2015 (12) TMI 132 - AT - Income Tax

Computation of capital gain - CIT(A) taking the date of development agreement as the point of time for accrual of Capital Gains while the assessee has offered the Capital Gains for taxation based on factual accrual of gains in the respective years - Held that - Plots were ready for allotment and assessee has in fact offered some capital gains in AY. 2005-06 and construction of houses were also started. As rightly held by the Ld. CIT(A), it is evident from the sequence of events that the development agreement was willingly executed and was taken up in right earnst by the developer and work has commenced. Thus, as assessee has handed over the land to the developers and the developer had clearly accepted their willingness to perform and do the development work and had proceeded accordingly, the capital gains arise on the date of development agreement in terms of Section 45 r.w.s. 2(47)(v). In view of the above, we uphold the order of CIT(A) and AO on this issue that the capital gain can be brought to tax in AY. 2004-05 and accordingly the ground is rejected. Denial of exemption u/s. 54F - Held that - The provisions of Section 54F(3) contemplates that the amount of capital gain arising from the transfer of original asset not charged u/s. 45 on the basis of the cost of such new asset shall be deemed to be income chargeable under the head Capital Gains relating to long term capital assets of the previous year in which such new asset is transferred. Consequently, assessee can not denied the deduction u/s. 54F in the year under consideration even if the asset stands sold subsequently. If the asset is sold the consequential action has to be taken in the year of sale. We are of the opinion that the denial of deduction by CIT(A) is not correct and therefore, for computation of deduction u/s. 54F, the matter is restored to the file of AO for working out the capital gains along eligible deduction u/s. 54F to assessee. Decided in favour of assessee for statistical purposes. Direction of the CIT(A) to assess the development of plots as Short Term Capital Gain on sale of plots - Held that - The order of CIT(A) pre-judges the issue and CIT(A) is not empowered to traverse beyond the year under consideration in appeal. In fact, he has virtually fixed how much is the Long Term Capital Gain and how much is the Short Term Capital Gain with out examination by AO or objections from assessee. In the process, the sale of plots allotted to assessee were termed to be Short Term Capital Gain, ignoring his own finding that assessee is owner of the plots and what he has got in bargain was only benefit of development cost, which was directed to be the value for capital gains working as sale consideration. Since assessee is owner of the plots, sale of plots will also be Long Term Capital Gain as assessee is owning the plot for more than three years. This basic aspect of ownership of the plot was not taken into consideration and accordingly, Ld. CIT(A) erred in directing the AO to tax the amount as Short Term Capital Gain. Since those years are not before the CIT(A) and the directions given are also not according to the facts, we therefore, set aside the computation of capital gains as was done by the CIT(A) on Phase-2- Table 2, Table 3 and Table 4 and also directions in para 28 for AY 2009-10. However, we make it clear that AO is free to take necessary steps to compute necessary capital gains as applicable in those years without being governed by the observations or directions of the CIT(A) in this order. Issues are open for consideration/ adjudication by the AO/ Assessee.

Summary

Issues:
1. Taxation of Capital Gains based on development agreement date
2. Denial of exemption under Section 54F
3. Assessment of development of plots as Short Term Capital Gain

Analysis:

Issue 1: Taxation of Capital Gains based on development agreement date
The appellant contested the taxability of Capital Gains in AY 2004-05, arguing that the gains should be taxed based on factual accrual rather than the development agreement date. The AO determined the gains based on Sub-Registrar valuation. The ITAT upheld the CIT(A)'s order, citing the Potla Nageswara Rao case where the High Court ruled in favor of taxing gains in the year of the development agreement. The ITAT agreed that as the developer had commenced work post-agreement, the gains were taxable in AY 2004-05.

Issue 2: Denial of exemption under Section 54F
The appellant claimed exemption under Section 54F for investment in houses received in lieu of the development agreement. The CIT(A) denied the deduction, stating that one house was completed after three years and the other two were sold in the same year. The ITAT disagreed, holding that as no monetary consideration was received, the gains were reinvested in the houses. The ITAT referred to Section 54F(3) and directed the AO to compute the deduction for the year under consideration.

Issue 3: Assessment of development of plots as Short Term Capital Gain
The CIT(A) determined Long Term and Short Term Capital Gains for other assessment years, which were not under appeal. The ITAT noted that the CIT(A) overstepped by pre-judging the issue and directing the AO without examining the facts. As the appellant was the owner of the plots for over three years, the sale should be Long Term Capital Gain. The ITAT set aside the CIT(A)'s computation for other years and directed the AO to independently assess the capital gains without being bound by the CIT(A)'s observations.

In conclusion, the ITAT partially allowed the appeal for statistical purposes, addressing the issues of taxation of Capital Gains, denial of Section 54F exemption, and assessment of development of plots as Short Term Capital Gain, providing detailed reasoning and directions for each issue.