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TMI Blog2021 (1) TMI 1069X X X X Extracts X X X X X X X X Extracts X X X X ..... S. Bhalekar [ 2018 (5) TMI 1887 - ITAT MUMBAI] wherein has held that the extinguishment of assessee s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly held that the compensation receipt upon extinguishment of right which was held for more than 3 years falls under the head Capital gain under section 45 - direct the AO to allow the claim of the assessee on account of long term capital loss. - Decided in favour of assessee. - ITA No.6528/M/2018 - - - Dated:- 21-1-2021 - Shri Rajesh Kumar, Accountant Member And Shri Amarjit Singh, Judicial Member For the Assessee : Shri Porus Kaka, A.R. For the Revenue : Shri T.S. Khalsa, D.R. ORDER PER RAJESH KUMAR, ACCOUNTANT MEMBER: The present appeal has been preferred by the assessee against the order dated 12.09.2018 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2015-16. 2. The only effective issue raised by the assessee is against the order of Ld. CIT(A) upholding the order of AO whereby the AO has rejected the long term capital loss of ₹ 3,37,09,505/- as made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the letter of intent was issued in favour of the assessee. According to the AO the assessee has merely made a deposit with the developers which is refundable to the assessee along with compensation subject to certain terms and conditions. The AO further held that when an asset does not exist it is not a capital asset and therefore assessee is not entitled to claim the capital gain on the same and accordingly the claim of the assessee was rejected. The long term capital gain as calculated by the assessee by subtracting indexed cost of acquisition and cost of improvement of ₹ 16,63,09,595/- from sales consideration of ₹ 13,25,99,999/- which comprised of ₹ 10,75,99,999/- as the refund of money already paid to the builder + the compensation of ₹ 2,50,00,000/- awarded by the builder upon cancellation of the letter of intent vide letter dated 02.04.2014 and a net long term capital loss of ₹ 3,37,09,596/- was claimed by the assessee. The AO was not in agreement with the assessee s contentions and added the amount of compensation of ₹ 2,50,00,000/- as income from other sources by holding that the said receipt is not from transfer of capital assets. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree intending purchasers did not sign the letter of surrender dated 2/4/2010 which was signed by the builder and the assessee only. Moreover mere exchange of letters for making investment if any, in shares and Securities and/or flats if any between the assesses and the builder and three so called intending purchasers appears to be of debatable and doubtful in nature. It is also observed from the records that (1) on the date of issue of LOI dated 9/2/2010, neither the shares of the company nor the building was in existence and even the plans for the building construction were not approved by the MCQM, (2) company had the approval to construct the waterfront building only upto the height of 230 feet only, and company was to construct the flats on the 15 the floor at a height of 335 to 346 feet only after requisite permissions from the statutory authorities, 3) when there was no agreement for sale, it was not registered and the agreement for sale was to be executed and registered at a later date and shares transferred thereafter, 4) clause 5 of the LOI clearly states that company shall issue the qualifying securities consisting of class A and B shares only after the obtention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement for the surrender dated 2/4/2010 was signed by the builder cum developer Kunal Corporation only. Moreover, assessee being a senior executive with a company signing and advancing crores of rupees to an unknown entity by way of mere signing of letters on plain paper and not even registering the LOI appears to be very strange and unusual especially when the LOI and other letters exchanged between the assessee and the builder cum developer appear to have been legally drafted and appear to have been vetted by legal experts. Thus it goes on to prove that the arrangement between the assessee and the builder Kunal Corporation and the three intending purchasers-Mehta Mittal and Bijalani were to raise the deposits from the assessee towards securities and assets to be created in future which was contingent in nature, including class A and class B shares which were also issued on completion of construction. It is therefore held that the LOI dated 9/2/2010 was an agreement for accepting deposits from the assessee between the builder and so called three intending purchasers to raise funds by making false promises to the assessee of offering shares and securities and assets to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty which was contingent in nature and these shareholders were to be issued shares on completion of the construction. Therefore, Ld. CIT(A) has wrongly held that the letter of intent dated 09.02.2010 was a deposit raising agreement by hypothecating the future assets to be created by the developers and builders and hence did not conferred any right of ownership to anyone and therefore the same can not be treated as capital asset within the meaning of section 2(14) of the Act. The Ld. A.R. submitted that the findings of Ld. CIT(A) that ₹ 2,50,00,000/- received by the assessee as a compensation upon cancellation of letter of intent on 02.04.2014 was in fact interest on the deposit made with these three shareholders of Kunal Corporation Pvt. Ltd. The Ld. A.R. drew our attention to section 2(47) clause (vi) and submitted that transfer in relation to capital assets also includes any transaction whether by way of becoming a member of, or acquiring shares in, a corporate society company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever which has the effect of transfer or enabling the enjoyment of any immovable property. