2014 (3) TMI 288 - AT - Income Tax

Nature of Asset - Whether the development arrangement entered into by the owners is in furtherance of their business activity of real estate development or is only toward realizing a capital asset - No capital gains arises to the assessee prior to A.Y. 2005-06, whereat the entire capital gain under the agreement dated 28.08.2001, as modified by the conciliation deed dated 05.04.2004, inures - To the extent, the same is against cash consideration, the capital gain is assessable u/s.45(1), while to the extent it is against the consideration in kind, i.e., the constructed space, the same is assessable u/s.45(2) - thus, liable to tax in the year of sale of the corresponding stock-in-trade. The difference in the per unit sale price, i.e., between the rates at which it is effected in respect of the assessee and her co-brother, Sh. Bharat Khatiwala even though the consideration for the area foregone for both is qua the same property and from the same person (Developer), being in fact qua the same Agreement - the area foregone for cash consideration, is only toward direct transfer u/s. 45(1) - the area stipulated as consideration for transfer of land being since substituted for cash, the consideration as stipulated, i.e., without reference to a different (or higher) rate for the other would be adopted - the different rate would not have any bearing on the computation of capital gains, which in either case would be per the respective rates - This is also so as the Revenue has not doubted the genuineness of the arrangement, and neither invoked s.50C. The assessee has worked out the area finally retained (6172.75 sq. ft.), and which would therefore be subject to capital gains u/s. 45(2), at 11%, qua which there is though no adjudication. Besides, how and in what manner, in case of any difference between the parties, would the issue get resolved. The ld. CIT(A) has also himself not given finding of the entire capital gains as having been computed by the assessee in terms of his findings. We have already stated that we consider this aspect as integral to the income determination (qua the relevant agreement). Accordingly, while presenting our observations in the matter (which may not be considered as final findings, but only as representing our understanding), we remit this aspect back to the file of the first appellate authority, so that the due process of adjudication is observed and no prejudice caused to either side; there being no argument on this aspect of the matter before us. We shall, nevertheless, clearly state the basis on which our calculation is premised to enable its appreciation. What is important is that internal consistency is maintained inasmuch as it is only the transfer consideration as agreed to and arrived at between the parties that forms the basis of the determination of the land and the construction component of the assets under reference, with the Revenue having not applied s.50C - Each method would have its pluses and minuses, being essentially an estimation exercise, so that what is paramount is that internal consistency, or the integrity of the computation, is maintained. The value of the capital asset (land) treated as stock-in-trade and the construction as reckoned for computing the capital gains, shall become the cost thereof for the purpose of computing the business income on its sale/transfer - The capital gain, though arising in the year of conversion/treatment as stock-in-trade, so that the same is to be computed applying the fair market value on the date of conversion/treatment, i.e., 05.04.2004, the charge to tax is deferred to the year of actual sale or transfer of the asset - the difference between the final sale (transfer) consideration and the cost, so arrived at, would be chargeable u/s.28 as business income; the assessee selling one flat and two flats in the previous years relevant to A.Ys. 2005-06 and 2006-07 respectively thus, the matter remitted back to the CIT(A) for computation of capital gain as well as the business income arising to the assessee for both the years Decided in favour of Assessee.

Issues Involved:
1. Nature of the development arrangement and its classification as a business activity or capital asset realization.
2. Computation of capital gains and business income arising from the development arrangement.
3. Year of taxability of the income arising from the development arrangement.

Issue-wise Detailed Analysis:

1. Nature of the Development Arrangement:
The primary issue was whether the development arrangement entered into by the owners was in furtherance of their business activity of real estate development or merely for realizing a capital asset. The authorities below determined that the arrangement was a part of the business activity. The CIT(A) noted that the appellant, along with the co-owner, carried out a systematic activity to exploit the land to realize its full market value. The contract with Romell Properties was seen as outsourcing the construction and development activity, which the co-owners would have otherwise undertaken themselves. The built-up area received by the appellant was deemed stock-in-trade, and the land appurtenant thereto was also converted into stock-in-trade. The Tribunal found that the sequence of events leading to the property becoming the individual property of the two members in the business of real estate development indicated a planned scheme for property development. The Agreement with the developer was part of this scheme, and the Tribunal upheld the view that the development arrangement was indeed a business activity.

2. Computation of Capital Gains and Business Income:
The second issue involved the computation of capital gains and business income arising from the development arrangement. The Tribunal noted that the Agreement dated 28.08.2001, modified by the conciliation deed dated 05.04.2004, had a significant impact on the income arising to the assessee. The modification increased the cash component of the consideration and decreased the consideration in kind (constructed area). The Tribunal found that the land appurtenant to the flats retained by the assessee formed part of the stock-in-trade of her business. The Tribunal directed that the cost of construction, as per the ready reckoner rates, should be added to the cash consideration to determine the value of the land transferred. The Tribunal emphasized maintaining internal consistency in the computation and remitted the matter back to the CIT(A) for detailed computation, considering the observations made.

3. Year of Taxability:
The third issue was the year of taxability of the income arising from the development arrangement. The Tribunal found that no capital gains arose to the assessee prior to A.Y. 2005-06, and the entire capital gain under the agreement dated 28.08.2001, as modified by the conciliation deed dated 05.04.2004, inured in A.Y. 2005-06. The capital gain was assessable under Section 45(1) to the extent it was against cash consideration, and under Section 45(2) to the extent it was against the consideration in kind (constructed space). The Tribunal directed that the capital gain should be computed applying the fair market value on the date of conversion/treatment (05.04.2004) and the charge to tax deferred to the year of actual sale or transfer of the asset.

Findings:
The Tribunal summarized its findings as follows:
a) No capital gains arose to the assessee prior to A.Y. 2005-06.
b) Capital gain was assessable under Section 45(1) for cash consideration and under Section 45(2) for constructed space consideration.
c) The value of the capital asset treated as stock-in-trade and the construction thereon should become the cost for computing business income on its sale/transfer.

Decision:
The Tribunal remitted the matter back to the CIT(A) to compute the capital gains and business income for both years under reference, considering the Tribunal's findings and observations, and allowing both parties to be heard. The assessee's appeals were allowed for statistical purposes.

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