Saturday, August 24, 2013

Income tax case laws

Recently on 21th June 2013, ITAT bench held Capital gain can be charged in the year of handing over the possession of the property u/s 2(47)(v) and not on account of Development Rights Agreement entered with the developer.
 
The assessee society was the owner of the plots on which building consisting of three blocks had been constructed during the year 1967-68. The flats in the buildings were allotted to 59 members of society including State Bank of India. The assessee society in the year 2008-09 entered into DRA with the developer for redevelopment of the property and the agreement was registered on 12.2.2009. The property was having FSI of 2803.60 sq. meter and additional FSI of 2803.60 meter also become available in view of the amendments in the DCR. Further FSI of 33% was also available on account of new notification of the State Government. The developer was authorized to demolish and reconstruct the existing residential building and to provide residential units with an additional 28% carpet area to the existing members. He was also required to pay to the society a sum of Rs. 4.85 crore in installments. In return, the developer was authorized to construct new buildings on additional FSI available to the society after obtaining TDR certificates. As the developer could not obtain IOD and CC within the prescribed time limit as per the terms and conditions of DRA the society vide resolution dated 26.9.2010 decided to cancel the DRA. In response to which the developer filed arbitration petition before the High Court. Subsequently, consent terms were arrived at between the two parties dated 26.10.2011 under the seal of the High Court. The main terms and condition of DRA were retained in consent terms in which there was additional provision for providing compensation for alternate accommodation to the members, to allocate 22 car parking space to the society without any cost and to reimburse the legal cost including the Income Tax matters, professional fee and solicitor fee if any incurred by the society. The developer however has still not obtained IOD and CC nor the old building had been demolished till date.
 
Whether on the facts of the case capital gain can be charged on account of Development Rights Agreement in the assessment year 2009-10 and, in case, capital gain is chargeable what would be the quantum of the capital gain.
 
The authorities below applied the provisions of section 2(47)(v) as per which any transaction involving allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act 1882 will constitute transfer. Since the DRA was registered on 12.2.2009 and assessee had received a sum of Rs. 1.10 lakh from the developer the authorities below have concluded that there was transfer during the assessment year 2009- 10 in view of the provisions of section 2 (47)(v) mentioned above. Assessee has however argued that assessee retaining the complete control over the property and having not handed over the possession, there could not be any transfer u/s 2(47)(v).
 
ITAT noted that, the assessee in this case has not transferred the land and the building. The assessee has only transferred its entitlement to additional FSI to the developer for reconstruction of building. The developer is required to demolish and reconstruct the old building with an additional 28% carpet area and hand over the same to the existing members. The transfer is only of additional FSI available to assessee in respect to the existing land for the purpose of construction of additional buildings which would be owned by the developer. Therefore, the real issue is whether assessee has transferred its rights in the additional FSI during the year.
 
The clause (j) of DRA clearly provided that the developer was authorized to demolish and reconstruct the old building and simultaneously he was authorized to develop the remaining property consuming the principal FSI of the plot and by buying and utilizing additional TDR as per DC regulations. Therefore, assessee could transfer the additional FSI only on demolition of old building which has not taken place even till now. The developer has not been able to obtain even the IOD and CC in respect of the reconstruction of the old building as was required to be done under the DRA. The old building has not been demolished till date and the members continue to occupy their flats in the old buildings. In such a situation it could not be said that the assessee had transferred its rights over the FSI to the developer in assessment year 2009-10.
 
ITAT observed that in the case of Chaturbhuj Dwarka Das Kapadia Vs. CIT, The High Court observed that the date of agreement i.e. 18.8.1994 on which the assessee had agreed to execute power of attorney to the builder was relevant date for determining the date of transfer. Further the High Court also noted that the power of attorney had been executed only on 12.3.1999. The High Court, therefore, held that in either case the capital gain could not be chargeable in assessment year 1996-97. The judgment in case of Chaturbhuj Dwarka Das Kapadia Vs. CIT had also came up for consideration before the Hon'ble High Court of Bombay in case of CIT Vs. Geeta Devi Pasari. The Hon'ble High Court following the said judgment had held that capital gain could be taxable only in the assessment year in which the purchaser was physically put into the possession of the property. Thus even after considering the judgment in case of Chaturbhuj Dwarka Das Kapadia it has been held by the Hon'ble High Court that there will be transfer only in the year of handing over the possession of the property u/s 2(47)(v) as part performance of the contract. The same view has been followed by the Mumbai bench of Tribunal in case of Megji Mathura Das Vs. JCIT.
 
ITAT noted that in this case, the assessee retained full control over the existing building as well as the additional FSI available which had not been parted with. The assessee had received only a sum of Rs. 1.10 lakh from the developer which is stated to be reimbursement of expenses incurred by the assessee. In these circumstances we are of the view that no transfer had taken place in the year under consideration and, therefore, no capital gain can be charged in this year.
 
Further Ld. AR for assessee has also argued that the capital gain that can be charged is only in respect of transfer of additional FSI to which the assessee was entitled. The assessee had not transferred nor was required to transfer the land of which the assessee was absolute owner and the building occupied by the members. The transfer could take place only in respect of additional FSI which the assessee had acquired as per the Government policy and there was no cost of acquisition involved. Therefore, it has been argued that no capital gain can be charged in such a case in view of the judgment of Hon'ble Supreme Court in case of B.C. Shrinivas Shetty. The argument of assessee is supported by the decision of Mumbai bench of Tribunal in case of Jetha Lal D Mehta. The reliance has also been placed on the decision of Mumbai bench of Tribunal in case of Maheshwari Housing Property Ltd . In that case also, the issue was chargeability of capital gain on account of additional FSI available to the assessee related to the old building. The Tribunal observed that entire FSI of the land having been exhausted there was no right of additional construction embedded into the land. The additional FSI became available to the assessee due to operation of development control regulation which did not involve any cost. It had been argued before the Tribunal that additional FSI was available only because of ownership of the land and, therefore the cost of land had to be spread over the original FSI and additional FSI as is done in the case of bonus share and thus the additional FSI did have cost attached to it. The Tribunal however did not accept the contentions raised. It was observed that the concept of acquisition of bonus shares could not be imported as bonus shares were issued to the detriment of original shares but in this case there was no detriment to the cost of land rather the same had increased. No contrary decision of any High Court or Apex Court has been brought to our notice. Therefore, following the decision of Tribunal mentioned above no capital gain could be charged on the ground that no cost of acquisition was involved in the additional FSI.
 
ITAT held that charge of capital gain by the authorities below in the relevant year was not justified. The order of CIT(A) upholding the order of AO is, therefore, set aside.
 
Must Read:
 
Sri S. Ranjith Reddy vs DCIT (ITAT) Held, there cannot be any capital gain earned by the assessee on account of the impugned development agreement.
 
Baisakhi Bhattacharjee v. Shayamal Bose & Ors. (Calcutta High Court), Held, "Development agreement comes out of the scope of the ambit of section 53A of the Transfer of Property Act. Therefore, section 53A of the TP Act, has no manner of application to a development agreement."
 

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