Query – Capital gain issues on surrender of Land (held as capital asset) in lieu of TDR, sale of TDR, applicability of section 50C in case of sale of TDR etc.

1. A) By means of DRC [DevelopmentRight Certificates] the Govt. or Local Authority allows the land-owners to exploit the potential of the land acquired by the Authority on any other land. Thus in effect what the landowner looses is not the FSI but merely the land to which it is attached and continues to retain to himself, the right of developing its potential viz. FSI. Therefore, though it can be said that there is a transfer (since compulsory acquisition is a transfer within the meaning of section 2(47) of I.T. Act), there is no gain arising to the land owner, but in fact there may be loss since value of FSI in respect of receiving land may have less market value. Again, though the landowner may have lost his right of enjoyment of his land, he has fully retained its exploitation value which is not transferred by him or taken by the Govt. Thus what Govt. retains is land without FSI i.e. land without any value. As such there does not appear to be any charge of capital gains tax being attracted in case of issue of DRC/TDR to the landowner against the surrender of the land.

1. B) However, on transfer of any DRC/TDR there is transfer, within the meaning of section 2(47) and liability u/s.45 may arise. Though there is a view that there is no cost to the owner of DRC and on that ground charge of Capital Gains can be avoided.I personally, do not ascribe to this view.

1. C) It is a case of sale ofdevelopmentrights already embedded in the land owned by the assessee. The land earlier in the possession of the assessee does not continue to remain with it, on getting the DRC. Thus cost of land surrendered is the cost of DRC. In case of land acquired before 01.04.1981, in view of section 55(2)(b)(i) the cost of acquisition is to be adopted as FMV as on 01.04.81, as certified by the approved registered valuer for the purpose.

 

[In Shakti Insulated Wires Ltd. vs. Jt. CIT (2003) 87 ITD 56 (Mum.) it was held that development rights are embedded in the ownership of the land are recognized as distinct from the land as per DCR and therefore constitute capital asset and Fair Market Value of development rights as on 1-4-81 should be taken as cost of acquisition for indexation.]

1. D) As a natural corrolary, for the purpose of determiningperiod of holding of capital asset,the date of acquisition of DRC will be the date when land was acquired. This will determine whether the Development Rights transferred are short-term or long-term asset.

1. E) Next issue is, whether section 50C is applicable in case of transfer of TDR/DRC?

The issue is debatable one. However, there are judgements in favour of assessee.

ITO vs. Prem Rattan Gupta, ITAT Mumbai: S. 50C does not apply to transfer of FSI & TDR

Case Details:

The assessee owned a plot of land admeasuring 2244.18 sq. mts of which 2110 sq. mts was acquired by the Municipality fordevelopment purposes. The assessee was entitled to receive TDR/ FSI in lieu of the land acquired. The assessee sold the development rights to the said property for Rs. 20 lakhs and computed capital gains on that basis. However, for purposes of stamp duty, the property was valued at Rs. 1.19 crores. The AO held that the value of the property as adopted by the stamp duty authorities had to be taken as the consideration u/s 50C for purposes of capital gains. This was reversed by the CIT(A). On appeal by the department to the Tribunal,

 

HELD:

1. 50C applies only to the transfer of “land or building” and not to the transfer of all “immovable property“. Accordingly, though FSI and TDR is “immovable property” as held in Chedda HousingDevelopmentvs. Babijan Shekh Farid 2007 (3) MLJ 402 (Bom), it is not “land or building” and so cannot be the subject matter of s. 50C.

 

NOTE: Please note that the recent judgements of Bombay HC [Ex: CIT vs. Sambhaji Nagar Co-op. Housing Society [2015] 54 taxmann.com 77 (Bombay) etc.] saying that there is no cost of acquisition attached to TDR/DCR and accordingly there is no taxable capital gain on transfer of TDR, are mostly in case of Housing societies and its members which are getting the TDR/DCR free of cost in view of new DC Rules, 1991 without there being any surrender of land. Accordingly, the same is not applicable to situation discussed above.