2018 (5) TMI 1887 - AT - Income Tax

Compensation on surrender of flats - capital gain u/s 45 - Transfer of capital asset u/s 2(47) - extinguishment of rights in the capital asset - CIT-A directing the AO to assessee the same as capital gains and consequent allowance of claim of deduction u/s 54 - builder could not obtain permission to construct the building upto 17th floor and the assessee surrendered the right to receive the flats and the builder cancelled the allotment of the above flats and agreed to pay the compensation on account of surrender of such flats and transferred the initial advance of ₹ 50,00,000/- to new flat in the same project which the assessee agreed to buy - HELD THAT - The facts clearly show that the extinguishment of assessee s right in Flat No. 1703, 1704 and 1705 proposed building known as shubh Residency allotted vide allotment letter dated 20.06.2008 is actually extinguishment of any right in relation to capital asset in view of the provisions of section 47 of the Act and falls in the definition of transfer and hence, result in capital gain chargeable under section 45 of the Act. It is a fact that assessee held this right for more than 3 years for a reason that this flats were subject to allotment vide allotment letter dated 20.06.2008 and assessee received compensation of ₹ 1.10 crores and in lieu of that acquired flat No. 301 and 305 in the same project vide agreement dated 28.02.2012, which period is more than three years. The assessee has made payment of ₹ 1.10 crores on various dates mentioned above and this is eligible for the claim of deduction under section 54 of the Act also. CIT(A) has rightly deleted addition made by the AO in regard to disallowance of the claim of the assessee disallowing deduction of long term capital gain under section 54 of the Act on the premise that the compensation received is income from other sources. We noted that the CIT(A) has rightly allowed the claim of the assessee and we confirm the same. - Decided against revenue

Summary

Issues:
- Dispute over whether extinguishment of rights in a capital asset constitutes a transfer and is eligible for capital gains treatment.
- Validity of the claim for deduction under section 54 of the Income Tax Act.
- Interpretation of the provisions of section 2(47) regarding the definition of transfer in relation to capital assets.

Analysis:

1. The appeal by the Revenue challenges the CIT(A)'s decision to accept the claim of the assessee regarding the extinguishment of rights in a capital asset and the consequent treatment of the same as capital gains. The Revenue raised multiple grounds questioning the validity of considering the extinguishment as a transfer of a capital asset. The CIT(A) examined the facts, including the allotment of flats to the assessee, subsequent surrender due to construction delays, and compensation received. The CIT(A) referred to relevant legal precedents and Circulars to support the assessee's claim, emphasizing that surrendering allotment rights constitutes a transfer of a capital asset. The CIT(A) allowed the claim for exemption under section 54 based on the Delhi High Court decision and CBDT Circular, leading to the deletion of the addition made by the AO.

2. The assessee, an Advocate, was allotted flats in a proposed building but surrendered the rights due to construction delays. The builder compensated the assessee for the surrendered flats, and the assessee invested the compensation in a new flat within the same project. The CIT(A) reasoned that the surrender of allotment rights qualifies as a transfer under section 2(47) of the Act, resulting in capital gains chargeable under section 45. The CIT(A) supported the assessee's claim for exemption under section 54, citing legal precedents and Circulars to establish the eligibility for the deduction. The CIT(A) directed the AO to compute the capital gains and allow the exemption under section 54, ultimately deleting the addition made by the AO.

3. The Tribunal confirmed the CIT(A)'s decision, emphasizing that the extinguishment of the assessee's rights in the allotted flats constituted a transfer of a capital asset. The Tribunal agreed that the compensation received and reinvested in a new flat qualified for capital gains treatment and exemption under section 54. The Tribunal upheld the CIT(A)'s ruling, dismissing the Revenue's appeal and affirming the allowance of the claim for deduction under section 54. The Tribunal concluded that the CIT(A) correctly interpreted the provisions of the Act and legal precedents in deciding in favor of the assessee.

This detailed analysis highlights the key issues, arguments, and the final decision of the Tribunal in the legal judgment regarding the treatment of extinguishment of rights in a capital asset and the eligibility for deduction under section 54 of the Income Tax Act.