2015 (7) TMI 482 - HC - Income Tax

Computation of capital gain - Whether the Tribunal was correct in holding that the amount received by the assessee from L & T, the developer of the adjoining land in respect of the transfer of 7575.37 square meters of FAR in assessee s residential plot measuring 1.6 acres is not transferable as the same is not a capital asset and consequently no capital gains can be levied? - Held that - The search came to be conducted on 4.2.2004 wherein number of vital documents were found against the assessee and L & T. Even thereafter a letter dated 7.6.2005 came to be written to the assessee (wherein they have enclosed a letter dated 23.9.1999) confirming the terms on which the amount in respect of the FAR surrendered to be paid. It is clearly mentioned in the said letter that the available approved FAR area is for 35 acres 6 guntas though the joint development agreement dated 19.10.1995 was only in respect of 34 acres of land. It is also mentioned in the said letter that the FAR area accrued on the balance area of 1 acre 6 guntas will be shared between the L & T and assessee as per the ratio defined in the joint development agreement dated 19.10.1995, which clearly means that the assessee is entitled to 25% of the profit earned by utilizing 7575.37 square meters of FAR relatable to 1 acre 6 guntas of land. However, curiously another letter came to be issued by the L & T on 4.7.2005 mentioning that the amount of ₹ 3.15 crores paid to the assessee is in the nature of advance. Such letter is clearly an after thought inasmuch as, the search was made in the year 2004 and this self-serving letter written by the L & T to protect the assessee from tax liability by any stretch of imagination cannot be said to be reliable. Thus, the explanation of the L & T deserves to be rejected as the same is after thought. We concur with the opinion expressed by the Assessing Officer and Appellate Commissioner that the assessee has surrendered FAR to an extent of 7575.37 square meters in respect of 1 acre 6 guntas exclusively held by him in favour of the L & T and has earned ₹ 3.15 crores as advance in that regard. We have already clarified that surrendering of the said FAR by the assessee in favour of the L & T amounts to transfer within the definition of Section 2(47) of the Act. All these aspects are considered in detail by the Appellate Commissioner as well as the Assessing Officer. ITAT is not justified in concluding that there is no transfer of FAR relating to 1 acre 6 guntas during the relevant year. The Appellate Tribunal is also not justified in holding that no income has accrued during the year as no construction has taken place relating to such FAR. The reasons assigned by the Income Tax Appellate Tribunal while setting aside the orders passed by the Assessing Officer and the Appellate Commissioner cannot be accepted - Decided in favour of the Revenue.

Summary

Issues Involved:
1. Whether the FAR (Floor Area Ratio) transferred by the assessee to L&T constitutes a transfer of a capital asset.
2. Whether the income from the FAR transfer is liable to capital gains tax.

Detailed Analysis:

Issue 1: Transfer of FAR as a Capital Asset
The primary issue is whether the transfer of 7575.37 square meters of FAR by the assessee to L&T constitutes a transfer of a capital asset under Section 2(47) of the Income Tax Act. The court noted that the assessee owned 35 acres and 6 guntas of land, out of which 1 acre and 6 guntas were retained for personal use. The remaining 34 acres were subject to a Joint Development Agreement with L&T.

The Assistant Commissioner of Income Tax determined that the transfer of FAR to L&T amounted to a 'transfer' under Section 2(47) of the Act, making it liable for capital gains tax. The Appellate Commissioner upheld this view, stating that the relinquishment of FAR by the assessee constituted a transfer within the meaning of Section 2(47).

The Tribunal, however, overturned this decision, stating that the retained 1 acre and 6 guntas were not a capital asset and thus not subject to capital gains tax. The High Court disagreed with the Tribunal, emphasizing that the definition of 'transfer' under Section 2(47) includes the sale, exchange, or relinquishment of an asset or the extinguishment of any rights therein. The court concluded that the assessee's relinquishment of FAR to L&T constituted a transfer of a capital asset.

Issue 2: Taxability of Income from FAR Transfer
The second issue revolves around whether the income from the FAR transfer is liable to capital gains tax. The assessee argued that the amount received from L&T was an advance and not taxable. However, the court found that the seized documents and the letter from L&T dated 23.12.1999 clearly indicated that the assessee had transferred the FAR for a consideration of Rs. 3.15 crores.

The court held that the transfer was complete when the plan was sanctioned and construction began, making the income taxable in the year of transfer, i.e., the assessment year 1999-2000. The court rejected the Tribunal's view that no income had accrued during the year due to the lack of construction related to the FAR.

The court also dismissed the assessee's argument that the amount was an advance, noting that a subsequent letter from L&T stating the amount as an advance was an afterthought and not reliable.

Conclusion:
The High Court allowed the appeal, setting aside the Tribunal's order and restoring the orders of the Appellate Commissioner and the Assessing Officer. The court concluded that the transfer of FAR by the assessee to L&T constituted a transfer of a capital asset under Section 2(47) and was liable to capital gains tax.