ITAT directs AO to ascertain how sale consideration can be bifurcated between land & built up area of flats

DCIT Vs Muppala Bhasker Reddy (ITAT Bangalore)

The next question is how to appropriate the sale consideration for the transfer of land and building if a lump-sum monetary consideration is received by the transferor from the transferee when the transfer is effected through a single conveyance deed. As per section 50C as amended by the Finance Act 2009, where the consideration received or accruing as a result of transfer of land and/ or building is less than the value adopted or assessed or assessable by an authority of the State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of consideration received or accruing as a result of such transfer for computing capital gains. In all the registered conveyance deeds, wherein transfer of land and building is involved, an Annexure is appended or there are documents wherein the market values are furnished for the land and the building separately for the purpose of stamp duty valuation. The market value of the immovable property transferred as indicated in the sale deed will be equivalent to the actual sale consideration received by the transferor from the transferee. If this value exceeds the value adopted or assessable by the Registration Authority for stamp duty purposes, the said sale consideration as appropriated to land and building as per Annexure or other documents attached with the registered sale deed could be adopted for the purpose of computing the capital gains. If the sale consideration is lesser than the value adopted or assessable by the Registration Authority for stamp duty purposes, then such value so adopted by the Registration Authority as appropriated between the land and building could be adopted as deemed sale consideration for the respective assets for the purpose of computing the capital gains.

20. We are of the view that it would be just and appropriate to direct the AO to examine the issue afresh in the light of the directions as given above.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This is an appeal by the Revenue against the order dated 21.01.2019 of CIT(A)-1, Bengaluru, passed under section 143(3) of the Income Tax Act, 1961 (hereinafter called ‘the Act’), relating to Assessment Year 2015-16.

2. The main issue that needs adjudication in this appeal is as to whether the Revenue authorities were justified in holding that the assessee is entitled to deduction under section 54F of the Act on the long-term capital gain on sale of property of the assessee under Joint Development Agreement (JDA) as against the claim of the Revenue that the income in question has to be assessed under the head “Income from Business”. The following are the grounds of appeal raised by the Revenue:

1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.

2. On the facts and in the circumstances of the case and in law, is the Ld. CIT(A) justified in deleting the disallowance of the deduction claimed under section 54F of the Income Tax Act, 1961 for an amount of Rs.4,48,10,155/- on the ground that nature of transaction in the instant case attracts capital gains and not business income.

3. On the facts and in the circumstances of the case and in law, is the Ld. CIT(A) justified in holding that the assessee did not exploit the asset for commercial benefit ignoring the fact that the Joint Development Agreement was entered with the “sole Intention” of profit maximisation.

4. On the facts and in the circumstances of the case and in law, is the Ld. CIT(A) justified in deleting the disallowance of the deduction claimed under section 54F of the Income Tax Act, 1961 by holding that the assessee did not venture into activities which were similar to adventure in nature of trade.

5. On the facts and in the circumstances of the case and in law, is the Ld. CIT(A) justified in directing the A O to allow the deduction under section 54F of the Income Tax Act, 1961 for an amount of Rs.4,48,10,155/- without examining the fact that the said asset was never held as a long term capital asset.

6. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored.

7. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.

3. The assessee is an individual. The assessee along with Ms. Bejawada Swarupa purchased property measuring 1 acre in survey No.102/1, situated at Harlur Village, Varthur Hobli, Bangalore South Taluk, (hereinafter referred to as ‘the property’) under a sale deed dated 28.03.2005. On 31.03.2006, the assessee and Ms. Bajawada Swarup along with two others Mrs. Janki and Mr. Muppala Sudhakar Reddy, entered into a deed of partnership under which they agreed to carry on the business of purchase of immovable properties and dealing with the same for construction, development, marketing, maintenance, etc., under the name and style M/s. Sri Harsha Developers. It is not in dispute that the property purchased by the assessee along with M/s. Bejawada Swarupa in the year 2005 was not brought in firm as property of the firm. In fact, the firm did not do any business whatsoever right from the date of its formation. The assessee and Ms. Bejawada Swarupa entered into a JDA on 11.11.2010 with Mr. T. Krishna Reddy whereby the property was given on a JDA basis to the developer. The Assessee and Ms.Bejawada Swarupa were to get 40% of the built up area. As between the Assessee and Ms.Bejawada Swarupa, they were to get built up area under the JDA, of 39,208 sq.ft. and 16,781 sq. ft. respectively. The assessee had 70% share in the property and Ms. Bejawada Swarupa had 30% of share in the property.

