SHRI DHARMENDRA KUMAR PAREEK,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2, JAIPUR

PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 01.01.2019 of

ld. CIT (A)-I, Jaipur for the assessment year 2014-15. The assessee has raised the

following grounds :-

“ 1. The ld. CIT (A) has erred on fcts and in law in not allowing the claim of deduction u/s 54 of Rs. 68,41,728/- by incorrectly holding that income f5rom house constructed on the agricultural land sold by the assessee is not chargeable to tax under the head Income from house property but is considered as Agricultural income u/s 2(1A) and therefore, benefit of section cannot be availed on sale of agricultural land having constructed house thereon by ignoring Explanation 2 to section 2(1A).

2 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

Ground no. 1 is regarding disallowance of claim of deduction u/s 54. The assessee is an individual and filed his return of income on 31st July, 2014 2.

declaring total income of Rs. 8,85,82,260/- including long term capital gain arising

from the sale of agricultural land and building. The assessee sold agricultural land

along with construction on it for a consideration of Rs. 9,90,00,000/- vide sale deed

dated 21.08.2016. The assessee has computed the capital gain after claiming

deduction on account of purchase of land and construction of building as well as

boundary wall at Rs. 9,53,88,740/-. Against the said capital gain, the assessee

claimed deduction under section 54 of the IT Act at Rs. 68,41,728/- as well as

deduction under section 54B at Rs. 42,56,250/-. The AO observed that the assessee

has sold the agricultural land whereas the deduction under section 54 is allowable on

sale of residential house. The AO further noted that the agricultural land has been

sold by the assessee vide single sale deed and, therefore, the agricultural land and

construction thereon was considered as single unit in the said sale deed. Since no

separate sale deed has been executed regarding house built upon the land,

therefore, the AO denied the claim of deduction under section 54 of the IT Act. The

assessee challenged the action of the AO before the ld. CIT (A) but could not

succeed. The ld. CIT (A) has also considered the entire property being agricultural

land in terms of section 2(1A) which defines Agricultural income.

3 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

Before us, the ld. A/R of the assessee has submitted that there is no dispute 3.

as to the fact that assessee has sold the agricultural land measuring 4.32

hectare, i.e. 43,200 sq. mt. along with 2,000 sq. ft. construction thereon for

Rs.9.90 crores. However, the stamp duty authorities have evaluated its

value at Rs.5,53,86,000/- comprising of the value of land at

Rs.5,31,36,000/-, value of construction at Rs. 12 lacs and value of boundary

wall at Rs.10,50,000/-. In the said evaluation, the property criteria is

mentioned as 'Residential-Main Road (Abadi Bhoomi)'. Thus, it is a fact on

record that what is constructed on the land is a residential construction. The

Ld. CIT(A) has not brought any material on record that the construction

existing on the land is not a residential construction and therefore, only

because in the sale deed the word 'residential construction' is not mentioned

would not mean that what is constructed is not a residential construction by

ignoring the value evaluated by the stamp authorities where the

construction is specifically stated to be residential construction. Therefore,

the finding of ld. CIT(A) to this extent is incorrect. The ld. A/R further

submitted that the observation of the lower authorities that the sale deed is

executed as a single unit without bifurcating the sale consideration between

the value of land and value of construction and that the property is recorded

as agricultural land in the revenue record as per Khasra Girdavari/Jamabandi

would not mean that the construction existing on the land is not residential

construction or that no consideration is there in respect of the construction

4 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

existing on the said land by ignoring the value of land and construction

evaluated by the stamp authorities. It is a settled law that when there is a

combined consideration for a property which comprises of land and

construction thereon, such consideration has to be reasonably apportioned

between the land and the construction as these are two separate assets as

held by Hon'ble Rajasthan High Court in case of CIT Vs. Vimal Chand Golecha

201 ITR 442 (Raj.) and Hon'ble Bombay High Court in case of CIT Vs.

Citibank N.A. 261 ITR 570 (Bom). Accordingly, the assessee has correctly

bifurcated the actual sale consideration of Rs.9.90 crores towards the value of

land at Rs.9,49,78,226/-, value of boundary at Rs.18,76,828/- and value of

building at Rs.21,44,946/- on the basis of value evaluated by the stamp

authorities. On this basis the value of residential house in the total sales

consideration has been worked out as under:-

(i) Value of 2,750 sq. mt. land appurtenant to the residential land Rs. 60,46,068/- (ii) Value of 2,000 sq. ft. construction Rs. 21,44,946/- Total value of the residential house Rs.81,91,014/-

