2017 (4) TMI 120 - AT - Income Tax

Tax exemption granted for flats under joint development agreement, capital gains computed based on construction cost.

The court upheld the eligibility for exemption under section 54F of the Income Tax Act for all flats received under a joint development agreement. The ... Eligibility for deduction u/s 54F - house is leased out to an educational society - Held that:- Assessee is eligible for exemption u/s 54F of the Act, towards all the flats received in pursuance to development agreement. See CIT Vs. Syed Ali Adil [2013 (6) TMI 278 - ANDHRA PRADESH HIGH COURT ] The flats constructed by the assessee are commercial property but not residential house, we find that the assessee has filed necessary evidences to prove that the property in question is a residential flat. The assessee has furnished a copy of plan sanctioned by the municipal authorities, which clearly shows that the apartments constructed by the builder are residential houses. Though the assessee has leased out the premises to an educational society, the tenant has used the premises for the purpose of accommodation of students. Therefore,merely because the house is leased out to an educational society, it cannot be said that the property in question is a commercial property, which is not entitled for exemption u/s 54F of the Act. The CIT(A), after considering the relevant facts, and also by following certain judicial precedents has rightly directed the A.O. to allow exemption claimed u/s 54F of the Act. We do not find any reasons to interfere with the order of the CIT(A). Hence, we uphold the CIT(A) order and reject the ground raised by the revenue. Computation of long term capital gain in pursuance of joint development agreement and adoption of consideration for transfer of property - Held that:- Once the issue has been decided that the assessee is eligible for exemption u/s 54F of the Act, in respect of all the flats, the other issues, i.e. computation of capital gains and adoption of guidance value for the purpose of determination of capital gain becomes academic, as the assessee is eligible for exemption towards all the flats received in pursuance of a joint development agreement and hence computation of capital gain and adoption of guidance value for the purpose of determination consideration has no impact on the total income. Clubbing of income of the minor children in the hands of the assessee - Held that:- we are of the view that even though section 64(1)(a) of the Act, applies for clubbing of income of minors in the hands of the assessee, before clubbing of income, the normal procedure for computation of capital gain has to be adopted. Therefore, before arriving at net income for the purpose of clubbing in the hands of the assessee, the deduction available u/s 54F of the Act has to be considered separately in the hands of the minor children. The CIT(A) has rightly considered the issue and we do not find any reasons to interfere with the order of the CIT(A). Accordingly, we uphold the CIT(A) order and reject the ground raised by the revenue. Assessee appeal allowed. Issues Involved:1. Reopening of assessment under section 147 of the Income Tax Act.2. Determination of capital gains on the transfer of property under a joint development agreement.3. Eligibility for exemption under section 54F of the Income Tax Act.4. Computation of long-term capital gains and adoption of consideration for transfer.5. Clubbing of minor children’s income with the assessee’s income.Detailed Analysis:1. Reopening of Assessment under Section 147 of the Income Tax Act:The case was reopened under section 147 of the Income Tax Act as the income chargeable to tax had escaped assessment. The assessee, along with others, entered into a development agreement with a construction company for developing a piece of land. The agreement was deemed a transfer within the meaning of section 2(47) read with section 53A of the Transfer of Property Act, 1882. The assessee had not admitted the resultant capital gain in the original return, leading to the issuance of a notice under section 148.2. Determination of Capital Gains on the Transfer of Property under a Joint Development Agreement:The Assessing Officer (A.O.) considered the development agreement as a transfer of property, thereby attracting capital gains tax. The assessee contended that there was no transfer as per section 2(47)(v) since possession was not handed over for part performance of the contract. The A.O. rejected this argument, stating that allowing possession for construction purposes constituted a transfer, thus making the capital gain chargeable.3. Eligibility for Exemption under Section 54F of the Income Tax Act:The A.O. denied the exemption under section 54F, arguing that the flats received were used for commercial purposes. The CIT(A) overturned this, stating that the flats were residential and used to accommodate students, thereby qualifying for the exemption. The CIT(A) relied on judicial precedents, including the case of CIT Vs. Syed Ali Adil, which held that multiple flats received under a development agreement could be considered a single residential unit for the purpose of section 54F.4. Computation of Long-Term Capital Gains and Adoption of Consideration for Transfer:The A.O. computed the capital gains based on the cost of construction incurred by the developer, rejecting the assessee's claim that the value should be based on the cost of construction. The CIT(A) ruled that the value of the undivided share of land should not form part of the consideration received from the builder, as the land belonged to the assessee. This decision was upheld, making the computation of capital gains and adoption of guidance value academic since the assessee was eligible for exemption under section 54F.5. Clubbing of Minor Children’s Income with the Assessee’s Income:The A.O. included the minor children’s share of the property in the assessee’s income under section 64(1) of the Act. The CIT(A) held that before clubbing the income, the deduction under section 54F should be considered separately for the minor children. This approach was upheld, affirming that the income of minors must be computed independently before clubbing.Conclusion:The appeals filed by the revenue were dismissed, and the cross objections filed by the assessee were also dismissed as not maintainable. The CIT(A)'s decisions were upheld, affirming the eligibility for exemption under section 54F for all flats received under the joint development agreement and the proper computation of capital gains.