), it was held that the
Tribunal was right in law in holding that surplus realised on sale of land
shall be treated as long-term capital gain and surplus on sale of building
shall be treated as short-term capital gain.
Similarly, in CIT v. Smt. Lakshmi B. Menon & Anr. (2003) 264 ITR 76 (Ker), it
was held that capital gains arising from the sale of land and building should
be determined separately; the gain from the land should be treated as long-
term capital gain and the gain from the building alone should be treated as
short-term capital gain for the purpose of assessment.
A short-term capital gain is charged to tax at the rate
applicable to the total income of an assessee, treating the
same as normal income; long-term capital gain is taxable at
rates prescribed by section 112 of the Act.
Volume X Part 3 February 10, 2015 7 Business Advisor
9.1 In ITC Ltd. v. Dy. CIT (2003) 86 ITD 135 (Cal), Tribunal (T.M.), it was
decided that the land and the building are separate assets and in the
normal course they have to be separately considered for the purpose of
depreciation as also for the computation of capital gains and if it is possible
to work out the cost of the land and the sale consideration of the same on
the basis of material on record, it will not be justified to deny the claim of
long-term capital gains on the undivided share in the land sold along-with
the floors.
10. What happens when consolidated consideration is received?
According to CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj), where
there is sale of land and superstructure thereon, the consolidated
consideration can be bifurcated in respect of each capital asset to determine
the nature of receipt whether short-term or long-term. It was observed that
u/s 48, the income chargeable under the head „capital gains‟ has to be
computed by deducting from the full value of the consideration received or
accruing as a result of the transfer of the capital asset, the cost of
acquisition and improvement in the manner provided in this section. If the
price of two capital assets has been charged as one consolidated price then
the assessee is entitled to bifurcate the same.
A situation may arise that where a gain from one of the capital assets is
short-term capital gain while from the other it is a long-term capital gain
and in such a situation the benefit to the assessee cannot be denied in
respect of a gain arising from the sale of an asset, which could be
considered as a long-term capital gain.
10.1 In CIT v. Estate of Omprakash Jhunjhunwala (2002) 254 ITR 152 (Cal),
it was held that if the interest in leasehold plot or the leasehold plot was
held by assessee for more than 3 years, the sale proceeds of that interest are
assessable as long-term capital gain and structure; if sold before expiry of 3
years, the sale proceeds received on account of sale of the structure can be
taxed as short-term capital as held by Tribunal.
11. Summing up
The legal position is, thus, very clear. Gain arising from sale of land and
superstructure are to be segregated even if the price received is
consolidated. The legal position that emerges is that the gain arising on sale
of land with superstructure should be computed by treating both of them as
separate assets. Nature of gain would depend period of holding of the
relevant asset being the land and/ or the superstructure.
(T. N. Pandey is Former Chairman, Central Board of Direct Taxes)

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How capital gain is to be computed when superstructure (building) less than 3 years old and constructed on an old land owned for more than 3 years is sold - T. N. Pandey

  • 1. Volume X Part 3 February 10, 2015 3 Business Advisor How capital gain is to be computed when superstructure (building) less than 3 years old and constructed on an old land owned for more than 3 years is sold T. N. Pandey Case details „A‟ owned a land, acquired by purchase, since the year 2008. In the year 2012, he started putting up a superstructure (building), which was completed in 2013 and sold the same along-with the land beneath it in the year 2014. How the capital gain in such situation shall be computed and worked out for taxation purpose is being considered in later discussion. 2. Legal provisions concerning taxation of capital gain „Income‟ and „capital gain‟ have the same impact on a person‟s financial capacity/ stability. Income comes in a „flow‟ from almost in a regular way while capital gains come sporadically by disposal of capital assets, which, in many cases, by and large, have been generating income. Distinct methodology for taxing the same have been prescribed under the Income Tax Act, 1951 (Act). 3. Taxation of capital gain under the Act Taxation of capital gains is a part of the taxation of income tax. Any receipt, in order to be taxed under the Act, should bear income character. The word „income‟ is defined in the section 2(24) of the Act by an inclusive definition, which gives it a very wide scope. According to the sub-clause (vi) of section 2(24), „income‟ includes inter alia any capital gains chargeable u/s 45. Thus, it is provided in the statute that capital gain, which is chargeable u/s 45 of the Act will constitute income within the meaning of section 2(24), which provides statutory legitimacy to the charging of capital gains to tax under the Act. 3.1 Capital gain is not, however, defined in the Act. The language of section 45 of the Act, which is the charging section for the purposes of capital gains, has some indication as to what is capital gains or what is chargeable under the head capital gains. Shorn of avoidable details, section 45 says that any
  • 2. Volume X Part 3 February 10, 2015 4 Business Advisor profits and gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head „capital gains‟. Two very important terms are there in this sentence, for they constitute the base from which capital gains may spring up. They are „capital asset‟ and „transfer‟. In order that chargeable capital gain gets generated, there has to be a capital asset and then there has to be a transfer of the capital asset. 4. Capital assets – short-term and long-term Capital asset is defined in section 2(14) of the Act to be property to any kind but specifically excluding certain items enumerated in sub-clauses (i) to (vi). Then the capital assets may be of two types, short-term capital asset and long-term capital asset. Whether a capital asset is the former or latter type depends on the period for which that particular asset is held by the assessee before its transfer. If the holding period exceeds 36 months [12 months in case of shares and units of UTI, mutual funds specified u/s 10(23D) and zero coupon bonds], the asset will be a long-term capital asset. These two different types of capital assets are given different tax-treatments under the Act vis-à-vis their transfer. Short-term capital asset defined in section 2(42A) of the Act and short-term capital gain is defined in section 2(42B). Section 2(29A) defines the term long-term capital asset and section 2(29B) defines the term long-term capital gain. 5. Transfer The Act gives definition of transfer of capital asset. The definition is not of the word „transfer‟ simpliciter but of the words „transfer in relation to a capital asset‟. The definition is an inclusive one implying that its scope is very wide. In other words, „transfer‟ within the meaning of section 2(47) will encompass all transactions, which may, in common parlance, be regarded as transfer. Apart from such transactions, it will necessarily encompass within its scope also transactions, which are specified in the seven sub- clauses of the section 2(47) being – [i] the sale, exchange or relinquishment of the asset; or [ii] the extinguishment of any rights therein; or [iii] the compulsory acquisition thereof under any law; or [iv] in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or [v] maturity or redemption of a zero coupon bond; or
