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Case Number

I.T.A No. 1081 of 2006

Judges

K. Sreedhar Rao
B. Manohar, JJ.

Acts

TRANSFER OF PROPERTY ACT
section 2(42) of the Income-tax Act.
section 2(47) of the Income-tax Act.
SECTION 54 INCOME TAX ACT

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Smart Summary

Judgment Summary — B. Manohar, J.

Factual and Procedural Background

The Revenue appealed against the Income-tax Appellate Tribunal, Bangalore “B” Bench order dated February 28, 2006 (I.T.A No. 3782 Bang/2004), which had partly allowed the assessee's appeal and set aside the assessment order dated March 26, 2004. The assessment (assessment year 2001‑02) arose after the respondent-assessee filed his return (declaring income Rs. 8,98,127) and was selected for scrutiny.

The Assessing Officer re-computed long-term capital gains on two properties: (a) J.P. Nagar property — the assessee claimed one-third share and adopted fair market value as on April 1, 1981 for indexation; the Assessing Officer disagreed and assessed higher long-term capital gain; and (b) Aga Abba Ali Road property — a joint development with M/s Embassy Investment; the assessee treated a value of Rs. 66,00,000 (based on fair market value as on April 1, 1981) with long-term capital gain shown as nil; the Assessing Officer used the developer's reported construction cost (Rs. 2,86,22,931) and apportioned 50% as consideration, arriving at a higher capital gain.

The assessee appealed to the Commissioner of Income-tax (Appeals), who partly allowed the appeal (order dated November 9, 2004) by allowing a deduction of Rs. 1,82,720 towards unexplained expenditure and otherwise confirming the assessment. The assessee then appealed to the Tribunal, which in its February 28, 2006 order partly allowed the appeal, set aside the assessing officer's order, and directed the assessing authority to give exemption under section 54 of the Income‑tax Act. The Revenue then appealed to this Court.

Legal Issues Presented

Whether the Tribunal was right in holding that for the purpose of computation of long‑term capital gain in respect of J.P. Nagar Property sold by the assessee indexation in order to determine the cost element should be as on April 1, 1981, by ignoring the law declared by this Hon'ble court in the case of CIT v. Dr. V.D Modi?
Whether the Tribunal was right in holding that the estimated cost of construction of Rs. 66 lakhs shown in the joint development agreement for development of the property situated at Aga Abba Ali Road, Bangalore, should be taken into account and not 50 per cent (Rs. 1.43 crores) of Rs. 2.86 crores actually spent by the builder in working out the sale consideration for the purpose of section 45 of the Act?
Whether the Tribunal was correct in holding that the assessee is exempted to exemption under section 54 of the Act in respect of capital gains arising out of transfer of vacant land and also to consider the assessee's alternative claim of being entitled to exemption under section 54F of the Act?

Arguments of the Parties

Appellant (Revenue) — Principal Contentions

For the J.P. Nagar property: The assessee obtained absolute ownership only on August 8, 1987 (sale deed), so the fair market value as of April 1, 1981 cannot be adopted for indexation in view of the judgment of this Court in CIT v. Dr. V.V Mody ([1996] 218 ITR 1 (Karn)). The Assessing Officer's computation (rejecting FMV as on 1981) was therefore correct.
For Aga Abba Ali Road: The joint development agreement was in 1995 with construction completed in 2000; therefore, the property value as of 2000 should be considered and not the value as of the date of agreement. Further, 50% of the actual cost of construction (as per developer's reported Rs. 2.86 crores) should be reckoned as the consideration, not the estimated Rs. 66 lakhs shown in the development agreement.
Exemption: The assessee is entitled only to exemption under section 54F, not section 54; the Tribunal's direction to allow section 54 exemption is contrary to law and should be set aside.

