2016 (6) TMI 297 - AT - Income Tax

Transfer of land and building in term of development agreement - whether constitutes Long term capital gain or income from other sources - entitlement of exemptions u/s. 54 - Held that - In the present case what was transferred by the assessee was development rights in respect of the property. On the plot of land owned by the assessee in co-ownership, which was subject matter of development agreement, certain area of construction was permissible, which was the normal FSI permissible as per the development control rules of the state. Besides the above, the plot of land owned by assessee and carried out additional construction, over and above the permissible FSI, can be made as the plot of land, which was capable of receiving TDR. TDR could be obtained by the developer and could be loaded on the normal FSI construction permissible as per the development control rules. The right to construct building on the said plot of land by consuming FSI and the right as a receiving plot owner to load TDR over and above normal FSI, are rights which accrue to the assessee by virtue of development control regulation of the state government. These are rights over property, which are capital in nature and comes within the definition of capital asset u/s. 2(14) of the Act. The consideration received by the assessee is for transfer of rights over such capital asset for the reason that the 3rd party purchaser has no interest over the land is not relevant. The permission to load the TDR on permissible FSI allowed by the owner is by itself a transfer of right in immovable property and therefore, clearly falls within the provision of section 45 of the Act. Thus in the present case before us, the sale of development rights is to be taxable as long term capital gain and not as income from other sources as held by AO. The consequential deductions/exemptions u/s. 54 of the Act etc. will be allowed to the assessee - Decided against revenue Adoption of market value as per the provisions of section 50C - Held that - In the present case assessee received consideration in two-folds i.e. partly cash and partly in kind i.e. by way of property in the shape of flats in the re-developed property. Such transactions are thus a combination of sale and exchange.We find that as per development agreement the market value of assessee s share is ₹ 2,31,41,000/-. Further, assessee has received the sum of ₹ 11.20 lacs due to fall in free area committed by the developer i.e. committed area of 4,000 sq. Ft. as against the same received area is only 3776 sq. Ft. The assessee has computed market value as per agreement at ₹ 34.36 lacs which is the total area of 3776 sq. Ft. as attached in the agreement. Accordingly, the market value of 224 sq. Ft. is ₹ 2,03,830/- only. In view of the above, we are of the view that the value declared in agreement (including all transaction) will be higher than the stamp duty valuation. Accordingly, no tinkering can be made to the value disclosed in the development agreement. - Decided against revenue

Summary

Issues Involved:
1. Classification of consideration received from transfer of land and building under a development agreement as Long Term Capital Gain or Income from Other Sources.
2. Applicability of Section 50C of the Income Tax Act for computing Long Term Capital Gains based on stamp duty valuation.

Detailed Analysis:

Issue 1: Classification of Consideration Received
The primary issue is whether the consideration received from the transfer of land and building under a development agreement should be classified as Long Term Capital Gain or Income from Other Sources. The assessee, a co-owner of a property, entered into a sale-cum-development agreement with a builder. The consideration included two flats, car parking space, and cash. The assessee declared the income as Long Term Capital Gain, while the Assessing Officer (AO) treated it as Income from Other Sources, arguing that there was no transfer of rights, title, and interest in the plot.

The AO's stance was based on the development agreement's recitals, which indicated that the development rights could not be executed without transferring the land and building. Consequently, the AO treated the entire sum of ?1.71 crores as Income from Other Sources. However, the CIT(A), referencing the Hon'ble Bombay High Court's decision in Chaturbhuj Dwarkadas Kapadia (260 ITR 491), ruled in favor of the assessee, classifying the sale of property by way of development rights as a transfer of a capital asset under Section 2(14) of the Act.

The Tribunal supported this view, noting that development rights are capital assets as defined under Section 2(14) of the Act. The Tribunal emphasized that the term "property" in the definition of capital asset includes rights, title, or interest in it. Ownership of land carries with it the right to development, which is a significant right. The Tribunal cited the decision of the Hon'ble Karnataka High Court in CIT vs. Dinesh D Ranka (2016) 380 ITR 440, which held that surrendering floor area ratio rights in land is a transfer of capital rights in relation to capital assets. Thus, the Tribunal concluded that the sale of development rights should be taxed as Long Term Capital Gain, not as Income from Other Sources. The AO was directed to allow the consequential deductions/exemptions under Section 54 of the Act.

Issue 2: Applicability of Section 50C
The second issue concerns the applicability of Section 50C of the Income Tax Act, which involves adopting stamp duty valuation for computing Long Term Capital Gains. The AO noted that the stamp duty valuation of the property was higher than the value declared by the assessee. The AO recomputed the total sale consideration based on the stamp duty valuation and treated the entire consideration as Income from Other Sources, disallowing exemptions under Sections 54 and 54EC.

The CIT(A) held that the consideration received by the assessee was higher than the stamp authority valuation, thus deleting the directions of the AO. The CIT(A) observed that Section 50C applies only to the transfer of land or land and building, not to other capital assets such as development rights associated with the land.

The Tribunal affirmed the CIT(A)'s view, stating that the assessee received consideration in two forms: cash and property (flats in the redeveloped property). Such transactions are a combination of sale and exchange. The Tribunal found that the value declared in the development agreement was higher than the stamp duty valuation. Therefore, no adjustments were necessary to the value disclosed in the development agreement. The Tribunal upheld the CIT(A)'s order on this issue, dismissing the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming that the consideration received from the transfer of development rights should be classified as Long Term Capital Gain and that the provisions of Section 50C do not apply to the transfer of development rights. The order was pronounced on May 31, 2016.