|CORAM:||Ramit Kochar (AM), Saktijit Dey (JM)|
|SECTION(S):||28, 45, 48, 50C|
|CATCH WORDS:||capital gains, Development agreement|
|DATE:||July 27, 2016 (Date of pronouncement)|
|DATE:||August 10, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 50C: Land purchased by a builder with the knowledge that there are encumbrances on it and development is not feasible is a “capital asset” and not “stock-in-trade”. The gains on transfer of such land is assessable as capital gains and not as business profits. S. 50C applies to development agreements if the effect of the development agreement read with the conveyance deed is that the entire land with ownership rights are transferred|
(i) The assessee had purchased the title and interest in the land from the Rebello Family in 1994. The land so purchased by the assessee from the Rebello family in the year 1994 was subject to several encumbrances and defects which are also listed in the purchase agreement dated 15-08-1994 . The said land was also occupied by tenants/Kuls who are having claims in the said land. The said Rebello family earlier sold the land in the year 1979 to ‘Sweet Homes’ and also handed over possession to them. The said Sweet Homes made part payments under the said agreement to sale executed by Rebello family in favour of ‘Sweet Homes’ in the year 1979. The Rebello family had also executed the power of attorney in 1979 in favour of ‘Sweet Homes’ with respect to this land. The said agreement to sale entered into between Rebello family and ‘Sweet Homes’ in the year 1979 was not yet been cancelled by the ‘Sweet Homes’. There was also no approach road as well no right to way /access with respect to the afore-said land. It was also in the new revised development plan of ‘R’ ward sanctioned by the State Government in the year 1993 whereby the portion of the property was reserved for public purposes of garden, secondary school, houses for dishoused , roads as well for residential purposes. The assessee had also not undertaken any development or construction of the building on the said land since it acquired interest and title in the land in the year 1994 till the date of sale by the assessee. No approval was even taken by the assessee from the Government for development of the said land or construction of building thereof since interest and title in the land was acquired by the assessee in the year 1994 till the date of sale by the assessee. The assessee was fully aware that the land is having several encumbrances/defects in its title at the time of its acquisition in the year 1994 itself which duly find mentioned in the purchase agreement dated 15-08-1994. The said land was carried by the assessee in its books of accounts/Balance Sheet as ‘Investment in properties’ since its acquisition in the year 1994 till the date of sale, and was never ever reflected as stock in trade in its books of accounts/Balance Sheet. The assessee did not spend any amount on the land development or construction of building thereon after its acquisition apart from spending on legal charges and payment of interest.
(ii) The assessee sold development rights in the land for Rs 58 lacs during relevant previous year to three different parties as against stamp duty value adopted by the authorities of Rs.3.51 crores. In-fact on perusal of the development agreements read along with and in conjunction with the conveyance/confirmation deeds executed by the assessee in favour of the buyers, it is clear that the assessee in-fact sold the land with all attached rights of ownership to the buyers for Rs.58 lacs with further rights to sell, construct etc. in favour of the buyers. These development agreements along with conveyance deed/confirmation deeds entered into by the assessee with the three parties are placed in paper book page 95-787. Thus, if the facts and circumstances are seen in totality, it is crystal clear that the assessee made an investment in the year 1994 by acquiring interest in the land knowing fully well that there are several encumbrances/defect in the land so acquired by the assessee from Rebello family and the assessee can gain profits by way of appreciation in the value of land with efflux of time as well by removing defects / encumbrances with which the land was then saddled with at the time of acquisition of title and interest in the land and also knowingly well that in the revised development plan of ‘R’ Ward sanctioned by the State Government, the portion of the land is reserved for secondary school and residential purposes. The assessee was fully aware at the time of acquisition in the year 1994 itself that the development of land and construction of building thereon in near future is not possible in view of several encumbrances and defects in the title of the land with which the land was saddled with , but the assessee was fully aware that the assessee can earn profits from this investment in land by way of appreciation in the value of land with efflux of time as well with removal of defects and encumbrances with which land was saddled with keeping in view also that the development plan of ‘R’ ward was sanctioned by the State Government in the year 1993 whereby there was reservation earmarked for some portion of this land for secondary school and residential zone.
(iii) Thus, we are of the considered view, the investment was made by the assessee in the year 1994 for acquiring this land from Rebello family as investment for long term basis by the assessee knowing fully well that the land is suffering from several encumbrances and defects in its title as set out above, with an objective to make long term gains on appreciation in value of land due to efflux of time and also by removing defects and encumbrances in the land. The assessee was also fully aware that there was no possibility of development and construction of building on the land in the immediate near future due to several encumbrances and defects in the title of the land with which the land was saddled with as set out above. The assessee therefore reflected the said land as ‘investment in properties’ in its books of accounts since the year 1994 till it was sold as intention was always to hold the land for a long period of time to earn gains by way of appreciation in the value of the land. The assessee has also not demonstrated that there was any project conceived by the assessee to be undertaken on this land for construction or development nor any approvals were even applied for with the Government for development/construction on the said land despite the land being retained for almost 12-13 years by the assessee.
