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Capital gain computation

sivasubramanian (articled assistant) (79 Points)

31 July 2010

A property has been sold consisting of land and a super structure (2 floors). Initially ground floor was constructed and the assessee holds the property in same state for more than 36 months. Then he constructs two floors (I think it will b considered as cost of improvement) and within 1 year from constructing the two floors sells the property. Is it right if land & ground floor is considered as long term capital gain and the improvement in the property (2 floors) is considered as short term capital gain (since not held for more than 36 months)? If no can I claim indexation for cost of improvement? Also please provide me if there is any decided case laws or clarification from the department regarding this issue.

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venkatraman shrinivas (Tax consultant/Tax Advocate In Practice.) (313 Points)
Replied 31 July 2010

Mr.Siva,

The sale proceeds of the whole property will be considered only as aong term capital gains under section 45. It is only the composite component of the property sold, which is identified as the capital asset, that is material in deciding the resultant gain. for classification as between shortr and long term. There is no matter that the 2nd floor was just coinstructed a year before the sale. You are entitled to adopt the indexed cost at different figures i.e. for the land, cost of construction of the ground plus I floor and then the II floor, based on the year of acquisition/constrruction.. The gains would not be seggregated as between short and long term, especially when the moss of the property is one. There are a number of decided cases on this. Since, however, it is an acknowledged mode of understanding for any tax administraror, there could be no difficulty in canvassisng this valid view, which has to be accepted..

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Member (Management) (325 Points)
Replied 31 July 2010

The answer given is correct. All additions to the property will qualify as "improvement" for which indexation can be claimed.

However, it is possible under certain circumstances that the land and superstructure can be regarded as seperate which is also judicially approved, though yours is not one such instance.