Respondent (Assessee) — Principal Contentions

The Tribunal's order is factually and legally sound. The judgment in Dr. V.V Mody is said to be inapplicable because of an amendment to section 2(47) of the Income‑tax Act. The first issue is covered by this Court's Division Bench order in I.T.A No. 25 of 2001 (ITO v. R. Sathyanarayana) disposed of on December 17, 2007.
For Aga Abba Ali Road: The land was handed to the developer on May 6, 1995 and the development agreement fixed the value at Rs. 66,00,000; 50% of the apartment is to be handed to the owners and the assessee has one‑third share. The fair market value as of April 1, 1981 should be adopted despite completion in 2000; the Assessing Officer's use of the developer's project cost is incorrect.
Exemption: After demolition and construction of a new residential apartment, the assessee is entitled to exemption under section 54 of the Act (per the Tribunal), and the Revenue's appeal should be dismissed.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Dr. V.V Mody ([1996] 218 ITR 1 (Karn))	Authority cited by Revenue for the proposition that fair market value as on April 1, 1981 cannot be adopted when ownership arose later (ownership by sale deed in 1987).	The Court considered this authority but held it inapplicable to the facts because possession/allotment and part performance principles (and amendment to section 2(47)) meant FMV as on April 1, 1981 could be adopted in the present case. The Court therefore answered Issue No. 1 against the Revenue.
ITO v. R. Sathyanarayana (I.T.A No. 25 of 2001, disposed December 17, 2007)	Division Bench decision relied on by the assessee/Tribunal regarding treatment of possession and FMV date for computation of capital gains.	The Court stated that Issue No. 1 is fully covered by that Division Bench judgment and applied the same reasoning to allow adoption of FMV as on April 1, 1981 for the J.P. Nagar property.
CIT v. B.K. Saroja (I.T.A No. 328 of 2003, dated December 13, 2007)	Held that where a party is put in possession under part performance (section 53A of the Transfer of Property Act), that person is to be treated as owner from the date of possession for relevant purposes.	The Court relied on this principle to treat the allottee/possessor as owner from the date of possession, thereby supporting use of FMV as on April 1, 1981 for the J.P. Nagar computation of capital gains.

Court's Reasoning and Analysis

The Court examined each issue in sequence and applied the facts, the development agreement documents, and applicable statutory changes and earlier decisions:

J.P. Nagar property (Issue No. 1):
- The site was originally allotted by BDA on November 5, 1975 and the allottee was put in possession thereafter; although the registered sale deed to the assessee and his brothers was dated August 8, 1987, possession and allotment predated that.
- The assessee claimed indexation from the date of original allotment and adopted fair market value as on April 1, 1981. The Tribunal and this Court accepted that where possession was given under part performance (as contemplated by section 53A of the Transfer of Property Act), the date of possession is to be treated as the relevant date for ownership-related calculations.
- The Court noted the amendment to section 2(47) (insertion of sub-clause (v) effective April 1, 1988) bringing within "transfer" any transaction involving allowing possession in part performance under section 53A; on this basis the assessee was entitled to adopt FMV as on April 1, 1981 and claim indexation. The Court therefore answered Issue No. 1 against the Revenue.
Aga Abba Ali Road property (Issue No. 2):
- The parties entered into a joint development agreement (1994/1995); developer was put in possession on March 6, 1995; construction completed in 2000.
- Clause 1.1 and related clauses of the agreement set out that 50% of undivided right and interest (saleable area, parking, terrace, etc.) was to be conveyed to the developer in consideration of development; an exchange value for 50% of the land was specified (exchange value / consideration recorded in the agreement).
- The Assessing Officer used the developer's reported project cost (letter dated February 1, 2004) and treated 50% of Rs. 2.86 crores as the consideration. The Court held that the exchange value specified in the joint development agreement represents the market value on the date of entering into the agreement and is an appropriate basis for computation in a joint development transaction.
- The Court observed that the project cost need not represent only cost of construction and the assessing authority had not considered the agreement's stated exchange value. On that basis the assessment approach was contrary to law; Issue No. 2 was held against the Revenue.
Exemption under section 54 / 54F (Issue No. 3):
- The development agreement required demolition of the existing residential building and handing over of vacant site (16,800 sq. ft) to the developer.
- The Court found that because the assessee and his brothers themselves demolished the residential building and handed over the vacant land, they were not entitled to claim exemption under section 54 (which had been directed by the Tribunal to be allowed). At most they could claim benefit under section 54F.
- Therefore, the Tribunal's direction to allow deduction under section 54 was contrary to law and could not be sustained; Issue No. 3 was held against the assessee.

