By TIOL News Service

ALLAHABAD, MAR 09, 2018: THE issue before the Bench is - Whether mere grant of lease of Nazul land, is sufficient to divest title from State to such person. And the HC verdict is NO.

Facts of the case

The Assessee-company, engaged in the business of property development, had established a Paper Mill at Lucknow. In 1942, the State Government had leased out land for establishment and running a Paper Mill, besides constructing residential building for the benefit of Staff of Assessee Paper Mill. The lease was granted initially for a period of 30 years, renewable upto 90 years. Part of this land was converted by Assessee from "capital asset" to "stock in trade", and later on proposed to be bifurcated for residential and commercial purposes. The cost price of land on April 01, 2003 was taken to be cost price as on April 01, 1981 which was indexed as per cost index prescribed on the date of conversion, and the Assessee got valuation through a Registered Valuer. For A.Y 2004-05, the Assessee filed return showing land as converted into "stock-in-trade" on the basis of market value determined by Registered Valuer. It declared net loss of Rs. 171240/- and claimed refund of Rs. 39686/-. Subsequently a revised return was filed increasing amount of refund to Rs. 5,39,686/-. It also disclosed that Assessee had entered into an agreement with M/s Arif Builders for development of land. The case was selected for scrutiny on the ground that the factum of Builder's agreement etc., which was element of capital gain, was not disclosed. During assessment, the AO held that Builder also entered into an agreement and advanced Rs.51 lacs to enable Assessee to get leaseland free hold and language of agreement showed that there was a "deemed transfer of land" to Builder, therefore Assessee was liable to pay capital gain tax. On appeal, the FAA held that loss or gain whatsoever should be computed during the A.Y in which land was so converted and not during the period of conversion. This action of FAA was upheld by the Tribunal.

During the A.Y 2008-09, the assessee's return was filed declaring total income of Rs. 5,72,85,150/-, and the case was selected for scrutiny. The Assessee's representative appeared and explained that Assessee had converted the land as Stock in trade in 2003 and had also entered into building agreement with M/s Arif Construction Company for construction of residential Flats, School, Buildings, Religious Building, Parking Stilts etc. and commercial shops and commercial Garages. Assessee's share was 1/3 in each residential Towers. The AO therefore computed the capital gains at Rs.84,27,065/-. On appeal, the FAA held that since valuation report of Registered Valuer relied on by Assessee was accepted by AO in earlier year, then the AO was not justified in taking market value for the purpose of computing "capital gain" as "circle rate" as that could not be a necessary parameter for arriving at a fair market value. Therefore, the addition of Rs. 84,27,065/- by AO working out capital gain on the basis of circle rate for cost of acquisition was deleted. On further appeal, the Tribunal observed that fair market value determined by Registered Valuer as also the one adopted by AO was incorrect and consequently, set aside the order passed by CIT(A) and remanded the matter to AO for fresh adjudication.

After hearing the parties, the HC held that,

++ the land in question was owned by State Government and is 'Nazul Land'. This fact was also not disputed by the counsels. The Lease to Assessee was granted vide lease deed executed in 1942, and it forms a 'Capital Assets' to Assessee in the light of definition of 'Capital Asset' u/s 2(14). The property of any kind held by Assessee in the case at hand does not mean the land itself but it is lease right which Assessee had over land in dispute and that is the kind of property held by Assessee. A lease right over immovable property is a kind of property right possessed by Lessee and would be a 'capital asset' as defined u/s 2(14), but it cannot be said that property i.e. land itself is owned by Assessee. The kind of property which Assessee held did not include its title as he did not held property with absolute rights as are available to an owner of a land. Here, admittedly owner of land is State Government. It is in this backdrop, certain basic issues have not been addressed by any Revenue Authority, though integrally connected and relevant to be looked into to understand the nature of further transactions. The Department has not bothered to answer whether conversion of 'capital asset' into 'stock in trade' in respect of land in dispute was confined only to the extent of lease rights which Assessee held over property in dispute or it can be said that land itself became a 'stock in trade'. Further, when Assessee claimed that 'capital asset' in respect of land was converted into 'stock in trade', whether Assessee held land in question as a 'Lessee', is also overlooked by AO. It appears that Revenue Authorities are not clear in their concept with regard to "Nazul" and its nature;

++ as far as Nazul land is concerned, the title of land was with Government, and mere grant of lease to any person cannot have the consequence of divesting title from State to such person. The land in question was leased out to Assessee in 1942. Initial tenure of lease was 30 years, which was renewable for two terms, each of 30 years. The first tenure of 30 years ended on March 31, 1972 and the second term would have ended on March 31, 2002. It has however not been brought on record, whether the term of lease was extended in 1972 and thereafter in 2002. Only when term of lease would have been renewed by State Government, Assessee could have continued with lease rights, validly upto March 31, 2032, otherwise in absence of renewal of lease, after expiry of initial period, lease rights of Assessee came to an end in terms of lease-deed and its status thereafter of having possession of land in dispute would also be of a different nature i.e. unauthorized. Since in the present case, the Assessee tried to change status of his right over land in question on April 01, 2003, i.e. after expiry of second term of lease, it would be relevant to find out whether Assessee got the lease renewed before or after March 31, 2002 or not. If lease was renewed, then Assessee possessed only 30 years of lease right over property in dispute. The valuation of said rights when converted from 'capital asset' to 'stock in trade', had to be valued looking these aspects of the matter wherein nature of lease and the terms of lease are also relevant factors;

++ it is also to be seen that whether the Assessee continued to have possession over land in dispute without renewal of lease as an unauthorized occupant, this has again to be examined whether Assessee could have claimed any right over property in dispute either as 'capital asset' or as 'stock in trade' at all. What has been done in the case at hand is that ignoring the fact that Assessee did not have any title over land but possessed only lease rights, and land was owned by State Government, Revenue Authorities have proceeded to consider valuation assuming that Assessee had a right/title over land which is convertible into the manner, Assessee liked, and have proceeded accordingly. It is seen that Lease land was converted by Assessee in 'stock in trade' in A.Y 2004-05, and the Assessee got valuation through a registered Valuer who followed the price of a land flashed in an auction held in 1985 and on that basis valued rate of Rs. 95-/ per square feet and accordingly indexed cost was worked out at Rs. 285/- per square feet. It is pointed out by Assessee's counsel that assessment for 2004-05 when made, the AO had accepted valuation relied by Assessee and proceeded accordingly by working out 'long term capital gain' at Rs. 37,31,686/-. Assessee preferred appeal only to the extent that loss or gain should have been computed in the A.Y in which land was converted and not during the period of conversion. It is however found that Assesses's Valuer's report as claimed has not been accepted as such at any point of time. The assessment order relating to A.Y 2004-05 shows that AO basically has considered the question that land of Assessee under building agreement was converted into 'stock in trade', hence long term capital gain/loss has to be worked out. Since such agreement of builder results in transfer of land u/s 2(47)(iv)(v)(vi), therefore, 'long term capital gain' has to be worked out on the land for which agreement was executed with the builder.

(See 2018-TIOL-406-HC-ALL-IT)