No Capital gains if possession not given persuant to joint development agreement
short overview : Possession had not been given to developer by assessee society. In fact developer had filed a suit for specific performance in 2014 which was still pending before High Court. Hence, there was no transfer within the meaning of section 2(47)(v) read with section 53A of Transfer of Property Act, 1882, even based on part performance of the contract and accordingly, there could not be any incidence of capital gains.
Assessee society entered into joint development agreement (JDA) as regards certain plot of land. AO sought to tax long-term capital gain during the year under consideration based on part performance of contract.
it is held that Possession had not been given to developer by assessee society. In fact developer had filed a suit for specific performance in 2014 which was still pending before High Court. Hence, there was no transfer within the meaning of section 2(47)(v) read with section 53A of Transfer of Property Act, 1882, even based on part performance of the contract and accordingly, there could not be any incidence of capital gains.
Decision: In assessee’s favour.
Distinguished: Chaturbhujdas Dwarikadas Kapadia in (2003) 260 ITR 491 (Bom) : 2003 TaxPub(DT) 1029 (Bom-HC).
IN THE ITAT, MUMBAI BENCH
PAWAN SINGH, J.M. & M. BALAGANESH, A.M.
ITO v. State Bank of India Staff Vaibhav Co-op. HSG. Ltd.
ITA No. 5324/Mum/2016, CO No. 8/Mum/2018 (Arising out of ITA No. 75324/Mum/2016)
19 June, 2019
Appellant by: Santanu Kumar Saikia
Respondent by: P. Daniel
M. Balaganesh, A.M.
This appeal in ITA No. 5324/Mum/2016 and Cross Objection in CO No. 8/Mum/2018 for assessment year 2011-12 arise out of the order by the learned Commissioner (Appeals)-44, Mumbai in Appeal No. Commissioner (Appeals)44/ITO32(3)(3)/ITA.371/15-16, dated 16-06-2016 (learnd Commissioner (Appeals) in short) against the order of assessment passed under section 143(3) read with section 147 of the Income Tax Act, 1961 (hereinafter referred to as Act), dated 27-3-2015 by the learned Pr. Commissioner-32, Mumbai (hereinafter referred to as learned Assessing officer).
2. Though the revenue had raised various grounds, we find that the only effective issue to be decided in this appeal of the revenue is as to whether the learned Commissioner (Appeals) was justified in deleting the addition made on account of long term capital gains in the facts and circumstances of the case.
3. The brief facts of this issue are that the assessee is a Co-operative Housing Society with 57 members. It had not filed any return of income for the assessment year 2011-12. The PAN of the assessee is allotted in the status of “Association of Persons” (AOP). The learned assessing officer observed that pursuant to the information received from the Director of income Tax (Intelligence & Criminal Investigation), the case of the assessee was reopened by issuance of notice under section 148 of the Act on 30-8-2013 after recording the following reasons :–
“Information had been received from the Director of Income Tax (Intelligence & Cr. Inv), Mumbai that assessee development agreement had taken place between State Bank of India staff “Vaibhav” CHS Ltd. and M/s. Ahura Developers (P) Ltd. It is observed from the agreement executed on 4-11-2010 that the State Bank of India staff “Vaibhav” CHS Ltd. who is the owner of all that piece & Parcel of free land and ground along with 57 Bungalows standing thereon bearing survey No 216, Hissa No 1(pt) & 47(pt) corresponding CTS No. 1877 to 1880, 1880/1 to 4 total admeasuring 29,889 Sq. Mts in Borivali. By the terms of agreement, the developers have to provide 57 flats and 144 car parking spaces to the existing members of the society. Further, the developer is free to utilize the extra FSI available by constructing and sale of building.
The agreement for transfer of these development rights is valued at Rs. 34,69,55,000 by the stamp duty authority whereas the agreement value is Rs Nil. The fact is that the transfer has occurred concerning unutilized FSI in the land and the transfer of land and building being capital assets of the society. Thus, this transaction appears to be covered by section 50C of the Income Tax Act, 1961. It is also observed that the society has received the consideration (on date of transfer of the capital asset being land and building) at Nil which is less than the stamp value. The valuation of stamp duty authority has to be adopted and shall be taken as the full value of consideration.
Further, it also appears from the agreement that the society shall be paid Rs. 50,00,000 by the developer ie 50% at the time of execution and registration of the agreement for development and the remaining 50% at the time of completion of project This amount of Rs. 50,00,000 received by the society is to be taxed under the head income from other source.
In view of the above facts I have reason to believe that the income of Rs. 34,69,55,000 Plus Rs. 50,00,000 totaling Rs. 35,19,55,000 has escaped income. The notice under section 148 of the Income Tax act, 1961 is issued.”