Holding and Implications

Holding: The Court rendered the following operative outcome:

APPEAL ALLOWED IN PART. Specifically, the Court set aside the Appellate Tribunal's direction to the assessing authority to allow deduction under section 54 of the Income‑tax Act. In all other respects, the appeal was dismissed.

Implications:

The assessee is permitted to adopt the fair market value as on April 1, 1981 (and claim indexation) for the J.P. Nagar property because possession/allotment predated that date and, in the circumstances, possession in part performance is treated as ownership for capital gains computation.
For the Aga Abba Ali Road joint development, the exchange value specified in the joint development agreement shall be the appropriate basis for computing the assessee's consideration (rather than 50% of the developer's reported aggregate construction cost as used by the Assessing Officer).
The Tribunal's grant of exemption under section 54 is set aside because the assessee and co-owners demolished the residential building and handed over vacant site; the assessee may at most claim exemption under section 54F. The Court did not extend section 54 relief in these facts.
No broader new legal principle or precedent was declared by this judgment beyond applying existing authorities and statutory amendment (section 2(47) and the part performance principle under section 53A) to the facts of the case; the decision modifies the Tribunal's directions but does not purport to establish a novel rule of general application beyond the facts considered.

Source: Summary prepared exclusively from the provided court opinion text. No external information has been added.

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Commissioner Of Income-Tax And Another v. Ved Prakash Rakhra

The Judgment of the Court was delivered by

B. Manohar, J.:— This appeal is by the Revenue, being aggrieved by the order dated February 28, 2006, made in I.T.A No. 3782.Bang/2004 passed by the Income-tax Appellate Tribunal, Bangalore “B” Bench, partly allowing the appeal setting aside the order dated November 9, 2004, made in I.T.A No. 14.W6(4)/CIT(A)III/2004-05 passed by the Commissioner of Income-tax (Appeals)-III, Bangalore.

