2024 (5) TMI 1361 - AT - Income Tax

Revision u/s 263 - Treatment of Sale of Residential Property as Short-Term or Long-Term Capital Asset - Appropriation Between Land and Building for Capital Gains Computation - determination of share of property under a JDA - CIT considered the order as erroneous and prejudicial to the interest of the Revenue since the Ld. AO has erred in treating the asset as long term capital asset - CIT considered the sale as short term capital gains and consequently concluded that deduction claimed u/s. 54EC of the Act is not allowable - HELD THAT - We do not agree that the residential flat was in existence at that time, since the completion and possession was granted during Feb 2011. In flats/multi-storied apartments/commercial complexes, the ownership consists of owning undivided share of land and built-up area and these together is the property. It has two components and ownership of both components of undivided share of land and ownership of building is necessary to complete title to a flat. Generally, when a JDA is entered into the owner of the land offers it to a developer with an understanding that he will retain undivided share of land proportionate to his share of built-up area and the undivided share of land proportionate to the built-up area which falls to the share of the developer is agreed to be sold. Therefore, the owner of the property retains undivided share of land proportionate to his share of built-up area. When the built-up area is delivered to the owner of the land and when he sells his share, he again transfers not only the built-up area but also proportionate undivided share of land. In such transaction, there will be no bifurcation of cost of land and building. AO has to call for details and arrive at the cost of undivided share of land and built-up area. When the owner sells his share of built-up area, the built-up area is acquired when the developer delivers possession of the built-up area to the owner but the undivided share of land is already owned by the owner. When an owner sells his share of property under a JDA he sells two components one is undivided share of land which he held for a longer period than the building and the building which he gets from the developer on completion of the building and the period of holding of the building is much shorter than the period of holding of the land. The concept of bifurcation of undivided share of land and built-up area is a well recognized concept. In practice, a building and the land appurtenant thereto held by an assessee, could be transferred together to a transferee through a single conveyance deed against a lumpsum monetary consideration. In such cases, the question on the method of computing the long term capital gains arises (i.e.) whether the long term capital gain/short term capital gain could be computed for land and building separately? This question assumes paramount importance since the period of holding will decide whether the capital gain is long term or shorter and the indexed cost of acquisition and improvement thereto in respect of these assets will vary depending upon the period of holding. Based on the holding period of these assets, the capital gain is long term or short term and the indexed cost of acquisition could be computed. Likewise in order to claim the indexed cost of improvement necessary documents in support of the improvements done and the expenditure incurred thereon have to be also maintained by the assessee. How to appropriate the sale consideration for the transfer of land and building if a lump-sum monetary consideration is received by the transferor from the transferee when the transfer is effected through a single conveyance deed. As per section 50C as amended by the Finance Act 2009, where the consideration received or accruing as a result of transfer of land and/ or building is less than the value adopted or assessed or assessable by an authority of the State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of consideration received or accruing as a result of such transfer for computing capital gains. The market value of the immovable property transferred as indicated in the sale deed will be equivalent to the actual sale consideration received by the transferor from the transferee. If this value exceeds the value adopted or assessable by the Registration Authority for stamp duty purposes, the said sale consideration as appropriated to land and building as per Annexure or other documents attached with the registered sale deed could be adopted for the purpose of computing the capital gains. If the sale consideration is lesser than the value adopted or assessable by the Registration Authority for stamp duty purposes, then such value so adopted by the Registration Authority as appropriated between the land and building could be adopted as deemed sale consideration for the respective assets for the purpose of computing the capital gains. Thus we are of the view that the Ld. CIT has erred while invoking the powers u/s. 263 of the Act without considering the appropriation between land and building, and hence the order u/s. 263 deserves to be quashed. It would be just and appropriate to direct the AO to examine the issue afresh in the light of the directions as given above. We therefore allow the ground raised by the assessee for statistical purposes.

Summary

Issues Involved:
1. Treatment of sale of residential property as short-term or long-term capital asset.
2. Appropriation between land and building for capital gains computation.
3. Validity of invoking powers u/s 263 of the Income Tax Act.

Summary:

Issue 1: Treatment of Sale of Residential Property as Short-Term or Long-Term Capital Asset

The assessee, a Non-Resident Indian, sold a flat on 12/12/2012 for Rs. 44,15,000/- without filing a return of income for AY 2013-14. The Ld. AO reopened the case u/s 147 and issued a notice u/s 148. The assessee declared total income of Rs. 7,74,600/- and claimed NIL capital gains after indexation and cost of improvement. The Ld. AO partly disallowed these claims and assessed the total income at Rs. 7,80,035/-. The Ld. CIT invoked powers u/s 263, considering the order erroneous and prejudicial to the revenue, treating the sale as short-term capital gains since the possession of the flat was taken in February 2011, less than three years before the sale. The Tribunal observed that the date of the Joint Development Agreement (JDA) should be considered as the date of acquisition, not the date of possession.

Issue 2: Appropriation Between Land and Building for Capital Gains Computation

The Tribunal noted that ownership of a flat includes both undivided share of land and built-up area. The Ld. CIT failed to consider the bifurcation of these components. The Tribunal emphasized that the long-term capital gains could be computed separately for land and building, as supported by various judicial precedents. The AO should call for details and compute the capital gains accordingly, considering the holding period of both components.

Issue 3: Validity of Invoking Powers u/s 263 of the Income Tax Act

The Tribunal found that the Ld. CIT erred in invoking powers u/s 263 without considering the appropriation between land and building. The Tribunal quashed the order u/s 263 and directed the AO to re-examine the issue afresh, considering the bifurcation of land and building and the relevant judicial precedents.

Conclusion:

The appeals filed by the assessees are allowed for statistical purposes, directing the AO to re-examine the issues in light of the Tribunal's directions. The decision in ITA No. 292/Viz/2023 applies mutatis mutandis to ITA No. 295/Viz/2023.