3.1. Pursuant to the said notice under section 148 of the Act, the assessee filed the return of income on 24-2-2015 declaring total income of Rs. 91,311 and after claiming deduction under Chapter VIA of the Act, the assessee has shown Nil income. The primary facts are that the assessee is a cooperative housing society having registration no. BOM/HSG/1962 of 1969 and is registered as a co-operative housing society under the Maharashtra Co-operative Society Act, 1960. The society has 57 members. Each member is having a Bungalow on the plot held by the Society. These Bungalows were old and constructed during the years 1969 to 1973 and the land on which these Bungalows were situated is surrounded on three sides by DAHISAR River and during rainy seasons, there use to be incidence of flooding as these are low lying areas. Vide its Special General Meeting held on 14-8-2009, the society passed a resolution for re-development of the society property. The Society vide Agreement, dated 13-10-2010 entered into a Development Agreement with M/s. Ahura Developers (P) Ltd., whereby the Society authorized the Developer to demolish the said Bungalows and reconstruct a Tower. As per the Development Agreement, the Developer agreed to pay Rs. 50 lakhs as Corpus Fund to the Society and Rs. 40 lakhs to each member of the Society on vacating and handing over their Bungalow to the Developer. The Development Agreement was approved by the 2/3rd majority of the members of the Society. This Development Agreement, dated 13-10-2010 was registered on 14-10-2010 by the Developer and the latter paid the stamp duty of Rs. 1,73,47,750. The Stamp duty valuation of the property of the Society comes to Rs. 34,69,55,000. As per Development Agreement, the Society authorized the Developer to demolish the said old Bungalow and reconstruct the new proposed building after utilizing the entire Floor Space Index (FSI) of the said property as well as maximum permissible Transferable Development Rights (TDR) FSI in respect of the said property. The payment of Rs. 40 lakhs to the member was revised to Rs. 52 lakhs besides a flat with 1300 sq.ft to each member along with two car parking areas vide Supplemental Development Agreement, dated 29-4-2014. The Developer also agreed to pay each of the member rent for temporary alternate accommodation of Rs. 15,000 per month, which was subsequently revised to Rs. 30,000 per month and Rs. 1,50,000 as refundable deposit. The Developer also agreed to provide Bank Guarantee of Rs. 50 Crores and also provide Solvency Certificate for a sum of Rs. 50 Crores.
3.2. After execution of the agreement, the Developer paid 50% of the amount agreed being Rs. 25 lakhs to the Society and the Developer had also paid Rs. 2,24,00,000 to the different members of the Society. The Society was asked as to why capital gains should not be levied in respect of this transaction by issuing show cause notice as under :–
“You have entered into a redevelopment agreement with M/s. Ahura Developers (P) Ltd., for transferring of property being land of the society, vide agreement dtd. 4-11-2010. The stamp duty valuation of this property was Rs. 34, 69, 55, 000 however society have not offered or paid any capital gain on the said transaction, please explain why capital gain for the above transaction of property should not be taxed in the hand of the society applying the provisions of the 50C of the Income Tax Act. 1961.”
3.3. The assessee responded vide letter, dated 19-2-2015 as under :–
“It is true that our Society has entered into a redevelopment agreement with M/s. Ahura Developers (P) Ltd. But it is incorrect to say that the Society has transferred the land to the developer. The land was and is always in the ownership and possession of the society. We had only given the development right to the developer and nothing beyond that. As per the stamp Duty Regulations, the developer is mandatorily required to pay the Stamp Duty on the registered Development Agreement. This liability is also worked out by the Stamp Duty office. This can be verified form the Development Agreement that the developer was only given the right to develop the property and that not an inch of the land was transferred in favour of the developer. As a consequence, there is no capital gain arising to the Society from this transaction.”
3.4. The assessee filed further letter, dated 24-3-2015 to the learned assessing officer by stating as under :–
“Perusal of the Development agreement would reveal that although the development rights have been granted to the developer under the said agreement, even as on today the possession of the property has not been handed over fully to the developer for the reason inter alia that some of the members have not vacated their respective premises. It may be appreciated that para 1.4 of the development agreement very logically and rightly provides that the developer will carry out development of the property by demolishing, bunglows/structures ”’standing on the said property. Since the bungalows and structures have not been vacated therefore, presently neither demolition is possible nor development is possible nor the development is possible.”
4. The learned assessing officer observed that the contention of the assessee society is not acceptable for the reason that the assessee was owner of the capital assets. He placed reliance on the development agreement which provided that Developer is entitled to construct new building by utilizing the entire FSI available to the said land arising from redevelopment. From this he observed that it is thus clear that rights and benefits available to the said land has been transferred to the developer for an agreed consideration. Thus as per the provisions of section 45 of the Act, the assessee is liable to pay capital gains earned on this transaction. With regard to the fact of not handing over the possession of the property as claimed by the assessee and consequently no transfer has taken place, is concerned, the learned assessing officer observed that the same is not acceptable since the assessee has entered into agreement for transfer of property and right in the property and also received part payment as agreed vide the Development Agreement. Therefore, as per section 53A of the Transfer of Property Act, transfer of the property has taken place and assessee should have offered total receipts for taxation in the financial year 2010-11 relevant to assessment year 2011-12. He placed reliance on the decision of Hon’ble Jurisdictional High Court in the case of Chaturbhuj Dwarikadas Kapadia v. CIT reported in (2003) 260 ITR 491 (Bom) : 2003 TaxPub(DT) 1029 (Bom-HC), wherein it was held that capital gain arises on the date of development agreement followed by part performance of the agreement.
