Capital Gain Tax Applicability

[Ethirajan Parthasarathy]

A person got two large sites by way of succession. In his absence in India, someone manipulated and sold both the sites.

In one site, the purchaser has constructed lot of apartments. The purchaser of other site has not developed it. Now the original owner has got the court judgement declaring him as lawful owner.

The purchaser of first site has come forward to give few apartments to the landowner as compensation.

My view the original owner is liable for paying capital gain tax @ 12.5% considering the SR value of super structure he got. Will section 78 (50C - Old Act) will apply to this transfer.

For the other site, the present owner is willing to return only half the site or same amount as compensation. What will be the tax effect and whether section 78 of the new Income Tax Act applies to this transaction also.

[Sanjeev Agarwal]

The tax implications depend on the legal nature of the settlement and the documents executed.

1. First Site - Apartments received under settlement

Where the Court has declared the original owner as the lawful owner and, under a settlement, the developer transfers apartments in lieu of the owner's claim over the land, the transaction may amount to a transfer if the owner relinquishes or extinguishes his rights in the land.

In such a case, capital gains may arise. The consideration would generally be the fair market value (FMV) of the apartments received on the date of settlement.

Section 78 of the Income-tax Act, 2025 (corresponding to section 50C of the Income-tax Act, 1961) applies where land or building is transferred for a consideration lower than its stamp duty value. Since the consideration here is received in kind (apartments) under a settlement, the applicability of section 78 is not automatic and would depend on the nature of the settlement deed and whether the deeming provision is attracted. A view that FMV of the apartments should be adopted is more appropriate unless section 78 specifically applies.

2. Second Site - Half the land or monetary compensation

• If half the land is restored pursuant to the court decree, there may be no transfer to that extent and hence no capital gains. However, if the owner relinquishes his rights over the remaining portion under a settlement, capital gains may arise on the rights surrendered.
• If monetary compensation is accepted in full settlement of ownership rights, the compensation would generally constitute consideration for transfer, and capital gains provisions would apply.

Applicability of Section 78

Section 78 does not automatically apply merely because immovable property is involved. It applies only where the statutory conditions relating to transfer of land or building for inadequate consideration are satisfied. In settlements involving exchange of rights or court-directed compromises, its applicability depends on the substance and documentation of the transaction.

Accordingly, the court decree, settlement agreement and conveyance documents should be examined before reaching a definitive tax conclusion.

AI Summary

Capital gains on property settlements hinge on transfer, relinquishment of rights, and settlement documents, not merely immovable property involvement. Capital gains consequences depend on the legal nature of the settlement and the documents executed. If the original owner receives apartments in lieu of his land claim and relinquishes rights in the land, the arrangement may amount to a transfer and capital gains may arise, with consideration generally taken as the fair market value of the apartments. Section 78 is not automatic and applies only if the statutory conditions for transfer of land or building for inadequate consideration are satisfied.