2. The respondent-assessee filed his return of income for the assessment year 2001-02 on February 1, 2012, declaring a total income of Rs. 8,98,127. The same was processed and, subsequently, selected for scrutiny. Accordingly, notice under section 143(2) was issued. The authorised representative of the respondent appeared and filed the documents. The Assessing Officer noticed that the assessee has shown one-third share of long-term capital gain on sale of J.P Nagar property site of Rs. 8,53,470. The said site was jointly held by the assessee along with his two brothers. The long-tenn capital gain has been calculated at Rs. 8,26,500 taking into consideration the fair market value as on April 1, 1981. However, the appellant got the ownership over the property on November 11, 1987. The Assessing Officer found that adopting the fair market value as on April 1, 1981, for calculating the capital gain is contrary to law and assessed the said property arriving at the long-term capital income of the assessee at Rs. 18,88,736. Further, in so far as the property situated at Aga Abba Ali Road, the assessee claimed that he was a co-owner of the said property along with his two brothers. The said property was sought to be jointly developed with M/s. Embassy Investment. As per the development agreement, the land was handed over to the developer in the year 1995 and superstructure was built in the year 2000 consisting of multistoried building. As per the agreement, 50 per cent, of the flats, 50 per cent, of the car parking space and 50 per cent, of saleable terrace were given to the assessee and two of his brothers. In that, the assessee is entitled for one-third share. The property value has been fixed at Rs. 66,00,000 taking into consideration the fair market value as on April 1, 1981. The long-term capital gain has been shown as nil. However, the assessing authority not accepting the long-term capital gain shown by the assessee, worked out the capital gain based on the actual cost of construction reported by the developer, vide letter dated February 1, 2004, as Rs. 2,86,22,931 and 50 per cent, has to be reckoned as the value of site received by the assessee and his brothers would comes about Rs. 1,43,11,465. The share of the assessee is one-third. Taking into consideration the said value, the Assessing Officer assessed the capital gain in respect of the property situated at Aga Abba Ali Road at Rs. 47,64,821 and assessed the income for the assessment year 2001-02 as Rs. 20,96,614 including the interest and surcharge, issued demand notice as per the assessment order dated March 26, 2004. The assessee, being aggrieved by the assessment order dated March 26, 2004, preferred an appeal before the Commissioner of Income-tax (Appeals), Bangalore, contending that the order passed by the assessing authority is contrary to law. The Commissioner of Income-tax (Appeals), by his order dated November 9, 2004, partly allowed the appeal and deducted a sum of Rs. 1,82,720 towards unexplained expenditure and confirmed the order in all other respects. The assessee, being aggrieved by the order passed by the appellate authority, approached the Income-tax Appellate Tribunal in I.T.A No. 3782 of 2004. The Appellate Tribunal, after examining the matter in detail by its order dated February 28, 2006, partly allowed the appeal setting aside the order passed by the assessing authority and issued directions to the assessing authority to give exemption under section 54 of the Income-tax Act. The appellate authority clearly held that the market value of the property has to be taken into consideration as on the date of grant of land in respect of the J.P Nagar property and also the market value of the property as on the date of development agreement entered into between the parties in respect of Aga Abba Ali Road. The Revenue, being aggrieved by the order dated February 28, 2006, passed by the Appellate Tribunal preferred this appeal. This appeal was admitted September 11, 2007, to consider the following substantial questions of law:

“(i) Whether the Tribunal was right in holding that for the purpose of computation of long-term capital gain in respect of J.P Nagar Property sold by the assessee indexation in order to determine the cost element should be as on April 1, 1981, by ignoring the law declared by this Hon'ble court in the case of CIT v. Dr. V.D Modi ?

(ii) Whether the Tribunal was right in holding that the estimated cost of construction of Rs. 66 lakhs shown in the joint development agreement for development of the property situated at Aga Abba Ali Road, Bangalore, should be taken into account and not 50 per cent. (1.43 crores) of Rs. 2.86 crores actually spent by the building in working out the sale consideration for the purpose of section 45 of the Act ?”

(iii) Whether the Tribunal was correct in holding that the assessee is exempted to exemption under section 54 of the Act in respect of capital gains arising out of transfer of vacant land and also to consider the assessee's alternative claim of being entitled to exemption under section 54F, of the Act ?”

3. Sri M. Thirumalesh, learned counsel appearing for the Revenue, contended that the order passed by the Income-tax Appellate Tribunal is contrary to law. Though the erstwhile Commissioner allotted the land on November 5, 1975, absolute sale deed was executed on August 8, 1987. In view of the judgment of this court in the case of CIT v. Dr. V.V Mody reported in [1996] 218 ITR 1 (Karn), the fair market value as on April 1, 1981, cannot be adopted since the assessee gets the ownership only on August 8, 1987. The capital gain assessed by the assessing authority and confirmed by the Commissioner of Income-tax (Appeals) is in accordance with law. Further, in so far as the property situated at Aga Abba Ali Road is concerned, the assessee along with his brothers entered into a development agreement and pursuant to the same, the building situated in the said property was demolished and vacant site was handed over to the developer. As per the development agreement, 50 per cent, of the flats have to be given to the owners of the property along with car parking space and saleable terrace. The remaining 50 per cent, would go to the developer. The joint development agreement was entered into between the parties in the year 1995 and construction of the residential apartment was completed in the year 2000. Hence, the property value of the year 2000 has to be taken into consideration and not the property value as on the date of agreement. Further, 50 per cent, of the total cost of construction has to be taken into consideration to assess the capital gain of the assessee. The reasoning of the Appellate Tribunal to set aside the order passed by the Commissioner of Income-tax (Appeals) is contrary to law. Further, the assessee is entitled for exemption only under section 54F of the Act. The direction issued by the Appellate Tribunal to extend the exemption under section 54 of the Act is contrary to law and sought for setting aside the same by allowing the appeal.