4.1. The learned assessing officer worked out the total compensation payable to the society on the above mentioned transaction pursuant to Development Agreement at Rs. 30,14,00,000, whereas the stamp duty value of Development Agreement was Rs. 34,69,55,000. The learned assessing officer observed that provisions of section 50C of the Act would be applicable in the instant case as the asset held by the society is a capital asset. The learned assessing officer observed that the assessee only objected regarding taxability of capital gain but did not raise any objection in respect of applicability of provisions of section 50C of the Act. Accordingly, he determined the total income of the assessee representing long term capital gains at Rs. 34,69,55,000 and completed the re-assessment for the assessment year 2011-12.
5. The assessee pleaded before the learned Commissioner (Appeals) that the assessee society being the owner of the capital asset is not in dispute at all. It referred to last line of Page 5 of the order of the learned assessing officer wherein it is stated as under :–
“It is thus clear that rights and benefits available to the said land has been transferred to the developer for an agreed consideration”.
5.1. The assessee pleaded that it is not clear from where the learned assessing officer arrived at this conclusion. Nowhere it is mentioned that the possession is handed over to the Developer. Besides time and again it was submitted by the assessee society that nothing has been transferred to the Developer. The assessee placed reliance on the co-ordinate bench decision of Mumbai Tribunal in the caes of Bhatia Nagar Premises Co-operative Society Ltd. v. ITO reported in (2013) 59 SOT 134 (Mumbai) in (ITA No. 7789/Mum/2012, dt. 21-6-2013) wherein it was held that property can be held to be transferred under a Development Agreement only when possession is handed over to the Developer and not on the agreement date, when only a small portion of consideration was received.
5.2. The assessee further pleaded that in respect of “Consideration received by the Society from Developer”, the learned assessing officer went on to add every benefit which will be accrued to anyone will be treated as income in the hands of the society. It was again pleaded that there was no transfer of a capital asset by the assessee society.
5.3. The assessee pleaded further that an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head “capital gains” as opposed to assets in the acquisition of which no cost at all can be conceived. Reliance in this regard was placed on the decision of Hon’ble Jurisdictional High Court in the case of CIT v. Sambhaji Nagar Co-Op-Hsg. Society Ltd. reported in (2015) 370 ITR 325 (Bom) : 2015 TaxPub(DT) 325 (Bom-HC).
5.4. In view of the aforesaid decision, the assessee society pleaded that :–
(a) Firstly, there is no transfer under section 2(47) of the Act.
(b) Secondly, even if it is presumed that there is any transfer still it cannot be taxed under the head capital gain because there is no cost of acquisition and not capable of having a cost of acquisition.
6. The learned Commissioner (Appeals) deleted the addition made towards long term capital gains in the sum of Rs. 34,69,55,000 by observing as under :–
“3.7 I have carefully gone through the assessment order as well as the submissions of the appellant. I have also studied the details filed by the appellant. From the facts of the case as emerging out of assessment order there are three related issues which have to be decided. They are :–
I. Is there a capital asset which has been transferred?.
II. Even if there is a capital asset which has been transferred, does this transfer lead to incidence of capital gain.
III. Is there application of section 50C in this case?
3.8 Regarding the first question an impression is created from a study of assessment order that as per the assessing officer, the assessee has entered into agreement for transfer of property and right in property. So what is the nature of the property? If the property sought to be transferred is meant to be land and building then clearly facts of the case do not point to this conclusion. Similarly, whether the assessee has relinquished its right over the property? This also does not seem to be the case as from the plain reading of the development agreement, dated 13-10-2010 (registered on 4-11-2010) it is obvious that this agreement is not an agreement for sale rather it is an executor contract with the developer. As per pages 4-5 of the agreement, the assessee has granted rights to the developer for carrying the development of the said property and constructing there upon the new proposed building. The developer shall be entitled to avail additional FSI which may be available in case of redevelopment and in lieu of the area used for widening of the highway or roads or nalla. Then, the question arises whether the assessee has relinquished its right over the property. This also does not seem to be the case as even after redevelopment the society will be the owner of the land. The land and buildings will always be the property of the appellant society and what the developer gets is only additional FSI which is available as per the development control regulations 1991, Further the developer will get such additional FSI only upon happening of certain events which had not taken place till the finalization of assessment. Thus prima facie there does not seem to be any transfer of capital asset.
