Case Law Details
Yalamanchili Neelima Vs ITO (ITAT Visakhapatnam)
ITAT Visakhapatnam held that capital gain taxable in the year in which possession of land is granted to the developer vide the original development agreement and not in the year in which supplementary agreement is entered.
Facts- The assessee is an individual entered into a Development Agreement-cum-General Power of Attorney with M/s. Lakshmi Infratech India Pvt Ltd., Hyderabad (“Developer”) registered at SRO, Mangalagiri for construction of Multistoried Residential Complex by name ‘Lakshmi’s Sreelikhitha Pride’. The assessee being the land owner is in possession of vacant land measuring 4,776 sq. yds acquired through a Registered Gift Deed. The assessee granted absolute power to the Developer to construct residential complex at their own cost. The assessee and the Developer agreed to share the built up are in the ratio of 46:54 respectively.
Since the possession of the property was handed over to the Developer during the previous year relevant to the AY 2016-17 AO as per the provisions of section 2(47) of the Act read with section 53A of the Transfer of Property Act considered the property as transferred during the assessment year 2016-17. AO noticing that the assessee has not filed return of income for the AY 2016-17 believed that the income chargeable to tax escaped assessment and notice u/s. 148 of the Act was issued. The assessee did not respond to the notice nor filed the return of income. Subsequently, the Ld. AO issued notice U/s. 142(1) of the Act. AO sought objections for considering Rs. 6,30,76,166/- as capital gains from the transaction entered into by the assessee with the Developer and also sought information regarding the flats sold.
In spite of issuance of various notices, the assessee failed to furnish any replies. AO therefore proceeded to compute the capital gains based on the materials available with him. AO worked out the capital gains at Rs. 6,20,13,020/- while framing the assessment U/s. 144 r.w.s 147 of the Act. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). However, the appeal was dismissed.
Conclusion- Held that in our considered view since the possession of the land has already been granted to the Developer vide the original development agreement entered into on 14/3/2016, the year of chargeability of capital gains in the hands of the assessee shall be AY 2016-17 and not AY 2017-18 when supplementary agreement was entered.
Held that the consideration for the relinquishment of 54% of the land to the Developer shall be the cost of construction of super built up area including parking area (Rs. 4,59,62,970 + Rs. 61,28,396 = Rs. 5,20,91,366/-) shall be the deemed sale consideration for the purpose of computation of capital gains.
FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM
This appeal filed by the assessee is against the order of the Ld. Commissioner of Income Tax (Appeals)-1, Guntur [Ld. CIT(A)] dated 07/06/2019 arising out of the order passed U/s. 144 r.w.s 147 of the Income Tax Act, 1961 [the Act] for the AY 2016-17.
2. This case is a recalled matter where the assessee has opted for Vivad-se-Vishwas Scheme by filing Form No.3. Later, the assessee could not pay the balance tax arrears and hence pleaded for recalling the appeal filed by the assessee.
3. Brief facts of the case are that the assessee is an individual entered into a Development Agreement-cum-General Power of Attorney with M/s. Lakshmi Infratech India Pvt Ltd., Hyderabad (herein after referred as “Developer”) vide Doc No. 2742/2016, dated 14/03/2016 registered at SRO, Mangalagiri for construction of Multistoried Residential Complex by name ‘Lakshmi’s Sreelikhitha Pride’ in Survey No.66, Mangalagiri. The assessee being the land owner is in possession of vacant land admeasuring 4,776 sq. yds acquired through a Registered Gift Deed bearing No. 3175/2013 dated 30/03/2013. The assessee granted absolute power to the Developer to construct residential complex at their own cost. The assessee and the Developer agreed to share the built up are in the ratio of 46:54 respectively. Since the possession of the property was handed over to the Developer during the previous year relevant to the AY 2016-17 the Ld. AO as per the provisions of section 2(47) of the Act read with section 53A of the Transfer of Property Act considered the property as transferred during the assessment year 2016-17. The Ld. AO noticing that the assessee has not filed return of income for the AY 2016-17 believed that the income chargeable to tax escaped assessment and notice u/s. 148 of the Act was issued and served on the assessee on 24/11/2017 requiring him to file the return of income within 15 days from the date of receipt of notice. The assessee did not respond to the notice nor filed the return of income. Subsequently, the Ld. AO issued notice U/s. 142(1) of the Act dated 18/09/2018 and served on the assessee on 19/09/2018. The Ld. AO sought objections for considering Rs. 6,30,76,166/- as capital gains from the transaction entered into by the assessee with the Developer and also sought information regarding the flats sold. The assessee failed to furnish any replies even to this notice. The Ld. AO once again issued notice on 19/11/2018 and served on the assessee on 19/11/2018. The assessee did not respond to this notice also. Considering these circumstances, the Ld. AO issued one more notice U/s. 142(1) dated 5/12/2018 for which also the assessee did not respond. The Ld. AO therefore proceeded to compute the capital gains based on the materials available with him. The Ld. AO worked out the capital gains at Rs. 6,20,13,020/- while framing the assessment U/s. 144 r.w.s 147 of the Act. