Capital gains is a Long-term or short-term capital gain arising from giving up of rights on flats in favour of developer within 36 months of date of JDA

Short Overview : Consideration of 14 flats for giving up related rights in favour of developer was received by assessee within a period of three years from the date of JDA. In such circumstances, concerned flats assumed the character of ‘short-term’ capital asset and gain on such transfer was rightly assessed by AO as STCG.

Assessee entered into a JDA and declared profit on giving up his rights on 14 flats in favour of developer as long-term capital gain. AO taxed the same as short-term capital gain.

it is held that consideration of 14 flats for giving up related rights in favour of developer was received by assessee within a period of three years from the date of JDA. In such circumstances, concerned flats assumed the character of ‘short-term’ capital asset and gain on such transfer was rightly assessed by AO as STCG.

Decision: Against the assessee.

IN THE ITAT, BANGALORE BENCH

N.V. VASUDEVAN & JASON P. BOAZ, JJ.

Sri Suresh C. v. Dy. CIT

ITA No. 1625/Bang/2016

A.Y. 2006-07

12 April, 2019

Appellant by: Narendra Sharma, Advocate

Respondent by: R.N. Siddappaji, Addl.Commissioner

N.V. Vasudevan, J.

This is an appeal by the assessee against the Order, dt. 29-7-2013 of the Commissioner (Appeals)-LTU, Bangalore, relating to assessment year 2006-07.

2. The assessee is an individual. He owned property in Bangalore in S.No. 151/2A, Vibbhutipura Village, K.R.Puram, Bangalore being land measuring 1 Acre and 6 Guntas (hereinafter referred to as ‘the property’). He entered into a Joint Development Agreement (JDA), dated 20-1-2003 with M/s. Ittina Properties (P) Ltd. for carrying out development over the land owned by her by constructing flats. As per the JDA, the assessee was to get 27 flats as his share of built up area in consideration for transferring 70% undivided share of property. Out of the 27 flats, the Assessee retained for himself 13 flats and sold the remaining 14 flats to the Developer for a consideration of Rs. 1,46,15,100. The sale of 14 flats to the developer by the Assessee admittedly gave raise to Short term Capital Gain (STCG). On acquiring 13 flats under JDA the gain was admittedly Long Term Capital Gain (LTCG). The dispute raised in the various grounds of appeal before the Tribunal is with regard to computation of STCG and LTCG.

3. As far as the LTCG on acquiring 13 flats by the Assessee under the JDA is concerned, the learned counsel for the Assessee submitted before us that the Assessee is entitled to claim deduction under section 54F of the Income Tax Act, 1961 (Act) and no part of the LTCG is taxable. In ground No. 2 raised by the Assessee before the Tribunal, the Assessee has only questioned the manner of determination of LTCG and not a ground regarding deduction under section 54F of the Act. However in Gr.No. 6 a specific ground seeking deduction under section 54F of the Act has been raised. Since the said claim for deduction under section 54F of the Act is a legal claim and can be adjudicated on the basis facts already on record, the same is taken up for consideration. The relevant provisions of section 54F of the Act, reads thus :–

’54F. Profit on sale of property used for residence:–(1) Subject to the provisions of sub-section (4) where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, not being a residential house,(hereinafter referred to as the original asset), and the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereinafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section that is to say,–

………”

“Provided that nothing contained in this sub-section shall apply where –

(a) the assessee–

(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or

(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or

(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and

(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.)

‘Provided that nothing contained in this sub-section shall apply where the assessee owns on the date of the transfer of the original asset, or purchases, within the period of one year after such date, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset.’

In support of the claim that deduction under section 54F of the Act is to be allowed on acquiring 13 flats under JDA, the learned Counsel for the assessee relied on a decision of the Hon’ble ITAT in the case of Smt. Netravathi v. ITO in ITA No. 2630/Bang/2017 Order, dt. 25-4-2018.

