New property cost for exemption u/s 54 has to be as per collaboration agreement & sale deed

Ramesh Chandna Vs ACIT (ITAT Delhi)

ITAT Delhi held that cost of new property for the purpose of exemption under section 54 has to be assumed to be value of interests and share in the new construction, as per the collaboration agreement and the sale deed terms.

Facts- During the year, assessee has showed capital gains from the sale of a 50% share in a property which was inherited by him along with his brother Mr Naresh Chandna, in 50% share each. Assessee claimed that, both the brothers had sold their shares to a builder for Rs. 4,53,75,000/- each. The brother of the assessee has received Rs. 4,53,75,000/- for his 50% share.

On the basis of the sale deed executed for 67.5% of the plot, the AO considered it to be the transfer of 67.5% of the property for Rs. 5,50,00,000/-, which was the sales consideration mentioned in the sale deed. AO observed that the assessee was getting only a 32.5% share in the new property. Thus, for Section 54 of the Act, the AO considered that the brothers together have sold 67.5% of the property to the builder for 5,50,00,000/-.

Thus, the cost of new property for Section 54 of the Act, was taken at Rs. 2,64,81,481/- and the same was considered to be an investment in new property. The cost of acquisition was considered to be 99,250/- and taking share consideration payable to the assessee at 4,53,75,000/- and reducing the cost of acquisition Rs. 99,99,250/-, the AO arrived at capital gains of Rs. 3,53,75,750/- and after reducing investment made in new property calculated as above at Rs. 2,64,81,481/- arrived at a taxable capital gain of 88,94,269/-. CIT(A) has confirmed the addition.

Conclusion-Thus, for the purpose of Section 54 of the Act, mere value of 32.5% ownership rights on the proportionate basis of share consideration of Rs. 5,50,00,000/- is not correct and the cost of new property has to be assumed to be Rs. Rs. 3,57,50,000/- being the value of interests and share of the assessee in the new construction, as per the collaboration agreement and the sale deed terms.

FULL TEXT OF THE ORDER OF ITAT DELHI

The appeal has been preferred by the Assessee against the order dated 11.12.2018 of CIT(A)-20, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No. 10211/2018-19 arising out of an appeal before it against the order dated 11.12.2018 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ACIT, Circle-61(1), New Delhi (hereinafter referred as the Ld. AO).

2. The facts in brief are that return of income was filed by the assessee declaring total income of Rs. 32,68,720/- and case of assessee was selected for limited scrutiny through CASS. The assessee is a Doctor by profession and derived income from business or profession, income from capital gain and income from other sources. During the year, assessee has showed capital gains from sale of 50% share in a property which was inherited by him along with his brother Mr. Naresh Chandna, in 50% share each. Assessee claimed that, both the brothers had sold their shares to a builder for Rs. 4,53,75,000/- each. The brother of assessee has received Rs. 4,53,75,000/- for his 50% share, however, as per the agreement with the builder the assessee was supposed to receive following :

1. Entire basement

2. Entire ground floor

3. ¹/₄portion of entire stilt area including space for car parking

4. Space for one utility with common WC

5. 5% undivided, indivisible and impartible ownership rights in the said plot of measuring 30 square yards and Rs. 96,25,000/- in cash. Consequent to this agreement a sale deed was executed between the builder and the assessee.

3. On the basis of sale deed executed for 67.5% of the plot, the Ld. AO considered it to be the transfer of 67.5% of the property for Rs. 5,50,00,000/-, which was the sales consideration mentioned in the sale deed. The Ld. AO observed that the assessee was getting only 32.5% share in the new property. Thus, for the purpose of Section 54 of the Act, the Ld. AO considered that the brothers together have sold 67.5% of the property to the builder for 5,50,00,000/-, so in view of the same, the share consideration value of 32.5% ownership rights, which remained with the assessee after completion of construction was calculated by Ld. AO as follows :-

