2005 (1) TMI 595 - AT - Income Tax

Capital gains - Cost of acquisition - taxability of receipts on account of sale of additional floor space index - transferable development rights (TDRs) under the Development Control Regulations for Greater Mumbai 1991 - HELD THAT - The CIT(A) s observations that this right cannot be said to be without any cost of acquisition because the TDRs have been received on surrender of reserved plot to the Government is ex facie incorrect inasmuch as what we are really concerned with is the right to receive the TDR on the plot owned by the assessee and not with the right to receive the TDR from the Government. The person getting TDRs from the Government has to surrender the reserved plot but the person on whose plot such TDRs can be used as is the case we are in seisin of does not do anything more than owning the receiving plot . The costs incurred by a third party for acquiring the TDR has nothing to do with the right to availing the said TDR on assessee s plot. Similarly the costs of plot and costs of construction are also not the cost of acquisition of these rights. What the assessee has transferred is not the plot or the building but a right parting with which does not result in parting with land or building. The costs of obtaining BMC approval for the building plan can also not be said to be the costs of acquisition of these rights as these rights do not arise by the virtue of getting these approvals but by the virtue of a legal right independent thereof. The law is trite and there is no dispute on the said position that when an asset has no cost of acquisition the gains on sale or transfer of same cannot be brought to tax. The law laid down by the Hon ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty 1981 (2) TMI 1 - SUPREME COURT clearly holds so. Thus we are of the considered view that the receipts on sale of assignment of rights to receive TDRs are not liable to tax. The authorities below erred in law and on facts in holding to the contrary. Thus we direct the Assessing Officer to delete the addition in the hands of the assessee. The Assessing Officer however will consider reducing the cost of acquisition of the related plot and building by the said amount as and when and in case the assessee sells the same partly or fully and the capital gains are required to be computed in respect of the same. In the result the appeal is allowed in the terms indicated above.

Summary

Issues involved:
Taxability of receipts on account of sale of additional floor space index received by the assessee u/s 'transferable development rights' (TDRs) under the 'Development Control Regulations for Greater Mumbai 1991'.

Comprehensive details of the judgment:

1. The Development Control Regulations for Greater Mumbai 1991 (DCR) provide compensation in the form of 'development right certificates' (DRCs) for owners of plots reserved for public purposes. These DRCs allow for additional floor space index (FSI) on 'receiving plots' for construction purposes.

2. The assessee, owning a 'receiving plot,' received consideration for allowing a developer to construct additional storeys using TDRs, resulting in a dispute over the taxability of the amount received.

3. The Assessing Officer and CIT(A) held that the consideration was taxable as long-term capital gain, considering the cost of acquisition of the plot and building as part of the acquisition of additional FSI under TDRs.

4. The Tribunal noted that the Special Bench decision in Cadell Wvg. Mill Co. case was reversed by the Bombay High Court, rendering the revenue's reliance on it unsustainable. The Tribunal emphasized that the rights assigned to the developer were acquired through the DCR introduced in 1991, distinct from the costs of purchasing the plot and constructing the building.

5. The Tribunal concluded that the amount received by the assessee on the assignment of TDR rights was not taxable, as the costs incurred on the plot and building were not directly related to acquiring these rights. The Tribunal clarified that the TDR rights were acquired due to ownership of the plot, and the consideration received did not involve parting with the land or building.

6. Accordingly, the Tribunal directed the Assessing Officer to delete the addition of the amount received from the sale of TDR rights. The Officer was instructed to consider reducing the cost of acquisition of the plot and building by this amount when computing capital gains upon any future sale of the property.

7. The appeal was allowed in favor of the assessee, highlighting the legal position that assets with no cost of acquisition cannot be taxed upon their sale or transfer, as established by the Supreme Court's precedent in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 2941.