4. In the case of Smt. Netravathi (supra) similar claim for deduction under section 54F of the Act on multiple flats acquired under a JDA was subject matter of dispute before the Hon’ble ITAT. In that case the assessing officer examined the claim of Assessee for deduction under section 54F of the Act. He held that as per the proviso (a)(i) to section 54F(1), deduction under section 54F of the Act is allowed only for a residential house. Since the Assessee purchased 13 flats the same cannot be one residential house. Moreover as per proviso (a)(ii) if the Assessee purchases more than on residential house within the time specified in the proviso the claim made in respect of one residential unit also has to be disallowed. He also observed that the enquiries revealed that the Assessee has sold two flats out of her share of built up area in assessment year 2015-16. He held that the condition that the new asset should not be sold within the period mentioned in section 54F(3) of the Act has also been contravened. The assessee placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. K.G Rukminiamma (2011) 331 ITR 211 (Karn) : 2011 TaxPub(DT) 429 (Karn-HC), wherein the Hon’ble Karnataka High Court held on the facts of the case which are identical to the case of the assessee (though in the context of section 54 of the Act which is pari materia the same as section 54F of the Act) as follows :–

“8. For a proper appreciation of the aforesaid contention, it is necessary to have a careful look at Section 54 of the income Tax Act, which reads as under :–

’54. Profit on sale of property used for residence:–(1) Subject to the provisions of sub-section where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of a long-term capital asset, being. buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head Income from house property” (hereafter in this section referred to as the original asset), and the assessee has within a period of one year before or two years after the date air which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions 01 this section , that is to say–

2. …………”

9. A reading of the aforesaid provision makes it very clear that the property sold is referred to as original asset in the section . That original asset in described as buildings or lands appurtenant thereto and being a residential house. Therefore, it is not mere a residential house.” ‘ The residential house may’ include buildings or lands appurtenant thereto. The stress is on the use to which the property is put to. Only when that asset was used as a residential house, which may consist of buildings or lands appurtenant thereto, the income derived from the sale of such a residential house is chargeable under the head ‘income from house property.” If the assessee has within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed a residential house, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the aforesaid provisions. In this part of the section also, the words “a residential house” is again used. The said residential house necessarily has to include buildings or lands appurtenant thereto. It cannot be construed as one residential house in this context it is useful to refer to section 13 of the General Clauses Act, 1987 which reads as under :–

“13. Gender and number.–In all Central Acts and Regulations, unless there is anything repugnant in the subject or context–

(1) Words importing the masculine gender shall be taken to include females; and

(2) words in the singular shall include the plural, and vice versa”

10. The context in which the expression ‘a residential house’ is used in Section 54 makes it clear that, it was not the intention of the legislation to convey the meaning that it refers to a single residential house, if that was the intention, they would have used the word “one.” As in the earlier part, the words used are buildings or lands which are plural in number and that is referred to as “a residential house”, the original asset. An asset newly acquired after the sale of the original asset also can be buildings or lands appurtenant thereto, winch also should be “a residential house.” Therefore the letter ‘a’ in the context it is used should not be construed as meaning “singular.” But, being an indefinite article, he said expression should be read iii consonance with the other words ‘buildings’ and ‘lands’ and, therefore, the singular ‘a residential house also permits use of plural by virtue of section 13(2) of the General Clauses Act. This is the view which is taken by this court in the aforesaid Anand Basappa’s case in ITA No. 113/2004, disposed of on 20-9-2008.

11. We, therefore, do not see any merit in the submission of the learned counsel for the revenue.

12. In the instant case, the facts are not in dispute. On a site measuring 30′ x 110′, the assessee had residential premises. Under a joint development agreement, she gave that property to a builder for putting iii. flats. Under the agreement eight flats are to be put up in that property and four flats representing 48% is the share of the assessee and the remaining 52% representing another four flats was the share of the builder. So the consideration for selling 52% of the site is four flats representing 48°/o. All the four flats are situate in a residential building. These four residential flats constitute a residential house” for the purpose of section 54. Pro-it on sale of property is used for residence. The four residential flats cannot be construed as four residential houses for the purpose of section 54. It has to be construed only as “a residential house” and the assessee is entitled to the benefit accordingly.

13. In that view of the matter, the Tribunal as well as the appellate authority were justified in holding that there is no liability to pay capital gain tax as the case squarely falls under section 54 of the income Tax Act. Hence, we do not see any substantial question of law arising for consideration in this appeal. Accordingly, the appeal is dismissed.”

5. The assessee also pointed out that the decision of the Hon’ble Karnataka High Court has been followed by the Hon’ble Delhi High Court in the case of CIT v. Gita Duggal (2013) 357 ITR 153 (Del) : 2013 TaxPub(DT) 960 (Del-HC) and the Hon’ble Andhra Pradesh High Court in the case of CIT v. Syed Ali Adil (2013) 352 ITR 418 (AP) : 2013 TaxPub(DT) 1290 (AP-HC).

6. Before the Tribunal, the assessee apart from relying on the decision of Hon’ble Karnataka High Court in the case of K.G. Rukminiamma (supra) also relied on the decision of Hon’ble Madras High Court in the case of CIT v. Smt. V.R Karpagam Tax Appeal No. 301 of 2014 judgment, dated 18-8-2014, wherein the Hon’ble Madras High Court has also taken a similar view.