4. On the other hand, Sri A. Shankar, learned counsel appearing for the respondent, contended that there is no infirmity or irregularity in the order passed by the Appellate Tribunal. The Tribunal, after considering the entire material on record, passed the order impugned and the same is not liable to be interfered with by this court. The judgment made in Dr. V.V Mody's case cited supra is not applicable to the facts of this case in view of the amendment to section 2(47) of the Income-tax Act. He also contended that the first issue raised by the assessee is fully covered by the order passed by the Division Bench of this court in I.T.A No. 25 of 2001 (ITO v. R. Sathyanarayana) disposed of on December 17, 2007. Further, in respect of the property situated at Aga Abba Ali Road, the assessee and his brothers entered into a joint development agreement with M/s. Embassy Investments and the said property was handed over to the developer on May 6, 1995, itself for construction of the residential apartment. As per the development agreement, 50 per cent, of the apartment shall be handed over to the owners of the property. In that the assessee is entitled to one-third share. Hence, the fair market value as on April 1, 1981, has to be adopted though the construction of the apartment was completed in the year 2000. As per the development agreement, the value of the apartment was fixed at Rs. 66,00,000. Taking into consideration 50 per cent, of the cost of construction, the assessing authority has arrived at the capital gain, which is totally incorrect. Further, after demolishing the residential house, new residential apartment has been constructed. Hence, the assessee is entitled for exemption under section 54 of the Act and sought for dismissal of the appeal confirming the order passed by the appellate authority.

5. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned passed by the authorities below.

6. It is not in dispute that the property situated at J.P Nagar was originally allotted by the then Commissioner (now known as “BDA”) on November 5, 1975, in favour of the father of the assessee Sri B.L Rakhra on lease-cum-sale basis and put the allottee in possession of the property. In the meantime, the father of the appellant died. In view of that, the BDA executed the registered sale deed in favour of the assessee and his two brothers as per the sale deed dated August 8, 1987. Further, the assessee has put up construction and compound wall to the said property. While computing the capital gain from the said property, the assessee claimed the indexation benefit in respect of the cost of acquisition right from the date of original allotment by the BDA. The allotment has been made and put the allottee in possession in the year 1977 itself. The fair market value has been taken as on April 1, 1981. The assessee is entitled for one-third share in the said property. Since the allotment has been made and put the allottee in possession prior to April 1, 1981, the fair market value as on April 1, 1981, has been taken into consideration for arriving at capital gain of Rs. 8,53,000. Issue No. 1 raised in this appeal is fully covered by this judgment of the Division Bench of this, court made in I.T.A No. 25 of 2001 (cited supra). Paragraph 7 of the judgment reads as follows:

“It is not in dispute that the lease-cum-sale deed was executed by the BDA on June 19, 1992. The assessee was put in possession of the property on June 19, 1992. He was enjoying the property as an absolute owner except to fulfil the terms and conditions of the lease-cum-sale deed. In other words, the assesses was enjoying the property as a owner and that he was put in possession of the property in terms of the agreement and such possession has to be treated as if he was enjoying the property under the part performance of the contract as defined under section 53A of the Transfer of Property Act. If the assessee was enjoying the property under the provisions of the Transfer of Property Act, we have to consider the date of ownership from the date on which he was put in possession of the property. As a matter of fact in a similar circumstances this court in I.T.A No. 328 of 2003, dated December 13, 2007, in the case of CIT v. B.K Saroja we have held that when a party is put in possession of the property under the part performance of the agreement as contemplated under section 53A of the Transfer of Property Act the person who is in possession in such capacity has to be treated as a owner from the date on which he was put in possession. If the same is taken into account, when the BDA has allotted the site and put the possession of the property, if the property is sold on May 8, 1997, it has to be treated as a long-term capital gains as he was enjoying for more than 36 months as contemplated under section 2(42) of the Income-tax Act.”

