2014 (12) TMI 1069 - HC - Income Tax

Transfer of Development Rights (TDR) - Chargeability to capital gain - Invocation of section 50C - Addition under the head LTCG computation of the sale of TDR Held that - The Tribunal was rightly of the view that while it is true that the AO invoked section 50C and computed these gains, in the decision of New Shailaja Co-operative Housing Society Ltd. Versus Income-tax Officer 2008 (12) TMI 442 - ITAT MUMBAI it has been held that the sale of TDR does not give rise to any capital gains chargeable to tax - Following the decision in Union of India vs. Cadell Weaving Mill Co. P. Ltd. and Anr. 2005 (1) TMI 13 - SUPREME Court wherein it has been held that an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head Capital gains as opposed to assets in the acquisition of which no cost at all can be conceived - the situation was that the FSI/TDR was generated by the plot itself - There was no cost of acquisition, which has been determined and on the basis of which the AO could have proceeded to levy and assess the gains derived as capital gains - It may be that subsection (2) of section 55 clause (a) having been amended, there is a stipulation with regard to the tenancy rights. It was also argued that the tenancy rights now can be brought within the tax net and in the present case the asset or the benefit is attached to the property - It is capable of being transferred. - all this may be true but as the Hon'ble Supreme Court holds it must be capable of being acquired at a cost or that has to be ascertainable - additional FSI/TDR is generated by change in the D. C. Rules - a specific insertion would therefore be necessary so as to ascertain its cost for computing the capital gains - Therefore, the Tribunal was in no error in concluding that the TDR which was generated by the plot/property/land and came to be transferred under a document in favour of the purchaser would not result in the gains being assessed to capital gains - what the Assessee sold was TDR received as additional FSI as per the D. C. Regulations - It was not a case of sale of development rights already embedded in the land acquired and owned by the Assessee - the Assessee had not incurred any cost of acquisition in respect of the right which emanated from 1991 Rules, making the Assessee eligible to additional FSI - The land and building earlier in the possession of the Assessee continued to remain with it - even after the transfer of the right or the additional FSI, the position did not undergo any change - Revenue could not point out any particular asset as specified in subsection (2) of section 55 the order of the Tribunal is upheld Decided against revenue.

Issues Involved:
1. Validity of the assessment made by the Assessing Officer under section 143(3) read with section 147 of the Income Tax Act.
2. Taxability of the sale of Transferable Development Rights (TDR) as long-term capital gains.
3. Applicability of section 54E of the Income Tax Act.
4. Interpretation of sections 50C and 55(2) of the Income Tax Act concerning the cost of acquisition and computation of capital gains.
5. Relevance of the Supreme Court decision in Union of India vs. Cadell Weaving Mill Co. P. Ltd. and Anr.

Detailed Analysis:

1. Validity of the Assessment:
The assessment made by the Assessing Officer under section 143(3) read with section 147 was upheld by the Commissioner of Income Tax (Appeals) and involved the addition of Rs. 2,23,25,157/- to the total income of the Assessee under the head "long term capital gains." The Tribunal, however, set aside this decision, leading to the Revenue's appeal to the High Court.

2. Taxability of the Sale of TDR:
The core issue was whether the sale of TDR by the Cooperative Housing Society, which generated Rs. 2,23,25,157/-, should be taxed as long-term capital gains. The Revenue argued that the gains derived from the sale of TDR were taxable as they were capital assets under section 2(14) of the Income Tax Act. The Tribunal, however, concluded that the sale of TDR does not give rise to any capital gains chargeable to tax, relying on its previous decisions in similar cases.

3. Applicability of Section 54E:
Mr. Malhotra, representing the Revenue, argued that section 54E was applicable and that the gains derived by the Assessee should be computed accordingly. The Tribunal, however, found no necessity to interfere with the order passed, as there was no mechanism evolved by the Revenue to compute the gains.

4. Interpretation of Sections 50C and 55(2):
Sections 50C and 55(2) were crucial in determining the cost of acquisition and computation of capital gains. Section 50C deals with the valuation of capital assets for stamp duty purposes, while section 55(2) provides the cost of acquisition for various capital assets. The Tribunal noted that the Assessee did not incur any cost for the TDR, and thus, the income should be considered Nil. This interpretation was consistent with the Supreme Court's decision in B. C. Srinivasa Shetty, which held that if the cost of acquisition cannot be determined, the capital gains cannot be computed.

5. Relevance of the Supreme Court Decision:
The Tribunal and the High Court heavily relied on the Supreme Court's decision in Union of India vs. Cadell Weaving Mill Co. P. Ltd., which dealt with the taxability of income from the surrender of tenancy rights. The Supreme Court had held that if the cost of acquisition of a capital asset cannot be determined, the transfer of such an asset would not attract capital gains tax. This principle was applied to the sale of TDR, as the FSI/TDR was generated by the plot itself without any ascertainable cost of acquisition.

Conclusion:
The High Court dismissed the Revenue's appeal, concluding that the Tribunal's decision was based on a correct interpretation of the relevant sections of the Income Tax Act and the Supreme Court's precedent. The Tribunal's view that the sale of TDR did not result in taxable capital gains was upheld, and the appeal did not raise any substantial question of law. The order was not deemed perverse, and no costs were awarded.

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