4. During the relevant previous year, the assessee sold the following flats and received the following sale consideration:

5. As already stated, the assessee and Ms. Swarupa Bejawada jointly purchased the property located at Harlur Village, varthur hobli and their share in the property and cost of acquisition was as follows:

–

The cost of acquisition was claimed by the assessee as Rs.30,19,380/- in the manner given above.

6. The assessee had invested in a property, situated at HAL II Stage Extension, Bangalore vide dated 28/02/2015 for a consideration of Rs.5,33,33,334/- and the same was claimed as deduction (Eligible amount) under section 54 F of the Income Tax Act,1961(Act).

7. The AO held that since the firm’s business was dealing in real estate the motive of the assessee when he purchased the property was to do business in real estate. Therefore, the JDA was entered into as part of the business of the assessee and therefore income derived from sale of assessee’s share of built-up area which the assessee was to receive under the JDA had to be regarded as income from business. The CIT(A) however took the view that income from sale of built-up area has to be regarded as “Capital Gain”. The following were the relevant findings of the CIT(A):

“In the light of the above facts and circumstances and the case laws discussed, it is seen that the appellant invested in the land together with another co-owner and after holding the same for 5 1/2 years without doing anything, given it for joint development to unconnected party and upon receipt of the proportionate agreed super built up area in the form of constructed flats, he has sold the same for re-investing in a single residential unit which is in a better location for self occupation. From all the above, it is clear that the appellant had intention to settle down to acquire a proper residence for himself. There is no such intention to carry out commercial activity in the whole transaction, as alleged by the AO. The action of the appellant by which the appellant formed a partnership firm with the co-owner and along with his family members in the year 2006 more than a year after investing in the property, cannot change the true character of the transaction of investment in the land. The case laws relied on by the appellant particularly Rungta Properties (P) Ltd 83 Taxmann.com 106 (2017) of the Hon’ble Calcutta High Court supports his case, wherein under similar circumstances it was held that the apartments received from the Developer through JDA and subsequently selling the flats, would not constitute adventure in the nature of trade arid the profit from sale of flats would be treated as income from capital gains. The Hon’ble Calcutta High Court in reaching the said conclusion have discussed & distinguished the judgements of G. Venkataswamy & Co 35 ITR 594 (SC) and P.M. Mohammed Meerkhan v, CIT (1969) 73 ITR 375 (SC), which have been relied on by the AO in the impugned Order.”

8. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal.

9. We have heard the rival submissions. The issue to be adjudicated is as to whether the sale proceeds of the built-up area which the assessee was to receive from the Developer as his share of built-up area under the JDA is to be assessed as Capital Gain or Business Income. In this regard the learned DR submitted that the deduction u/s.54F of the Act ought not to have been allowed to the assessee because the holding period of the built-up area that the assessee received under the JDA was less than 36 months and the capital gain was short term capital gain for which the benefit of deduction u/s.54F of the Act is not available. This argument of the learned DR is reflected is ground No.5 raised by the revenue though such a ground was never invoked by the AO or was discussed by the CIT(A).

