1998 (8) TMI 625 - AT - Income Tax

Summary

Issues Involved:

1. Determination of the correct sale proceeds for computing capital gains.
2. Timing and manner of recognizing capital gains.
3. Deductibility of certain expenses related to the sale.

Issue-wise Detailed Analysis:

1. Determination of the Correct Sale Proceeds for Computing Capital Gains:

The main objection raised by the appellant was that the Commissioner of Income-tax (Appeals) [CIT(Appeals)] erred by taking the sale proceeds of a property sold by the appellant for the purpose of working out the capital gains at Rs. 1,13,25,000 instead of Rs. 71,79,720. The appellant, a co-operative society, had filed a return declaring an income of Rs. 59,77,670, which included capital gains on the sale of Plot No. 1087. The sale consideration was based on an agreement dated 26-6-1992 with M/s. Marathon Combines, which stipulated a consideration of Rs. 1,13,25,000 for the development rights of the plot. However, the appellant argued that this amount was hypothetical and contingent upon the availability of Floor Space Index (FSI). The actual FSI obtained was less than the estimated 1,672 sq. meters, leading to a proportionate reduction in the sale consideration.

The Tribunal held that the sale consideration could not be taken at Rs. 1,13,25,000 since this amount was never received. The terms of the agreement made it clear that the consideration would be scaled down based on the actual FSI obtained, which was less than 1,672 sq. meters. Therefore, the appellant could not be taxed on an amount that was not received.

2. Timing and Manner of Recognizing Capital Gains:

The Assessing Officer (AO) and CIT(Appeals) contended that the entire capital gain should be recognized in one year, based on the stipulated sale consideration of Rs. 1,13,25,000. The appellant, however, offered capital gains on a proportionate basis over three years, corresponding to the actual FSI obtained and the consideration received in each year. The Tribunal agreed with the appellant's method, noting that the possession of the plot was given in stages and the consideration was received in different accounting years. The Tribunal emphasized that the transfer of development rights occurred in stages, and the capital gains should be levied in the relevant years as returned by the appellant.

3. Deductibility of Certain Expenses Related to the Sale:

The appellant claimed deductions for legal fees, expenditure on the construction of a compound wall, demolition of office structure, construction of a temporary office, and security salaries. The AO disallowed these expenses except for Rs. 4,500 paid for the demolition of the old structure. The CIT(Appeals) did not address these grounds, stating they were not pressed. The Tribunal remitted the matter to the CIT(Appeals) for considering the grounds raised by the appellant regarding these expenditures.

Conclusion:

The Tribunal concluded that the sale consideration should be based on the actual amount received, not the hypothetical figure of Rs. 1,13,25,000. The capital gains should be recognized in stages, corresponding to the actual FSI obtained and the consideration received in each year. The Tribunal also remitted the matter of deductibility of certain expenses to the CIT(Appeals) for further consideration. The appeal was partly allowed, subject to these remarks.