2021 (4) TMI 1005 - AT - Income Tax

Tribunal directs AO to deduct construction cost & use specific land value in computing capital gains.

The Tribunal allowed the assessee's appeal, directing the AO to deduct the cost of construction of Rs. 86,10,000 while computing the capital gains on the ... Allowability of cost of construction as cost of acquisition for capital gains where built up area is received in lieu of land under a Joint Development Agreement - treatment of built up area received as consideration for deemed transfer of undivided land - adoption of market guidance value for valuation of land in JDA for computation of capital gainsAllowability of cost of construction as cost of acquisition for capital gains where built up area is received in lieu of land under a Joint Development Agreement - treatment of built up area received as consideration for deemed transfer of undivided land - Deduction of cost of construction of flats received under a JDA while computing capital gains on subsequent sale of those flats. - HELD THAT: - The Tribunal found that the assessee had treated the built up area allotted under the JDA as consideration for the deemed transfer of undivided land when offering income on entering into the JDA; consequently, the corresponding cost element must be recognised when those flats are later sold. The Assessing Officer's rejection rested on the technicality that the developer physically incurred construction expenditure; but the Tribunal held that where flats are received in lieu of land the value of such flats constitutes the assessee's cost of acquisition for the purposes of computing capital gains on a subsequent sale. The decision was supported by earlier coordinate bench precedents (Jeeva Vadivelu and K. Rajanna) and the Tribunal directed the AO to consider and verify the cost of construction from the developer and allow the same while recomputing capital gains. The Tribunal therefore allowed the assessee's ground and remitted the matter to the AO for computation consistent with this principle. [Paras 14, 15, 16, 17, 18]Allowed; AO directed to consider the cost of construction of the seven flats as cost of acquisition while computing capital gains and verify the cost from the developer.Adoption of market guidance value for valuation of land in JDA for computation of capital gains - application of published guidance value for the specific property for determining consideration - Correct guidance value per square foot to be adopted for the land deemed transferred under the JDA for computation of capital gains. - HELD THAT: - The AO had adopted a rate of Rs. 800 per sq.ft based on information from the Sub Registrar; the assessee produced the Government of Karnataka's published guidance value applicable to the property. On examination of the published market guidance values and the site particulars, the Tribunal concluded that the notified value relevant to the impugned property was Rs. 550 per sq.ft (and noted an entry reflecting Rs. 550). The Tribunal thus found the AO's adoption of Rs. 800 per sq.ft not justified for this property and allowed the assessee's claim to adopt the lower applicable notified value. [Paras 23, 24]Allowed; the value for the property is to be adopted at Rs. 550 per sq.ft for computation of capital gains.Final Conclusion: The assessee's appeal is allowed: the cost of construction of the seven flats received under the JDA is to be treated as cost of acquisition and allowed while computing capital gains (with verification by the AO), and the guidance value for the impugned property is fixed at Rs. 550 per sq.ft for the purpose of computing capital gains for Asst Year 2008-09. Issues Involved:1. Deduction of cost of construction of 7 flats sold.2. Determination of capital gains on Joint Development Agreement (JDA) with M/s. Sai Gokul Builders.Issue-wise Detailed Analysis:1. Deduction of Cost of Construction of 7 Flats Sold:The assessee filed an appeal against the CIT(A) order dated 30-06-2017, challenging the disallowance of the cost of construction of 7 flats sold. The assessee argued that the built-up area received was in lieu of the land transferred to the developer, and thus, the cost of construction should be deductible while computing capital gains. The AO had disallowed this cost, stating that the builder incurred the construction expenses, not the assessee. The CIT(A) upheld this view.The Tribunal noted that the flats were received as consideration for the transfer of land under the JDA, and the cost of construction should be considered while computing capital gains. The Tribunal cited previous decisions, including the case of Jeeva Vadivelu and K. Rajanna, where it was held that the cost of construction should be allowed. The Tribunal directed the AO to consider the cost of construction of Rs. 86,10,000/- while computing the capital gains from the sale of the 7 flats.2. Determination of Capital Gains on JDA with M/s. Sai Gokul Builders:The assessee contested the AO's determination of capital gains based on a guidance value of Rs. 800/- per sq.ft., arguing that the correct value should be Rs. 500/- per sq.ft. as per the Government of Karnataka's notification. The AO had adopted the higher value based on information from the Sub-Registrar, Mahadevapura, Bangalore, which was upheld by the CIT(A).The Tribunal reviewed the market guidance value published by the Government of Karnataka and found that the correct value for the property should be Rs. 550/- per sq.ft. instead of Rs. 800/- per sq.ft. adopted by the AO. Consequently, the Tribunal allowed the assessee's appeal on this ground as well.Conclusion:The Tribunal allowed the appeal of the assessee, directing the AO to:1. Deduct the cost of construction of Rs. 86,10,000/- while computing the capital gains on the sale of the 7 flats.2. Adopt the value of Rs. 550/- per sq.ft. for the land transferred under the JDA with M/s. Sai Gokul Builders.Order Pronounced:The order was pronounced in the open court on 16th April 2021.