5,50,00,000 X 32.5 = 2,64,81,481/-
67.5%

3.1 Thus, the cost of new property for the purpose of Section 54 of the Act, was taken at Rs. 2,64,81,481/- and the same was considered to be investment in new property. The cost of acquisition was considered to be 99,250/- and taking share consideration payable to assessee at 4,53,75,000/- and reducing the cost of acquisition Rs. 99,99,250/-, the Ld. AO arrived at capital gains of Rs. 3,53,75,750/- and after reducing investment made in new property calculated as above at Rs. 2,64,81,481/- arrived at taxable capital gain of 88,94,269/-. Ld. CIT(A) has confirmed the addition. So the assessee is in appeal raising following grounds :

“1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in not allowing the cost of improvement made to the building in 1992 and that too by recording incorrect facts and findings and without observing the principles of natural justice.

2. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in not allowing the benefit of cost of improvement as claimed by assessee, is bad in law and against the facts and circumstances of the case.

3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of ld. AO on account of computation of capital gain and that too by recording incorrect facts and findings and in violation or principles of natural justice and has erred in not allowing the deduction u/s 54 as claimed by the assessee and has erred in restricting the same to the extent of Rs. 2,64,81,481/-.

4. That having regard to the facts and circumstances of the case, ld. CIT(A) has erred in law and on facts in not allowing the benefit of exemption of Rs. 50,00,000/- as claimed by assessee u/s 54EC of Income Tax Act, 1961 while calculating capital gain.

5. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234B and 234C of Income Tax Act, 1961.

6. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

4. Heard and perused the record.

5. In regard to ground no. 1 and 2 ; it has been submitted for the assessee that the valuation report has been accepted by the ld. AO for the purpose of fair market value of construction, however, cost of improvements as part of the report has not been considered on the basis that same is not supported with bills and vouchers. Ld. DR however, supported the findings of ld. Tax authorities below. It can be appreciated from the order of ld. AO that he has specifically mentioned that with respect to cost of improvement of the property, the assessee has provided the valuation report and based upon the same value of land at Rs. 17,40,000/- and value of building at Rs. 1,10,000/-, total Rs. 18,50,000/- is accepted and based upon the half share of assessee, the same was taken at Rs. 9,25,000/-. There appears to be no justification in accepting the cost of improvement provided by the valuer for improvements done during 1982 whereby 685 sq. ft. was added on the 2^nd floor. It is quite unreasonable to expect production of bills and invoices as assessee along with brother has inherited the property, in 2009 on the death of their father. Thus, this ground no. 1 and 2 are allowed with direction to the Ld. AO to take into consideration the cost of improvements mentioned in the valuation report.

6. As with regard to ground no. 3 ; Ld. AR submitted that Ld. AO committed basic error in combining the share of both brothers and proportionately calculating the share of the assessee in context to the share left with the assessee in furtherance of Joint Development Agreement with builder. It was submitted that the brothers had given their respective to shares for Rs. 4,53,75,000/- each but assessee received Rs. 96,25,000/- in cash and also remaining 3,57,50,000/- was in the form of investment in the constructed house from the builder. It was submitted that the assessee invested Rs. 3,57,50,000/-towards the build up house which builder gave to the assessee and i.e. how assessee had claimed this amount as admissible deduction u/s 54. It was submitted that Ld. AO has considered a wrong fact that in the new building assessee would get ownership over 32.5% property in return for a consideration corresponding to 50% of the old property and thus made a wrong calculation of investment in the new property at Rs.2,64,81,481/-.It was submitted that Ld.AO has failed to take into consideration,the sale deed and the Joint Development Agreement together as apart from 32.5% share in the property assessee also got entire basement and ground floor.

