2016 (4) TMI 1129 - AT - Income Tax

Valuation of the capital gain - joint development agreement - adoption of FMV/asset as deemed consideration or cost of the construction - Held that - Because at the time of signing JDA the capital gain has to be computed only on the guidance value of the land. Even otherwise, if any capital gains to be accrued in future in favour of assessee after receiving the possession of the property. Certainly that would also be subject to capital gains. Therefore, in our final conclusion valuation of the capital gain should be appropriate to adopt the FMV/asset as deemed consideration, but not cost of the construction. - Decided against revenue

Summary

Issues:
1. Valuation of property for capital gains computation based on Joint Development Agreement (JDA)
2. Consideration of market value versus cost of construction in determining capital gains

Issue 1: Valuation of property for capital gains computation based on Joint Development Agreement (JDA):

The case involved an appeal by the revenue against the order of the CIT(A) regarding the valuation of property for capital gains computation. The assessee, a transport company, declared a loss initially but later revised the return to include capital gains from a joint development agreement (JDA) for the transfer of immovable property. The AO observed that the long-term capital gains were based on the JDA where the value of the building was considered at ?1,250 per sq.ft even though the building was not completed. The CIT(A) allowed the appeal after considering various judgments.

The CIT(A) based the decision on the case law of CIT vs. Dr. T. K. Dayalu, where it was held that the date of transfer is the date of signing the JDA. The appellant argued that the consideration for capital gains should be the guidance value of the property as on the date of JDA, as the appellant only received the right to a particular area of the constructed building and not the building itself. The CIT(A) agreed with the appellant that the market value should be the deemed consideration for capital gains computation.

Issue 2: Consideration of market value versus cost of construction in determining capital gains:

The revenue contended that the value of the constructed apartments assigned to the assessee should be considered as the sale consideration, while the cost of construction should be treated as the sale consideration, not the market value of the asset. The revenue relied on a judgment from the ITAT at Hyderabad in a different case. However, the AR for the assessee argued that the logical deemed consideration for the JDA should be the guidance value of the property, as observed by the CIT(A).

The ITAT analyzed the facts and circumstances of the case, noting that the controversy was about the valuation of the property, not the assessment year. The ITAT referred to the judgment in CIT vs. Dr. T.K. Dayalu and concluded that the capital gain should be computed based on the guidance value of the land at the time of signing the JDA. The ITAT dismissed the revenue's appeal, stating that the valuation of capital gains should be based on the fair market value of the asset as deemed consideration, not the cost of construction.

In conclusion, the ITAT upheld the decision of the CIT(A) and dismissed the revenue's appeal, emphasizing that the valuation for capital gains computation should be based on the fair market value of the property as deemed consideration at the time of the JDA, rather than the cost of construction.