Grant of redevelopment rights on a property amounts to transfer of property, and gives rise to capital gains, liable to tax and provisions of Sec 50C are invokable in such a case

The owners granting the right, authority and power to develop the property in favour of the developers is considered as transfer of the land and building and thus liable to capital gain tax and section 50C of the Act is applicable

Recently ITAT Mumbai held that in the case of Chiranjeev Lal Khanna Vs. ITO (ITA No. 6170/Mum/2008) held that considering the facts of the case and clauses in the agreement, the taxpayer has transferred land and building to the developer would be chargeable to tax as capital gains. Accordingly, Section 50C of the Income-tax Act, 196 1(the Act) would be applicable.

Facts of the case

• The taxpayer and his wife jointly owned building along with plot of land ad measuring 840 sq.mts. i.e. 1,005 sq.yards. The owners entered into agreement with the developers to demolish the existing building and redevelop the said land into a new building on 50 percent sharing basis based on the terms and conditions set out in the agreement.
• As per the agreement, the plot of land will continue to be owned by the owners and developers have no right and title over it. The owners would retain FSI of 11,835 sq.ft granted to them by Municipal Corporation and the developer would load their sources of FSI and construct the total area.
• The owners have agreed to pay the developers costs of construction of FSI retained by owners at INR 1000 per sq.ft. as per the agreement.
• A sum of INR 21.83 million was received by the owners (including the taxpayer) from developers in consideration of the owners granting in favour of the developers the right, authority and power to develop the said property.
• In the return of income the taxpayer has computed the net capital gains arisen to the taxpayer on account of transfer of taxpayer’s 50 percent share by virtue of development agreement as nil after claiming deduction under Section 54 and 54F of the Act.
• During the course of assessment proceedings, the Assessing Officer (AO) has also raised a query whether the consideration received can be considered as income from other sources. However, ultimately, the AO recomputed the capital gains after considering the market value, as worked by Registration Authority for stamp duty valuation, of the property at INR 38.25 million under Section 50C of the Act.

Taxpayer’s contentions