Jammu & Kashmir High Court Affirms Leasehold Interest in Land as Valuable Company Asset

Jammu & Kashmir High Court Affirms Leasehold Interest in Land as Valuable Company Asset

The Jammu & Kashmir High Court, comprising Justices Tashi Rabstan and Puneet Gupta, recently ruled that leasehold interest in the land constitutes an asset of the company and is subject to valuation.

The Court upheld the Income Tax Appellate Tribunal’s decision, emphasising that leasehold interest must be factored into the overall value of assets held by M/s. Jyoti Private Limited. This inclusion is crucial for determining the fair market value of shares held by both the assessee and other shareholders.

Jyoti Pvt. Ltd. had several shareholders, including the assessee, his wife, and two sons. The assessee held 21,000 shares in the company. During the 1997–98 financial year, the assessee sold 7,150 shares to M/s. Bharat Hotels Ltd., New Delhi, receiving a substantial consideration of ₹10 crore. Interestingly, the initial valuation of these shares, as of April 1, 1981, stood at ₹14,48,59,000 (indexed cost). However, when filing the return on March 8, 1999, the assessee declared a total income of ₹16,89,477, comprising ₹12,000 under the salary category and ₹16,77,477 as income from other sources. Notably, the computation of income included a note indicating that the assessee had sold shares in M/s. Jyoti Pvt. Ltd., and based on the company’s asset valuation, there existed an unclaimed capital loss.

The assessing officer raised objections regarding the indexed cost of 7,150 shares. During the calculation of acquisition cost, the value of land, spanning 225.85 kanals, was excluded. This exclusion was based on the fact that the land was not part of the sale consideration for the shares transferred from M/s. Jyoti Pvt. Ltd. to M/s. Bharat Hotels Ltd. Consequently, the assessing officer determined the indexed cost per share at ₹3,262. As a result, the Assessing Officer adjusted the indexed cost of the 7,150 shares to ₹2,33,23,300, rather than the initial valuation of ₹14,48,59,000. Consequently, the Assessing Officer concluded that out of the total sale price of ₹10 crore, there was a capital gain of ₹7,66,76,700 received by the assessee.

The assessee appealed to the Commissioner of Income Tax (Appeals) in Jammu. The CIT(A) overturned the addition made by the Assessing Officer, citing that at the time of the share sale, M/s. Jyoti Pvt. Ltd. still had a lease period exceeding 20 years. Consequently, the land value held by the lessor was practically negligible, and for all practical purposes, M/s. Jyoti Pvt. Ltd. functioned as the de facto owner of the underlying land. Therefore, the value of the leasehold land could not be excluded when calculating the fair market value of M/s. Jyoti Pvt. Ltd.'s shares. As a result, the Assessing Officer was directed to adopt the valuation report submitted by the assessee during the assessment proceedings, leading to no capital gain.

The Income Tax Department appealed before the Income Tax Appellate Tribunal (ITAT). However, the tribunal dismissed the appeal, ruling that reopening the assessment case of the assessee was not in accordance with the law. Additionally, the ITAT allowed the cross-objections filed by the assessee.

The department contested the calculation of the cost of acquisition. Specifically, they argued that the value of land measuring 225.85 kanals should be excluded. This exclusion was based on the fact that the land was not part of the sale consideration for the shares transferred from M/s. Jyoti Pvt. Ltd. to M/s. Bharat Hotels Ltd. Consequently, the dispute revolves around the quantum of capital gain arising from the transfer of shares in Jyoti Pvt. Ltd.

The assessee argued that the sale of shares in M/s. Jyoti Pvt. Ltd. to M/s. Bharat Hotels Ltd., New Delhi, did not result in any capital gain for him. This assertion was based on the fact that the fair market value of those shares as of April 1, 1981, significantly surpassed the consideration received for the sale or transfer.

The court observed that the Tribunal, in rejecting the department’s plea to adopt the value of assets from the balance sheet (as per Rule 11 of the Wealth Tax Rules), correctly emphasized that the Assessing Officer had already applied the fair market value of buildings and other assets while computing capital gain in the assessment order. Importantly, it is the fair market value, not the book value, of an asset that matters for determining the cost of acquisition under Section 55(2)(b)(ii) of the Income Tax Act, 1961, as well as for calculating capital gain under Section 45 of the Act.

According to Section 2(22B), the fair market value represents the price an asset would ordinarily fetch in the open market on April 1, 1981. Therefore, for capital gain computation, the focus should be on determining the fair market value, rather than solely considering the value of shares. The valuation of shares falls under Rule 1D of the Wealth Tax Rules. Ultimately, the court dismissed the department’s appeal and upheld the order of the Income Tax Appellate Tribunal (ITAT).