2014 (6) TMI 495 - AT - Income Tax

Invocation of section 50C of the Act Verification of sale deeds - Understated sale consideration Cost of acquisition Held that - The AO and the CIT(A) has brought to tax the capital gains arising from both the transaction viz., the development as well sale of the developed areas handed over to the Assessee - capital gains arising out of the development of the land on the basis of an agreement in 2001 and 2002 cannot be taxed in the year - The Assessee had given possession of the land and the developer has also commenced construction on the same from those years Following Potla Nageswara Rao 2014 (6) TMI 494 - ITAT HYDERABAD - in case of development agreement which were executed the capital gains cannot be postponed - the profits/ capital gains arising from development of the land cannot be brought to tax this year, except to the extent the Assessee himself has offered for Tax in his return. Only the profits accrued on the sale of the built up area during the year shall be subject to tax - The AO is directed to compute the profit arising from sale of the built up area, together with undivided interest in land if any, made during the year - The addition made by the AO in respect of unsold area cannot be sustained as only profits arising from land and building transferred can be brought to tax - As regards the addition of Rs. 18,55,000/- the explanation of the Assessee is not clear - As the other issues have been set asided to the file of the AO this issue is also remitted back to the AO for fresh adjudication - The AO will consider the applicability of sec 50C and if he feels that the provisions are applicable, he may refer to the Valuation officer for determining the market value- as required in that section Decided in favour of Assessee.

Issues Involved:
1. Determination of the date of capital gain.
2. Taxability of the entire sale consideration.
3. Inclusion of advances received in the sale consideration.
4. Computation of capital gain.
5. Application of Section 50C of the IT Act.
6. Understatement of sale consideration.
7. Estimation of the cost of closing stock.

Detailed Analysis:

1. Determination of the Date of Capital Gain:
The primary issue was whether the capital gain arises on the date of the development agreement or on the date of handing over the constructed area. The CIT(A) held that the capital gain arises when the constructed area is handed over, as this is when the builder obtains the right to enjoy their portion of the property. The Tribunal, however, referenced the case of Potla Nageswara Rao, concluding that the capital gains arising from the development of the land cannot be taxed in the current year if the development agreement was executed in earlier years. Hence, only the profits accrued on the sale of the built-up area during the year shall be subject to tax.

2. Taxability of the Entire Sale Consideration:
The CIT(A) upheld the AO's decision to tax the entire sale consideration in the year under consideration, including the value of the unsold constructed area. The Tribunal directed the AO to compute the profit arising from the sale of the built-up area during the year, excluding the unsold area, as only profits from transferred land and building can be taxed.

3. Inclusion of Advances Received in the Sale Consideration:
The appellant argued that advances received should not form part of the sale consideration. The CIT(A) found no concrete evidence to support the appellant's claim that the amounts were advances. The AO's verification revealed that these amounts were not reflected as liabilities in the balance sheet, and the parties involved did not show these amounts as receivables. Thus, the CIT(A) upheld the inclusion of these amounts in the sale consideration.

4. Computation of Capital Gain:
The AO quantified the sale consideration and cost of acquisition, including the value of unsold constructed area. The CIT(A) directed the AO to adopt the cost of construction, not the sale price, for calculating capital gains. The Tribunal set aside the order of the CIT(A) and directed the AO to re-compute the income, considering only the profits from the sale of the built-up area during the year.

5. Application of Section 50C of the IT Act:
The AO applied Section 50C due to discrepancies between the market value and the sale consideration admitted by the appellant. The CIT(A) confirmed the application of Section 50C, as the appellant could not offer a satisfactory explanation for the lower admitted value. The Tribunal directed the AO to consider the applicability of Section 50C and refer to the Valuation Officer if necessary.

6. Understatement of Sale Consideration:
The AO added Rs. 18,55,000/- to the sale consideration, noting a discrepancy between the amount received and the amount admitted by the appellant. The CIT(A) upheld this addition, as the appellant failed to provide evidence of the advance received. The Tribunal set aside this issue to the AO for re-examination, along with other issues.

7. Estimation of the Cost of Closing Stock:
The AO added the value of the unsold constructed area to the total cost. The CIT(A) upheld this addition, stating that the entire value of the built-up area, whether sold or unsold, is the sale consideration in lieu of 50% of the land. The Tribunal directed the AO to exclude the value of the unsold area from the computation of capital gains.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to re-compute the income, considering only the profits from the sale of the built-up area during the year and excluding the value of the unsold area. The AO was also directed to re-examine the inclusion of advances and the understatement of sale consideration, and to consider the applicability of Section 50C, referring to the Valuation Officer if necessary. The appeal of the Assessee was treated as allowed for statistical purposes.

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