3.9 Having said that, suppose for argument’s sake it is assumed that there is a transfer of capital asset which is of the nature of additional FSI. In this situation how will the capital gain be computed. The assessing officer has simply taken the value adopted by the Stamp Duty authorities as the full value of consideration. The full value of consideration is a kind of gross receipt which cannot be equated to capital gain. Any capital gain has to be computed in accordance with the provisions of section 48 and 49 of the Income Tax Act 1961. In other words, capital gain has to be computed by making a reference to the cost of acquisition. In the assessment order the assessing officer has not even attempted to compute the long term capital gain and has taken the full value of consideration itself as equivalent to long term capital gain. As per section 55(2) cost of acquisition of many intangible assets are taken to be nil. However, the right to receive additional FSI is not among the list of intangible assets mentioned in section 55(2). In the case of the appellant society the right to receive additional FSI on redevelopment is acquired automatically by virtue of development control regulations of 1991, Even though the above said right can be treated as capital asset the transfer of such capital asset cannot be subject to tax under the head capital gain for reason that there was no cost of acquisition in acquiring the right which has been transferred. Being so, there will be no incidence of capital gain as decided by the jurisdictional Bombay High Court in the case of CIT v. Sambhaji Nagar Co-Op-Hsg. Society Ltd. (2015) 370 ITR 325 (Bom) : 2015 TaxPub(DT) 325 (Bom-HC).
In the case of C.I.T. v. Sambhaji Nagar Co-Op-Hsg. Society Ltd. the jurisdictional High Court held as under :–
“An Asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head “Capital Gains” as opposed to assets in the acquisition of which no cost at all can be conceived.
The assessee-society with the promulgation of the Development Control Rules for Greater Mumbai, 1991, acquired the right of putting up additional construction through transferable development rights. Instead of utilising the right itself, the assessee decided to transfer the right to a developer for a consideration. The assessing officer, for the assessment year 2007-08, held that the assessee transferred a valuable right, which was a capital asset under section 2(14) of the Income Tax Act, 1961. The right created by the 1991 Rules attached to the land owner by the assessee which was acquired for a value. Its title or ownership of the plot enabled the assessee to consume this floor space index/transferable development right. Under these circumstances, the assessing officer held that this was a transfer of a Capital asset held by the assessee, which was chargeable to tax. This was confirmed by the Commissioner (Appeals). The Tribunal, however, held that the Sale of transferable development rights did not give rise to any Capital gains chargeable to tax. On appeal :–
Held, dismissing the appeal, that in the case of the assessee the floor space index/transferable development right was generated by the plot itself. There was no cost of acquisition, which had been determined and on the basis of which the assessing officer could have proceeded to levy and assess the gains derived as capital gains. Additional floor space index/transferable development right was generated by change in the Development Control Rules, 1991. A specific insertion would, therefore, be necessary so as to ascertain its cost for computing the capital gains. Therefore, the transferable development right which was generated by the property and was transferred under a document in favour of the purchaser would not result in the gains being assessed to capital gains. The Tribunal concluded that what the assessee sold was transferable development right received as additional floor space index as per the 1991 Rules. It was not a case of a sale of development rights already embedded in the land acquired and owned by the assessee. The Tribunal found that the assessee had not incurred any cost of acquisition in respect of the right which emanated from the 1991 Rules making the assessee eligible for additional floor space index. The land and the building earlier in the possession of the assessee continued to remain with it. Even after the transfer of the right or the additional floor space index, the position did not undergo any change. The Revenue could not point out any particular asset as specified in sub-section (2) of section 55. The conclusion of the Tribunal was imminently possible on the facts and in the light of the legal-position-as noted by the language of section 55(2).
Similar view has been held by the jurisdictional ITAT Mumbai in the case of New Shailaja Cooperative Housing Society Ltd. v. ITO, (2010) 36 SOT 19 (Mum.) (URO) : 2009 TaxPub(DT) 1126 (Mum-Trib). In this case it has been held by the Mumbai Tribunal as under :–
The assessee was the owner of the land and building and continued to remain the same even after transfer of the said capital asset. Thus, the cost of the land and building of the existing structure could not be attributed to the additional FSI received by means of 1991 Rules. It is true that such right is a Capital asset as per the provisions of section 2(14) but in order to compute capital gains apart from the existence of capital asset, there should be sale consideration accruing as a result of transfer of capital asset as well as the cost of acquisition of the asset along with the cost of any improvement thereto, if any, section 48 sets out the mode of computation of income under the head Capital gains by providing that the expenditure incurred wholly and exclusively in connection with the transfer of a Capital asset along with the cost of acquisition and cost of any improvement, if any, shall be deducted from the full value of consideration received or accruing as a result of the transfer of capital asset. Transfer of capital asset which does not have any cost of acquisition does not result into capital gains chargeable to tax under section 45. The legislature in its wisdom brought out certain categories of Capital assets under section 55(2) as having cost of acquisition of Rs. Nil, where such assets have not been purchased by the assessee for consideration. The effect of this sub-section is that when the assets so specified in sub-section (2) of section 55 are transferred, then the cost of acquisition has been taken at Rs. Nil except where the assessee had acquired such assets by means of purchasing from the previous owner, and the computation of the capital gain would be done accordingly. There is a difference in the situation when cost of acquisition is Rs. Nil and where the cost of acquisition cannot be ascertained or no cost of acquisition has been incurred. The items of capital assets specified in section 55(2) are those for which the cost of acquisition shall be taken at Rs. Nil for computing capital gains. However, if the assessee had not incurred any cost of acquisition on a capital asset and such capital asset does not fall in the category of the capital assets specified in section 55(2) then no capital gain would be charged. It is abundantly clear that the assessee had not incurred any cost of acquisition in respect of the right which emanated from the 1991 Rules making the assessee eligible to additional FSI. The land and building earlier in the possession of the assessee continued to remain with it as such even after the transfer of the right to additional FSI for Rs. 48.96 lakhs. The Departmental Representative could not point out any particular asset as specified in sub-section (2) of section 55, which would include the right to additional FSI. No capital gains could be charged on the transfer of the additional FSI by the assessee for sale consideration of Rs. 48.96 lakhs the reason that it has no cost of acquisition.
