G. Sivarajan, J.
1. The Tribunal, Cochin Bench, has referred the following question of law to this Court under Section 256(1) of the IT Act, 1961 (for short 'the Act') at the instance of the Revenue :
'Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the capital gains arising from the sale of land and building should be determined separately?'
2. The brief facts relevant for the purpose of this case are as follows : The assessees (mother and daughter) had jointly purchased 10 cents of land on 15th July, 1981. A residential house was constructed on the said land and the construction was completed in February, 1982. The land together with the building was sold on 1st Aug., 1984.
3. In the assessment for the year 1985-86 they claimed that the capital gains arising from the sale of land and building should be determined separately and as the land was sold more than 36 months after its purchase, the gains arising from the sale of land should be treated as long-term capital gain and that the gain from the building alone should be treated as short-term capital gain for the purpose of assessment. This was not accepted by the AO, as according to him, though the land was purchased in July, 1981, since a building was constructed thereon in February, 1982, the nature of the assets was changed into one of house property, which came into existence only in February, 1982. On that basis the AO treated the entire gains arising from the transaction as short-term capital gains and the deduction available under Section 80T as well as exemption under Section 54E in regard to a portion of the capital gains was denied. In appeal by the assessees, the CIT(A) accepted the claim of the assessee and allowed the appeal. In appeal by the Department, the Tribunal confirmed the order of the CIT(A). Hence, the reference at the instance of the Department.
4. We have heard Sri. P.K.R. Menon, learned senior Central Government standing counsel for taxes appearing for the applicant, and Sri P. Balachandran, learned counsel appearing for the respondents-assessees. The senior counsel submitted that admittedly the assessees had constructed a building in February, 1982, on the land acquired by them in July, 1981, and the income therefrom has to be assessed under the head 'income from house property' under Section 22 of the Act. The senior counsel on that basis submits that when the assessees have sold the property subsequently the capital gains arising from the sale of the property will have to be arrived at treating the house property as one unit. In other words, according to the senior counsel, the appellate authorities were not justified in directing the AO to treat the gains attributable to the sale of the land alone as long-term capital gains and to allow the applicants' claim for deduction under Section 80T as well as exemption under Section 54E in accordance with law. The senior counsel in support of his contention has also relied on the provisions of Sections 53, 54 and 54D of the Act. On the other hand, the counsel for the assessees submits that both the land and the building constructed on it are separate capital assets for the purpose of Section 45 of the Act; the fact that the assessees had constructed a building on the land which is a long-term capital asset will not alter the character of the land as a long-term capital asset and, therefore, when the assessee had sold the property consisting of land and building, the capital gain arising from the sale of the land which is a long-term capital asset has to be computed separately and the building has also to be separately valued. The counsel further submits that Section 80-T of the Act clearly contemplates the separate valuation of the land and building as separate capital assets. The counsel on that basis submits that both the appellate authorities were justified in directing the assessing authority to separately assess the capital gains on land and building. The counsel also relied on the decisions of the Rajasthan High Court in CIT v. Vimal Chand Golecha , Madras High Court in CIT v. Dr. D.L Ramachandm Rao : [1999]236ITR51(Mad) and in CIT v. T.C. Itty Ipe : [2001]249ITR591(Mad) in support of his case.
5. The facts are not in dispute. The assessees had jointly purchased 10 cents of land on 15th July, 1981. The building was constructed thereon and it was completed in February, 1982, and the land together with the building was sold on 1st Aug., 1984. Section 2(14) of the Act defines 'capital asset' to mean property of any kind held by an assessee whether or not connected with his business or profession. The remaining portion is not relevant and hence not dealt with. Section 2(42A) defines 'short-term capital asset' to mean a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer.
6. Going by the definition of 'capital asset' it is clear that it refers to property of any kind held by an assessee and as per the definition of short-term capital asset any asset which is transferred within thirty-six months of its acquisition will be treated as a short-term capital asset. In the instant case the land which was purchased on 15th July, 1981, was sold on 1st Aug., 1984, i.e., more than 36 months after its acquisition. Hence, if the transfer of the capital asset is taken as land it cannot be treated as a short-term capital asset. However, since the assessees had constructed a residential building on the said property the building constructed in February, 1982, going by the definition of 'short-term capital asset' has to be treated as a short-term capital asset. The said building was constructed within 36 months of the sale.
7. According to the senior standing counsel for the Revenue, since the income from the residential property has to be assessed under the head 'Income from house property' there is no question of separately dealing the building and the land appurtenant thereto for the purpose of capital gains tax. According to the. senior counsel the residential property has to be assessed as a single unit. On the other hand, the contention of the assessees, as already noted, is that since the land and the building are separate capital assets there is no question of treating the land and the building as one unit on the ground that the income therefrom has to be assessed as income from house property for the purpose of capital gains tax. We will now consider the correctness of the respective contentions. Sections 45 to 48 deal with the assessment to capital gains. Under Section 45 any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Section 54, 54B, 54D, 54E and 54F be chargeable to income-tax under the head 'capital gains' and shall be deemed to be the income of the previous year in which the transfer took place.
