Land transfer for built-up area exchange taxed as capital gains under IT Act

The High Court upheld that the transfer of 52.5% interest in land by the assessee to a developer for exchange of built-up area constituted a transfer, attracting capital gains tax under Section 45(1) of the Income Tax Act. The court rejected the argument that there was only a diminution of ownership rights, emphasizing that allowing possession under a development agreement qualifies as a transfer. The decision was based on precedents highlighting that possession under such agreements triggers capital gains tax liability. The High Court set aside the ITAT's order and affirmed the computation of capital gains by the assessing officer and the first appellate authority.

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Issues Involved:
1. Determination of the cost of acquisition arrived at by the Assessing Officer and confirmed by the appellate Commissioner.
2. Whether the transfer of 52.5% interest in the land owned by the assessee to a developer for exchange of 47.5% built-up area amounts to a transfer, thereby attracting capital gains tax.

Detailed Analysis:

1. Determination of the Cost of Acquisition:
The assessee filed a return of income for the assessment year 1995-96, declaring a total income of Rs. 1,03,80,730, which included long-term capital gains of Rs. 1,32,59,786. The assessment was completed under Section 143(3) of the Income Tax Act, 1961, determining the total income at Rs. 1,86,62,121, which included long-term capital gains of Rs. 1,44,94,439. The discrepancy arose due to the cost of acquisition being adopted at Rs. 92,000 instead of Rs. 10 lakhs as claimed by the assessee. The first appellate authority directed the re-computation of capital gains, which was subsequently done, resulting in long-term capital gains of Rs. 1,32,03,153. The ITAT, in its order, held that there was only a diminution of ownership rights and not a transfer, and thus capital gains could not be assessed under Section 45(1) of the Act. The High Court, however, restored the orders of the first appellate authority and the assessing officer, confirming the computation of capital gains.

2. Transfer of 52.5% Interest in Land:
The assessee entered into a development agreement with a developer on 25-1-1993, agreeing to transfer 52.5% of the undivided share in the property in exchange for either a monetary consideration of Rs. 1,34,00,000 or 47.5% of the built-up area. The assessee opted for the latter. The ITAT held that this did not amount to a transfer as the assessee remained the owner of the entire property, and there was only a diminution of ownership rights. The High Court, however, disagreed, stating that the development agreement allowed the developer to enter into possession and put up construction, thereby constituting a transfer under Section 2(47)(v) and (vi) of the Act. This transfer attracted capital gains tax under Section 45(1) of the Act.

The High Court relied on the decision in Chaturbhuj Dwarkadas Kapadia vs. CIT (2003) 260 ITR 491, where it was held that allowing possession under a development agreement constitutes a transfer, attracting capital gains tax. The High Court also referred to CIT vs. Ghanshyam (HUF) (2009) 8 SCC 412, emphasizing that capital gains arise at the point of transfer, and the definition of 'transfer' under Section 2(47) includes allowing possession under a development agreement.

Conclusion:
The High Court allowed the appeals, setting aside the ITAT's order and restoring the orders of the first appellate authority and the assessing officer. The court concluded that the development agreement constituted a transfer of capital assets, attracting capital gains tax under Section 45(1) of the Income Tax Act, 1961.

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