3.10 On similar facts same view has been expressed by the jurisdictional Mumbai ITAT in the cases of CIT v. Land Breeze Chs Ltd.(2013) 21 ITR (Trib) 467 (Mum) : 2013 TaxPub(DT) 0430 (Mum-Trib) and ITO v. Lotia Court Chs Ltd. (2009) 27 SOT 36 (MUM.) (URO) : 2008 TaxPub(DT) 2069 (Mum-Trib). Thus, as per the judicial principles coming out of the above judgments of the jurisdictional High court and ITAT it can be seen that even if it is assumed that there was a transfer of capital asset it would not lead to capital gain as there has been no cost in acquiring the asset.
3.11 The third question regarding the application of section 50C becomes irrelevant and immaterial because when there is no incidence of capital gain there is no relevance of section
3.12 There is another aspect of this case which is important to consider. The agreement on which stamp duty valuation has been done is not a sale agreement but is an executory agreement. As per this agreement the transferee will acquire the additional FSI only upon happening of certain events i.e. demolition of old buildings and construction of new buildings. There is no dispute that till the time of finalization of assessment no such thing has taken place. The appellant society has not given possession to the developer. The developer has not even managed to get CC. On similar facts the ITAT, Mumbai in the case of Bhatia Nagar premises CHS Ltd. v. ITO (2013) 59 SOT 134 (Mumbai) in (ITA No. 7789/Mum/2012, dt. 21-6-2013) stated inter alia that “DRA clearly provided that the developer was authorized to demolish and reconstruct old building and simultaneously he was authorized to develop remaining property consuming the principle FSI of the plot and by buying and utilizing additional TDR as per OCR. Therefore, assessee could transfer the additional FSI only on demolition of old building which has not taken place till now. Developer has not been able to obtain even the IOD and CC in respect of reconstruction of the old building as was required to be done under the DRA. The old building has not been demolished till date and members continued to occupy the flats in the old buildings. In such a situation, it could not be said that the assessee has transferred its rights over the FSI to the developer in AY2009-10”
3.13 Facts of the present case are exactly similar to the case quoted above. As per the submission of the appellant dtd 12-4-2016, the bungalows and structures have not been vacated and therefore presently neither demolition nor development is possible. It is further stated that till the date of submission the developer has not even purchased the FS1/TDR as required for redevelopment of the society.
3.14 The assessing officer had relied in his order on the decision of Bombay High Court given in the case of Chatturbhuj Das Kapadia (2003) 260 ITR 491 (Bom) : 2003 TaxPub(DT) 1029 (Bom-HC). owever, this case is distinguishable on facts and law because the issue this case was regarding the year in which the capital gain was d the effect of insertion of clause v. and clause vi in section 2(47) wef-4-1998. In the present case the decision of Mumbai High Court which has come much later is more relevant. On the basis of the above discussions and after considering the totality of facts and principles of law I have come to a conclusion that there is no incidence of capital gain in the hands of the appellant society. Grounds of appeal no. 2,3,4,5 are allowed and consequently addition of Rs. 34,69,55,000 stands deleted.”
7. Aggrieved, the revenue is in appeal before us.
8. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of
(a) Deed of Confirmation – cum – Supplemental Agreement, dated 5-7-2014 (enclosed in pages 1 to 52 of Paper Book) ;
(b) Supplemental Agreeemnt to the Agreement for Development, dated 29-4-2014 (enclosed in pages 53 to 117 of Paper Book) ;
(c) Development Agreement, dated 13-10-2010 (enclosed in pages 118 to 183 to Paper Book) ;
(d) Detailed list of litigation pending in the courts (enclosed in pages 184 to 187 of Paper Book) ;
(e) Letter addressed to JCommissioner, Range 32(30, dated 28-12-2015 (enclosed in pages 188 to 196 of Paper Book) ;
(f) Letter addressed to Addl Commissioner, dated 22-6-2015 (enclosed in pages 197 to 206 of Paper Book) ;
(g) Letter submitted before learned Commissioner (Appeals), dated 12-4-2016 (enclosed in pages 207 to 220 of Paper Book) ;
(h) Letter submitted before learned Commissioner (Appeals), dated 26-4-2016 (enclosed in pages 221 to 225 of Paper Book) ;
(i) Cases pending before Hon’ble Bombay High Court with Case status, etc and of Cooperative Courts (enclosed in pages 226 to 256 of Paper Book) ;
(j) Letter submitted before learned Commissioner (Appeals), dated 9-6-2016 (enclosed in pages 257 to 264 of Paper Book) ;
8.1. We find that as per Development Agreement, the Society authorized the Developer to demolish the said old Bungalow and reconstruct the new proposed building after utilizing the entire Floor Space Index (FSI) of the said property as well as maximum permissible Transferable Development Rights (TDR) FSI in respect of the said property. The payment of Rs. 40 lakhs to the member was revised to Rs. 52 lakhs besides a flat with 1700 sq.ft to each member instead of 1300 sq.ft originally agreed, along with two car parking areas vide Supplemental Development Agreement, dated 29-4-2014. The Developer also agreed to pay each of the member rent for temporary alternate accommodation of Rs. 15,000 per month, which was subsequently revised to Rs. 30,000 per month and Rs. 1,50,000 as refundable deposit. It is the case of the assessee that the possession of the property was not given as on date. Various cases were pending before various courts against the society. Now the Developer had also filed a Suit for specific performance against the society before the Hon’ble Bombay High Court and the same is pending before the Hon’ble High Court. The following issues are to be decided to address the various disputes before us :–
(a) Was there any capital asset transferred within the meaning of section 2(47) of the Act in assessee’s case ?