7. The learned Departmental Representative had submitted that very same Hon’ble Karnataka High Court in the latter judgment in the case of CIT v. Late Khhbchand M Makhija in ITA No. 496/Bang/2007 judgment, dated 18-12-2013 took the view contrary to the view taken by the Hon’ble High Court in the case of K.G Rukminiamma (supra).

8. Similar arguments raised were considered and decided by the ITAT in the case of Smt. Netravati (supra). The tribunal after hearing the rival contentions held as follows :–

“11. We have given careful consideration to the rival submissions.–We find that the facts of the Assessee’s case are similar to the case of Smt. K.G. Rukminiamma (supra) decided by the Hon’ble Karnataka High Court. In the case of K.G. Rukminiamma, the facts were on a site measuring 30′ x 110′ the assessee had a residential premises. Under a joint development agreement she gave that property to a builder for putting up flats. Under the agreement 8 flats are to be put up in that property and 4 flats representing 48% is the share of the assessee and the remaining 52% representing another 4 flats is the share of the builder. So the consideration for selling 52% of the site was 4 flats representing 48% of built up area and the 4 flats are situated in a residential building. The Court held that the 4 flats constitute ‘a residential house’ for the purpose of sec 54. The 4 residential flats cannot be construed as 4 residential houses for the purpose of sec 54. It has to be construed as “a residential house” and the assessee is entitled to the benefit accordingly. In that view of the matter, the Court held that the Tribunal as well as the appellate authority were justified in holding that there is no liability to pay Capital Gains tax as the case squarely falls under section 54 of the Income Tax Act, 1961. As far as the decision of the Hon’ble Madras High Court in the case of V.R. Karpagam (supra) is concerned the facts were similar to the case of the assessee. The assessee in the case of V.R. Karpagam entered into an agreement with M for development of a piece of land owned by it-As per agreement, assessee was to receive 43.75% of built up area after development, which was translated into five flats. The Assessee claimed exemption under section 54F on the value of five flats. The assessing officer granted benefit of capital gains in respect of one flat and the Commissioner (Appeals) affirmed findings of assessing officer holding that claim of assessee under section 54F for all five flats could not be admitted, but however, he took the view that the assessee would be entitled to benefit of s 54F in respect of one single flat with largest area. In appeal, tribunal held that assessee was eligible for exemption under section 54F on all five flats received by her in lieu of land she had parted with and word ‘a’ appearing in s 54F should not be construed in singular, but should be understood in plural. The Madras High Court upheld the order of the Tribunal. It was also held that amendment was made to s 54F with regard to word ‘a’ by Finance (No. 2) Act, 2014 with effect from only from 1-4-2015 withdrawing deduction for more than one flat (residential house). Post amendment, viz., from 1-4-2015, benefit of s 54F will be applicable to one residential house in India. However, prior to said amendment, a residential house would include multiple flats/residential units. Similar decisions were rendered on identical facts by the Hon’ble Madras High Court in the case of CIT v. Gumanmal Jain (2017) 80 taxmann.com 21 (Mds). As far as the decision of the Hon’ble Karnataka High Court in the case of Khubchand Makhija (supra) is concerned, as rightly pointed out by the learned counsel for the Assessee the facts of the aforesaid case are clearly distinguishable from the facts of the case of the Assessee and the facts of the case of K.G. Rukmaniamma (supra) decided by the Hon’ble Karnataka High Court. In the case of the Late Khubchand M Makhija (supra), the facts were that one residential house was sold and the Long Term Capital Gain on such sale was used to buy two independent residential houses. This aspect has been noticed by the Hon’ble Court in paragraph 15 & 16 of the judgment in the case of Khubchand M. Makhija (supra) wherein the distinguishing facts between the facts of K.G. Rukminiammal (supra) and the facts of the case Khubchand M. Makhija (supra) were brought out by the Hon’ble Karnataka High Court. In the present case all the 13 flats were situate in the same premises and, therefore, the decision rendered in the case of Smt. K.G. Rukminiamma (supra) will apply. In the light of above judicial pronouncements on identical facts and circumstances of the case of the assessee we are of the view that the Assessee is entitled to deduction under section 54F of the Act on all the 13 flats and there was no capital gain chargeable to tax in the hands of the assessee. We hold and direct accordingly and allow the appeal of the Assessee.”