6.1 On the other hand Ld. DR supported the findings of Ld. Tax Authorities below.

7. The Bench has given thoughtful consideration to the matter on record and the submissions. What comes up is that there is on record a collaboration agreement dated 16.11.2015 between assessee and his brother with the builder available at page no. 111 to 126 of the paper book. Clause 7.1 of this collaboration agreement available at page no. 117 of the paper book is relevant and same is reproduced for conveniences :-

“7.1 That in addition to the Builder incurring the entire costs and expenses etc. shall pay a sum of Rs. 5,50,00,000/- (Rs. Five Crores Fifty Lacs only), as non refundable interest free Security Deposit/ consideration to the Owners [i.e. Rs. 4,53,75,000/- to Shri Naresh Chandna (the first party herein) and Rs. 96,25,000/- to Dr. Ramesh Chandna (the Second Party herein)] which shall form the total consideration against the rights, in the property to be transferred in favour of the Builder or his nominee/s on the completion or during the course of construction of the building. Out of the abovesaid amount, a sum of Rs. Fifty lacs only (Rs. 50,00,000/-) as part payment has been paid by the Builder to the Owners as under :

1. 25,00,000/- (Twenty five lacs only) vide Ch. No. 063036 dt. 16.11.2015 favouring Sh. Naresh Chandna.

2. 25,00,000/- (Twenty five lacs only) vide Ch. No. 063037 dt. 16.11.15 favouring Dr. Ramesh Chandna. Both drawn Yes Bank.

8. Further, relevant is the clause 8 available at page no. 118 of the paper book :-

“8. That it is made clear that the said shri Naresh Chandna (the First party herein) shall only be entitled to a sum of Rs. 4,53,75,000/- (Four crores fifty three lacs seventy five thousand Rs. only) from as stated above and upon receipt of said amount, the First Party shall be left with no right, title, interest, claim or concern of any nature with the said property or any part thereof.”

9. Further para no. 15 and 16 are relevant and same are reproduced as follows :-

“15. That as mentioned hereinabove, the building shall be consisting of Basement, Stilt, Ground Floor, First Floor, Second Floor and Third Floor with Terrace. The Builder shall apply Form B-1, obtain Form ‘B-2’ and Completion Certificate in respect of the newly constructed building.”

16. That the allocations of the respective parties shall be as under :-

10. Then, there is a sale deed dated 23.12.2015 available at page no. 60 to 79 of the paper book. The same is executed between the assessee and his brother in favour of the builder. The sale deed mentions that the two brothers have transferred 67.5% of the share in the plot. The circle rate is accordingly calculated for 67.5% the sale consideration mentioned in the sale deed as Rs. 5,50,00,000/-. A perusal of the sale deed shows that what is sold by the two brothers is narrated in recital I available at page no. 67 of the paper book :-

“I. And WHEREAS the Vendors have agreed to sell, convey, transfer and assign to the Vendee and the Vendee has agreed to purchase the Entire First Floor, Entire Second Floor (comprising of Barsati and Open Terrace) And Entire Terraces on, over and above the Entire Second Floor of the said property (with right to construct and own any areas / floors on the Entire Second Floor Entire Third Floor and subsequent terraces thereupon and thereabove, upto the limits of sky), and in the event of reconstruction of the said property, the right to construct and own, inter-alia, the 3/4^th Portion of Entire Stilt Area including space for Car parkings and space for Three Utilities with common W.C. therein, alongwith 67.5% undivided, indivisible and impartible ownership rights in the said plot of land measuring 300 sq. yds. Bearing no. D-8, situated at Greater Kailash Enclave-II, New Delhi, with all rights, title and interst, easements, privileges and appurtenances thereto, with all fittings, fixtures, connections, structure standing thereon, with all rights in common entrances, passages, driveway, staircase, and other common facilities and amenities to be provided therein, hereinafter referred to as ‘THE SAID PORTIONS OF THE SAID PROEPRTY’ for a total consideration of Rs. 5,50,00,000/- (Rs. Five Crores Fifty Lacs Only).”