10. On the issue whether the sale proceeds received by the Assessee on sale of flats that he obtained under the JDA gives raise to income from business or income from capital gain, we have to necessarily look into the definition of business as given in the Act. Section 2(13) of the Act defines ‘business’ and it reads as under : –

‘Business’ includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

Under the Act the term ‘business’ has been defined in an inclusive manner and not in an exhaustive manner as may be seen from the definition in section 2(13) which defines business to include any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture. Likewise, profession has also been defined in section 2(36) to include vocation. Thus, the definitions being inclusive in nature, should be construed as being extensive and not limited in scope to only that which is specified in or by the words of the definition. The definition of business includes within its scope specifically and explicitly every adventure in the nature of trade, commerce or manufacture. Even an isolated transaction may constitute an adventure in the nature of trade and would be liable to be construed as business carried on. To constitute business or an adventure in the nature of trade it is not, therefore, essential that in every case there must be a series of transactions all motivated by commercial and profit making considerations nor is it essential that the transactions must fructify and materialise in every case into a full-fledged business through the running of an establishment for carrying on business or industry.

11. In the case of G. Venkataswami Naidu Vs. CIT (1959) 35 ITR 594 (SC) (supra), the Hon’ble Supreme Court explained as to when a single of isolated transaction can be regarded as an Adventure in the nature of trade. wherein it was said that the character of transaction cannot be determined solely on the application of an abstract rule, principle or test but must depend upon all the facts and circumstances of the case. It is well settled that there cannot be an abstract rule or principle which could be applied to determine the character of the transaction. It would depend on the facts and circumstances of each case. It was observed that ultimately it is a matter of first impression with the Court whether a particular transaction is in the nature of trade or not. A single plunge may be enough provided it is shown to the satisfaction of the Court that the plunge was in the waters of the trade, but a mere purchase and sale of property—if that is all that is involved in the plunge—it may fall short of anything in the nature of trade.

12. The above tests laid down by the Hon’ble Supreme Court still holds good in deciding cases where the question arises for consideration as to whether a single or isolated transaction can be regarded as an Adventure in the nature of trade so as to characterize the income as business income.

13. The Supreme Court has also laid down that cases of commercial commodities stand on different footing from land. A transaction of purchase of land cannot be assumed without more to be a venture in the nature of trade Janki Ram Bahadur Ram Vs. CIT (1965) 57 ITR 21 (SC) and P.M.Mohammed Meerakhan Vs. (1969) 73 ITR 735 (SC). It was also held that land is not generally or ordinarily a trading commodity unlike, for example, manufactured articles that are normally the subject-matter of trade. Land, on the other hand, is often the subject-matter of investment CIT Vs. Kasturi Estates (P) Ltd. (1966) 62 ITR 578 (Mad). If a land-owner developed his land, expended money on it, laid roads, converted land into house sites and with a view to get a better price for land, eventually sold plot for a consideration yielding a surplus, it could hardly be said that transaction was anything more than a realization of a capital investment or conversion of one form of asset into another. Surplus in such a case would not be trading or business profit.

14. The learned DR submitted that land was not regarded as a commodity in which people will trade and that decision rendered several decades ago will no longer be valid in the context of present times when land is a commodity regularly traded. Though there is force in this argument of the learned DR, we have to see all the cumulative circumstance and in particular intention at the time of purchase of the property and probably this factor would may weigh more than the fact that land in the present times is regarded as a commodity regularly traded.

15. The learned counsel for assessee contended that the single or isolated transaction of entering into a JDA to acquire immovable property cannot be regarded as adventure in the nature of trade. In this regard the assessee pointed out that the assessee had never indulged in any transactions in the past and the intention at the time of acquisition of the property in question was not to sell the same as an adventure in the nature of trade. In this regard it was reiterated that when the property was purchased on 28.3.2005 by the co-owners, there was no partnership envisaged by the two co-owners who purchased the property. On 31.3.2006 the two co-owners and two others entered into a partnership deed but the property was neither brought in as property of the firm or any other circumstance exists to show an intention to plunge into waters of trade. The Partnership never did any business of dealing in properties. On 11.11.2010 when the JDA was entered into by the two co-owners there was no intention of venturing into any trade but was an activity of exploiting the best way to get best returns on the property. There are no circumstances brought out to show that the assessee plunged into waters of trade either at the time when the property was acquired or any time thereafter while entering into JDA or thereafter.

