Ishverlal Manmohandas Kanakia vs. ACIT (ITAT Mumbai)

TDR is “improvement” of land & if it has no cost, then, even if the land has a “cost”, no part of the gain on transfer of land is taxable

The assessee was the owner of land acquired in 1963. Pursuant to the Development Control Regulations, 1991, the assessee was entitled to construct up to 1:1 FSI on the property. The assessee was also entitled to load Transferable Development Rights (“TDR”) on the property. The assessee entered into a development agreement with a developer pursuant to which the developer agreed to develop on the said land by utilizing the FSI & TDR and paid compensation to the assessee. The assessee claimed that the TDR was an “improvement” of the land and as a “cost of improvement” of the land could not be determined, no capital gains was chargeable. In appeal, the CIT (A) held that the FSI and TDR were separate & distinct assets and that while the TDR did not have a cost, the FSI did and if both were transferred together, there was a “cost” for the “asset” and capital gains was chargeable. On appeal by the assessee, HELD allowing the appeal:

The assessee transferred “Development Rights” being the FSI and the “right to load TDR” on the land. While the right to construct on the land by consuming FSI was a capital asset which was acquired at a cost, the right to load TDR arose pursuant to the DC Regulations, 1991 without payment of any cost. The said right to “load TDR” was an improvement to the “capital asset” held by the assessee. If the “cost of improvement” of an asset is not determinable, capital gains are not chargeable. The result was that even the consideration attributable to the FSI (which had a cost) was not assessable to tax (Principle laid down in Jethalal D. Mehta 2 SOT 422 (Mum) & Maheshwar Prakash CHS 24 SOT 366 (Mum) in the context of transfer of only TDR followed).