2018 (10) TMI 58 - AT - Income Tax

Calculation of capital gain - CIT(A) rejection of the market value rate adopted by the Sub-Registrar relatable to the superstructure as consideration for calculating Long term capital gains - JDA - Held that - There is no finding by any of the Courts that vide JDA, there is no transfer of property u/s 2(47)(v). In fact, in lieu of parting of a portion of its land, the assessee is receiving the consideration in kind (i.e. by way of superstructure on the land retained by it) in future and is therefore, a transfer within the meaning of section 2(47)(v) of the Act. As regards the quantification of the consideration received by the assessee, we find that the capital gains has arisen to the assessee on account of the execution of the joint development agreement. The cost of construction should include only the amount of ₹ 60.00 lakhs which was actually paid and not the entire amount which was agreed to be paid. Further, cost of construction also varies due to duration of construction and also other circumstances. Therefore, at the time of filing of the ROI it is difficult to estimate and consider the cost of construction to the builder as the consideration for the land. When the assessee is offering the capital gains, it can only do so, on the basis of material available before it at that point of time and cannot presume about the events in future. Therefore, the assessee had adopted the SRO value, but as rightly pointed out by the AO and the CIT (A), the same cannot be relied upon in the case as the description of the nature of the building in the SRO certificate did not match with the description of assessee s building. The quality of construction would also differ between building-to-building. SRO value can at best be a guiding factor but cannot be a substitute. Therefore, we reject the assessee s contention that the SRO value should be accepted as the value of the property receivable by the assessee - the cost of construction of the building alone is the right choice, as at the time of assessment proceedings, the cost of construction was available. AO has taken into consideration certain expenditure incurred by the builder which is not part of the cost of construction of the building. The assessee s contention that certain part of consideration has already been offered to tax in the hands of its sister concern also has not been verified by the AO/CIT (A) - remand the issue to the file of the AO with a direction to re-compute the capital gain again by considering only elements which are necessary for the construction of the building as the cost of construction, and not the entire expenditure of the builder, including the compensation agreed to be paid to Kohli Constructions and also the finance charges etc., which are not relevant for computing the cost of the construction - assessee s appeal is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Rejection of market value rate adopted by the Sub-Registrar for calculating Long Term Capital Gains (LTCG).
2. Consideration of the cost of construction incurred by the developer.
3. Inclusion of probable costs in the construction area.
4. Adoption of cost of construction for calculating LTCG.
5. Amount not paid by the developer to M/s Kohli Constructions as part of the cost of construction.
6. Adoption of ?21,38,39,466 as consideration received under the development agreement.
7. Amount payable to M/s Kohli Constructions offered to capital gains tax in Udai Health Care Private Limited.
8. Development rights of ?4,24,08,889 as part of the cost of construction.

Detailed Analysis:

1. Rejection of Market Value Rate Adopted by Sub-Registrar:
The assessee contended that the Sub-Registrar’s market value rate should be used for calculating LTCG. The AO and CIT (A) rejected this, citing that the SRO value did not match the description of the assessee’s building and that the quality of construction varied. The Tribunal upheld this rejection, noting that the SRO value could be a guiding factor but not a substitute for actual cost.

2. Consideration of Cost of Construction Incurred by Developer:
The AO adopted the cost of construction incurred by the builder as the consideration received by the assessee, which the CIT (A) upheld. The assessee argued that the future cost of construction could not be accurately estimated at the time of filing the ROI. The Tribunal agreed that the actual cost of construction could not be estimated accurately at the time of filing the ROI and remanded the issue to the AO for re-computation, considering only relevant construction costs.

3. Inclusion of Probable Costs in Construction Area:
The assessee objected to the inclusion of probable costs in the construction area. The Tribunal directed the AO to exclude any costs not directly related to the construction, such as finance charges and compensation to Kohli Constructions, from the cost of construction.

4. Adoption of Cost of Construction for Calculating LTCG:
The AO adopted a cost of ?3,381.65 per sq.ft for calculating LTCG, which the CIT (A) upheld. The Tribunal found this approach reasonable but directed the AO to re-compute the capital gains by considering only the relevant elements of construction cost.

5. Amount Not Paid by Developer to M/s Kohli Constructions:
The AO included the entire agreed amount of ?1,76,00,000 to Kohli Constructions in the cost of construction, though only ?60,00,000 was paid. The Tribunal directed the AO to consider only the actual payment of ?60,00,000 in the re-computation of the cost of construction.

6. Adoption of ?21,38,39,466 as Consideration Received Under Development Agreement:
The AO adopted ?21,38,39,466 as the consideration received, which the CIT (A) upheld. The Tribunal found that the cost of construction should be the basis for consideration but directed the AO to re-compute this by excluding non-construction related costs.

7. Amount Payable to M/s Kohli Constructions Offered to Capital Gains Tax in Udai Health Care Private Limited:
The assessee argued that the amount payable to M/s Kohli Constructions was already offered to capital gains tax in Udai Health Care Private Limited. The Tribunal directed the AO to verify this claim during the re-computation process.

8. Development Rights of ?4,24,08,889 as Part of Cost of Construction:
The assessee contended that the development rights offered to capital gains tax in Udai Health Care Private Limited should not be part of the cost of construction. The Tribunal directed the AO to verify and exclude such amounts from the cost of construction during re-computation.

Conclusion:
The Tribunal remanded the case to the AO for re-computation of capital gains, ensuring only relevant construction costs are considered. The assessee’s appeal was partly allowed for statistical purposes, and the AO was instructed to provide a fair opportunity for the assessee to present its objections.