9. We are of the view that the facts of the Assessee’s case are identical to the case decided by the Tribunal in the case of Smt. Netravati (supra). Respectfully following the same, we hold that the Assessee is entitled to benefit of deduction under section 54F of the Act, on the 13 flats which he got as his share of built up area from the developer under the JDA. The LTCG brought to tax by the revenue authorities is accordingly directed to be deleted. Gr.No. 6 is accordingly allowed. In view of decision on Gr.No. 6 and Gr.No. 2 raised by the Assessee does not require any adjudication.

10. As far as Ground Nos. 3, 4 & 5 are concerned; the same are in relation to STCG on sale of 14 flats out of 27 flats which were earmarked as share of the assessee under the JDA.

10.1. The first issue raised in Ground No. 3 is as to whether the gainin-question is an STCG or LTCG? This issue was not raised by the assessee before the lower authorities. Perusal of the records shows that assessee entered into a JDA on 20-1-2013 and a supplementary agreement dt. 23-2-2004 with the developer. The share of 27 flats which were to be allotted to assessee was identified and it is shown as Item No. 2 in Schedule-B of the supplementary agreement. The admitted factual position is that the sum of Rs. 1,46,15,100 was received as consideration of 14 flats by the assessee for giving up his rights in favour of the developer. The said sum was received within a period of three years from the date of JDA. In such circumstances, the 14 flats on which rights were given up in favour of the developer by the assessee were held by assessee for a period of less than 36 months and therefore, those flats assume the character of ‘Short Term Capital Asset’. The act of giving of rights over those 14 flats would amount to a transfer and since such transfer is of a Short Term Capital Asset, the gain on such transfer was rightly assessed by the Revenue authorities as STCG.

10.2. We find no merit in Ground No. 3 raised by the assessee. Hence, the same is dismissed.

11. As far as Ground No. 4 raised by assessee is concerned, the dispute is with regard to Fair Market Value (FMV) as on 1-4-1981 of the 14 flats that were given up in favour of the developer. The admitted factual position was that assessee was entitled to claim the benefit of adopting FMV as on 1-4-1981 while computing the cost of acquisition of the capital asset for determination of capital gain. The assessee claimed FMV as on 1-4-1981 at Rs. 300 but had no evidence in support of his claim.

11.1. On the other hand, the assessing officer was able to identify a sale instance of a property in Survey No. 160/2 in Vibuthipura Varthur Hobli, which sale instance was dt. 29-6-1981. The value as per the said sale deed was Rs. 0.33 per Sq. Ft. The Commissioner (Appeals) gave a benefit of higher value at Rs. 1 per Sq. Ft., and computed the FMV as on 1-4-1981 to arrive at the cost of acquisition of the property by the assessee.

11.2. Aggrieved by the aforesaid order of Commissioner (Appeals), assessee raised Ground No. 4 before the Tribunal.

11.3. The dispute is with regard to rate to be adopted as FMV as on 1-4-1981. It is no doubt true that the Revenue authorities claim for adopting FMV as on 1-4-1981 at Rs. 1 per Sq. Ft., has the backing of the sale instance. We are however, of the view that in such matters, it is not possible to identify identical property as that of assessee for determination of FMV as on 1-4-1981, giving the benefit of doubt to assessee, We are of the view that it would be just appropriate in the given facts and circumstances of the case to adopt the FMV as on 104-1981 at Rs. 50 per Sq. Ft. Assessing officer is accordingly directed to compute STCG on sale of 14 flats by the assessee to the developer. Ground No. 4 is accordingly partly allowed.

12. As far as Ground No. 5 is concerned, the claim by the assessee is with regard to cost of improvement of land, the cost of improvement to the land which should be taken into consideration while determining the capital gain. The admitted position is that no evidence in support of such claim was filed before the Revenue authorities or before the Tribunal. In the given facts and circumstances of the case, we are of the view that there is no merit in Ground No. 5 raised by the assessee. Hence, this ground is dismissed.

13. Ground No. 7 raised by the assessee is with regard to treating the sum of Rs. 6 Lakhs, which was paid as refundable deposit under the JDA as income of the assessee. The admitted factual position stated by the assessing officer in para 7 of the assessment order is that this sum was never returned by the assessee to the developer. In these circumstances, we uphold the orders of Revenue authorities and find no merit in Ground No. 7 raised by the assessee. Hence, the same is dismissed.

14. Ground No. 8 is with regard to the year in which capital gain has to be taxed. Since this ground was not pressed, the same is dismissed as not pressed.

15. Ground Nos. 9 and 10 are general in nature and are consequential and needs no adjudication.

16. In the result, the appeal filed by assessee is partly allowed.