Flats to be constructed by vendee on behalf of co–owners does not constitute non–monetary consideration

Brief about the case

In the case of Asstt. Commissioner of Income Tax Vs Late Gopal V. Gorwani, the following issues were taken up by the ITAT Mumbai.

ISSUE 1: Whether Flats to be constructed by the vendee on behalf of the co–owners is the non–monetary consideration received by them on account of sale of the property?

On the basis of a survey conducted in the business premises of Gorwani Builders, a partnership firm where the assessee was a partner, assessment of the assessee for the impugned assessment year was re–opened under section 147. During the re–assessment proceedings, the Assessing Officer found that in the relevant previous year, the assessee along with his brother Shri Srichand Gorwani, who were the joint owners of a property named “Gorwarni House” sold it to Queen’s Villa Developers Pvt. Ltd. through a deed of conveyance dated 25th January 2005 for a recorded sale consideration of Rs. 8.15 crore. On a perusal of the deed of conveyance, it was noticed by the Assessing Officer that as per the arrangement made with the vendee, two residential flats in 9th and 10th floor are to be constructed by the vendee for the vendors. The terms of the deed further provided that amount of Rs. 15 lakh each towards the cost of construction of each land is to be adjusted from the sale consideration of Rs. 8.15 crore. The Assessing Officer, on perusing the aforesaid terms of the agreement was of the view that flats to be constructed by the vendee on behalf of the co–owners is the non–monetary consideration received by them on account of sale of the property. He, therefore, quantified non–monetary consideration on pro–rata basis for each flat at Rs. 93,50,000 and treated it as part of sale consideration and computed long term capital gain accordingly. Being aggrieved by the addition of Rs. 93,50,000 to the sale consideration, the assessee challenged the same in an appeal preferred before the learned Commissioner (Appeals).

Thus, it was held by the learned Commissioner (Appeals) that since one cannot sell to self, non–monetary consideration considered by the Assessing Officer is erroneous. Therefore the CIT (A) decided in favour of the assessee. Being aggrieved, Revenue knocked the door of Mumbai ITAT.

The Mumbai ITAT held that it cannot be said that the assessee has sold or exchanged the FSI towards construction of two flats. As per the terms of agreement, the vendors are to pay Rs. 15 lakh each towards cost of construction of the flats by the vendee. Thus, it is evidently clear from the terms of the agreement that the construction of flat by the vendee is not free of cost; on the contrary, cost of construction is to be adjusted from sale consideration. Under these circumstances, it cannot be said that the assessee has received any non–monetary consideration on account of construction of flat by the vendee. Therefore, the Mumbai ITAT confirmed the order of the learned Commissioner (Appeals) in deleting the addition of Rs. 93,50,000.

ISSUE 2: Disallowance of deduction u/s 54

The Assessing Officer had disallowed assessee’s claim under section 54 towards investment in acquiring his brother’s share in a separate property, on the plea that the partition of the property between the assessee and his brother had taken place orally in the year 1996. And so it will be deemed that transfer of property had taken place in the year 1996. Therefore, assessee’s claim that it had invested in construction of new house by virtue of partition deed on 29th January 2005, is not acceptable. The CIT (A) however, upheld that the assessee purchased his brother’s shares in the plot along with constructions vide agreement dated 29th January 2005 by utilising the sale proceeds of a property sold by him. Therefore, as the assessee had invested the capital gain in construction / purchase of a new house, he is eligible for deduction under section 54. This landed the revenue to appeal before the Mumbai ITAT which held that since no consideration was received by the assessee at the time of the oral partition, there is nothing on record to show that as a result of the oral partition Shri Srichand Gorwani (assessee’s brother), actually relinquished his right, title and interest over the property in favour of the assessee. Moreover, no transfer of immovable property can take place otherwise than by way of written registered agreement.

Hence, the appeal of the revenue was dismissed.

Facts of the case:

ISSUE 1:

