Wednesday, October 30, 2013

Converting a leasehold property into a freehold property improves title of asset; holding period reckoned from date of lease

Conversion of rights of lessee in property from leasehold right into freehold right only results in improvement of his or her rights over property and it would not have any effect on taxability of gain from such property, which is related to period over which property is held


1) The assessee purchased a property on leasehold basis in year 1984. She got said property converted into freehold property in year 2004 and thereupon sold it. . The capital gain arising therefrom was declared by assessee as long-term capital gain (‘LTCG’);

2) The Assessing Officer held that since the property was acquired by converting the leasehold right into freehold right and was sold within three years, gain arising thereform was taxable as short-term capital gain.

3) On appeal, the CIT(A) held that capital gain arising from sale of such property was to be taxed as LTCG. Further, the Tribunal upheld the order of the CIT (A). The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) The difference between the 'short-term capital asset' and 'long-term capital asset' was the period over which the property had been held by the assessee and not the nature of title over the property;

2) The conversion of the rights of the lessee in the property from having leasehold right into freehold right was only by way of improvement of her rights over the property and it would not have any effect on the taxability of gain arising from such property, which was related to the period over which the property was held by assessee;

3) In the present case, the property was held by the assessee as a lessee since 1984, and the same was transferred on 31.3.2004, (i.e. after holding it for more than three years) after the leasehold rights were converted into freehold rights on the same property which was in her possession. Thus, gain arising from such property would be taxable as LTCG  -  CIT v. Smt. Rama Rani Kalia [2013] 38 176 (Allahabad)

Assessee needn’t be unemployed while going abroad for a job; only stay in India would determine his residential status

Where status of assessee was a non-resident, fact that assessee was already employed before leaving India should not affect his residential status


a) The assessee working in Whirlpool China filed his return of income and declared taxable income under the head 'salary'. During scrutiny assessment, he pleaded that he was out of India for 236 days and he was not liable to be taxed in India as he was non-resident during the relevant financial year;

b) The Assessing Officer did not accept the assessee's contention and made the assessment on ground that assessee was already employed in Whirlpool India prior to leaving India;

c) On appeal, the CIT (A) held that the assessee’s salary was not taxable in India. The aggrieved revenue filed the instant appeal.
The Tribunal held as in favour of assessee as under:

1) Section 6(1) read with the Explanation  provides that for an individual, who has left India for employment outside India, should be treated as resident of India only if he was in India during the relevant year for 182 days or more [Anurag Chaudhary, In re [2010] 190 Taxman 296 (AAR-New Delhi)];

2) A careful reading of such Explanation would show that the requirement of the Explanation is not leaving India for employment but it is leaving India for the purposes of employment outside India. For the purpose of the Explanation, an individual need not be an unemployed person who leaves India for employment outside India [British Gas India (P) Ltd. In re [2006] 155 Taxman 326 (AAR-New Delhi)]

3) During the relevant financial year, the assessee's stay in India was of less than 182 days and, thus,  his residential status was non-resident;

4) The assessee’s contention, that he was already employed in the Whirlpool India prior to the leaving India for working with Whirlpool China, would not affect his residential status. Therefore, the order of the CIT(A) stating that salary income of the assessee accrued and arose during his employment in China and was not taxable in India was to be upheld - ACIT v. Raj Jain [2013] 38 133 (Delhi- Trib.)