High Court: FAR Transfer Equals Capital Gains Tax

The High Court held that the transfer of Floor Area Ratio (FAR) by the assessee to L&T constituted a transfer of a capital asset under Section 2(47) of the Income Tax Act, making it liable for capital gains tax. The court rejected the assessee's argument that the income was an advance, determining that the transfer was complete upon sanctioning of the plan and commencement of construction. The court set aside the Tribunal's order, reinstating the decisions of the Appellate Commissioner and the Assessing Officer, thereby affirming the taxability of the income from the FAR transfer.

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Issues Involved:
1. Whether the FAR (Floor Area Ratio) transferred by the assessee to L&T constitutes a transfer of a capital asset.
2. Whether the income from the FAR transfer is liable to capital gains tax.

Detailed Analysis:

Issue 1: Transfer of FAR as a Capital Asset
The primary issue is whether the transfer of 7575.37 square meters of FAR by the assessee to L&T constitutes a transfer of a capital asset under Section 2(47) of the Income Tax Act. The court noted that the assessee owned 35 acres and 6 guntas of land, out of which 1 acre and 6 guntas were retained for personal use. The remaining 34 acres were subject to a Joint Development Agreement with L&T.

The Assistant Commissioner of Income Tax determined that the transfer of FAR to L&T amounted to a 'transfer' under Section 2(47) of the Act, making it liable for capital gains tax. The Appellate Commissioner upheld this view, stating that the relinquishment of FAR by the assessee constituted a transfer within the meaning of Section 2(47).

The Tribunal, however, overturned this decision, stating that the retained 1 acre and 6 guntas were not a capital asset and thus not subject to capital gains tax. The High Court disagreed with the Tribunal, emphasizing that the definition of 'transfer' under Section 2(47) includes the sale, exchange, or relinquishment of an asset or the extinguishment of any rights therein. The court concluded that the assessee's relinquishment of FAR to L&T constituted a transfer of a capital asset.

Issue 2: Taxability of Income from FAR Transfer
The second issue revolves around whether the income from the FAR transfer is liable to capital gains tax. The assessee argued that the amount received from L&T was an advance and not taxable. However, the court found that the seized documents and the letter from L&T dated 23.12.1999 clearly indicated that the assessee had transferred the FAR for a consideration of Rs. 3.15 crores.

The court held that the transfer was complete when the plan was sanctioned and construction began, making the income taxable in the year of transfer, i.e., the assessment year 1999-2000. The court rejected the Tribunal's view that no income had accrued during the year due to the lack of construction related to the FAR.

The court also dismissed the assessee's argument that the amount was an advance, noting that a subsequent letter from L&T stating the amount as an advance was an afterthought and not reliable.

Conclusion:
The High Court allowed the appeal, setting aside the Tribunal's order and restoring the orders of the Appellate Commissioner and the Assessing Officer. The court concluded that the transfer of FAR by the assessee to L&T constituted a transfer of a capital asset under Section 2(47) and was liable to capital gains tax.

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