Lease of land

This query is : Resolved 

12 November 2007

One of our client has given his land on lease of 99 years to a company for a lease rent of Rs. 30 lacs received in advance.Will this transaction be treated as 'Sale' for Capital Gain Tax ? If yes, Why ? If not,then how the rent should be taken into computation of income.Entire Rs. 30 lacs or Rs. 3000000/99=30303 for the FY 2007-08 ?

Amarjeet Singh (Expert)
13 November 2007

As per section 2(47) lease is not covered in by the defination of sale.Therefore it is not liable to capital gains.Moreover As per section 23 rent received or receiavable is taxable as income from house property,It is not cleared that 30 lacks is sole amount or in addtion to it u will recd yearly rent.However if as per agreement it is only the amount for 99 years then it will be apportioned in 99 years,otherwise yearly amount if any as per aggrement will recd then it will be ur yearly rent income .Further you have to compare ur rent amount with Fair Rent ,Muncipal Rent & whichever will be higher is ur income from house property.

Pushkraj Sathe (Querist)
13 November 2007

Dear Amarjeet Singh,it is clear from the query that lease rent of Rs. 30 lacs is received in advance and is sole amount.Moreover it is only land I have mentioned not the House property.It is an open land.The company will build its own factory building

Pushkraj Sathe (Querist)
15 November 2007

I think the query is still not answered.Any takers please.

vishal (Expert)
15 November 2007

Hi Pushkraj
Your query has two questions. so let take it one by one.
1. That the lease is not covered u/s 2 (47) as the transfer hence no question of capital gain. Due to the fact that there is no transfer of right. Assessee is only letting his right to the company and not transferring in his favour.

2. Section 22 which is charging section for house property very clearly says that only land appurtenant to a builing is chargeable in HP head & for this assessee has to be owner of that building.Since your client is not the owner of building & he has only lent land hence it is not covered by section 22.

3. The aforesaid rental income would be covered u/s 56 i.e other source & for that your client may opt either for Cash system or mercantile system of accounting


K V Subba Rao (Expert)
16 November 2007

I didn’t find straight answer to your query. However my search helped me gather the following information, though from lessess's point of view, which is not irrelevant.

(1) A person who has acquired right by way of long term lease of property will be treated as the owner of that property and income from that property will be taxable in his hands as under house property income. For this purpose long term lease means lease for period of more than 12 years.

(2) Long lease: MOVERS Ltd took on 99 years' lease three flats by paying Rs 30 lakh in December 1998... The lease agreement provided that the lessee can purchase the flats by paying Rs 2 lakh after the expiry of the lease term. The company claimed the entire payment as revenue expenditure in addition to the rent paid of Rs 5,000 per month for each flat for the year ended March 31, 1999. Decide.
In this case, the assessee has paid a lumpsum…There was no sale deed, yet the manner in which the payments were made by the lessee to the lessor in terms of the agreement shows that the transaction is to allow the lessee to enjoy the property with ownership rights therein. The entire payment cannot be claimed as a revenue expenditure. Also, it cannot be amortised over the lease period as the payment symbolises premium towards the property. The payment, therefore, is to be considered as a capital expenditure…The assessee is advised to claim depreciation on the building instead of seeking revenue expenditure of the amount paid.”

It therefore appears to me that the sum of Rs 30 lakhs received should be subjected to Capital Gains Tax subject to indexation etc. However, I advise that further search may be made to get into fuller details. In any case, if it is possible for one to receive such huge sum as Rs 30.00 lacs in one year and offer it for tax over a period of 99 years, every one would perhaps follow the same procedure to avoid Registration Charges to the State Govt. Such course of action would also mean that practically no Income Tax is paid on sale transactions in real estate, if we take inflation aspect etc., into consideration. So first psychologically be prepared to shell down tax on Rs 30 lacs and then search for correct legal position well before due date for payment of advance tax.

Pushkraj Sathe (Querist)
16 November 2007

Dear KVS Rao,Thanks for the reply.My assessee is not worried as there are 68 coowners of the property, in any case the LTCG may be so paltry,of course after indexation, that the amount would come to a mere 200000 Rs. each which will qualify for basic exemption of Rs. 110000/- and the remaining taxable.These facts apart but your logic is very strong and appeals me.The data given by you is also helpful.
Thanks a lot.

KAAPIL (Expert)
17 November 2007

I personally thank all the experts and also Mr. Rao for giving his time and invaluable inputs.

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