2017 (8) TMI 1191 - HC - Income Tax

Computing taxable gain under Income Tax Act - quantum - development agreement - assessee contended that, what was transferred under the collaboration agreement was only 44% of the land owned by them in exchange for 56% of the built up area and not the entire land - consideration in kind - Held that - ITAT has rightly decided that, it is clear that in the year under consideration, there was transfer of not only the flats as super structure but also the proportionate land in as much as 56% of the land was retained by the assessee under the collaboration agreement. So we are in agreement with the alternate contention of the assessee s counsel that it was a sale of improved asset and consequently, cost of acquisition would include the cost of flats as well as cost of land. As far as cost of flat is concerned, we have already observed that it would be equal to the cost of construction of 56% of the built up area. The reason is obvious. The sale consideration of 44% land was in kind and, therefore, it also amounted to investment in the construction of built up area. Hence, the same will be taken as cost of acquisition of flats after examining the record of the builder - Decided in favour of the Revenue and against the Assessee. However, ITAT did commit an error by not reducing the land and development charges from the sale consideration received by the Assessee while working out the capital gains. - This issue decided in favor of assessee.

Issues Involved:
1. Whether the ITAT was correct in holding that the value of land as declared and assessed under Section 7(4) of the Wealth Tax Act could not be adopted as market value of the asset as on 1.4.1981 for purposes of computing taxable gain under the Income Tax Act?
2. Whether the ITAT committed an error in rejecting the appellant’s plea that the taxable capital gain arising from the sale of the land in question was to be computed with reference to the cost of acquisition of 100% value of the asset transferred by the appellant and co-owners in terms of the agreement dated 2.5.1984, executed with the builder and not by reference to the market value of 44% of the said asset?
3. Whether the ITAT committed an error in rejecting the contention of the appellant that the market value of the land in question had to be determined by reference to 10.11.1984, and not 1.4.1981?
4. Whether the ITAT committed any error in law by not reducing the land and development charges from the sale consideration received by the assessee while working out the capital gains?

Detailed Analysis:

Issue 1: Adoption of Market Value for Computing Taxable Gain
The ITAT held that the value of land as declared and assessed under Section 7(4) of the Wealth Tax Act could not be adopted as the market value of the asset as on 1.4.1981 for the purposes of computing taxable gain under the Income Tax Act. The ITAT reasoned that the value under Section 7(4) was a "frozen value" and did not represent the actual market value as of 1.4.1981. This position was upheld by the High Court, which noted that the figure indicated in the wealth tax return could not be the basis for determining capital gains.

Issue 2: Computation of Taxable Capital Gain
The ITAT rejected the appellant’s plea that the taxable capital gain should be computed with reference to the cost of acquisition of 100% value of the asset transferred by the appellant and co-owners in terms of the agreement dated 2.5.1984. The ITAT held that what was transferred under the collaboration agreement was only 44% of the land in exchange for 56% of the built-up area, not the entire land. The High Court agreed with this conclusion, noting that the Assessees transferred not only the flats but also the proportionate right in the appurtenant land.

Issue 3: Determination of Market Value Date
The ITAT rejected the contention that the market value of the land should be determined by reference to 10.11.1984, the date when the land was released from the Urban Land Ceiling Act (ULCA). Instead, the ITAT held that the market value as on 1.4.1981 should be used. The High Court upheld this view, noting that the ITAT correctly understood that the relevant date for determining the market value was 1.4.1981, not the date of release from ULCA.

Issue 4: Reduction of Land and Development Charges
The ITAT did not reduce the land and development charges from the sale consideration received by the assessee while working out the capital gains. The High Court found this to be an error, stating that these charges should indeed be deducted when computing capital gains. Consequently, the High Court directed the AO to give effect to this correction.

Conclusion:
The High Court dismissed the Revenue’s appeals and partially allowed the Assessees’ appeals. It held that the value declared in the wealth tax return could not be used for determining capital gains, the taxable capital gain should be computed with reference to the cost of acquisition of 44% of the asset, the market value should be determined as of 1.4.1981, and the land and development charges should be deducted from the sale consideration. The AO was directed to re-compute the capital gains accordingly.

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