Recently ITAT Mumbai held that in the case of Chiranjeev Lal Khanna v. ITO (ITA No. 6170/Mum/2008) held that considering the facts of the case and clauses in the agreement, the taxpayer has transferred land and building to the developer would be chargeable to tax as capital gains. Accordingly, Section 50C of the Income-tax Act, 196 1(the Act) would be applicable.
Facts of the case
?The taxpayer and his wife jointly owned building along with plot of land admeasuring 840 sq.mts. i.e. 1,005 sq.yards. The owners entered into agreement with the developers to demolish the existing building and redevelop the said land into a new building on 50 percent sharing basis based on the terms and conditions set out in the agreement.
?As per the agreement, the plot of land will continue to be owned by the owners and developers have no right and title over it. The owners would retain FSI of 11,835 sq.ft granted to them by Municipal Corporation and the developer would load their sources of FSI and construct the total area.
?The owners have agreed to pay the developers costs of construction of FSI retained by owners at INR 1000 per sq.ft. as per the agreement.
?A sum of INR 21.83 million was received by the owners (including the taxpayer) from developers in consideration of the owners granting in favour of the developers the right, authority and power to develop the said property.
?In the return of income the taxpayer has computed the net capital gains arisen to the taxpayer on account of transfer of taxpayer’s 50 percent share by virtue of development agreement as nil after claiming deduction under Section 54 and 54F of the Act.
?During the course of assessment proceedings, the Assessing Officer (AO) has also raised a query whether the consideration received can be considered as income from other sources. However, ultimately, the AO recomputed the capital gains after considering the market value, as worked by Registration Authority for stamp duty valuation, of the property at INR 38.25 million under Section 50C of the Act.
?Before the AO and Commissioner of Income Tax (Appeals) the taxpayer contended that the right of ownership of plot of land continued to be with the taxpayer.
?On query from the AO that why the consideration received from the developer should not be treated as income from other sources, , the taxpayer contended that there is in fact transfer of right, title and interest in the plot of land. He ceases to be the single holder of right, title and interest therein. He, along with the purchaser of the flats in the new building would become joint interest holders. Accordingly, there is a transfer of capital asset which is exigible to capital gain tax.
?The taxpayer also contended that development rights on land and
building do not come under the purview of Section 50C of the Act.
?Before the Tribunal the taxpayer relied on various judicial precedents (Refer Note -1 for list) and contended that the transaction was not liable to tax as capital gains as per the provisions of the Act. The taxpayer also contested the applicability of Section 50C of the Act to the said transaction.
Tax department’s contentions
?Referring to the various decisions relied by the taxpayer, the tax department submitted that in all those cases, the existing building was not demolished and only further construction/modifications were done to the existing building.
?The developer is entitled to demolish the building and the debris and other building material of the demolished building will belong to the developer as the consideration thereof is included in the aforesaid consideration. Thus, the entire building has been transferred.
?The documents have been registered by the State Registration Authorities; therefore, the AO had no other option but to apply provisions of Section 50C of the Act.
?It is a clear transfer of capital asset falling under the provisions of Section 50C of the Act.
?On perusal of the various clauses of the agreement and including the submission of the taxpayer before the AO, the Tribunal held that there is transfer of land and building. Therefore, the provisions of Section 50C of the Act are clearly applicable to the facts of the present case.
?The various decisions relied on by the taxpayer are distinguishable and not applicable to the facts of the present case as in none of the cases relied on by the taxpayer, there was demolition of existing building. In all those cases, there was construction of additional floor/modifications on the existing structure.
?The Tribunal also distinguished the decision in case of New Shailaja Co-op. Hsg. Soc. Ltd. relied on the taxpayer, on the basis in that case the taxpayer transferred his entitlement for consideration to the builder. In that case the Mumbai tribunal held that the taxpayer has not incurred any cost of acquisition in respect of the right which emanated from the 1991 rules making the taxpayer eligible for additional FSI. Since there was no cost of acquisition for additional FSI, the Tribunal, relying on a couple of decisions including decision of Supreme Court in case of CIT v. B C Srinivasa Shetty  128 ITR 294 held that no capital gain chargeable to tax has arisen.
However, in the instant case, there is a transfer of existing land and building.
?Considering the totality of the facts of the present case and certain clauses of the agreement and submission made by the taxpayer before the AO, in the instant case the taxpayer has transferred the land and building to the developer through a document, which has been registered through State Registration Authorities. Therefore, there is transfer of a capital asset i.e. land and building, the capital gain on which is chargeable to income tax. Accordingly, provisions of Section 50C of the Act are applicable to the facts of the instant case.