8. The mode of computation and deduction are provided in Section 48 as per which the income chargeable under the head 'capital gains' shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset (i) expenditure incurred wholly and exclusively in connection with such transfer ; and (ii) the cost of acquisition of the asset and the cost of any improvement thereto. Section 53 of the Act provides for exemption of capital gains from a residential house, It provides that capital gain arises from the transfer of a capital asset (other than a short-term capital asset) being building or land appurtenant thereto, and being a residential house, the income of which is chargeable under the head 'Income from house property', the capital gain arising from such transfer shall be dealt with in accordance with the following manner : (a) in a case where the full value of the consideration received or accruing as a result of the transfer of such capital asset does not exceed two hundred thousand rupees the whole of the capital gain shall not be charged under Section 45 and (b) in a case where the full value of such consideration exceeds two hundred thousand rupees, so much of the capital gain as bears to the whole of the capital gain the same proportion as the amount of two hundred thousand rupees bears to such consideration shall not be charged under Section 45. Under the proviso this section shall not apply to a case where the assessee owns on the date of such transfer any other residential house. Section 54 deals with profit on sale of property used for residence. It refers to capital gains arising from the transfer of a long-term capital asset being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head 'Income from house property'. Similarly, Section 54D deals with capital gain on compulsory acquisition of lands and buildings. It also refers to capital gain arising from the transfer by way of compulsory acquisition under any law of a capital asset, being land or building or any right in land or building, forming part of an industrial undertaking belonging to the assessee.
9. A conspectus of these provisions would show that if a residential house consisting of building and land appurtenant thereto is sold, the capital gain arising from the said transfer has to be assessed to tax under the head 'capital gains'. The question of separately dealing the land and the building assumes importance only in the matter of availing the deduction provided under Section 80T and under Section 54E of the Act. In the above circumstances, it is also necessary to refer to the said provisions. Under Section 80T as it stood at the relevant time, deduction in respect of long-term capital gains in the case of assessees other than companies was provided. As per the said section where the gross total income of an assessee, not being a company, includes any income chargeable under the head 'capital gains' relating to capital assets other than short-term-capital assets (such income being, hereinafter, referred to as long-term capital gains), there shall be allowed, in computing the total income of the assessee, a deduction from such income of an amount equal to (a) in a case where the long-term capital gains do not exceed ten thousand rupees, the whole of such long-term capital gains; and (b) in any other case, ten thousand rupees as increased by a sum equal to (a) fifty per cent of the amount by which the long-term capital gains relating to capital assets, being buildings or lands or any rights in buildings or lands or gold, bullion or jewellery, exceed ten thousand rupees. Similarly, under Section 54E where the capital gain arises from the transfer of a capital asset, not being a short-term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset), and the assessee has, within a period of six months after the date of such transfer, invested or deposited the whole or any part of the net consideration in any specified asset (such specified asset being hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the further provisions contained in the said section.
10. From the aforesaid two provisions it would appear that if the capital asset which is transferred is a long-term capital asset an assessee will be entitled to the special deductions provided under Section 80T and also exemption from assessment to capital gains tax under Section 54E in case the requirements of the said section are satisfied.
11. As already noted, 10 cents of land and a building were sold by the assessees and the capital gains arising from the sale of the said capital asset was sought to be assessed under the Act. If the land on which the building is situated is treated separately the same will have to be treated as a long-term capital assets since the same was sold after 36 months after its acquisition and the assessee will be entitled to deduction provided under Section 80T and also the exemption provided under Section 54E, provided the conditions therein are satisfied. On the other hand, if the land and the building are treated as on unit and consequently if the date of completion of the building is taken as the basis for determining the nature of the asset as short-term capital asset, certainly it has to be assessed as short-term capital asset in which case the benefits available under Section 80T as well as under Section 54E has to be denied. The Rajasthan High Court in Vimal Chand Golecha's case (supra) considered the question whether the Tribunal was justified in holding that the capital gains arising from the sale of land had to be treated as long-term capital gains. In that case the assessee purchased two plots of land in March, 1962. The assessee had constructed a bungalow on the said land, the construction of which was completed in June, 1970. The land together with the building was sold in 1970. In the assessment the AO took the view that the land and the building will be treated as the short-term capital asset since the transfer was effected within two years of the construction of the building. This was affirmed by the first appellate authority also. The assessee challenged the said order before the Tribunal, where it was contended that the land and building should be treated as separate assets and since the land was acquired much before the two years from the date of sale, it should be treated as a long-term capital gain. The Tribunal came to the conclusion that there is no dispute that the value of land taken by the ITO and the CIT(A) was at a figure of Rs. 45,700 and, therefore, the capital gains arising from the sale of land has to be treated as long-term capital gain. The contention of the Revenue that the composite figure of the sale cannot be bifurcated was rejected. In the reference before the High Court the counsel for the Revenue contended that the land has no separate existence after the building is constructed thereon and there cannot be any bifurcation of the price in respect of a composite item of a property which has been sold as one item. The Rajasthan High Court after referring to the provisions of Section 2(14), Section 32 and Section 48 of the Act observed that it is not in dispute that land is a capital asset and if the price of two capital assets has been charged at one consolidated price, then the assessee is entitled to bifurcate the same. It is also observed that 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. This was followed by the Madras High Court in CIT v. Dr. D.L. Ramachandra Rao (supra). The High Court observed that the land can be regarded as capital asset as per Section 2(14) of the Act and in accordance with the scheme of the Act, land would be considered as a separate capital asset, even if a building is constructed thereon. It was also held that where the land has been held for more than the prescribed period, the gains arising from the sale of the land could be considered as long-term capital gains, though the building thereon was a new construction held for a period of less than 36 months.
12. The Madras High Court in CIT v. T.C. Itty Ipe (supra) followed the said decision and held that the Tribunal was correct in corning to the conclusion that the land and the superstructure can be assessed separately as a 'long-term capital asset' and as a 'short-term capital asset' for the purpose of capital gain. We are in full agreement with the view taken by the Rajasthan and Madras High Courts and hold that the land has to be assessed as a long-term capital and the building has to be assessed as a short-term capital for the purpose of levy of capital gains tax. We also hold that the fact that the income from the residential property is being assessed as income from house property cannot be a ground for denying the benefit available under Section 80T and Section 54E of the Act as contended by the senior Central Government standing counsel. We accordingly answer the question referred in the affirmative, i.e., in favour of the assessees and against the Revenue.