11. Further clause 16 of the sale deed available at page no. 74 of the paper book is relevant and same is reproduced for convenience :-

“16. That it is hereby also clarified that at present the said property is very old and therefore as and when the said property is re-constructed afresh, then in that event the share/ entitlement/ portions hereby sold to the Vendee shall not be changed/ affected and/ or diluted in any manner of whatsoever and accordingly, the vendee in lieu of its rights, title and interests etc. purchased under this Sale Deed, shall be entitled to re-develop and re-construct and be the absolute and exclusive owner of the Entire First Floor, Entire Second Floor, Entire Third Floor, Entire Terraces over and above the Entire Third Floor and also 3/4^th Portion of Entire Stilt Area including space for Car parkings and space for Three Utilities with common W.C. therein, [fully shown in proposed Stilt Floor plan annexed herewith as Annexure-A], alongwith 67.5% undivided, indivisible and impartible ownership rights in the said plot of land measuring 300 sq. yds. bearing no. D-8, situated at Greater Kailash Enclave-II, New Delhi, without any right, title, interest or claim from the Vendors or any other person(s) claiming through or under the Vendors.

12. It is pertinent to observe from the sale deed that details of payment by the vendee to the vendors is available at page no. 76 of the paper book in the form of Schedule I. The sale deed nowhere mentions that in what ratio the vendors have shared the sale consideration in regard to 67.5% share sold by them. There is also no mention of the collaboration agreement dated 16.11.2015 between the vendors and vendee.

13. The bench is of considered opinion that when in the sale deed the ratio of apportionment of the sales consideration amongst vendors is not disclosed and there is no other recital indicating in what proportion or ratio the consideration is shared by the vendors, then the presumption shall be that Joint owner have received consideration in accordance with their respective shares alienated by them under the sale deed. However, the matter of fact is that the brother of the assessee has received Rs. 4,53,75,000/- under the Development agreement being his half of the share. So it has to be concluded that the balance Rs. 96,25,000/-, of the Rs. 5,50,00,000/- sales consideration mentioned in the sale deed was the share of Assessee and the deficiency of Rs. 3,57,50,000/- ( Rs. 4,53,75,000 – Rs 96,25,000), was in the form of rights received in Basement + Ground floor of the new construction.

14. In this context, the statement of income from capital gain submitted by the assessee available at page no. 2 of the paper book shows assessee had claimed that the consideration @ 100% is Rs. 9,75,00,000/- in which the assessee has shown his share to be Rs. 4,53,75,000/- and from which indexed cost for acquisition and improvement of Rs. 1,07,02,142/- have been reduced and total capital gain has been calculated at Rs. 3,46,72,858/- on which the deduction u/s 54 of the Act has been claimed as Rs. 3,57,50,000/-. Thus, arriving at a total capital gain of nil.

15. AO while giving the benefit of Section 54 considered the fact that as per the sale deed 67.5% ownership rights have been transferred to the builder for Rs. 5,50,00,000/- and what remained with the assessee is 33.5% and accordingly proportionate value of 32.5% being the cost of new property u/s 54 was arrived at 2,64,81,481/-.

16. The bench is of considered opinion that what Ld. AO missed was the fact that the assessee on the basis of agreement with the builder had got entire basement, entire ground floor, 1/4^thportion of entire stilt area including space for parking, space for one utility with common WC also in the new construction. The 32.5% undivided, indivisible and impartibly ownership rights in the said plot of measuring 300 square yards was the share in the land alone. Which was not transferred and was retained in favor of the assessee while the two brothers jointly sold 67.5% of the land. Cost of new property however is not the cost of share in the plot alone but all the other constructed and covered area received by the assessee. Thus, for the purpose of Section 54 of the Act, mere value of 32.5% ownership rights on the proportionate basis of share consideration of Rs. 5,50,00,000/- is not correct and the cost of new property has to be assumed to be Rs. Rs. 3,57,50,000/- being the value of interests and share of the assessee in the new construction, as per the collaboration agreement and the sale deed terms. Thus, the bench is inclined to sustain the ground no. 3.

17. As with regard to other grounds nothing was contended.

Accordingly, the appeal of assessee is allowed.

Order pronounced in the open court on 3^rd May, 2023.