(iv) Keeping in view the ratio of decisions cited by learned DR as detailed above and overall facts and circumstances of the case in totality, we also find that section 50C of the Act is clearly applicable even to the sale of development rights in the land as was held in the decisions relied upon by the learned DR as detailed above , more-so we have already held that in-fact the assessee has not only sold development rights in the land but the assessee sold the entire land with ownership rights in the land if the development agreement are read in conjunction with deed of confirmation / conveyance executed by the assessee which are placed in paper book filed with the Tribunal. Thus, the land which was sold during the previous year by the assessee, thus keeping in view our above discussions in the light of facts and circumstances of the case, was a capital asset within the provisions of Section 2(14) of the Act and the valuation of the land as per stamp duty valuation authorities as per section 50C of the Act was rightly adopted by the AO as full value of consideration but in our considered view the gains arisen to the assessee in the instant case thereon shall however be long term capital gains as the interest and title in the land has been acquired by the assessee in the year 1994 itself from Rebello family and the assessee shall also be entitled for benefit of cost inflation indexation while computing cost of acquisition and improvement thereon as per provisions of Section 48 of the Act .
(v) Thus, to the extent it was held by the AO that gains arising from the sale of the land in the instant case to be short term capital gains as confirmed/sustained by learned CIT(A) are reversed by us vide this order by holding that the gains arising from sale of this land are long term capital gains and not short term capital gains as held by authorities below as the interest and title in the land was acquired by the assessee in the year 1994 itself and held by the assessee for more than thirty six months in accordance with provisions of Section 2(29A) read with Section 2(42A) of the Act . However, the assessee has contended during the assessment proceedings before the AO that if the A.O. is adopting the valuation as adopted by stamp duty authorities by applying provisions of Section 50C of the Act, the assessee in that case is challenging the valuation done by stamp duty authorities and requested the A.O. to refer the matter to DVO u/s 50C(2) of the Act for finding out the correct value of the land so sold by the assessee which in-fact is the mandate of Section 50C(2) of the Act , and in our considered view the assessee rightly exercised its right and invoked the provisions of Section 50C(2) of the Act to refer the matter to DVO albeit this plea was taken by the assessee for the first time on 23-12-2009 which was at the fag-end of the assessment proceedings u/s 143(3) read with Section 143(2) of the Act being getting time-barred on 31-12-2009 under the provisions of Section 153(1) of the Act.
(vi) Hence, keeping in view the interest of justice and fair play, in our considered view this matter/issue needs to be set aside and restored to the file of the A.O. for de-novo determination of the issue on merits after referring the matter to DVO for valuation report and thereafter the AO shall complete the assessment de-novo on merits after considering the evidences/explanations submitted by the assessee in its defense , valuation report of DVO as well the value adopted by the stamp duty authorities to arrive at the full value of consideration to compute capital gains chargeable to tax under the head ‘Income from capital gains’ under Chapter IV-E of the Act. Needless to say that the A.O. shall provide proper and adequate opportunity of being heard to the assessee in accordance with the principles of natural justice in accordance with law. We order accordingly.
1. ITA No. 2519/Ahd/2009 for A.Y. 2006-07 order dated 13.4.2012 in the case of ITO v. Shri Yasin Moosa Godil
2. ITA No. 1561/M/09 for A.Y. 2005-06 order dated 27.11.2009 in the case of Smt. Kishori Sharad Gaitonde v. ITO
3. ITA No. 1459/Kol/2011 for A.Y. 2008-09 order dated 29.2.2012 in the case of DCIT v. Tejinder Singh.
4. In the case of Atul G. Puranik v. ITO in ITA No. 3051/Mum/2010 for A.Y. 2006-07 order dated 13.5.2011 (2011) 58 DTR (Mumbai) (Trib) 208.
1. In the case of Chheda Housing Development v. Bibijan Shaikh Farid and Others (Bombay High Court) 2007 (3) MhLj 402.
2. In the case of Arif Akhtar Hussain v. ITO, 45 SOT 257 (ITAT, Mumbai)
3. In the case of Chiranjeev Lal Khanna v. ITO in ITA No. 6170/Mum/2008 (ITAT, Mumbai).
4. In the case of Arlette Rodrigues v. ITO in ITA No. 343/Mum/2010 (ITAT, Mumbai)
5. In the case of ACIT v. Manubhai Sheth Larger (HUF) in ITA No. 5775/Mum/2008 (ITAT, Mumbai) and
6. In the case of Shavo Norgren (P) Ltd. v. DCIT, 33 taxmann.com 491 (ITAT, Mumbai)