(b) Even if any asset is transferred then can the value of such an asset be treated as Nil in view of the provisions of section 55(2) of the Act ?
(c) If both the conditions stated above does not prevail, then can there be any relevance to applicability of provisions of section 50C of the Act?
8.2. It would be relevant to get into the definition of “transfer” as per section 2(47) of the Act which is reproduced as under :–
(47) “transfer”, in relation to a capital asset, includes,–(i) the sale, exchange or relinquishment of the asset ; or
(ii) the extinguishment of any rights therein ; or
(iii) the compulsory acquisition thereof under any law ; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or
(iva) the maturity or redemption of a zero coupon bond; or
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or
(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative 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 transferring, or enabling the enjoyment of, any immovable property.‖
8.2.1. From the above definition, it could be seen that the only clause which can be considered is (v) i.e section 2(47)(v) read with section 53A of Transfer of Property Act, 1882. In our considered opinion, the same is not applicable in this case because Possession have not been given to the Developer by the assessee society till today. Infact the Developer had filed a suit for specific performance in 2014 which is still pending before the Hon’ble Bombay High Court. Moreover, we find that the learned assessing officer had addressed a letter in Reference No. ITO 32(3)(4)/Report/2018-19, dated 6-7-2018 to learned Commissioner Departmental Representative, ITAT, Mumbai submitting the report on the factual position on handing over possession of 57 bungalows by the assessee society to the Developer, enclosing the Inspector’s Report who personally visited the site. In the said report, the Ex-Secretary of the assessee society had categorically stated that the possession of land and 57 Bungalows were not handed over to the Developer. It was also stated that there are only 15 Bungalows and remaining physical structures were destroyed or damaged by Flood which occurred in 2005. Some front part of society’s property was also taken by Mumbai Metro for construction work, for which also, the possession was not handed over by the assessee society. The Inspector also placed certain photographs of the building found during the inspection, which admittedly contained lot of old bungalows belonging to assessee society. This letter, dated 6-7-2018 received from the learned assessing officer was also forwarded by the learned Commissioner Departmental Representative ITAT G Bench to this Tribunal vide his letter in Reference No. Commissioner–Departmental Representative/ITAT/G-Bench/2018-19, dated 3-10-2018 which is also forming part of our records. Hence it is categorically clear that possession is not handed over to the Developer by the assessee society. Hence there cannot be any transfer within the meaning of section 2(47)(v) of the Act read with section 53A of Transfer of Property Act, 1882, even based on part performance of the contract. We find that the learned Commissioner (Appeals) had also observed that possession was not handed over to the Developer by the assessee society. This fact was not controverted by the revenue before us. Accordingly, there cannot be any incidence of capital gains. Hence the answer to question no. a) raised hereinabove, is decided in favour of the assessee.
8.3. The provisions of section 55(2) of the Act states as under :–
“55(2) For the purposes of sections 48 and 49, “cost of acquisition”,--(a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business or profession, tenancy rights, stage carriage permits or loom hours,–
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and
(ii) in any other case (not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49, shall be taken to be nil ;
(aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee–
(A) becomes entitled to subscribe to any additional financial asset ; or
(B) is allotted any additional financial asset without any payment, then, subject to the provisions of sub-clauses
(i) and (ii) of clause (b) (i) in relation to the original financial asset, on the basis of which the assessee becomes entitled to any additional financial asset, means the amount actually paid for acquiring the original financial asset
(ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee ;
(iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset ;
(iii) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee ; and
(iv) in relation to any financial asset purchased by any person in whose favour the right to subscribe to such asset has been renounced, means the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company or institution, as the case may be, for acquiring such financial asset ;
(ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for demutualisation or corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange :–
Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil;
((ac) subject to the provisions of sub-clauses (i) and (ii) of clause (b), in relation to a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before the 1-2-2018 shall be higher of–
(i) the cost of acquisition of such asset; and
(ii) lower of–
(A) the fair market value of such asset; and
(B) the full value of consideration received or accruing as a result of the transfer of the capital asset.