  • 3. Volume X Part 3 February 10, 2015 5 Business Advisor [vi] any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882; or [vii] any transaction (whether by way of becoming a member of, or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) has the effect of transferring, or enabling the enjoyment of, any immovable property. 6. Capital gain constitutes a separate head of income for taxation of income Capital gains constitutes one of the five heads of income enumerated in the section 14 of the Act. This is presently the fourth head and is identified by the head E – Capital gains. 7. Long-term and short-term capital gain Long-term capital gain arises from the transfer of a long-term capital asset, and short-term, from a transfer of short-term capital asset. Section 2(29A) provides a negative definition of long-term capital asset. Accordingly, long- term capital asset means a capital asset which is not a short-term capital asset. In order to arrive at a definition of long-term capital asset, therefore, the definition of short-term capital is to be reversed. So done, a long-term capital asset means an asset, which is held for a period of more than 36 months immediately preceding the date of its transfer. 7.1 In the following table, the minimum period of holding an asset is indicated to categorise it as long-term capital asset (and consequently the gain arising on its transfer as long-term capital gain). Name of capital asset Min holding period Share in a company 12 months Any other security listed in a recognised stock exchange in India 12 months Units of UTI 12 months Units of a mutual fund specified u/s 10(23D) 12 months Any other capital asset 36 months Zero coupon bond 12 months
  • 4. Volume X Part 3 February 10, 2015 6 Business Advisor 7.2 In the case of shares of companies, or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963, or a unit of mutual fund specified under clause (23D) of section 10 or a zero coupon bond it is provided that if they are held for more than 12 months immediately preceding the date of their transfer, they will be long-term capital assets. 8. Charge of tax A short-term capital gain is charged to tax at the rate applicable to the total income of an assessee, treating the same as normal income; long-term capital gain is taxable at rates prescribed by section 112 of the Act. Generally, the tax rate is 20% with applicable cess and surcharge. 9. Examination of the issue posed With the aforesaid background, the problem/ issue posed in the beginning of the article, including in the title of the article, can be examined. The illustration given shows that the land comprised in the transaction is long-term capital asset while the superstructure (building on it) is a short- term capital asset. Hence, when the composite property is sold, the land would generate long-term capital gain while superstructure short-term capital gain. In CIT v. Citibank N.A. (2003) 261 ITR 570 (Bom), it was held that the Tribunal was right in law in holding that surplus realised on sale of land shall be treated as long-term capital gain and surplus on sale of building shall be treated as short-term capital gain. Similarly, in CIT v. Smt. Lakshmi B. Menon & Anr. (2003) 264 ITR 76 (Ker), it was held that capital gains arising from the sale of land and building should be determined separately; the gain from the land should be treated as long- term capital gain and the gain from the building alone should be treated as short-term capital gain for the purpose of assessment. A short-term capital gain is charged to tax at the rate applicable to the total income of an assessee, treating the same as normal income; long-term capital gain is taxable at rates prescribed by section 112 of the Act.
  • 5. Volume X Part 3 February 10, 2015 7 Business Advisor 9.1 In ITC Ltd. v. Dy. CIT (2003) 86 ITD 135 (Cal), Tribunal (T.M.), it was decided that the land and the building are separate assets and in the normal course they have to be separately considered for the purpose of depreciation as also for the computation of capital gains and if it is possible to work out the cost of the land and the sale consideration of the same on the basis of material on record, it will not be justified to deny the claim of long-term capital gains on the undivided share in the land sold along-with the floors. 10. What happens when consolidated consideration is received? According to CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj), where there is sale of land and superstructure thereon, the consolidated consideration can be bifurcated in respect of each capital asset to determine the nature of receipt whether short-term or long-term. It was observed that u/s 48, the income chargeable under the head „capital gains‟ has to be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, the cost of acquisition and improvement in the manner provided in this section. If the price of two capital assets has been charged as one consolidated price then the assessee is entitled to bifurcate the same. A situation may arise that where a gain from one of the capital assets is short-term capital gain while from the other it is a long-term capital gain and in such a situation the benefit to the assessee cannot be denied in respect of a gain arising from the sale of an asset, which could be considered as a long-term capital gain. 10.1 In CIT v. Estate of Omprakash Jhunjhunwala (2002) 254 ITR 152 (Cal), it was held that if the interest in leasehold plot or the leasehold plot was held by assessee for more than 3 years, the sale proceeds of that interest are assessable as long-term capital gain and structure; if sold before expiry of 3 years, the sale proceeds received on account of sale of the structure can be taxed as short-term capital as held by Tribunal. 11. Summing up The legal position is, thus, very clear. Gain arising from sale of land and superstructure are to be segregated even if the price received is consolidated. The legal position that emerges is that the gain arising on sale of land with superstructure should be computed by treating both of them as separate assets. Nature of gain would depend period of holding of the relevant asset being the land and/ or the superstructure. (T. N. Pandey is Former Chairman, Central Board of Direct Taxes)