2022 (10) TMI 373 - AT - Income Tax

Correct head of income - surplus arising from Joint Development Agreement (JDA) - business profit or Long Term Capital Gains - assessee is holding this ancestral land and sold by her and in return got new flats in 4 Nos. for a consideration and monetary consideration - HELD THAT - GPA s supplementary agreement and construction agreement entered into between the assessee and the developer company, it shows only the intent of the assessee and purpose of the assessee in all the above to get the new residential house in lieu of old without any outflow of money. According to us, as per records assessee neither had any knowledge or capability about the business or property development nor had any intention to do so as the assessee gave a general power of attorney in favour of the builder accordingly. All the activities were done by builder through GPA whereby builder was authorized to do all such things as is necessary to enable construction of flats and also to sell the same. GPA was restricted to the extent of builder s right at 73.33% of the land and that portion allotted as builder s share and the balance 26.67% was retained by the assessee. In our view, the entire above transaction is purely sale of plot to the builder and in turn received monetary consideration and balance 4 Flats valued - Hence, according to us, this is a transaction of capital gains and assessee s transaction is that of Long Term Capital Gain. Hence, we direct the A.O to treat the transaction as LTCG and assess the same accordingly. Whether the assessee is entitled to claim of deduction u/s. 54 or 54F? - Because the assessee has been allotted 4 residential Flats against the sale of her ancestral land or in lieu of development of her ancestral land. We noted that this issue has been considered by the Hon ble Madras High Court in the case of Tilokchand Sons 2019 (4) TMI 713 - MADRAS HIGH COURT wherein a residential house as occurring in s. 54(1) of the Act can include more than one or plural residential house. The Hon ble High court has considered even the amendment which is effective from 01.04.2015 and applicable far and from assessment year 2015-16 and the relevant assessment year before us 2014-15. Hence, the amendment will not apply in this case. We direct the A.O to allow the claim of deduction u/s. 54 and allow the claim of the assessee.

Summary

Issues Involved:
1. Classification of surplus arising from Joint Development Agreement (JDA) as business profit versus Long Term Capital Gains.
2. Eligibility for exemption under Section 54F of the Income Tax Act for multiple units obtained under the JDA.

Issue-wise Detailed Analysis:

I) Classification of Surplus from JDA:
The primary issue was whether the surplus arising from the JDA should be treated as business profit or as Long Term Capital Gains. The assessee entered into a JDA with a builder, selling a plot of land and receiving four flats and monetary consideration in return. The Assessing Officer (A.O) treated this transaction as an "adventure in the nature of trade," thus classifying the surplus as business profit. The CIT(A) upheld this view, noting that the assessee's activities were commercial in nature.

However, the ITAT observed that the assessee's intent was to sell ancestral land and receive residential flats and monetary consideration, not to engage in a commercial venture. The ITAT noted that the assessee lacked the knowledge or capability for property development and had merely given a General Power of Attorney (GPA) to the builder. The transaction was deemed to be a sale of ancestral land, resulting in Long Term Capital Gains, not business income. The ITAT directed the A.O to treat the transaction as Long Term Capital Gains.

II) Eligibility for Exemption under Section 54F:
The second issue was whether the assessee could claim exemption under Section 54F of the Act for the multiple residential units received. The A.O denied this exemption, arguing that the assessee received four distinct flats, each with a different address, and thus did not qualify for the exemption under Section 54F, which allows for only one house property.

The ITAT referred to the Hon'ble Madras High Court's decision in the case of Tilokchand & Sons Vs. ITO, which held that the term "a residential house" could include multiple units. The ITAT noted that the amendment restricting the exemption to one residential house was effective only from 01.04.2015 and was not applicable to the assessment year in question (2013-14). Consequently, the ITAT directed the A.O to allow the exemption under Section 54F for the multiple units, following the precedent set by the Madras High Court.

Conclusion:
The ITAT ruled in favor of the assessee on both issues. It directed that the surplus from the JDA be treated as Long Term Capital Gains and allowed the exemption under Section 54F for the multiple residential units received. The appeal of the assessee was allowed, and the order was pronounced on 21st September 2022.