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). The assessee’s Representative filed written submissions before the Ld. CIT(A) challenging the reopening of assessment and also chargeability of the capital gains in the AY 2016-17. The Ld. AR also further submitted before the Ld. CIT(A) regarding the expenses claimed towards NALA tax of Rs. 22,43,340/-, property tax of Rs. 1,88,965/- and deviation charges amounting to Rs. 3 1,36,000/- as per the terms of the development agreement. The Ld. CIT(A) considering these as additional evidences submitted U/s. 46A of the IT Rules, 1962 sought a remand report from the Ld. AO. The Ld. AO submitted his reply stating that the assessee has not filed any details during the assessment proceedings and hence these additional evidences should not be considered. However, the Ld. AO in his remand report accepted the payment of property tax and requested the Ld. CIT(A) it may be considered for deduction in the hands of the assessee. Further, the Ld. AO with respect to NALA charges and Deviation charges stated that the assessee may be allowed 46% of the payments made as it is related to the development of land consequent to Development Agreement entered into by the assessee with the Developer. The copy of the remand report of the Ld. AO was forwarded to the assessee for furnishing a rejoinder. The Ld. AR submitted a rejoinder and pleaded that the additional evidence may be considered while deciding the appeal. The Ld. CIT(A) considering the provisions of Rule 46A of the IT Rules, 1962 observed that the conditions prescribed under the Rule 46A were not satisfied and did not accept the additional evidence filed by the assessee. The Ld. CIT (A) hence dismissed the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.
4. The assessee has raised the following grounds of appeal:
“1. The order of the Ld. CIT(A) is contrary to the facts and also the law applicable to the facts of the case.
2. The Ld. CIT(A) ought to have quashed the notice issued U/s. 148 of the Act and further he ought to have held that the reassessment proceedings are liable to be quashed as void ab initio.
Without prejudice to the above:
3. The Ld. CIT(A) is not justified in confirming the addition of Rs. 6,20,13,020 made by the AO towards long term capital gains in respect of a land property alleged to have been transferred by development agreement dated 14/3/2016.
4. The Ld. CIT(A) ought to have held that the capital gains if any are applicable for the AY 2017-18 in view of the supplementary agreement entered into by the appellant with the developer on 18/5/2016.
5. The Ld. CIT(A) is not justified in upholding the action of the AO in including the value of the land received towards the share of the appellant also as part of the sale consideration while computing the capital gains.
6. The Ld. CIT(A) ought to have allowed the following expenses as deduction from capital gains in as much as the expenses were incurred by the appellant as per the terms and conditions of the development agreement:
| NALA Charges (conversion charges) | Rs. 22,43,340 |
| Property Taxes | Rs. 1,88,965 |
| Deviation Charges | Rs. 31,36,000 |
7. The Ld. CIT(A) ought to have allowed the exemption of capital gains /s. 54F of the Act towards the built up area received by the appellant.
8. The Ld. CIT(A) ought to have held that the Assessing Officer is not justified in charging interests of Rs. 41,32,499/- U/s. 234A and Rs. 52,25,779/- u/s. 234B of the Act.
9. Any other grounds may be urged at the time of hearing.”
5. Grounds No.1 and 9 are general in nature and need no adjudication.
6. In Ground No.2 the assessee raised objection for the issuance of notice U/s. 148 of the Act and pleaded that the reassessment proceedings are liable to be quashed as void ab initio. We find from the records that the assessee has failed to respond to the notices and the Ld. AO has rightly after seeking permission from the Additional Commissioner of Income Tax, Guntur found that the income has escaped assessment and hence notice U/s. 148 was issued to the assessee. The Ld. AO further observed that the assessee has failed to furnish the return of income for the relevant assessment year inspite of having capital gains. In these circumstances, we find that reopening of assessment proceedings U/s. 147 of the Act is valid in law and hence this ground raised by the assessee is dismissed.
