2014 (10) TMI 1078 - AT - Income Tax

Deduction u/s 54F - Taxability of compensation received by the assessee from the developer under the head capital gains - assessee has given his old flat and obtained compensation amount and new flat - agitating the taxing of the monitory value of the additional area of 210 sq. ft. under the head capital gains - entitlement to deduction u/s 54F - HELD THAT - The assessee along with other owners of the flat and the society has collectively handed over the land and flats for re-development, meaning thereby, the existing right of the assessee over his flat got extinguished and in lieu thereof the assessee has obtained a compensation of Rs. 11,00,000/- and a new flat having an area of 660 Sq.ft. Hence, in our view, the Ld CIT (A) was justified in holding that the impugned transaction is liable for Capital gains tax. We are of the view that the value of new flat and the compensation received is to be considered as the sale consideration received on giving of old flat. Against the same, the assessee is entitled to deduct the indexed cost of acquisition of old flat and the indexed cost of improvement, if any, incurred in respect of that flat in order to arrive at the Capital gain. Since the new flat is obtained on transfer of old flat, the assessee s claim for deduction u/s 54 of the Act is also justified, i.e., the assessee is entitled to avail deduction u/s 54 of the Act in respect of the cost of the new flat. Accordingly, we modify the order passed by Ld CIT (A) and restore the matters to the file of the assessing officer with the direction to compute the capital gain in terms of the discussion made supra. Needless to mention, the assessee should be given necessary opportunity of being heard. Assessee appeal allowed.

Summary

Issues:
1. Taxability of compensation received by the assessee from the developer under the head 'capital gains'.
2. Taxation of the monetary value of the additional area of 210 sq. ft. received by the assessee under the head 'capital gains'.
3. Claim of deduction under section 54F of the Income Tax Act by the assessee.

Analysis:
1. The assessee received compensation of Rs. 11,00,000/- and additional area of 210 sq. ft. in a redevelopment agreement with a developer. The Assessing Officer (AO) treated the compensation and the value of the additional area as taxable under 'Income from other sources'. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld this decision, considering the total consideration as capital gains. The Tribunal found that the transaction involved surrendering rights for redevelopment, making it a commercial transaction. The Tribunal held that the compensation and additional area were taxable as capital gains.

2. The assessee argued that only the transfer of additional Floor Space Index (FSI) should be considered for capital gains tax, as there was no cost of acquisition for the additional FSI. However, the Tribunal noted that the society, not the assessee, was the lessee of the land, contradicting the assessee's claim. The Tribunal found that the old flat's rights were extinguished in exchange for compensation and a new flat, justifying the taxability of the transaction as capital gains.

3. The Tribunal distinguished the case from precedents where Transferable Development Rights (TDR) were involved, as the assessee here exchanged the old flat for a new one and compensation. The Tribunal rejected the assessee's reliance on other case laws, emphasizing that the society, not the assessee, held the rights over the plot. The Tribunal allowed the deduction under section 54 of the Act for the cost of the new flat, directing the AO to compute the capital gains accordingly and granting the assessee a hearing opportunity.

In conclusion, the Tribunal allowed the assessee's appeal, modifying the CIT(A)'s order and directing the AO to calculate the capital gains considering the value of the new flat and compensation received, while allowing the deduction under section 54 of the Income Tax Act.