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Background

  • As per the Development Control Regulations of the Municipal Corporation of Greater Bombay, 1991 (‘DCR’), in the case of redevelopment of existing buildings, an additional FSI is granted to the land owner.
  • The additional FSI can be utilised in the following manner:

a) for extension of the existing building; or

b) construction of new building(s) using the total FSI (existing plus additional); or

c) additional FSI may be transferred like a negotiable instrument to the developer.

  • In case of situation (a) and (b) above, the owner would need to appoint an independent developer.
  • Recently, Mumbai Bench of Income tax Appellate Tribunal (‘the Tribunal’) in the case of M/s New Shailaja CHS Limited v ITO (ITA No. 512/Mum/2007) (unreported)  dealt with the tax implications arising on transfer of additional FSI to the developer.
  • The Tribunal has held that since the taxpayer has not incurred any cost of acquisition for the additional FSI and such ‘capital asset’ does not fall in the category of the capital assets specified in Section 55(2) of the Income-tax Act, 1961 (‘the Act’), there would be no capital gains on transfer thereof.

Facts and arguments

  • During the year 1972, the taxpayer had acquired land along with building constructed thereon based on the applicable FSI (approximately 11,000 square feet).
  • In view of enactment of DCR, the taxpayer became entitled to an additional FSI i.e. 11,000 square feet.
  • During the Assessment Year 2003-2004, the taxpayer sold the right to additional FSI for a consideration of INR 4.9 millions.
  • The taxpayer contended that since the right to additional FSI does not have any cost of acquisition, capital gains on transfer of FSI cannot be computed. Hence, the consideration received on transfer of additional FSI should not be subject to tax.
  • The taxpayer relied on Mumbai Tribunal decisions in the case of  ITO v Lotia Court Co-op Housing Society Ltd. [2008] 12 DTR (Mumbai) 396 and Jethalal D. Mehta v DCIT (ITA 672 / MUM / 2000).
  • The tax authorities however computed capital gain of INR 12.2 millions by considering the value of residential flats (additional flats to be received after construction of the entire building) as arrived at by the stamp duty authorities.

Issue for consideration: – Since the additional FSI was acquired without any cost of acquisition, whether transfer thereof will attract any capital gain tax?

 Tribunal’s Decision

  • The taxpayer became entitled to the additional FSI due to its land holding.
  • The taxpayer was the owner of the land and building and continued to remain the owner even after the transfer of additional FSI. Thus, the cost of the land and building of the existing structure could not be attributed to the additional FSI.
  • The Tribunal followed the decision of the Supreme Court in the case of CIT v B. C. Srinivasa Setty [1981 128 ITR 294 (SC) where it was held that if the cost of acquisition is not possible to ascertain then transfer of capital asset does not result into capital gains.
  • Though the additional FSI is a ‘capital asset’ within the meaning of Section 2(14) of the Act, the taxpayer has not incurred any cost of acquisition. Further, such ‘capital asset’ does not fall in the category of the capital assets specified in Section 55(2) of the Act.
  • In view of the above and relying on the decision in the case of Jethalal D. Mehta (discussed above), the Tribunal held that there would be no capital gain on transfer of additional FSI.

Comments

  • The Supreme Court in the case of B. C. Srinivasa Setty has held that in case the cost of acquisition of the asset was not determinable, the capital gains computation mechanism fails. The Tribunal has followed this golden principle.
  • This decision may help the taxpayers in their existing as well as forthcoming cases where there is transfer of redevelopments rights.
  • This decision will have a positive impact on the taxpayer transferring the additional FSI in a similar situation, especially in cities like Mumbai. However, it would be important to examine this issue on a case to case basis.

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0 Comments

  1. ugaonkar says:

    I had purchased a bungalow in 1994 at Rs 85000/- now I want to had over to a promoter. he is giving me a 2000 sqft flat on top floor (fifth)and a 1000 sqft flat in his adjustant new building and Rs 40lakh. My present bunglow plot is 5200 sqft with 2000 sqft builtup areaat Pune. Presently my income is not in tax bracket.
    1) What will be implification and capital gain tax 2) How to save it ? My age is 77 years now
    Ugaonkar

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