Explanation.–For the purposes of this clause,–
(a) “fair market value” means,–
(i) in a case where the capital asset is listed on any recognised stock exchange as on the 31-1-2018, the highest price of the capital asset quoted on such exchange on the said date :–
Provided that where there is no trading in such asset on such exchange on the 31-1-2018, the highest price of such asset on such exchange on a date immediately preceding the 31-1-2018 when such asset was traded on such exchange shall be the fair market value;
(ii) in a case where the capital asset is a unit which is not listed on a recognised stock exchange as on the 31-1-2018, the net asset value of such unit as on the said date;
(iii) in a case where the capital asset is an equity share in a company which is–
(A) not listed on a recognised stock exchange as on the 31-1-2018 but listed on such exchange on the date of transfer;
(B) listed on a recognised stock exchange on the date of transfer and which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31-1-2018 by way of transaction not regarded as transfer under section 47, an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-18 bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later;
(b) “Cost Inflation Index” shall have the meaning assigned to it in clause (v) of the Explanation to section 48;
(c) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43;)
(b) in relation to any other capital asset,–
(i) where the capital asset became the property of the assessee before the 1st day of April, 81(2001), means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 81(2001), at the option of the assessee ;
(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 81(2001), means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 81(2001), at the option of the assessee ;
(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head “Capital gains” in respect of that asset under section 46, means the fair market value of the asset on the date of distribution ;
(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on–
(a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares,
(b) the conversion of any shares of the company into stock,
(c) the re-conversion of any stock of the company into shares,
(d) the sub-division of any of the shares of the company into shares of smaller amount, or
(e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived.”
In the case of the assessee, what is transferred is none of the above items.
8.3.1. We find that even if the property is not transferred, then there is a right created by the “Land Development Control Rules, 1991” attached with the land embedded in it. No detriment is created to cost of land by granting transfer of such rights. There is no element of cost in acquiring such right which had been transferred. Hence if there is no cost, there cannot be any element of capital gains. Reliance in this regard is placed on the decision of the co-ordinate bench of this tribunal in the case of Maheswar Prakash-2 Co-operative Housing Society Ltd. v. ITO reported in (2009) 118 ITD 223 (Mum Trib) : 2009 TaxPub(DT) 0526 (Mum-Trib), dated 15-5-2008 wherein the head notes are as under :–
“Capital gains-Chargeability-Sale of additional FSI or right to construct additional floor-Bombay Municipal Corporation (BMC), in 1991, relaxed the Development Control Regulations, 1991 (OCR) entitling the assessee to additional FSI by virtue of which, assessee became entitled to additional space of 15,000 sq. ft. for further construction-Assessee thereupon entered into agreement with developers for such additional construction for a consideration of Rs. 42 lacs-Transferable development rights (TDR) were to be arranged by the developers at their own cost-AO, took the cost of acquisition of additional FSI at nil and brought the entire receipt of Rs. 42 lacs to tax at long-term capital gains-Not justified-Under the OCR, two distinct and separate rights arose, viz., TDR and the right to construct additional floor-Acquisition of TDR being to the detriment of land surrendered it had an inbuilt cost in the form of cost of land surrendered while the later one arose without any cost-Right to make additional construction on account of increase in FSI as per DCR was no doubt ^capital asset’ under section 2(14) and its assignment ‘transfer’ under section 2(47)-However, right to construct additional floors is not covered by any of the assets mentioned in section 55(2), and therefore capital gains cannot be charged by taking its cost at nil under that provision-Cost of acquisition of right to make additional construction being ‘nil’ de hors and independent of section 55(2), computational provisions failed and the capital receipt could not be brought to tax under section 45-Concept of cost of acquisition of bonus shares could also not be imported as bonus shares are issued to the detriment of original shares but in this case, there was no detriment to the cost of land, rather the same had increased-Further, entire FSI having been exhausted there was no right of additional construction embedded in the land-If the asset has inherent quality of being available on expenditure of money and the assessee has acquired it without cost, then only the cost of acquisition can be taken to be nil – Additional FSI and consequent right to additional construction could not be available to assessee on expenditure of money but for operation of DCR – Receipt was capital receipt not chargeable to tax.
The ultimate conclusion drawn by this tribunal in the said case was as under :–
Right to make additional construction on acquisition of additional FSI by operation of Development Control Regulations, 1991, having no cost of acquisition to assessee, receipt on transfer thereof was capital receipt and could not be charged to tax as capital gains.
Respectfully following the said decision, the question no. b) raised hereinabove is decided in favour of the assessee.
