2022 (1) TMI 655 - HC - Income Tax

Computation of capital gain - determination of full value of consideration - guidance value to be adopted as consideration for computing capital gain - Value of consideration to be received in the form of constructed area at 26% - section 50C/50D applicability - HELD THAT - In the present case AO has adopted the rate of ₹ 1250/- per square feet merely based on the letter given by the developer which is not supported with any particulars. It cannot be ruled out the possibility of the developer giving an inflated figure to suit his requirements in order to gain minimum tax on his profits by inflating his costs. As such, the basis for determination of full value of consideration by the Assessing Officer based on the letter of the developer cannot be appropriate. No doubt at the relevant period, no provision was available in cases where the consideration received or accruing as a result of transfer of a capital asset by an assessee is not ascertainable. Section 50D inserted by Finance Act, 2012 with effect from 01.04.2013 would throw some light on the said issue. As per the memorandum to Finance Bill, 2012, the reasoning for inserting Section 50D cost of construction would not be the appropriate method to arrive at the full market value of consideration When the scheme of the Act does not contemplate the method of computation, no capital gains could be computed - As to overcome this aspect, a machinery provision has been introduced by way of Section 50D of the Act. Though the said provision has come into effect from 1.4.2013, it certainly throws some light on the mode of computation under Section 48 of the Act. In the circumstances, we are of the considered opinion that the guidance value of the land or the guidance value of the building would be appropriate mode to determine the full value of consideration in the case of a transfer where consideration for the transfer of a capital asset is not attributable or determinable. Hence, guidance value adopted by the Tribunal cannot be faulted with. Having regard to the facts and circumstances of the case, the Tribunal having exercised its discretionary power adopted the guidance value of the land as the mode for determination of full value of consideration, the same being not perverse or arbitrary, we are not inclined to interfere with the impugned order - no substantial question of law arises for our consideration.

Summary

Issues Involved:
1. Determination of full value of consideration for computing capital gains under a Joint Development Agreement (JDA).
2. Applicability of guidance value versus cost of construction for capital gains computation.
3. Interpretation of Sections 45, 48, 50C, and 50D of the Income Tax Act, 1961.
4. Revenue neutrality and its impact on capital gains tax.

Detailed Analysis:

1. Determination of Full Value of Consideration for Computing Capital Gains Under a Joint Development Agreement (JDA):

The primary issue revolves around the determination of the "full value of consideration" when an assessee enters into a JDA. In ITA No.11/2017, the assessee was entitled to 26% of the constructed area, and the assessing officer computed long-term capital gains by treating the cost of construction as the full value of consideration. The Commissioner of Income Tax (Appeals) and the Tribunal, however, considered the guidance value as the full value of consideration. Similarly, in ITA No.653/2016, the Tribunal upheld the guidance value for computing capital gains, leading to the Revenue's appeal.

2. Applicability of Guidance Value Versus Cost of Construction for Capital Gains Computation:

The court examined whether the guidance value or the cost of construction should be adopted for computing capital gains. The Revenue argued for the cost of construction, referencing Section 48 of the Act, which specifies that the "full value of consideration" should be interpreted with reference to the cost of construction. However, the Tribunal and the court found that the guidance value was a more appropriate method, especially considering the absence of specific provisions in the Act for JDAs during the assessment years in question.

3. Interpretation of Sections 45, 48, 50C, and 50D of the Income Tax Act, 1961:

Section 45 deals with the chargeability of capital gains, while Section 48 prescribes the mode of computation. Section 50C addresses cases where the consideration is less than the value adopted by the stamp valuation authority, and Section 50D, effective from 01.04.2013, deals with cases where the consideration is not ascertainable. The court noted that although Section 50D was not applicable for the assessment years in question, it provided clarity on the issue. The court referenced the Supreme Court's interpretation in Commissioner Of Income-Tax, West V/s. George Henderson And Co. Ltd., which stated that the "full value of consideration" should be what the transferor receives in exchange for the asset, not the market value of the asset transferred.

4. Revenue Neutrality and Its Impact on Capital Gains Tax:

The court emphasized the concept of revenue neutrality, noting that any capital gains accrued to the assessee after receiving the possession of the property would be subject to capital gains tax in the year of such sale. The Tribunal observed that the issue was revenue-neutral, as any subsequent sale of the built-up area would attract capital gains tax. The court cited Commissioner of Income-tax V/s. Excel Industries Ltd., and Commissioner of Income-tax V/s. Bilahari Investment [P.] Ltd., to support the view that disputes with minor tax effects or revenue-neutral outcomes should not be pursued aggressively by the Revenue.

Conclusion:

The court concluded that the guidance value of the land or building is the appropriate method for determining the full value of consideration in cases where the consideration for the transfer of a capital asset is not ascertainable. The Tribunal's adoption of the guidance value was deemed neither perverse nor arbitrary. Consequently, the appeals were dismissed, and no substantial question of law was found to arise for consideration.