Tax incidence of joint development agreement and subsequent sale of flats is different

Smt. V. Kalpagam Vs ITO (ITAT Chennai)

ITAT Chennai held that the incidence of tax for joint development agreement (JDA) is different and incidence of tax for subsequent sale of flats is different. Therefore, long term capital gains/ short term capital gains should be declared for the year in which the joint development agreement pertains and subsequent sale of flats pertains.

Facts- The case of the assessee was selected for scrutiny and during the course of assessment proceedings, AO noticed that the assessee entered into a joint development agreement for developing the land. AO, further noted that the assessee computed long term capital gains arising from development of the property and declared nil capital gains after availing exemption u/s. 54F of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). Therefore, AO computed LTCG by rejecting deduction claimed u/s. 54F of the Act.

CIT(A) rejected the appeal. Being aggrieved, the present appeal is filed.

Conclusion- In our considered view, the incidence of tax for joint development agreement is different and incidence of tax for subsequent sale of flats is different. Therefore, the assessee should declared long term capital gains/ short term capital gains as the case may be for the year in which the joint development agreement pertains and subsequent sale of flats pertains. In this case, although the assessee supposed to compute long term capital gains separately for joint development agreement and subsequent sale of flats, she had computed long term capital gains when flats has been sold in the assessment year 2013-14. The Assessing Officer had also made a fundamental mistake in computing capital gains for assessment year 2013-14 based on date of sale of flats, even though the date of joint development agreement and supplementary agreement falls under assessment year 2011-12 & 2012-13. Therefore, we are of the considered view that the Assessing Officer needs to reexamine the claim of the assessee in light of date of joint development agreement, supplementary agreement and date of sale of flats by the assessee and compute capital gains separately for joint development agreement and subsequent sale of flats. The Assessing Officer is directed to compute the capital gains by considering cost of acquisition and other deductions claimed by the assessee as per law. Therefore, we set aside the order of the ld. CIT(A) and restore the issue back to the file of the Assessing Officer and direct the Assessing Officer to recompute capital gains arising out of joint development agreement and subsequent sale of flats denovo in accordance with law after providing opportunity of hearing to the assessee.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

1. This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-12, Chennai, dated 27.08.2018 and pertains to assessment year 2013-14.

2. The assessee has raised the following grounds of appeal:

“1. The learned Commissioner (Appeals) erred in sustaining addition towards interest claimed, alleged addition towards short term capital gains and towards long term capital gains.

2.1 The learned Commissioner (Appeals) erred in sustaining the action of the learned AO in substituting the estimated sale consideration of Rs.51,70,400/-with the guideline value of Rs.92,69,700/-.

2.2 The learned Commissioner (Appeals) failed to consider the plea of the appellant that the learned AO should not have negatived the claim of exemption u/ s 54F of the Act more especially when there is jurisdictional High Court’s judgements in the case of CIT vs V R Karpagam -50 taxmann.com 55 dated 18­08-2014 and Dr.PK vasanthi Ranagarajan vs CIT-Tax case No. 1435 of 2005 dated 06-07-2012.

2.3 The learned Commissioner (Appeals) should not have just brushed aside and confirmed the action of the AO in rejecting the claim of the appellant that since the joint development agreement is dated 07^th February 2011, the capital gains is assessable for the A Y 2011-2012 only. The deposit amount was also received during the previous year relevant to A Y 2011- 2012 only. When the deposit received is verifiable from the Bank records, the learned AO should not have considered the stand of the appellant as an afterthought.

2.4 The learned Commissioner(Appeals) should have considered the point that even accepting for argument sake that the guide line value will have to be adopted, then the guideline value for the property under consideration from 01-08-2007 to 31-03-2012 is only Rs.450/- per sq. feet. This alone should have been adopted as against the guideline value adopted of Rs.3,300/- for the purpose of capital gains computation and Sec 54F exemption should have been allowed based on the jurisdictional High Court decisions referred to above.

2.5 The learned Commissioner (Appeals) should have accepted the fact that the property at Sastri Nagar has been let out for commercial purposes only and the same should not have been considered at all for the purpose of Sec 54 / 54 F of the Act. The decision of the Jurisdictional High Court in the case of Dr. P K vasanthi Ranagarajan vs CIT – Tax case No. 1435 of 2005 dated 06-07-2012 referred to above supports the stand of the appellant. If that property is excluded, then exemption u/ s 54F is allowable.

2.6 The learned Commissioner (Appeals) should not have sustained the action of the learned AO in treating the capital gains arising out of subsequent sale of three flats as short term as the appellant cannot sell the UDS separately and building portion separately. It is a composite sale and the learned AO cannot treat them as separate sale.

2.7 The learned Commissioner (Appeals) should not have sustained the disallowance of interest claimed as paid / payable to the appellant’s mother, more especially when the appellant has produced the assessment order passed u/ s 143(3) of the Act in the hands of the appellant’s mother from where the learned AO could have found out whether the said assessee has admitted the said income or not.

3.1 In any view of the matter, the order of the Commissioner (Appeals) is unjust and arbitrary and is contrary to the provisions of the law and the facts of the case.

