COMMISSIONER OF INCOME TAX Vs. HINDUSTAN HOTELS LTD.

JUDGEMENT

(1.) This appeal is directed against the judgment and order dated 1-10-2001 passed by the Income Tax Appellate Tribunal (for short "the Tribunal").

(2.) The Respondent is a company incorporated and registered under the Companies Act, 1956. The main object of the company is establishing and running of hotels. By a lease deed dated 17-3-1988 the Respondent took on perpetual lease a plot of land bearing plot No. 18 admeasuring 1992.50 square metres situated at village Morombi-O Pequeno Goa from the Economic Development Corporation of Goa (For short the EDC) by paying a premium of Rs. 40,16,425 and agreeing to pay yearly rent of Rupee one for the first five years and at the rate of 1% of the amount of premium thereafter. The plot was taken on lease by the Respondent for the purpose of establishment of a hotel. The Respondent thereafter obtained a building licence for the construction of a hotel building from the local authority as also the necessary permission from the Department of Tourism and commenced the construction of a hotel building in the year 1990. The contract for the construction of the building was given to M/s Likpro of India Private Limited. During the period 1990 to 1995 the Respondent spent a sum of Rs. 2,78,68,664/- towards the construction cost. The money was spent in instalments as the work progressed. The construction of the building however could not be completed for the lack of sufficient funds and inability of the Respondent to tie up and secure necessary funds for completing the construction. The Respondent therefore desired to sell the incomplete hotel project. In June, 1995 the Respondent sold the hotel project consisting of land as also partly constructed building for a consideration of Rs. 11 crores. The Respondent filed return of its income for the assessment year 1996 -1997 (ending on 31-3-1996) in which it is declared the sale transaction. The Respondent claimed the profit earned by it by sale of the hotel project was in the nature of a capital gain. The Assessing Officer held that what the Assessee had transferred was a land with a building which was incomplete. The hotel building which was under construction was not held by the Assessee for a period of more than three years and therefore the profit arising on sale of the incomplete hotel project was a short term capital gain. After deducting the cost of the acquisition of the land and the cost of construction of the incomplete building from the sale price of Rs. 11 crores, the surplus of Rs. 7,80,05,356 was held to be a short term capital gain liable for tax. The assessing officer rejected the contention of the Respondent that it was a long term capital gain and completed the assessment treating the profit of Rs. 7,80,05,356 as a short term capital gain.

(3.) Aggrieved by the decision of the assessing officer rejecting the contention of the Respondent that the profit arising from the sale of the hotel project was in the nature of a long term capital gain, the Respondent filed an appeal before the Commissioner of Income Tax (Appeals) (for short CIT (appeals)). The CIT (appeals) held that the Assessee had maintained the accounts properly and therefore it was possible to ascertain how much money was spent by the Assessee on the hotel project up to 18-6-1992 i.e. three years prior to the date of the sale and how much amount was spent thereafter. By considering the accounts and taking into the lease premium paid, and the expenses for the construction he held that Rs. 2,01,41,361/- were spent by the Assessee up to 18th June, 1992 and of Rs. 1,18,53,282/- were spent between 19-6-1992 to 18th June, 1992 i.e. the date of sale. He held that the capital gain therefore should be apportioned in the proportion of the money spent prior to 18-6-1992 and the money spent after 18-6- 1992. He further held that the amount of capital gain attributable to the money spent prior to 18-6-1992 should be treated as a long term capital gain and that attributable to the money spent after 18-6-1992 should be treated as a short term capital gain. He also allowed indexation on the basis of the actual date of spending of the money. He accordingly directed the assessing officer to recompute the capital gain and the tax payable by the Respondent.