2022 (4) TMI 447 - AT - Income Tax

Deduction under section 54F - Denial of deduction as income derived from sale of assessee s share of built-up area which the assessee was to receive under the JDA had to be regarded as income from business - whether the sale proceeds of the built-up area which the assessee was to receive from the Developer as his share of built-up area under the JDA is to be assessed as Capital Gain or Business Income? - HELD THAT - 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. In order to claim the capital gains separately for land and building, the assessee is required to give basic details like the original cost of acquisition of land and building, the year acquisition etc separately duly supported by necessary documentary evidences as they may be required at the time of scrutiny assessment. 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 ? - In all the registered conveyance deeds, wherein transfer of land and building is involved, an Annexure is appended or there are documents wherein the market values are furnished for the land and the building separately for the purpose of stamp duty valuation. 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. We are of the view that it would be just and appropriate to direct the AO to examine the issue afresh in the light of the directions as given above. The AO will afford opportunity of being heard to the assessee in the set aside proceedings. Appeal of the Revenue is accordingly treated as partly allowed for statistical purposes.

Issues Involved:
1. Whether the assessee is entitled to deduction under section 54F of the Income Tax Act, 1961.
2. Whether the income from the sale of property under a Joint Development Agreement (JDA) should be assessed as "Income from Business" or "Capital Gains".
3. Determination of the nature of the transaction and the intention behind it.
4. Assessment of the holding period and classification of the capital gain as short-term or long-term.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 54F:
The Revenue challenged the CIT(A)'s decision to allow the deduction claimed under section 54F of the Income Tax Act, 1961, amounting to ?4,48,10,155/-. The Revenue contended that the nature of the transaction should attract business income rather than capital gains. The CIT(A) held that the assessee did not exploit the asset for commercial benefit, thus qualifying for the deduction under section 54F. The Tribunal upheld the CIT(A)'s decision, concluding that the assessee's actions were consistent with an intention to invest in a residential unit rather than engage in a commercial activity.

2. Nature of Income - Business Income vs. Capital Gains:
The primary issue was whether the sale proceeds from the built-up area received under the JDA should be assessed as business income or capital gains. The AO argued that the transaction was part of the assessee's business in real estate, thus constituting business income. However, the CIT(A) and the Tribunal found that the assessee's intention was to invest in property for personal use, not for commercial exploitation. The Tribunal emphasized that the property was not brought into the firm as a business asset and that the firm did not engage in any business activities. The Tribunal concluded that the income should be assessed as capital gains.

3. Determination of the Nature of the Transaction:
The Tribunal analyzed whether the transaction constituted an adventure in the nature of trade. Citing the Supreme Court's decision in G. Venkataswami Naidu Vs. CIT, the Tribunal noted that a single or isolated transaction could be considered an adventure in the nature of trade depending on the facts and circumstances. The Tribunal found that the assessee's actions did not indicate an intention to engage in trade. The property was held for over five years before entering into the JDA, and the partnership formed later did not change the nature of the initial investment.

4. Holding Period and Classification of Capital Gain:
The Tribunal addressed the issue of whether the gain should be classified as short-term or long-term capital gain. The Revenue argued that the holding period of the built-up area was less than 36 months, making it a short-term capital gain. However, the Tribunal noted that the flats were sold before completion, and what was sold was the right to receive the flats, which was held for more than 36 months. The Tribunal remanded the issue to the AO to determine whether the sale involved the built-up area or the right to receive the built-up area and to compute the capital gain accordingly.

Conclusion:
The Tribunal upheld the CIT(A)'s decision that the income from the sale of the built-up area received under the JDA should be assessed as capital gains and not business income. The Tribunal directed the AO to re-examine the computation of capital gains, considering the nature of the asset sold and the holding period. The appeal was partly allowed for statistical purposes.

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