7. With respect to Grounds No.3 & 4, the assessee has challenged the year of taxability of capital gains. The Ld. AR argued that the assessee has entered into a development agreement on 14/3/2016. Consequently, a supplementary agreement was entered into with the Developer by adding additional 209 sq yds on 18/5/2016. Further, the Ld. AR submitted that 209 sq yds of land was gifted to the mother of the assessee on 5/3/2016 before entering into the development with the Developer. However, the gift deed was revoked on 18/5/2016 thereby requiring the assessee to enter into a supplementary development agreement with the Developer on 18/5/2016 including this 209 sq yds arising out of the revocation of the gift deed. The Ld. AR therefore pleaded that the capital gains shall be taxable only in the AY 2017-18 as the agreement became final on 18/5/2016 only. Per contra, the Ld. DR relied on the orders of the Ld. Revenue Authorities. We have heard both the sides and perused the material available on record. Admitted facts are that the development agreement was originally entered into by the assessee on 14/3/2016 in the ratio of 46:54 with the Developer. Consequently, additional 209 sq yds acquired subsequent to execution of the development agreement by way of revocation deed dated 18/5/2016 and added in the supplementary deed dt 18/5/2016 during the AY 2017-18. We find that the supplementary deed is an extension of the original development agreement with the same terms and conditions only with an addition of 209 sq yds. Therefore, in our considered view since the possession of the land has already been granted to the Developer vide the original development agreement entered into on 14/3/2016, the year of chargeability of capital gains in the hands of the assessee shall be AY 2016-17 and not AY 2017-18. We are therefore inclined to uphold the order of the Ld. CIT(A) on this ground and needs no interference. Accordingly, the Grounds No. 3 and 4 raised by the assessee are dismissed.
8. Ground No.5 is with regard to the consideration received for the relinquishment of 54% of the land to the Developer. The Ld. AR argued that since the land is owned by the assessee, cost of land shall not be included in the sale consideration received while computing the capital gains. The Ld. AR pleaded that only the cost of the construction shall be included as consideration or the value of the land conveyed to the Developer shall be considered as sale consideration for the purpose of computing the capital gains. The Ld. AR therefore pleaded that the cost of land as computed by the Ld. AO at Rs. 1,09,84,800/- including the value of parking area at Rs.61,28,396/-, aggregating to Rs. 1,71,13,196/- shall be considered as deemed sale consideration for the purpose of computing the capital gains. The Ld.AR relied on the decision of the Coordinate Bench in the case of Yandrapu Joseph Ratna Kumar vs. ACIT in ITA No. 84 & 85/Viz/2021, dated 24/09/2021.
Per contra, the Ld. DR pleaded that the cost of built up area shall be considered as deemed sale consideration while computing the capital gains. The Ld. DR relied on the order of the Ld. AO with respect to the cost of computation.
9. We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. Admittedly the assessee has conveyed 54% of the land admeasuring 2579.04 sq yds to the Developer for the purpose of constructing multistoried residential complex at Mangalagiri. The consideration for the part conveyance of the land to the Developer is the receipt of the super built up area including the parking area. Admittedly both the Revenue and the assessee has not disputed the cost per square yard adopted by the Ld. AO. In these circumstances, we find that the consideration for the relinquishment of 54% of the land to the Developer shall be the cost of construction of super built up area including parking area (Rs. 4,59,62,970 + Rs. 61,28,396 = Rs. 5,20,91,366/-) shall be the deemed sale consideration for the purpose of computation of capital gains. We therefore direct the Ld. AO to compute the capital gains adopting the above deemed sale consideration. Accordingly, this ground no. 5 raised by the assessee is allowed for statistical purposes.
10. With respect to Ground No.6 the assessee has claimed certain expenses like NALA Charges, Property taxes and Deviation Charges. The Ld. AR submitted that as per the Development Agreement the assessee is supposed to incur these charges for the purpose of conversion of the agricultural land to residential purposes. The Ld. AR further submitted that the assessee is in agreement to the deviation in the construction of the Multistoried Residential Building and hence the payment made towards the deviation charges shall be allowed as cost of construction for the purpose of computing the capital gains. Per contra, the Ld. DR submitted that the conversion of the land arises out of the development agreement entered into by the assessee and hence it has to be borne by the Developer. Further the Ld. DR submitted that the deviation charges shall also be payable by the Developer for the deviation occurred during the construction of the building and hence no deduction shall be allowable to the assessee.