Against the above, the indexed cost of acquisition of corresponding land and

construction thereon is worked out at Rs.14,43,224/- and thus, long term

capital gain with reference to the residential house is worked out at

Rs.67,47,789/-. This has been accepted by the AO. Since assessee has

purchased the residential land for Rs.23,41,728/- and Rs.45,00,000/- is

deposited in capital gain account scheme, totaling to Rs.68,41,728/-,

5 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

assessee has rightly claimed deduction u/s 54 to work out capital gain

separately on sale of house and sale of agricultural land. The ld. A/R

submitted that the Ld. CIT(A) by referring to definition of agricultural

income u/s 2(1A) has observed that income derived from the building in the

immediate vicinity of the agricultural land required as dwelling house or

store house or other out building is regarded as agricultural income and

therefore, even if the building is used as a dwelling house, it would not

change the nature of the land and it will be regarded as agricultural land

only. However, in holding so he ignored Explanation 2 to section 2(1A)

where it is held that income derived from any building arising from the use

thereof for any purpose (including letting for residential purpose or for the

purpose of any business or profession) other than agricultural shall not be

the agricultural income. In the present case, the building constructed on the

land is used by the assessee for residential purpose and therefore, the

income therefrom, if any, would be assessable under the head income from

house property as required u/s 54 and thus, assessee is entitled to claim

deduction under section 54 on the sale value of the residential house

constructed on such agricultural land. The ld. A/R submitted that without

prejudice to above, in case even it is assumed that the residential house sold

by the assessee on the agricultural land is not eligible for deduction u/s 54,

then such deduction would be allowable u/s 54F in as much as even when an

6 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

agricultural land is sold and the same is invested in purchase/ construction of

residential house, the same is eligible for deduction u/s 54F.

land, no other asset is sold under the said sale deed. Therefore, the assessee has

sold only the agricultural land along with the construction of the building. He has

relied upon the orders of the authorities below.

record. The agricultural income has been defined under section 2(1A) of the IT Act

which is quoted as under :-

“ 2. In this Act, unless the context otherwise requires,— 3[(1) xxxx xxxxx 4[5(1A)] 6"agricultural income"7 means8— 9[(a) any rent10 or revenue10 derived10 from land10 which is situated in India and is used for agricultural purposes10;] (b) any income derived from such land10 by—

(i) agriculture10; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause; (c) any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in- kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on : 9[Provided that— (i) the building is on or in the immediate vicinity of the land, and is a building which the receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by reason of his connection with the land, requires as a dwelling house, or as a store-house, or other out-building, and (ii) the land is either assessed to land revenue in India or is subject to a local rate

7 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

assessed and collected by officers of the Government as such or where the land is not so assessed to land revenue or subject to a local rate, it is not situated— (A) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board and which has a population of not less than ten thousand 11[***]; or 12[(B) in any area within the distance, measured aerially,— (I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten thousand but not exceeding one lakh; or (II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than one lakh but not exceeding ten lakh; or (III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (A) and which has a population of more than ten lakh. 1 3[14[Explanation 1.]—For the removal of doubts, it is hereby declared that revenue derived from land shall not include and shall be deemed never to have included any income arising from the transfer of any land referred to in item (a) or item (b) of sub- clause (iii) of clause (14) of this section.] 1 5[Explanation 2.—For the removal of doubts, it is hereby declared that income derived from any building or land referred to in sub-clause (c) arising from the use of such building or land for any purpose (including letting for residential purpose or for the purpose of any business or profession) other than agriculture falling under sub- clause (a) or sub-clause (b) shall not be agricultural income.] 16 [Explanation 3.—For the purposes of this clause, any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.] 17 [Explanation 4.—For the purposes of clause (ii) of the proviso to sub-clause (c), "population" means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;]”

As per sub-clause (c) of section 2(IA) any income derived from any building owned

and occupied by the receiver of revenue or rent of the land or occupied by the

cultivator which is considered as a dwelling house or a store house or other out

building by the reason of its connection with the land, the same is treated as

agricultural income. Explanation 2 to the said section explains that the income

8 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

derived from any building or land referred to in sub-clause (c) arising from the use

of such building or land for any purposes including letting for residential purpose or

for purposes of any business or profession other than the purposes falling as

agriculture under sub-clauses (a) or (b) shall not be treated as agricultural income.

Thus so far as any building on the agricultural land which is used and occupied only

for the purposes of agricultural operations, then the income from such building is

treated as agricultural income. On the other hand, if the said building is not used or

occupied for the purpose of agricultural operation, then the income from such

building will not be treated as agricultural income. In the case in hand, the structure

constructed on the land in question as per the description given in the sale deed is

about 2000 sq. ft. and it is a double storey building. The very nature of structure

and building which was sold along with the land manifest that it was not mere a out-

house or a store building used for agricultural purposes but it was a proper

residential building used for residential purposes. The assessee has assigned the

sale consideration to the building as per the value determined by the Stamp Duty

Valuation Authority and, therefore, the assessee has applied the same

ratio/proportion to the total sale consideration as adopted by Stamp Duty Valuation

Authority. The details of the valuation determined by the Stamp Duty Valuation

Authority are as under :-

Particulars Area DLC value or Evaluated value Land 43200 53136000 Boundary 3500 1050000 Building 2000 1200000 48700 55386000

9 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

Thus the Stamp Duty Valuation Authority has determined the total value at Rs.

