2014 (4) TMI 399 - AT - Income Tax

Assessability of capital gains of property Development agreement - Whether it is assessable in the year in which the development agreement was entered into or in the relevant subsequent year in which the area duly developed and constructed coming to the share of the assessee-owner has been handed over to the assessee - Held that - The decision in Ms. K. Radhika Versus Deputy Commissioner of Income-tax, Central Circle-2 2011 (9) TMI 257 - ITAT HYDERABAD followed - Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration - Though it has been noted by the AO that the assessee has handed over the possession of the property for development within a week of entering into the development agreement, it appears from the material available on record, there is no activity undertaken by the developer during the year, to discharge the obligations cast upon it by the development agreement - no deemed transferred could be inferred and no capital gains could be brought to tax in the hands of the assessee - the CIT(A) was justified in deleting the addition made by the AO in that behalf thus, the order of the CIT(A) upheld Decided against Revenue. Determination of sale consideration Rejection of claim with regard to cost of improvement Validity of re-computation of capital gain Held that - The assessee was disputing the adoption of anything other than the disclosed sale consideration for the semi-finished apartment sold, and thus disputing the SRO rate as per S.50C, in terms of sub-section (2) of S.50C - the CIT(A) should have directed the AO to refer the matter to the Valuation Officer - Having failed to do so, the order of the CIT(A) cannot be sustained the CIT(A) has not adhered to the procedure as per S.50C in its totality, which mandated, in the event of dispute by the assessee as to the adoption of value as per SRO, a reference to the valuation cell thus, the order of the CIT(A) set aside and the matter is remitted back to the AO for examination of the matter after following the procedure envisaged in S.50C of the Act Decided partly in favour of Revenue. In view of the above discussion in the impugned order of the CIT(A) and the remand report of the Assessing Officer to him, which discussed at length the overwhelming evidence against the assessee, and in the absence of any evidence brought on record by the assessee, to counter the findings and observations of the Revenue authorities for denying the claim of the assessee with regard to the expenditure incurred on improvement, i.e. rock cutting, there was no justification to interfere with the order of the CIT(A) - thus, the order of the CIT(A) is upheld in denying the assessee s claim with regard to expenditure incurred on the improvement of the asset Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Year of assessability of capital gains for the assessment year 2004-05.
2. Determination of sale consideration and cost of improvement for the assessment year 2007-08.

Issue 1: Year of Assessability of Capital Gains (Assessment Year 2004-05)

The primary issue in the Revenue's appeal for the assessment year 2004-05 (ITA No.1356/Hyd/2012) concerns the year of assessability of capital gains arising from a property subject to a development agreement. The assessee filed a return of income admitting a total income of Rs.76,200, which was later assessed at Rs.45,23,400, including short-term capital gains of Rs.44,47,200. The Assessing Officer (AO) noted that the assessee had given land to a developer under a development agreement dated 24.7.2003 and handed over possession within a week. The AO brought the capital gains to tax in the year the development agreement was executed, relying on the Tribunal's decision in Dr. Maya Shenoy's case.

On appeal, the CIT(A) deleted the addition, relying on the Tribunal's decision in Smt. K. Radhika and Others, which held that capital gains should be assessed when the developed area is handed over to the assessee, not merely when the development agreement is signed. The Tribunal upheld the CIT(A)'s decision, noting that no development activity had occurred during the year under appeal, and thus, no deemed transfer could be inferred.

Issue 2: Determination of Sale Consideration and Cost of Improvement (Assessment Year 2007-08)

In the cross-appeals for the assessment year 2007-08 (ITA No.896/Hyd/13 by Revenue and ITA No.853/Hyd/13 by Assessee), the facts reveal that the assessee declared short-term capital gains of Rs.1,41,770 from the sale of a sixth apartment received under a development agreement. The AO held that capital gains arise in two stages: first, when the land is given for development, and second, when the developed property is sold. The AO computed the sale consideration at Rs.70 lakhs based on enquiries, while the assessee declared it at Rs.22,68,000.

The CIT(A) determined the sale consideration based on the SRO rate at Rs.38,56,040, excluding Rs.2.71 lakhs for minor deficiencies. The CIT(A) rejected the assessee's claim for cost of improvement. Both the Revenue and the assessee appealed against these findings.

The Tribunal held that the CIT(A) erred by not referring the matter to the Valuation Officer as required under S.50C when the assessee disputes the SRO value. The Tribunal set aside the CIT(A)'s order and directed the AO to re-examine the matter, including the nature of the construction and the sale consideration, by referring it to the Valuation Cell.

Regarding the cost of improvement, the Tribunal upheld the CIT(A)'s rejection of the assessee's claim for rock cutting expenses, as there was no evidence to support the claim, and the remand report indicated no rock was present on the land when the development began.

Conclusion:

The Tribunal dismissed the Revenue's appeal for the assessment year 2004-05, upheld the CIT(A)'s deletion of the addition, and partly allowed the cross-appeals for the assessment year 2007-08 for statistical purposes, directing a re-examination of the sale consideration and cost of improvement by the AO. The order was pronounced on 4.4.2014.