11. We have considered the rival submissions of the Ld. AR and the Ld. DR. The Ld. AR in paper book page 51 has submitted the payments of NALA charges of Rs. 22,43,340/- paid to Government of Andhra Pradesh for the purpose of conversion of the land. The receipt shows that it is paid by the assessee and we find merit in the argument of the Ld. AR that the assessee has to bear the cost of conversion of the agricultural land which would entitle the Developer to construct the multistoried residential building and which was part of the development agreement. We therefore direct the Ld. AO to allow these expenses towards the cost of construction. Further, it is also noticed from the remand report of the Ld. AO that the AO has not objected to the property tax paid by the assessee for Rs. 1,88,965/- and hence these expenses incurred by the assessee shall be allowed while computing the cost of construction. However, with respect to deviation charges, the Ld. AR has submitted in page 53 of the paper book the fine paid of Rs. 31,36,000/- is with respect to set back as per the sanctioned plan in comparison with the completed building plan. These expenses are incurred for the entire building and the claim made by the Ld. AR that they should be allowed in the hands of the assessee could not be accepted. We find the deviation has occurred in the construction of the entire building and does not belong exclusively to the assessee. In these circumstances, the cost of deviation charges pertaining to the assessee shall be in proportion to the ratio of the land agreed between the Developer and the assessee as per the development agreement. We therefore direct the Ld. AO to allow 46% of Rs. 31,36,000/-amounting to Rs. 14,42,560/- as deduction from the capital gains for the assessee. Accordingly, this ground No.6 raised by the assessee is partly allowed.
12. With respect to Ground No.7 regarding exemption claimed U/s. 54F of the Act, the Ld. AR submitted that the assessee claimed the entire share of building received by him as one unit and also claimed as deduction U/s. 54F of the Act. The Ld. AR submitted that the assessee is entitled for one unit and accordingly the exemption may be allowed U/s. 54F of the Act. Per contra, the Ld. DR submitted that the assessee is having two houses and hence exemption U/s. 54F cannot be allowed in this scenario. The Ld. DR relied on the order of the Ld. Revenue Authorities.
We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. The provisions of section 54F of the Act is extracted herein below for reference:
’54F. Capital gain on transfer of certain. capital assets not to be charged in case of investment in residential house.—(1) Where, in the case of an assessee being an individual, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:
Provided that nothing contained in this sub-section shall apply where the assessee owns on the date of the transfer of the original asset, or purchases, within the period of one year after such date, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset.
Explanation.—For the purposes of this section,—
(i) “long-term capital asset” means a capital asset which is not a short-term capital asset;
(ii) “net consideration”, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.
(2) Where the assessee purchases, within the period of one year after the date of the transfer of the original asset, or constructs, within the period of three years after such date, any residential house, the income from which is chargeable under the head “Income from house property”, other than the new asset, the amount of capital gain arising from the transfer of the original asset not changed under section 45 on the basis of the cost of such new asset as provided in clause (a), or, as the case may be, clause (b), of sub-section (1), shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such residential house is purchased or constructed.
(3) Where the new asset is transferred within a period of three years from the date of its purchase or, as the case may be, its construction, the amount of capital gain arising from the transfer of the original asset not charged under section 45 on the basis of the cost of such new asset as provided in clause, (a) or, as the case may be, clause (b), of sub-section (I) shall be deemed to be income chargeable under the head “Capital gains” relating to long-term capital assets of the previous year in which such new asset is transferred.’.
The assessee has claimed exemption U/s. 54F considering the entire built up area as one residential unit. In our view it cannot be considered as a single residential unit. The Ld. AO is therefore directed to verify whether the assessee is owning more than one house to claim deduction u/s. 54F of the Act. Accordingly, we direct the Ld. AO to verify these facts and afford a reasonable opportunity of being heard to the assessee and the deduction U/s. 54F shall be allowed in accordance with law.
for statistical purposes.
13. With respect to Ground No.8 relating to charging of interest U/s. 234A and 234B of the Act, which is consequential to the tax computation. Accordingly, we direct the Ld. AO to recompute the interest in accordance with the directions as per this order.
14. In the result, appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open Court on the 15th December, 2022.
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