2014 (2) TMI 688 - AT - Income Tax

Taxability of surplus on sale of Development Rights Whether the receipt can be treated as capital receipt or not and non-taxable Held that - The decision in ACIT vs IGE India Ltd 2013 (12) TMI 235 - ITAT MUMBAI followed The TDR is embedded in the land for the purposes of additions made by the owner (or lessee) - The TDR in the form of additional FSI is negotiable by the owner to the buyer/developer only for prospective development - there is no element of cost to the owner On reading of the various clauses of the development agreement, the sale of TDR was acquired on behalf of the developers and sold normally to the developers (as emerging from the Development Agreement) - This is LTCG, but, does not entail any capital gain tax, as there was no cost involved with the assessee s CHS the order of the CIT(A) set aside and the AO is directed to delete the addition Decided in favour of Assessee.

Summary

Issues Involved:
1. Taxability of surplus on the sale of "Development Rights" as Short Term Capital Gain (STCG).
2. Computation of capital gains and the cost of acquisition related to Transfer of Development Rights (TDR).

Detailed Analysis:

1. Taxability of Surplus on Sale of "Development Rights" as STCG:
The primary issue in the appeal was the treatment of the sale of TDR by the appellant Cooperative Housing Society (CHS). The Assessing Officer (AO) determined that since the sale and purchase of TDR occurred within the same financial year, it constituted Short Term Capital Gain (STCG) rather than Long Term Capital Gain (LTCG). This decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

The appellant argued that the TDR was embedded in the land as per the Development Control (DC) Rules of 1991, and thus, the CHS had ownership of the TDR since 1991. The appellant contended that the TDR did not have a cost of acquisition and should not be taxable under capital gains.

The Tribunal reviewed the facts and noted that the CHS was registered under the Maharashtra Cooperative Societies Act, 1960, and the TDR was granted as per the DC Rules of 1991. The Tribunal referred to several precedents, including the decisions in ACIT vs. IGE India Ltd and Sambhaji Nagar CHS vs. ITO, which held that TDR does not have any cost of acquisition and thus, cannot be subjected to capital gains tax.

2. Computation of Capital Gains and Cost of Acquisition Related to TDR:
The appellant argued that the AO erroneously computed the capital gains by only allowing a proportionate cost of Rs. 45,13,035/- for 6887 sq. ft. of TDR, while the consideration related to additional construction and repairs also involved a balance TDR of 2047 sq. ft. The appellant contended that the entire cost of TDR of Rs. 58,54,430/- should be allowable.

The Tribunal examined the development agreement and noted that the CHS acted as a facilitator for the developers to purchase the TDR and additional Floor Space Index (FSI). The Tribunal emphasized that the TDR was embedded in the land and did not involve any cost to the CHS. Thus, the computation of capital gains on the sale of TDR as STCG was misconstrued by the revenue authorities.

The Tribunal relied on the Supreme Court decision in CIT vs. B.C. Srinivasa Setty, which held that if there is no cost of acquisition, no capital gains can be computed. The Tribunal concluded that the sale of TDR did not entail any capital gains tax as there was no cost involved for the CHS.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition made on account of the sale of TDR as STCG. The appeal filed by the assessee was allowed, and all grounds of appeal, including additional grounds, were ruled in favor of the appellant. The Tribunal pronounced the order in the open court on 29th January 2014.