7. Further under section 2(47), the term “transfer” has undergone change with effect from April 1, 1988, by insertion of sub-clause (v) to section 2(47) which provides that any transaction involving allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, will also come within the ambit of transfer is relevant. When the possession of the immovable property in pursuance of the said agreement is given in part performance of the said agreement, it is to be considered that there is a transfer for the purpose of computing capital gains. Hence, we find that the assessee is entitled to adopt the fair market value of the property as on April 1,1981, and, accordingly, entitled to indexation while computing the capital gain in respect of J.P Nagar property. Hence, issue No. 1 is answered against the Revenue.

8. In so far as the property situated at Aga Abba Ali road is concerned, as per the development agreement of the year 1994, the developer was put in possession of the property on March 6, 1995, for construction of the apartment and construction of the apartment was completed in the year 2000. Clause 1.1 of the agreement reads as under:

“The owner shall sell 50 per cent, of undivided right and interest in the schedule-A property to developer and/or their nominee/s in all equivalent to 8,250 sq. ft. approximately (hereinafter called the ‘saleable undivided’ right and interest in the schedule property in consideration of the development).

A. Paying non-refundable deposit of Rs. 21,00,000 (rupees twenty-one lakhs only) as set out in para 11.3;

B. The construction and handing over to the owners 50 per cent, of the super built area to be constructed on the scheduled property;

C. Construction and handing over to the owners 50 per cent, basement, car parking units;

D. Allotment of 50 per cent, of saleable garden/terrace area;

E. Providing rent free accommodation as set out in clause (1.4).”

9. The exchange value in consideration of 50 per cent, of the land was agreed to be conveyed to the developer and/or his nominee/s valued at Rs. 1,16,70,000. The fair market value as on April 1, 1981, as per the Sub-Registrar valuation has to be taken into consideration. However, the assessing authority has not taken into consideration this aspect of the mat ter. Taking into consideration the project cost incurred by the developer on the basis of their letter dated February 1, 2004, which includes all expenditure connected with the construction of the residential apartment. The exchange value as specified in the project development agreement can be taken as the basis for computation of the construction in joint development. The cost incurred by the developer need not necessarily represent only a cost of construction. The detailed particulars are not given. The transaction of joint development is one of exchange. The consideration specified in the said document represents the market value on the date of entering into the agreement. The assessment made by the assessing authority is contrary to law. Hence, we hold issue No. 2 against the Revenue.

10. In so far as issue No. 3 is concerned, as per the development agreement entered into between the parties, the assessee and his brothers have demolished this existing residential building and handed over the vacant space to an extent of 16,800 sq. ft. to the developer for construction of the apartment Since the residential building has already been demolished by the assessee and his brothers themselves, they are not entitled to claim benefit under section 54 of the Act. At the most they are entitled to benefit under section 54F of the Act. The order passed by the appellate authority directing the assessing authority to allow the deduction under section 54 of the Income-tax Act is contrary to law and the same cannot be sustained. Hence, issue No. 3 is held against the assessee. Accordingly, we pass the following:

11. The appeal is allowed in part. The order passed by the Appellate Tribunal in so far as directing the assessing authority to give deduction under section 54 of Income tax Act is set aside. In all other respects, the appeal is dismissed.

Commissioner Of Income-Tax And Another v. Ved Prakash Rakhra

Judgment Summary — B. Manohar, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant (Revenue) — Principal Contentions

Respondent (Assessee) — Principal Contentions

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax And Another v. Ved Prakash Rakhra

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