3.2 For these and other reasons that may be adduced at the time of hearing the appellant prays that the income returned be directed to be accepted without making addition towards interest claimed, addition of alleged short term capital gains and long term capital gains and thus render Justice.”

3. The brief facts of the case are that, the assessee has e- filed her return of income for assessment year 2013-14 on 31.07.2014, admitting total income of Rs.7,08,460/-, which comprises of income from salary, income from house property and interest income. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that the assessee entered into a joint development agreement dated 07.02.20211 with Shri. P. Shanmugavel and Shri. K. Narasimha for developing the land. The Assessing Officer, further noted that the assessee computed long term capital gains arising from development of the property and declared nil capital gains after availing exemption u/s. 54F of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). Therefore, the Assessing Officer called upon the assessee to file necessary evidence and details for computation of capital gains. The Assessing Officer after considering relevant submissions of the assessee and also taken note of computation of long term capital gains, rejected arguments of the assessee and determined total income from capital gains at Rs. 1,40,54,654/-, after rejecting deduction claimed u/s. 54F of the Act. The assessee carried the matter in appeal before the first appellate authority, but could not succeed. The ld. CIT(A), for the reasons stated in their appellate order rejected arguments of the assessee and sustained additions made by the Assessing Officer towards computation of long term capital gains arising out of development of property. Aggrieved by the CIT(A) order, the assessee is in appeal before us.

4. The Ld. Counsel for the assessee, referring to dates and events submits that the assessee had entered into a joint development agreement for development of property on 07.02.2011 and further entered into supplementary agreement on 21.10.2011 and if you go by the date of agreements, capital gains arising from joint development agreement should be assessed in the assessment years 2011-12 & 2012-13, but not in the assessment year 2013-14. The Assessing Officer without appreciating relevant facts simply computed capital gains for assessment year 2013-14 and also rejected deduction claimed u/s. 54F of the Act. Therefore, submits that the matter may be remanded to the file of the Assessing Officer to determine the year of taxability and computation of capital gains.

5. The ld. DR, Shri. AR V Sreenivasan, Addl. CIT, on the other hand supporting order of the CIT(A) submits that the assessee has declared capital gains from sale of property for the impugned assessment year and thus, as per joint development agreement and subsequent supplementary agreement, the capital gains is not assessable in the assessment year 2013-14, is devoid of merits. Therefore, he submits that the Assessing Officer has rightly computed capital gains for the assessment year 2013-14 and rejected various arguments of the assessee in respect of sale consideration, cost of acquisition and deduction u/s. 54F of the Act and thus, their order should be upheld.

6. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The fact with regard to the impugned dispute are that the assessee entered into a joint development agreement dated 07.02.2011 for development of property at Chennai. The assessee had computed long term capital gains arising from the development of the property for the assessment year 2013-14 and declared nil capital gains after claiming exemption u/s. 54F of the Act. The assessee claimed that, although the year of taxability of capital gains from joint development agreement does not pertains to assessment year 2013-14, but she had declared long term capital gains on the basis of subsequent sale of flats received from the builders in terms of joint development agreement for the assessment year 2013-14. However, the assessee has disputed computation of long term capital gains for assessment year 2013-14 before the Assessing Officer and argued that capital gains arising out of joint development agreement is not assessable in the assessment year 2013-14. We find that, if you go by the joint development agreement dated 07.12.2011 and supplementary agreement dated 21.10.2011, the capital gains arising from development of property is assessable in the assessment year 2011-12 or 2012-13, but the assessee has computed long term capital gains for the assessment year 2013-14 on the basis of subsequent sale of flats for the assessment year 2013-14. In our considered view, the incidence of tax for joint development agreement is different and incidence of tax for subsequent sale of flats is different. Therefore, the assessee should declared long term capital gains/ short term capital gains as the case may be for the year in which the joint development agreement pertains and subsequent sale of flats pertains. In this case, although the assessee supposed to compute long term capital gains separately for joint development agreement and subsequent sale of flats, she had computed long term capital gains when flats has been sold in the assessment year 2013-14. The Assessing Officer had also made a fundamental mistake in computing capital gains for assessment year 2013-14 based on date of sale of flats, even though the date of joint development agreement and supplementary agreement falls under assessment year 2011-12 & 2012-13. Therefore, we are of the considered view that the Assessing Officer needs to reexamine the claim of the assessee in light of date of joint development agreement, supplementary agreement and date of sale of flats by the assessee and compute capital gains separately for joint development agreement and subsequent sale of flats. The Assessing Officer is directed to compute the capital gains by considering cost of acquisition and other deductions claimed by the assessee as per law. Therefore, we set aside the order of the ld. CIT(A) and restore the issue back to the file of the Assessing Officer and direct the Assessing Officer to recompute capital gains arising out of joint development agreement and subsequent sale of flats denovo in accordance with law after providing opportunity of hearing to the assessee.

7. In the result, appeal filed by the assessee is allowed for statistical purposes.

Order pronounced in the court on 19^th July, 2023 at Chennai.