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for transfer of share in the immovable property, which did not exist as on the date of the Letter of intent nor did they exist as on the date of cancellation of the said Letter of intent, can not be said to be agreement for the purpose of treating the compensation received on cancellation thereof as part of the sales consideration and the resultant Capital Loss. It is submitted that in the State of Maharashtra, transfer of flats is controlled by The Maharashtra Ownership Flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963 (MOFA). The object of this Act as stated therein is that it is an Act to regulate in the State of Maharashtra, the promotion of the construction of, the sale and management, and the transfer of flats on ownership basis. Sec. 4(1) of MOFA, 1963, reads as follows: 4(1) Notwithstanding anything contained in any other law, a promoter who intends to construct or constructs a block or building of flats, all or some of which are to be taken or are taken on ownership basis, shall, before, he accepts any sum of money as advance payment or deposit, which shall not be more than 20 per cent of the sale price enter into a writt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e three shareholders also with countersigned by Mr. Shailendra Bhandari and Mrs. Rina Shailendra Bhandari. A perusal of the said letter of intent dated 09.02.2010 reveals that it contains all the terms and conditions for purchase of flats including total consideration for which flats were to be bought, amount of advance payment to be made on the execution of letter of intent etc and possession etc. The Kunal Corporation was not granted permission to raise the height of the building up the to level of 15th floor and finally the said letter of intent was cancelled vide cancellation agreement dated 02.04.2014. In the said cancellation agreement the assessee was refunded ₹ 10,75,99,999/- paid by the assessee to the Developer during F.Y. 2009-10, 2010-11 2011-12 beside a compensation of ₹ 2,50,00,000/- towards loss of opportunity in settlement of all other claims which the assessee may have in respect of the said properties and agreed that he shall not have any right, title or interest in the said flats under the letter of intent dated 09.02.2010. The assessee computed long term capital gain by taking the sales consideration at ₹ 13,25,99,000/- which was calculated b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as regards specific performance of the agreement etc. In our considered view this letter of intent as good as agreement to sell in all respects and definitely it creates a right in favour of the assessee so far as the property mentioned therein is concerned. We do not find any merit in the contentions of the Ld. D.R. that letter of intent issued by the builder for the purpose of allotment of flat which is not in existence on the date of execution of letter of intent as well as on the date of cancellation of the said letter of intent is not an agreement. The Ld. D.R. relied on the M.H. Ownership Flats Regulation of Promotion, Construction, Sale and Management and Transfer Act, 1963 (MOFA). A perusal of section 4(1) of MOFA, 1963 reveals that the builder shall not accept more than 20% of the sale price under agreement to sale qua the flats which he intents to construct and such agreement shall be registered under Regulation Act, 1908 and such agreement shall be in the prescribed form. According to the Ld. D.R. the seller has not followed the provisions of MOFA which are applicable in the state of MH and therefore the letter of intent can not be treated to have created any interest, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement for sale. Thus, the amount of compensation received by the assessee minus the earnest money paid and the legal and other expenses, was correctly treated by the ITO as capital gain in the hands of the assessee. 11. The case of the assessee is also squarely covered by the decision of the co-ordinate Bench of the Tribunal in the case of ACIT vs. Ashwin S. Bhalekar ITA No.6822/M/2016 A.Y. 2012-13 wherein the co-ordinate Bench of the Tribunal has held that the extinguishment of assessee s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly held that the compensation receipt upon extinguishment of right which was held for more than 3 years falls under the head Capital gain under section 45 of the Act by observing and holding as under: 4. Under the provisions of section 54 of the Transfer of Property Act, 1882, a contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties and it does not of itself create any interest in or charge on such property. Section 40 of the Transfer of Property Act states that where a third ..... X X X X Extracts X X X X X X X X Extracts X X X X
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