5,53,86,000/- divided into 3 components – (1) land measuring 43200 sq. mtr. @ Rs.

1230/- per sq. mtr. amounting to Rs. 5,31,36,000/-; (2) boundary wall measuring

3500 sq. ft @ Rs. 300/- per sq. ft. amounting to Rs. 10,50,000/- and (3) building

area 2000 sq. ft @ Rs. 600/- per sq. ft amounting to Rs. 12,00,000/-. The allocation

of the value in percentage comes as under :-

Land 95.94% Boundary 1.90% Building 2.17% -------- 100%

The assessee has allocated the total sale consideration of Rs. 9,90,00,000/- by

applying the same ratio to total value adopted by the Stamp Duty Valuation

Authority and the share of each component in said ratio comes as under :

Land Rs. 9,49,78,226/- Boundary Rs. 18,76,828/- Building Rs. 21,44,946/- --------------------- Rs. 9,90,00,000/-

We find these details are factually correct and, therefore, as far as the allocation of

the sale consideration to the construction of building and boundary is not in dispute.

The assessee has assigned the sale consideration towards building and land

underneath by applying the ratio as value adopted by the DLC which comes to Rs.

81,91,014/-. Therefore, the computation of capital gain on the basis of valuation

and ratio as applied by the Stamp Duty Valuation Authority cannot be

disputed. The only issue is whether the two storey building sold by the assessee

10 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

along with the land can be treated as a separate asset and residential house for the

purpose of claiming the deduction under section 54 of the IT Act or not. The ld.

A/R has relied upon the decision of Hon’ble Jurisdictional High Court in case of CIT

vs. Vimal Chand Golecha, 201 ITR 442 (Raj.) wherein the Hon’ble High Court has

held as under :-

“Land is a capital asset in terms of section 2(14) of the Act and, in accordance with the scheme of the Act, it is treated as a separate asset. Even for the purpose of section 32, a building which is entitled for depreciation would mean only the superstructure and would not include the site. Under section 48 of the Act, 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 in the manner- provided in this section. It is not in dispute that land is a capital asset and only then (sic) it is liable to tax. If the price of two capital assets has been charged at one consolidated price, then the assessee is entitled to bifurcate the same. A situation may arise where a gain from one of the capital assets is a short-term capital gain while from the other it is a long-term capital gain as in the present case and, in such a situation, the benefit to the assessee cannot be denied in respect of the gain arising from the sale of an asset which could be considered as a long-term capital gain. Even for the purpose of value, the valuer and the Department have taken the value of the land and superstructure thereon separately; therefore, we are of the view that the Income-tax Appellate Tribunal was justified in holding that the capital gains arising from the sale of land has to be treated as long-term capital gains. The reference is, accordingly, answered in favour of the assessee and against the Revenue. No order as to costs.” Thus the Hon’ble High Court has held that if the prices of two capital assets have

been charged at consolidated price then the assessee is entitled to bifurcate the

same. In the case in hand, we find that the bifurcation of sale consideration

between agricultural land and the residential house is based on the same ratio as

applied by the Stamp Duty Valuation Authority. Similarly, in case of CIT vs. Citibank

N.A. 261 ITR 570, the Hon’ble Bombay High Court has held in para 5 as under :-

“5. Section 32 of the Income-tax Act, inter alia, lays down that in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of business or profession, the assessee is entitled to deduction. In this case, we are concerned with the assessment year 1979-80. Under section 32(1)(ii), the assessee was entitled to deduction for depreciation in case of buildings, machinery, plant or furniture, etc. That deduction was to consist of a certain percentage on the written down value. Therefore, under section 32, the assessee was entitled to depreciation only in respect of the buildings and not the land. In the case of AlpsTheatre (supra), it has been held

