Capital gains relief on JDA flats, villa sale under s.50C, s.54 exemption and s.23(1)(c) Covid vacancy benefit

The Tribunal partly allowed the assessee's appeal. It held that, for computing capital gains on sale of flats under a JDA, the cost of land must be allocated only to the saleable/built-up area, enhancing the allowable cost per sq. ft. It applied s.50C third proviso and directed adoption of the actual sale consideration for a villa, as stamp value did not exceed 110% thereof. The assessee was granted full exemption under s.54, accepting unvouched expenditure of about 5% as incidental to construction. Notional rental income on two villas kept for sale during the Covid period was deleted under s.23(1)(c). However, capital gains on transfer of land under the JDA were confirmed as short-term capital gains.

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Issues: (i) Whether the cost of acquisition per sq.ft. for flats received under a joint development agreement should be computed on the basis of saleable/built-up area attributable to the assessee (resulting in Rs.95.26 per sq.ft.) or on the basis of entire land area as adopted by the AO (Rs.45.91 per sq.ft.); (ii) Whether the stamp authority (guidance) value under section 50C can be applied instead of actual sale consideration for Villa No.13; (iii) Whether the assessee's claim of expenditure for exemption under section 54 should be restricted to the invoiced amount or the marginal undocumented balance may be allowed; (iv) Whether notional rent under section 23 should be brought to tax for villas kept for sale during the year; (v) Whether capital gains arising on transfer of land under the JDA in AY 2007-08 are short-term or long-term capital gains.

Issue (i): Whether the correct basis for computing cost of acquisition per sq.ft. for capital gains on sale of flats obtained under a JDA is the saleable/built-up area attributable to the assessee (giving Rs.95.26 per sq.ft.) or the entire land area (giving Rs.45.91 per sq.ft.).

Analysis: The Tribunal examined the allocation of the remaining proportionate cost to the assessee (Rs.1,04,72,000) and noted that sale consideration was determined with reference to saleable/built-up area as per the JDA. The authorities below treated cost on the basis of the entire land given up in the JDA; the Tribunal rejected the view that cost can only be what was claimed at the time of offering capital gains on JDA, and held that the proportionate cost relevant for the later sale must be apportioned to the saleable area/built-up area actually sold.

Conclusion: In favour of Assessee. The Tribunal directed adoption of cost of acquisition at Rs.95.26 per sq.ft. (1,04,72,000/1,09,924) for computation of capital gains.

Issue (ii): Whether the stamp valuation (guidance) value under section 50C should be adopted instead of actual sale consideration for Villa No.13.

Analysis: Applying the third proviso to section 50C, the Tribunal compared the stamp authority value and 110% of the actual sale consideration. The stamp value did not exceed 110% of the actual consideration received; therefore the proviso permits treating the actual sale consideration as the full value for purpose of section 48.

Conclusion: In favour of Assessee. The Tribunal directed the AO to adopt the actual sale consideration of Rs.2,18,29,631 for Villa No.13 instead of the higher stamp value.

Issue (iii): Whether the assessee's exemption claim under section 54 should be restricted to the invoiced amount produced (Rs.71,67,207) or whether the marginal undocumented balance (approx. 5% / Rs.3,87,726) may be allowed.

Analysis: The Tribunal recognised that in construction and development activities certain minor items (labour, petty materials, transport, supervision) often lack formal bills. The assessee produced about 95% of bills and vouchers and no adverse material was shown. Given the evidentiary position and that the expenses were incurred wholly and exclusively for improvement, the Tribunal found it appropriate, on facts, to allow the marginal balance.

Conclusion: In favour of Assessee. The claim under section 54 was allowed in full and the AO's restriction was set aside.

Issue (iv): Whether notional rent under section 23 should be brought to tax for two villas that were kept vacant and for which agreements for sale had been entered into during the year.

Analysis: The Tribunal considered section 23(1)(c) and relevant factual matrix. The assessee demonstrated that the villas were kept for sale, agreements of sale had been executed but sale deeds were not completed, and that the inability to let or sell arose from the Covid pandemic impairing marketability. The Tribunal accepted that where property is vacant due to bona fide efforts to sell (and due to pandemic-related inability to let), taxing notional rent is unwarranted.

Conclusion: In favour of Assessee. The notional rent addition of Rs.71,331 was deleted.

Issue (v): Whether capital gains on transfer of land under the JDA in AY 2007-08 are short-term or long-term capital gains.

Analysis: The Tribunal reviewed the facts that the partnership firm originally held the land, the firm distributed the land to partners by court compromise in the same year, the firm paid capital gains on distribution, and the partners (as co-owners) entered into the JDA in the same financial year. The Tribunal held that distribution by the firm and subsequent transfer under JDA are separate transactions and that the period of holding by the co-owners was less than 36 months; precedents relied upon by the assessee were distinguishable.

Conclusion: In favour of Revenue. The Tribunal upheld the authorities below in treating the gains as short-term capital gains taxable at the applicable higher rate and dismissed the appeals for AY 2007-08.

Final Conclusion: The Tribunal allowed the appeal(s) relating to AY 2021-22 on the issues of cost allocation, section 50C valuation, section 54 exemption and deletion of notional rent, and dismissed the appeals relating to AY 2007-08 holding the gains to be short-term; overall the result is partly in favour of the assessee and partly in favour of the Revenue.

Ratio Decidendi: Where sale consideration for units under a JDA is determined by reference to saleable/built-up area, the proportionate cost of acquisition must be apportioned to that saleable area for computation of capital gains; and under the third proviso to section 50C, if the stamp valuation does not exceed 110% of actual consideration, the actual consideration shall be treated as full value for section 48.

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