2019 (12) TMI 1588 - AT - Income Tax

Capital gain computation - Calculation of the sale consideration - development agreement for construction of the flats - property belongs to 2 owners - cost the construction determined by the AO which was collected from the developer - Deduction u/s 54 - HELD THAT - Assessee has valid point that AO should have considered only the cost of construction not the cost of the project as per the submission made by the developer and the cash component will definitely be part of the project cost to the developer when the AO adopts the actual cost to the developer as the relevant cost for the fair value to the assessee. He should have restricted himself to calculate the sale consideration only to the portion of relevant cost of construction only relevant for the flats allotted to the assessee and he should have not considered the cash component which is already embedded in the cost of project. Accordingly we direct the AO to remove the cash component from the sale consideration. With regard to other cost of expenditure for which the developer has not provided the breakup of the cost of project/construction we direct the AO to collect the breakup of the cost of the project/construction from the developer and calculate only the cost of construction and eliminate all those promotional expenditures and the expenditure which is not relating to the cost of construction. Therefore we are inclined to remit this issue to the file of AO to re-calculate the cost of construction. Accordingly this ground raised by the assessee is allowed for statistical purposes. Deduction u/s 54 - Combining of flats - how combined portion of the area will be treated as one single unit? - We notice that assessee has modified the development agreement for construction of the flats from 40 flats to 36 flats and 2 penthouses and distributed between them as per terms of original agreement. Therefore the modified agreement and its schedule which is placed on record at page no. 43 of the paper book clearly indicates that the intention of the developer and the assessee to make 2 penthouses in 11th and 12th floor as penthouses and assessee was regularly pleading that these 2 penthouses were constructed by combining 4 flats at floors 11th and 12th. AO has rejected the contention of the assessee with the observation that there is no record that this combing of flats were made during the impugned assessment year. We cannot accept the contention of the AO for the reason that the purpose of modification of the development agreement was to combine 4 flats and to make 2 penthouses. Therefore we are in agreement with the submission of Ld. AR that there exist 2 penthouses at the site developed by the developer as per the terms of agreement in modified development agreement. Development agreement was entered by the assessee along with his son with share of 73 27 between them and it is clear that there exist 2 penthouses and two individual assessee . Therefore each assessee will get separate exemption u/s 54F of the Act. This benefit is legally available to both the assessee . There are catena of cases in which courts have held that w hen there exists two portion of flats with one ketchen then the whole combined portion of the area will be treated as one single unit for the purpose of granting exemption u/s 54 as well as 54F . Accordingly we direct the AO to grant exemption u/s 54F of the Act to each assessee and as per their choice. On record assessee prefers to get penthouse occupied by his daughter as exemption u/s 54F and by legally AO should allow this penthouse as exemption u/s 54F of the Act. Accordingly this ground raised by the assessee is allowed. Classification of transaction of sale into land and super structure - CIT-A distributing the sale proceeds into sale proceeds attributable to the land and super structure - flat purchaser has irrecoverably withdrawn his rights for any future FSI /TDR benefits awarded to the owners - assessee determined the capital gains in 2 portions as sale proceeds attributable to the land and determined the capital gain as long term capital gain and second portion as sale proceeds attributable to super structure and determined the capital gain as short term capital gains - HELD THAT - We notice that in the case of CIT v Citibank 2003 (4) TMI 92 - BOMBAY HIGH COURT it was held that as per the above ratio the flat owners will get right of possession as well as right on portion of the undivided share in the land. We notice that as per the proportionate area of flats occupied by him in respect of the total area of the building i.e. undivided share the owner of the flat will get an automatic membership in the cooperative society in proportion to the undivided share. Since cooperative society owns the total area of the land and being a member of the society he gets the ownership of the undivided share. As per the sale deed it is clear that assessee gets a membership on the cooperative societies it does mean that flat owners not only owns a super structure and also ownership right on the undivided share therefore we are inclined to accept the findings of Ld. CIT(A) in distributing the sale proceeds into sale proceeds attributable to the land and super structure. Accordingly we reject the contentions of the revenue and dismiss the grounds of appeal raised by the revenue.

Summary

Issues Involved:
1. Determination of Long Term Capital Gains (LTCG) for AY 2004-05.
2. Adoption of Fair Market Value (FMV) as on 01.04.1981.
3. Calculation of Cost of Construction.
4. Exemption under Section 54F of the Income Tax Act.
5. Classification of Capital Gains for AY 2005-06.

Detailed Analysis:

1. Determination of Long Term Capital Gains (LTCG) for AY 2004-05:
The assessee initially declared a long-term capital gain of ?1,69,97,842 for AY 2005-06. However, the Assessing Officer (AO) determined the LTCG as ?12,44,78,990 due to lack of supporting documents. The AO reopened the assessment for AY 2004-05 based on a development agreement dated 06.02.2004, relying on the Bombay High Court decision in Chatrabhuj Dwarkadas Kapadia, which mandates capital gains to be taxed in the year the development agreement is entered. The LTCG was taxed on a protective basis.

2. Adoption of Fair Market Value (FMV) as on 01.04.1981:
The AO adopted the District Valuation Officer (DVO) value of ?62,54,000 instead of ?40,73,896 used by the assessee. This issue was not contested by the assessee before the Tribunal, thus the value adopted by the AO reached finality.

3. Calculation of Cost of Construction:
The AO observed four different estimates for the cost of construction:
- Assessee's estimate: ?7,81,05,909.
- Ready reckoner value: ?3,51,30,3257.
- DVO estimate: ?15,08,49,000.
- Actual cost by the developer: ?13,44,21,345.
The AO adopted the actual cost incurred by the developer, which included various expenses. The Tribunal directed the AO to re-calculate the cost of construction, eliminating non-construction-related expenses and excluding the cash component already included in the project cost.

4. Exemption under Section 54F of the Income Tax Act:
The assessee claimed exemption for six flats, arguing they were used as a single residential unit. The AO allowed exemption for only one flat due to lack of evidence proving the combination of flats during the relevant assessment year. The Tribunal, however, accepted the modified development agreement indicating two penthouses and directed the AO to grant exemption u/s 54F for each assessee separately, considering the combined flats as single units.

5. Classification of Capital Gains for AY 2005-06:
The AO classified the gains from the sale of four flats as short-term capital gains. The CIT(A) bifurcated the sale proceeds into land and superstructure, determining part of the gains as long-term. The Tribunal upheld the CIT(A)'s decision, noting that flat purchasers gain an undivided share in the land, thus supporting the bifurcation of sale proceeds.

Conclusion:
The Tribunal partly allowed the assessee's appeal for AY 2004-05, directing the AO to re-calculate the cost of construction and grant separate exemptions under Section 54F. The Tribunal dismissed the revenue's appeal for AY 2005-06, upholding the bifurcation of sale proceeds into land and superstructure components. The final capital gains for the assessee were determined after considering these adjustments.