11 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

that depreciation under the Income-tax Act was not allowable on the cost of the land on which the building is erected but only on the cost of the superstructure. In that matter, the assessee carried on the business as exhibitor of films. The Income-tax Officer initiated proceedings under section 34(1)(b) of the Indian Income-tax Act, 1922, on the ground that in the original assessment depreciation was wrongly allowed on the entire cost of Rs. 85,091 shown as cost of the building which included Rs. 12,000 as cost of land. By order dated February 22, 1959, the Income-tax Officer recomputed the depreciation excluding the cost of land. Being aggrieved, the assessee appealed to the Appellate Assistant Commissioner (AAC), who upheld the order of the Income-tax Officer. The assessee carried the matter in appeal to the Tribunal which came to the conclusion that it is not possible to conceive of a building without a bottom. That, the word "building" included the land upon which the superstructure was constructed, and, therefore, it was wrong on the part of the Department to exclude the value of the land upon which the superstructure was constructed. This finding of the Tribunal has been reversed by the Supreme Court which took the view that depreciation under section 10(2)(vi) was not allowable on the cost of the land on which the building was erected. That, depreciation was allowable only on the cost of the superstructure. Hence, the assessee failed. Therefore, depreciation under section 32(1) of the Income-tax Act, 1961, was allowable only on the cost of the superstructure and not on the cost of the land. Section 50 of the Income-tax Act, 1961, as it stood at the relevant time, relates to special provision for computing cost of acquisition in the case of depreciable assets. Since land is not a depreciable asset, section 50 will not apply to the site on which the building is erected. Section 50, therefore, provides for determination of the cost of acquisition of a depreciable asset which in the present case is a superstructure on the site. Section 50 refers to the provisions of section 48 which in term deals with mode of computation and deductions in respect of the income chargeable under the head "Capital gains". Section 48 states that such income shall be computed by deducting from the full value of the consideration received, the expenditure incurred wholly in connection with such transfer and the cost of acquisition of the capital asset as also the cost of improvement thereto. Section 43(6) defines the expression "written down value" to mean the actual cost to the assessee less depreciation actually allowed to him under the Act in the case of asset acquired before the previous year. Therefore, one has to read section 50 which provides for determination of cost of the acquisition of the asset along with section 43(6) and section 48 of the Act. Therefore, to sum up section 48, read with section 50 provides for computation of income chargeable under the head "Capital gains" whereas, section 45 is the charging section and it states, inter alia, that any profits or gains arising from the transfer of a capital asset shall be chargeable to income- tax under the head "Capital gains". It is well-settled that in the matter of capital gains, the charging section 45 and the computation provisions under sections 48 and 50, constitute one integrated code. That, the character of computation provisions bear direct relationship to the nature of the charge under section 45 of the Income-tax Act. This point is important to decide the point at issue in this case because, without the computation provisions, the charge by itself under section 45 cannot stand. Hence, bifurcation is necessary

12 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

between the site and the building for the purposes of capital gains. Therefore, profits arising from the sale of site are required to be treated separately from profits arising from the sale of building. Now, in the present case, the assessee received Rs. 14,00,000 for land under the above conveyance as against the cost of Rs. 9,20,530 resulting in the capital gain of Rs. 4,79,470. According to the Department, this working is correct (see page 82 of the paper book). However, according to the Department, since the land was a part of the superstructure, the said amount of Rs. 4,79,470 was not a long-term capital gain but it was to be treated as short-term capital gain. This is the only issue which arises in this case. As stated above, this view of the Department is erroneous for two reasons. Firstly, under section 32(1), no depreciation is admissible for land - judgment of the Supreme Court in the case of Alps Theatre (supra). Secondly, the department can assess the company to short- term capital gains only qua depreciable assets which in the present case is the superstructure erected on the site [see section 41(2) of the Income-tax Act as it stood at the relevant time]. For both the above reasons, we hold that in the present case, on the sale of land carried to the building vide conveyance dated August 7, 1978, the gain which accrued to the assessee was long-term capital gain and the Department was wrong in treating such gain as short-term capital gain. Our view is supported by the judgment of the Madras High Court in the case of Dr. D.L. Ramachandra Rao(supra) which has taken the view that if the lands are held by the assessee for a period more than the period prescribed under section 2(42A) of the Income-tax Act, 1961, viz., 36 months, then, it is not possible to say that by construction of the building thereon, the land which was a long-term capital asset ceases to be such long-term capital asset. This is because, the land is an independent and identifiable capital asset, and it continues to remain so even after construction of the building thereon. We respectfully agree with the view taken by the Madras High Court in the above judgment.” The Hon’ble High Court has allowed the bifurcation of the land being a long term

capital asset and building as a separate asset and would not change the long term

capital asset nature of land to short term capital asset. In view of the above facts

and circumstances of the case, when the building in question was not falling in the

sub-clause (c) of section 2(1A) but it is falling in the Explanation 2 to the said

section, then the same is required to be treated as separate asset being residential

house and the capital gain arising from the sale of the said residential house is

eligible for deduction under section 54 of the Act. Accordingly, we allow the claim of

the assessee.

13 ITA No. 457/JP/2019 Shri Dharmendra Kumar Pareek, Jaipur.

Ground no. 2 is regarding the claim of deduction under section 54F.

of deduction under section 54, therefore, this ground of the assessee’s appeal

becomes infractuous. The same is dismissed.

Order is pronounced in the open court on 17/06/2019.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member

Jaipur Dated:- 17/06/2019. Das/ आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

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