8.4. Since both the questions raised hereinabove are decided in favour of the assessee, the question of applicability of provisions of section 50C of the Act to the same does not arise at all. In any case, the provisions of section 50C of the Act can be applied only for transfer of land or building or both and not for “Rights in Development Agreement”. Reliance in this regard has been rightly placed on the co-ordinate bench of this tribunal in the case of Voltas Ltd. v. ITO in ITA Nos. 5330, 5331 and 5320/Mum/2009 for assessment year 2005-06, dated 16-9-2016 wherein it was held that :–
3.6. Lastly, it was submitted without prejudice to the above submissions that in any case transaction of sale of Development Rights is not covered under section 50C. In support of this argument, learned Counsel drew our attention on other allied provisions of the Act such as section 269A of the Act. Learned Counsel vehemently argued that on this ground itself addition made by the assessing officer becomes illegal and deserves to be deleted.
3.7. Per contra, learned Departmental Representative relied upon the orders of the lower authorities and submitted that the assessing officer has substituted the amount of sales consideration on the basis of report of the DVO. Since, the valuation shown by the DVO is more than the consideration shown by the assessee, therefore, as per section 50C higher value should be adopted.
3.8. We have gone through the submissions of the assessee. We shall first deal with the last argument of the assessee which is directly on the scope of section 50C. The perusal of section 50C shows that the section 50C shall be applicable where the consideration received as a result of transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of State Government………. Thus, it is noted that the term ‘capital asset’ mentioned in the section specifically refers and confines its meaning to ‘land or building or both’. Thus, scope of section 50C is restricted by the legislature itself to these two types of capital assets only.
3.9. Turning back to the facts of the case before us, the capital asset transferred by the assessee was ‘Development Rights in the land’ and not the ‘Land’ itself. If we go through few other similar provisions of the Act, we find that the legislature has used this expression consciously and carefully and keeping in view its need and objective of legislating section 50C. For example, in section 269A, the expression ‘immovable property’ has been defined as under :–
“Immovable property” means–(i) any land or any building or part of a building, and includes, where any land or any building or part of a building is transferred together with any machinery, plant, furniture, fittings or other thing which machinery, plant furniture, fittings or other things also.
Explanation–for the purposes of this (sub-clause), land building part of a building, machinery, plant, furniture, fittings and other things include any rights therein;
(ii) any rights of the nature referred to in clause (b) of sub-section (1) of section 269AB…..”
3.10. Similarly, in section 269 UA also identical definition has been given. In these cases, ‘rights’ in ‘land & building’ have been specifically included as per requirement of these sections. In other words, term ‘land & building’ and ‘rights therein’ have been clearly understood and treated as independent from each other. Thus, the perusal of the definitions given in these sections when compared with section 50C shows that legislature was conscious about the proper expression to be used as per its intention, scope, object and purpose of the section 50C, wherein it has been expressly mentioned that capital asset should be ‘land or building or both’. It has not been mentioned that any type of ‘rights’ shall also be included in the definition of capital assets to be transferred by an assessee.
3.11. The provisions of section 50C are deeming provisions. It is settled law and well accepted rule of interpretation that deeming provisions are to be construed strictly. Thus, while 12 Voltas Ltd. interpreting deeming provisions neither any words can be added nor deleted from language used expressly. We should apply the ‘Rule of Strict Interpretation’ as well as ‘Rule of Literal Construction’ while understanding the meaning and scope of deeming provisions. In our opinion, under the given facts and circumstances, learned Counsel has rightly contended that since the impugned capital asset transferred by the assessee upon which long term capital gain has been computed by the assessing officer is on account of transfer of Development Rights in the land of the assessee. The land itself has not been transferred by the assessee. Thus, in our opinion provisions of section 50C have been wrongly applied upon the impugned transaction. Thus, we reverse the action of lower authorities in applying the provisions of section 50C and in substituting any value other than the amount of actual sales consideration received by the assessee. It is also noted by us that for the assessment year under consideration there is no other provisions on the statute which permit the assessing officer to substitute any other value with the full amount of consideration actually received by the assessee, while computing income under the head of capital gains. Under these circumstances, ground No. 1.2 of the main grounds of the assessee is allowed. Since we have allowed the grounds of the assessee on the preliminary objection itself and therefore we are not dealing with other arguments at this stage as these have been become academic in nature. Thus, supplementary ground nos. 1.5 to 1.10 and original ground nos.1.1 to 1.4 are partly allowed with our directions as given above.
The question no. c) raised hereinabove is also decided in favour of the assessee.
8.5. We find that the learned assessing officer had placed reliance on the decision of Chaturbhujdas Dwarikadas Kapadia in (2003) 260 ITR 491 (Bom) : 2003 TaxPub(DT) 1029 (Bom-HC) supra. We find that in that case, the issue was the year in which the capital gains was taxable and the effect of insertion of clause (v) and (vi) of section 2(47) of the Act with effect from 1-4-2008. This is not the issue in dispute before us. Hence the same is factually distinguishable with the assessee’s case.
9. In view of the aforesaid observations in the facts and circumstances of the case, we find no infirmity in the order of the learned Commissioner (Appeals). Accordingly, the grounds raised by the revenue are dismissed.
10. The learned Authorised Representatives stated before us that the cross objections raised by the assessee are only supportive of the order of the learned Commissioner (Appeals).
11. In the result, the appeal of the revenue is dismissed and cross objection of the assessee is dismissed.