Ramesh Chandna Vs ACIT (ITAT Delhi)
ITAT Delhi held that cost of new property for the purpose of exemption under section 54 has to be assumed to be value of interests and share in the new construction, as per the collaboration agreement and the sale deed terms.
Facts- During the year, assessee has showed capital gains from the sale of a 50% share in a property which was inherited by him along with his brother Mr Naresh Chandna, in 50% share each. Assessee claimed that, both the brothers had sold their shares to a builder for Rs. 4,53,75,000/- each. The brother of the assessee has received Rs. 4,53,75,000/- for his 50% share.
On the basis of the sale deed executed for 67.5% of the plot, the AO considered it to be the transfer of 67.5% of the property for Rs. 5,50,00,000/-, which was the sales consideration mentioned in the sale deed. AO observed that the assessee was getting only a 32.5% share in the new property. Thus, for Section 54 of the Act, the AO considered that the brothers together have sold 67.5% of the property to the builder for 5,50,00,000/-.
Thus, the cost of new property for Section 54 of the Act, was taken at Rs. 2,64,81,481/- and the same was considered to be an investment in new property. The cost of acquisition was considered to be 99,250/- and taking share consideration payable to the assessee at 4,53,75,000/- and reducing the cost of acquisition Rs. 99,99,250/-, the AO arrived at capital gains of Rs. 3,53,75,750/- and after reducing investment made in new property calculated as above at Rs. 2,64,81,481/- arrived at a taxable capital gain of 88,94,269/-. CIT(A) has confirmed the addition.
Conclusion-Thus, for the purpose of Section 54 of the Act, mere value of 32.5% ownership rights on the proportionate basis of share consideration of Rs. 5,50,00,000/- is not correct and the cost of new property has to be assumed to be Rs. Rs. 3,57,50,000/- being the value of interests and share of the assessee in the new construction, as per the collaboration agreement and the sale deed terms.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal has been preferred by the Assessee against the order dated 11.12.2018 of CIT(A)-20, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No. 10211/2018-19 arising out of an appeal before it against the order dated 11.12.2018 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle-61(1), New Delhi (hereinafter referred as the Ld. AO).
2. The facts in brief are that return of income was filed by the assessee declaring total income of Rs. 32,68,720/- and case of assessee was selected for limited scrutiny through CASS. The assessee is a Doctor by profession and derived income from business or profession, income from capital gain and income from other sources. During the year, assessee has showed capital gains from sale of 50% share in a property which was inherited by him along with his brother Mr. Naresh Chandna, in 50% share each. Assessee claimed that, both the brothers had sold their shares to a builder for Rs. 4,53,75,000/- each. The brother of assessee has received Rs. 4,53,75,000/- for his 50% share, however, as per the agreement with the builder the assessee was supposed to receive following :
1. Entire basement
2. Entire ground floor
3. 1/4portion of entire stilt area including space for car parking
4. Space for one utility with common WC
5. 5% undivided, indivisible and impartible ownership rights in the said plot of measuring 30 square yards and Rs. 96,25,000/- in cash. Consequent to this agreement a sale deed was executed between the builder and the assessee.
3. On the basis of sale deed executed for 67.5% of the plot, the Ld. AO considered it to be the transfer of 67.5% of the property for Rs. 5,50,00,000/-, which was the sales consideration mentioned in the sale deed. The Ld. AO observed that the assessee was getting only 32.5% share in the new property. Thus, for the purpose of Section 54 of the Act, the Ld. AO considered that the brothers together have sold 67.5% of the property to the builder for 5,50,00,000/-, so in view of the same, the share consideration value of 32.5% ownership rights, which remained with the assessee after completion of construction was calculated by Ld. AO as follows :-
5,50,00,000 X 32.5 = 2,64,81,481/-
67.5%
3.1 Thus, the cost of new property for the purpose of Section 54 of the Act, was taken at Rs. 2,64,81,481/- and the same was considered to be investment in new property. The cost of acquisition was considered to be 99,250/- and taking share consideration payable to assessee at 4,53,75,000/- and reducing the cost of acquisition Rs. 99,99,250/-, the Ld. AO arrived at capital gains of Rs. 3,53,75,750/- and after reducing investment made in new property calculated as above at Rs. 2,64,81,481/- arrived at taxable capital gain of 88,94,269/-. Ld. CIT(A) has confirmed the addition. So the assessee is in appeal raising following grounds :
“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in not allowing the cost of improvement made to the building in 1992 and that too by recording incorrect facts and findings and without observing the principles of natural justice.
2. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in not allowing the benefit of cost of improvement as claimed by assessee, is bad in law and against the facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of ld. AO on account of computation of capital gain and that too by recording incorrect facts and findings and in violation or principles of natural justice and has erred in not allowing the deduction u/s 54 as claimed by the assessee and has erred in restricting the same to the extent of Rs. 2,64,81,481/-.
4. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not allowing the benefit of exemption of Rs. 50,00,000/- as claimed by assessee u/s 54EC of Income Tax Act, 1961 while calculating capital gain.
5. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234B and 234C of Income Tax Act, 1961.
6. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”
4. Heard and perused the record.
5. In regard to ground no. 1 and 2 ; it has been submitted for the assessee that the valuation report has been accepted by the ld. AO for the purpose of fair market value of construction, however, cost of improvements as part of the report has not been considered on the basis that same is not supported with bills and vouchers. Ld. DR however, supported the findings of ld. Tax authorities below. It can be appreciated from the order of ld. AO that he has specifically mentioned that with respect to cost of improvement of the property, the assessee has provided the valuation report and based upon the same value of land at Rs. 17,40,000/- and value of building at Rs. 1,10,000/-, total Rs. 18,50,000/- is accepted and based upon the half share of assessee, the same was taken at Rs. 9,25,000/-. There appears to be no justification in accepting the cost of improvement provided by the valuer for improvements done during 1982 whereby 685 sq. ft. was added on the 2nd floor. It is quite unreasonable to expect production of bills and invoices as assessee along with brother has inherited the property, in 2009 on the death of their father. Thus, this ground no. 1 and 2 are allowed with direction to the Ld. AO to take into consideration the cost of improvements mentioned in the valuation report.
6. As with regard to ground no. 3 ; Ld. AR submitted that Ld. AO committed basic error in combining the share of both brothers and proportionately calculating the share of the assessee in context to the share left with the assessee in furtherance of Joint Development Agreement with builder. It was submitted that the brothers had given their respective to shares for Rs. 4,53,75,000/- each but assessee received Rs. 96,25,000/- in cash and also remaining 3,57,50,000/- was in the form of investment in the constructed house from the builder. It was submitted that the assessee invested Rs. 3,57,50,000/-towards the build up house which builder gave to the assessee and i.e. how assessee had claimed this amount as admissible deduction u/s 54. It was submitted that Ld. AO has considered a wrong fact that in the new building assessee would get ownership over 32.5% property in return for a consideration corresponding to 50% of the old property and thus made a wrong calculation of investment in the new property at Rs.2,64,81,481/-.It was submitted that Ld.AO has failed to take into consideration,the sale deed and the Joint Development Agreement together as apart from 32.5% share in the property assessee also got entire basement and ground floor.
6.1 On the other hand Ld. DR supported the findings of Ld. Tax Authorities below.
7. The Bench has given thoughtful consideration to the matter on record and the submissions. What comes up is that there is on record a collaboration agreement dated 16.11.2015 between assessee and his brother with the builder available at page no. 111 to 126 of the paper book. Clause 7.1 of this collaboration agreement available at page no. 117 of the paper book is relevant and same is reproduced for conveniences :-
“7.1 That in addition to the Builder incurring the entire costs and expenses etc. shall pay a sum of Rs. 5,50,00,000/- (Rs. Five Crores Fifty Lacs only), as non refundable interest free Security Deposit/ consideration to the Owners [i.e. Rs. 4,53,75,000/- to Shri Naresh Chandna (the first party herein) and Rs. 96,25,000/- to Dr. Ramesh Chandna (the Second Party herein)] which shall form the total consideration against the rights, in the property to be transferred in favour of the Builder or his nominee/s on the completion or during the course of construction of the building. Out of the abovesaid amount, a sum of Rs. Fifty lacs only (Rs. 50,00,000/-) as part payment has been paid by the Builder to the Owners as under :
1. 25,00,000/- (Twenty five lacs only) vide Ch. No. 063036 dt. 16.11.2015 favouring Sh. Naresh Chandna.
2. 25,00,000/- (Twenty five lacs only) vide Ch. No. 063037 dt. 16.11.15 favouring Dr. Ramesh Chandna. Both drawn Yes Bank.
8. Further, relevant is the clause 8 available at page no. 118 of the paper book :-
“8. That it is made clear that the said shri Naresh Chandna (the First party herein) shall only be entitled to a sum of Rs. 4,53,75,000/- (Four crores fifty three lacs seventy five thousand Rs. only) from as stated above and upon receipt of said amount, the First Party shall be left with no right, title, interest, claim or concern of any nature with the said property or any part thereof.”
9. Further para no. 15 and 16 are relevant and same are reproduced as follows :-
“15. That as mentioned hereinabove, the building shall be consisting of Basement, Stilt, Ground Floor, First Floor, Second Floor and Third Floor with Terrace. The Builder shall apply Form B-1, obtain Form ‘B-2’ and Completion Certificate in respect of the newly constructed building.”