• The deceased assessee was an individual, being a partner in Gorwani Builders, and was assessed u/s 147.
• During the re–assessment proceedings, the Assessing Officer found that in the relevant previous year, the assessee along with his brother Shri Srichand Gorwani, who were the joint owners of a property named “Gorwarni House” sold it to Queen’s Villa Developers Pvt. Ltd. through a deed of conveyance dated 25th January 2005 for a recorded sale consideration of Rs. 15 crore.
• On a perusal of the deed of conveyance, it was noticed by the Assessing Officer that as per the arrangement made with the vendee, two residential flats in 9th and 10th floor are to be constructed by the vendee for the vendors. The terms of the deed further provided that amount of Rs. 15 lakh each towards the cost of construction of each land is to be adjusted from the sale consideration of Rs. 15 crore.
• The Assessing Officer, on perusing the aforesaid terms of the agreement was of the view that flats to be constructed by the vendee on behalf of the co–owners is the non–monetary consideration received by them on account of sale of the property. He, therefore, quantified non–monetary consideration on pro–rata basis for each flat at Rs. 93,50,000 and treated it as part of sale consideration and computed long term capital gain accordingly.
• Being aggrieved by the addition of Rs. 93,50,000 to the sale consideration, the assessee challenged the same in an appeal preferred before the learned Commissioner (Appeals).
• it was held by the learned Commissioner (Appeals) that since one cannot sell to himself, non–monetary consideration considered by the Assessing Officer is erroneous.
• The Revenue, hence, pleaded the Mumbai ITAT.
• The learned Departmental Representative submitted, there is apparent contradiction in the finding of the first appellate authority as at one place, he observed that there is no non–monetary consideration received by the assessee whereas again in the same order he has observed that the deal of Gorwani House consisted of two parts, one in “cash” and other in “kind”. He, therefore, submitted, the addition made by the Assessing Officer should be restored.
• The assessee submitted that as per the terms of agreement, the vendee is to construct two flats in 9th and 10th floor utilizing the the FSI retained by the owners against cost of construction of Rs. 15 lakh for each flat which is to be adjusted from sale consideration of Rs. 15 crore. Thus, it was submitted, when the assessee has not sold the FSI and paid Rs. 15 lakh towards cost of construction of the flat it cannot be said that the flats were received by the assessee as non–monetary consideration.
• The Mumbai ITAT, after reading of relevant clauses of the conveyance deed, came to conclude that the assessee has not sold or exchanged the FSI towards construction of two flats. Thus, it was clear from the terms of the agreement that the construction of flat by the vendee is not free of cost; on the contrary, cost of construction was to be adjusted from sale consideration. Thereby, the assessee has not received any non–monetary consideration on account of construction of flat by the vendee.

ISSUE 2:

• The next issue relates to allowance of assessee’s claim of deduction under section 54 of the Act.
• in the return of income, the assessee computed long term capital gain on sale of Gorwani House at Rs. 3,07,11,800. Against such net long term capital gain, the assessee claimed deduction under section 54 for an amount of Rs. 4,09,31,886, towards investment in construction of a new property.
• The Assessing Officer, after examining the claim of the assessee, held that as far as investment in new property is concerned, the same cannot be allowed as the portion of land falling into the share of assessee’s brother came to the possession of the assessee in the year 1996 and the consideration for transferring such share to the assessee was also fixed at Rs. 80 crore.
• It was observed by the Assessing Officer that since the assessee had acquired the property in the year 1996, he cannot claim deduction under section 54 of the Act as it is not an investment in new property.
• Further the CIT (A) allowed the deduction.
• Consequently, the revenue appealed before the Mumbai ITAT which held that since no consideration was received by the assessee at the time of the oral partition, there is nothing on record to show that as a result of the oral partition Shri Srichand Gorwani (assessee’s brother), actually relinquished his right, title and interest over the property in favour of the assessee. Moreover, no transfer of immovable property can take place otherwise than by way of written registered agreement. Hence, the appeal of the revenue was dismissed.

Contention of the Revenue

• The Revenue averred that flats received by the assessee was in exchange of FSI retained by him. Therefore, it is part of the sale consideration to the assessee.
• The revenue asserted that the Flats to be constructed by the vendee on behalf of the co–owners constitute non–monetary consideration
• The revenue contended that assessee’s brother had transferred his right over the property in the year 1996 for all practical purposes; it will be deemed that transfer of property has taken place in the year 1996. Therefore, assessee’s claim of deduction u/s 54 is not acceptable.

Contention of the Assessee

• The Assessee’s contention was that the learned Counsel for the assessee submitted, the conveyance deed would make it clear that the FSI retained by the assessee and his brother was not part of the sale transaction.
• it was submitted, when the assessee has not sold the FSI and paid Rs. 15 lakh towards cost of construction of the flat it cannot be said that the flats were received by the assessee as non–monetary consideration.
• The assessee asserted that the registered partition deed dated 29th January 2005, refers to an oral partition between the assessee and his brother in the year 1996, and also stipulates that physical partition of the subject property by metes and bonds was not done in 1996. Moreover, the payment of Rs. 80 crore was made to Shri Srichand Gorwani on 29th January 2005 and therefore he is eligible for the deduction u/s 54.

Held by ITAT

• On the issue of flats to be constructed by the vendee on behalf of the co–owners the ITAT deleted the addition of Rs. 93,50,000 and held that it does not constitute non–monetary consideration due to the fact that what the assessee and his brother has sold to the vendee for sale consideration of Rs. 15 crore is the property excluding the FSI retained by them. Therefore, it cannot be said that the assessee has sold or exchanged the FSI towards construction of two flats.
• With regard to the issue of disallowance of deduction u/s 54, the ITAT held that as no transfer of immovable property can take place otherwise than by way of written registered agreement, therefore the transfer took place in 2005 and not in 1996 and subsequently the deduction u/s 54 is eligible as it’s an investment of capital gain.