2012 (10) TMI 286 - HC - Income Tax

Computation of long term capital gain - Exemption under Section 54 - actual cost of construction reported by the Developer v/s market value of the property as on the date of development agreement - Held that - In respect of the property situated at Aga Abba Ali Road, the assessee and his brothers entered into a Joint Development Agreement with M/s.Embassy Investments and the said property was handed, over to the Developer on 06-05-1995 itself for construction of the residential apartment. As per the Development Agreement, 50% of the apartment shall be handed over to the owners of the property. In that the assessee is entitled to 1/3 share. Hence, the fair market value as on 01-04-1981 has to be adopted though the construction of the apartment was completed in the year 2000. As per the Development Agreement, the value of the apartment was fixed at ₹ 66,00,000/-. Taking into consideration 50% of the cost of construction, the Assessing Authority has arrived at the capital gain, which is totally incorrect - in favour of assessee. The exchange value in consideration of 50% of the land was agreed to be conveyed to the Developer and/or his nominee/s valued at ₹ 1,16,70,000/-. The fair market value as on 01-04-1981 as per the Sub-Registrar valuation has to be taken into consideration. However, the Assessing Authority has not taken into consideration this aspect of the matter. Taking into consideration the project cost incurred by the developer on the basis of their letter dated 01-02-2004, which includes all expenditure connected with the construction of the Residential Apartment. The exchange value as specified in the project development agreement can be taken as the basis for computation of the construction in joint development. The consideration specified in the said document represents the market value on the date of entering into the agreement. The assessment made by assessing authority is contrary to law - against the Revenue. Claim benefit under section 54 - Held that - As per the Development Agreement entered into between the parties, the assessee and his brothers have demolished this existing residential building and handed over the vacant space to an extent of 16800 sq.ft. to the Developer for construction of the apartment they are not entitled to claim benefit under section 54. At the most they are entitled to benefit under Section 54F. The order passed by the Appellate Authority directing the Assessing Authority to allow the deduction under Section 54 is contrary to law and the same cannot be sustained - against the assessee.

Summary

Issues Involved:
1. Computation of long-term capital gain for J.P. Nagar property.
2. Computation of capital gain for property at Aga Abba Ali Road.
3. Exemption under Section 54 of the Income Tax Act.

Detailed Analysis:

Issue 1: Computation of Long-Term Capital Gain for J.P. Nagar Property
The respondent-assessee filed a return for the assessment year 2001-2002, declaring a total income of Rs. 8,98,127/-. The Assessing Officer (AO) noted that the assessee had shown 1/3rd share of long-term capital gain on the sale of the J.P. Nagar property, calculated using the fair market value as of 01-04-1981. However, the AO found this contrary to law since the ownership was acquired on 11-11-1987. The AO assessed the capital gain at Rs. 18,88,736/-. The CIT (Appeals) partly allowed the appeal, and the Income Tax Appellate Tribunal (ITAT) directed the AO to consider the market value as on the date of the grant of land. The High Court held that the assessee is entitled to adopt the fair market value as on 01-04-1981, referencing the Division Bench judgment in ITA No. 25/2001, which stated that possession under part performance of a contract as defined under Section 53A of the Transfer of Property Act should be considered for ownership. Thus, the issue was decided against the Revenue.

Issue 2: Computation of Capital Gain for Property at Aga Abba Ali Road
The property was jointly developed with M/s. Embassy Investment, with the development agreement executed in 1995 and construction completed in 2000. The AO assessed the capital gain based on the actual cost of construction reported by the Developer, Rs. 2,86,22,931/-, and calculated the assessee's share accordingly. The ITAT held that the estimated cost of construction shown in the Joint Development Agreement should be taken into account. The High Court agreed, stating that the fair market value as on 01-04-1981 should be considered and that the cost incurred by the developer does not necessarily represent only the construction cost. The issue was decided against the Revenue.

Issue 3: Exemption under Section 54 of the Income Tax Act
The ITAT directed the AO to allow the exemption under Section 54 of the Income Tax Act. The High Court found that since the existing residential building was demolished and the vacant space handed over to the Developer, the assessee was not entitled to claim benefit under Section 54 but could claim under Section 54F. The High Court set aside the ITAT's order directing the AO to allow the deduction under Section 54, deciding this issue against the assessee.

Conclusion:
The High Court allowed the appeal in part, setting aside the ITAT's direction to give deduction under Section 54 of the Income Tax Act. In all other respects, the appeal was dismissed.