16. The Hon’ble Gujarat High Court in the case of Pr.CIT Vs. Bhanuprasad D. Trivedi (HUF) (2017) 87 taxmann.com 137(Guj.) SLP dismissed by Hon’ble Supreme Court reported in (2018) 95 taxmann.com 19 (SC) wherein it was held that to decide the question whether income from sale of shares has to be assessed as “Income from Business” or “Capital Gain”, the intention at the time of purchase is very material. The assessee had no intention of doing any business and earn income at the time when he bargained to purchase the property in question and therefore the gain in question has to be regarded only as income chargeable to tax under the head “Capital Gain”. The assessee is not in the business of dealing in real estate. The assessee’s claim that there are no instances of similar transaction in the past is not disputed or contradicted by any material brought on record. As submitted by the learned counsel for the assessee, intention at the time of acquisition of the property will be a guiding factor. There is no material brought on record to show what the intention of the assessee was at the time when he acquired the property. The assessee claims that his intention was to hold the property as investments and to earn rental income. The Revenue says the circumstances show that the intention was to indulge in an adventure in the nature of trade. One of the tests laid down by the Hon’ble Supreme Court in the case of G. Venkataswami Naidu (supra) is to see whether the assessee as a purchaser was a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? The answer to the above question is in the negative in the present case, as the assessee was not a trader in acquiring properties and entering into JDA. Another test laid down by the Hon’ble Supreme Court in the decision of G. Venkataswami Naidu (supra) is to see as to, what is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resaleable? Applying the aforesaid test, we are of the view that entering into JDA, is not a common subject matter of trade. We are of the view that no other facts or circumstances are brought on record to show that the assessee indulged in an Adventure in the nature of trade when he entered into the JDA. We therefore uphold the order of the CIT(A) on this aspect.

17. The learned DR submitted that when the assessee sold his share of flats obtained under the JDA, there would arise an incident of short-term capital gain as the flats so acquired were held by the assessee for less than 36 months. The learned counsel for the assessee submitted that the flats were not completed when the assessee sold them and there was no property that was in existence when the assessee relinquished his rights under the JDA and completion certificate was obtained at a later point of time only. Therefore the right acquired under the JDA to receive flats has to be regarded as “Capital Asset” that was transferred and not the flats as such. Such right to receive flats under the JDA was held by the assessee for more than 36 months i.e., from the date of the JDA. The learned counsel for the assessee submitted that the flats were sold even before the same were received by the assessee and what was sold was in effect right to receive flats from the Developer under the JDA. Since that right was with the assessee for more than 36 months i.e., from the date of entering into JDA, the capital asset transferred was a long-term capital asset.

