2021 (2) TMI 21 - AT - Income Tax

Capital gain computation - Cost of acquisition of flats sold - JDA entered by assessee along with another brother and 2 sisters with M/s. Kuteer Builders to develop the land - assessee had handed over his possession of the land on the date of entering into JDA and in return the assessee had received 5 flats individually and 4 flats jointly in the Financial year 2011-12 - HELD THAT - In the instant cases, the assessee herein have sold part of the constructed area received by them in the form of flats. When the capital gain is assessed/assessable at the time of entering the JDA, sale consideration has to be determined by taking Fair market value of the constructed area that will be received by the assessees. Since the fair market value so determined is liable for capital gains taxation, the said Fair Market Value shall become cost of the constructed area. When the constructed area in the form of flats are sold subsequently, the cost of acquisition/indexed cost of acquisition of flats are required to be deducted in order to ascertain the capital gain, which shall be the Fair market value. AO did not allow the deduction of cost of acquisition of flats solely for the reason that the assessees have not declared capital gains in the year in which JDA was entered. It is well settled proposition of law that the income of a particular year is assessable in that year only. Hence the capital gain arising on entering JDA is assessable only in the year in which the JDA was entered. If the assessees have not declared capital gains in the appropriate year, the AO may take appropriate action to tax the same in accordance with the law. Failure of the assessee to offer capital gains in the appropriate year will not disentitle the assessee to claim cost of acquisition. Accordingly, we are of the view that the AO was also not right in law in rejecting the said claim of the assessee for deduction of correct amount of cost of acquisition/indexed cost of acquisition. The issue of computation of capital gains, particularly the claim for deduction of cost of acquisition of flats, requires to be examined afresh by the AO. Appeals of the assessee allowed for statistical purposes.

Summary

Issues:
- Determination of cost of acquisition of flats sold by the assessees

Analysis:
The appeals before the Appellate Tribunal ITAT Bangalore involved the determination of the cost of acquisition of flats sold by the assessees. The assessees had entered into Joint Development Agreements (JDAs) with developers for two properties, resulting in the receipt of flats. The assessees did not declare capital gains at the time of entering into the JDAs. Subsequently, when the assessees sold the flats, they claimed deductions for the cost of acquisition and improvement. The Assessing Officer (AO) adopted the sale consideration mentioned in the "Agreement to sale" for computing capital gains and allowed deduction only for the cost of land, rejecting the claim for the cost of improvement due to lack of evidence.

Before the Ld. CIT(A), the assessees provided evidence for the cost of improvement, and a remand report suggested allowing a deduction for improvement costs. However, the Ld. CIT(A) upheld the AO's decision regarding the cost of acquisition, citing a previous decision by a coordinate bench that permitted deduction of the cost of land only. The assessees argued that capital gains should be computed at two stages: at the time of entering the JDA and at the time of sale, based on a High Court decision and contended that the fair market value of the constructed area should be considered as the cost of acquisition.

The Appellate Tribunal noted that the capital gains liability arises at the time of entering the JDA, as per a High Court decision, and the fair market value of the constructed area should be considered as the cost of acquisition. The Tribunal disagreed with the Ld. CIT(A)'s interpretation of the previous decision by the coordinate bench. It emphasized that failure to declare capital gains at the appropriate time should not disentitle the assessee to claim the correct cost of acquisition. Therefore, the Tribunal set aside the Ld. CIT(A)'s decision and remanded the issue back to the AO for a fresh examination in accordance with the law.

In conclusion, the Appellate Tribunal allowed the appeals of the assessees for statistical purposes, emphasizing the need for a reevaluation of the computation of capital gains, specifically the deduction of the cost of acquisition of the flats sold by the assessees. The decision was pronounced on 3rd December 2020.