18. In this regard, we find that the AO/CIT(A) has not examined the claim of the assessee under the head “Capital Gain” in accordance with the provisions relating to capital gain as given in the Act. We therefore remand the question of computation of Capital Gain to the AO after due opportunity of being heard afforded to the assessee. The AO will examine the claim of the assessee that it did not sell its share of built-up area under the JDA but sold only it’s right to receive built up area from the Developer and therefore the entire gain has to be considered as long-term capital gain as the rights under the JDA was owned by the assessee for more than 36 months. If on the contrary the AO comes to the conclusion that what was sold was the built up area under the JDA, then, the AO has to carry out the exercise of ascertaining as to how the sale consideration has to be bifurcated between land and built up area of flats. In flats/multi-storied apartments/commercial complexes, the ownership consists of owning undivided share of land and built-up area and these together is the property. It has two components and ownership of both components of undivided share of land and ownership of building is necessary to complete title to a flat. Generally, when a JDA is entered into the owner of the land offers it to a developer with an understanding that he will retain undivided share of land proportionate to his share of built-up area and the undivided share of land proportionate to the built-up area which falls to the share of the developer is agreed to be sold. Therefore, the owner of the property retains undivided share of land proportionate to his share of built-up area. When the built-up area is delivered to the owner of the land and when he sells his share, he again transfers not only the built-up area but also proportionate undivided share of land. In such transaction, there will be no bifurcation of cost of land and building. The AO has to call for details and arrive at the cost of undivided share of land and built-up area. When the owner sells his share of built-up area, the built-up area is acquired when the developer delivers possession of the built-up area to the owner but the undivided share of land is already owned by the owner. When an owner sells his share of property under a JDA he sells two components one is undivided share of land which he held for a longer period than the building and the building which he gets from the developer on completion of the building and the period of holding of the building is much shorter than the period of holding of the land. The concept of bifurcation of undivided share of land and built-up area is a well recognized concept. In practice, a building and the land appurtenant thereto held by an assessee, could be transferred together to a transferee through a single conveyance deed against a lumpsum monetary consideration. In such cases, the question on the method of computing the long term capital gains arises (i.e.) whether the long term capital gain/short term capital gain could be computed for land and building separately? This question assumes paramount importance since the period of holding will decide whether the capital gain is long term or shorter and the indexed cost of acquisition and improvement thereto in respect of these assets will vary depending upon the period of holding. The long term capital gains could be computed separately for land and building as held by the Hon’ble ITAT, Calcutta in the case of CIT vs Sri Sekhar Gupta[2001]114 Taxmann 122 wherein it was held that the land is an independent, identifiable asset and continues to remain as an identifiable capital asset even after construction of a building thereon. Identical views were taken by the Hon’ble Rajasthan High Court in the case of CIT vs Vimal Chand Golecha reported in [1993]201 ITR 442 and by the Hon’ble Madras High Court in CIT vs Dr. D. L. Ramachandra Rao [1999]236 ITR 51. However in order to claim the above capital gains separately for land and building, the assessee is required to give basic details like the original cost of acquisition of land and building, the year acquisition etc separately duly supported by necessary documentary evidences as they may be required at the time of scrutiny assessment. Based on the holding period of these assets, the capital gain is long term or short term and the indexed cost of acquisition could be computed. Likewise in order to claim the indexed cost of improvement necessary documents in support of the improvements done and the expenditure incurred thereon have to be also maintained by the assessee.

19. The next question is how to appropriate the sale consideration for the transfer of land and building if a lump-sum monetary consideration is received by the transferor from the transferee when the transfer is effected through a single conveyance deed. As per section 50C as amended by the Finance Act 2009, where the consideration received or accruing as a result of transfer of land and/ or building is less than the value adopted or assessed or assessable by an authority of the State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of consideration received or accruing as a result of such transfer for computing capital gains. In all the registered conveyance deeds, wherein transfer of land and building is involved, an Annexure is appended or there are documents wherein the market values are furnished for the land and the building separately for the purpose of stamp duty valuation. The market value of the immovable property transferred as indicated in the sale deed will be equivalent to the actual sale consideration received by the transferor from the transferee. If this value exceeds the value adopted or assessable by the Registration Authority for stamp duty purposes, the said sale consideration as appropriated to land and building as per Annexure or other documents attached with the registered sale deed could be adopted for the purpose of computing the capital gains. If the sale consideration is lesser than the value adopted or assessable by the Registration Authority for stamp duty purposes, then such value so adopted by the Registration Authority as appropriated between the land and building could be adopted as deemed sale consideration for the respective assets for the purpose of computing the capital gains.

20. We are of the view that it would be just and appropriate to direct the AO to examine the issue afresh in the light of the directions as given above. The AO will afford opportunity of being heard to the assessee in the set aside proceedings.

21. The Appeal of the Revenue is accordingly treated as partly allowed for statistical purposes.

22. In the result, the appeal is partly allowed for statistical purposes.

Pronounced in the open court on the date mentioned on the caption page.