Ishwar Vithal Navadia, Surat V. The ITO 3 (2) (1), Surat

ITA 153/SRT/2021

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0403 (ITAT-SURAT)
• Duration Of Justice: 1 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 01-08-2022
• Assessment Year: 2011-2012
• Appeal Filed On: 20-09-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Invalid notice; Principle of natural justice; Cost of acquisition; Capital receipt; Capital Gains
• Section: 250; 48

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER ITA No. 153/Srt/2021 (Assessment Year: 2011-12) (Virtual hearing) Ishwar Vithal Navadia, 201, Jaltarang Apartment, Laxmi Nagar Society, Katargam, Surat. PAN No. AAKPN 1866 H Vs. I.T.O., Ward 3(2)(1), Surat. (Original A.O.-I.T.O., Ward 3(2)(3), Surat) Appellant/ assessee Respondent/ revenue Assessee represented by Shri Hiren M Diwan, CA Department represented by Shri S.B.G. Mahapatra, Sr.DR Date of hearing 02/08/2022 Date of pronouncement 18/10/2022 Order under Section 254(1) of Income Tax Act PER: PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals), Surat (in short, the ld. CIT(A)/National Faceless Appeal Centre, Delhi (in short, the NFAC) dated 26/07/2021 for the Assessment year (AY) 2011-12. The assessee has raised following grounds of appeal: “1. The ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in passing ex parte order u/s 250 of the Income Tax Act, 1961 when the adjournment application was filed by the appellant. The ld. CIT(A) has then erred in law and on facts in passing the impugned appellate order in defiance of principles of natural justice and fairness. 2. The ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in upholding the action of ld. A.O. of issuing invalid notice u/s 148 of the Act. ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 2 3. The ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the action of the ld. A.O. of making addition to the tune of Rs. 7,13,405/- on the ground of treating the “hardship compensation” and “relocation compensation” as taxable income under the head “income from other sources”. 4. The Appellant craves leave to add, amend, alter, modify, substitute, delete, change or vary all or any of the ground or grounds of appeal.” 2. At the outset of hearing, the ld. AR of the assessee submits that the grounds of appeal raised by assessee in the present appeal are covered by various decisions of Mumbai Tribunal. During the year under consideration, the assessee received an amount of Rs. 7,13,405/- on account of relocation compensation which was treated by the lower authorities as income from other sources. Such relocation compensation given by the builder/cooperative society for development or reconstruction of old flat in Juhu, Ville Parle, Mumbai, which is not a taxable receipt as has been held by various Tribunal. The ld. AR of the assessee has relied on various case laws, which are as under:  ITO Vs Kirit Raojibhai Patel, ITA No. 2339/Mum/2017,  Shri Lawrence Rebello vs ITO, ITA No. 132/Ind/2020,  Smt. Delilah Raj Mansukhani Vs ITO, ITA No. 3526/Mum/2017,  Rajnikant d. Shroff Vs ACIT, ITA No. 4424/Mum/2014,  Jitendra Kumar Soneja Vs ITO, ITA No. 291/Mum/2015,  Peoples Cosmopolitan CHS Vs DCIT, ITA No. 1204/Mum/2011,  Kushal K Bangia Vs ITO, ITA No. 2349/Mum/2011,  New Shailaja CHS Ltd. Vs ITO, ITA No. 512/Mum/2007,  ITO Vs Lotia Court Co-Op Housing, ITA No. 5096/Mum/2005 and  Jethalal D. Mehta Vs DCIT, ITA No. 672/Mum/2000. ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 3 3. On the other hand, the ld. Sr. DR for the revenue after going through the orders of the lower authorities and various decisions cited by ld AR for the assessee submits that supports the orders of lower authorities. 4. We have considered the submissions of both the parties and have gone through the orders of lower authorities. We find that during the assessment, the Assessing Officer noted that the assessee has received compensation/redevelopment receipt of Rs. 7,13,405/- from Kalptaru Limited for reconstruction of old flat situated at Garib Co-Operative Housing Society Ltd., North South Road No. 5, Juhu, Vile Parle Development Scheme, Juhu, Mumbai. The Assessing Officer after serving show cause notice and considering the reply of assessee has made addition thereof by treating the same as revenue receipt and added to income of assessee. On appeal before ld. CIT(A), the action of Assessing Officer was confirmed. Further aggrieved, the assessee is in further appeal before this Tribunal. 5. We have considered the submissions of both the parties as recorded in earlier paras. We find that the assessee has received compensation of Rs. 7,13,405/- from builder/ developer in term of agreement dated 19.05.2010 entered between the members of Garib Co-operative Society and Kalptaru Limited (builder) for re-development of the society at Juhu Vile Parle. We find that the assessee was one of owner of flat in the said society. Such compensation was grated on account of relocation / rehabilitation till the re-development is completed. We find ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 4 that on similar set of facts, the Coordinate Bench of Mumbai Tribunal in a series of decisions treated/ held it capital receipt and not taxable and in some cases similar receipt was treated as ‘income from other sources’, however, in all cases the additions were deleted. We find that on the basis of similar set of facts in Rajnikant D Shroff Vs ACIT (supra), the coordinate bench of Tribunal passed the following order; “7. We have considered the submissions of the parties and perused the material available on record. Undisputedly, the assessee is a member of a society owning a building. The society has entered into an agreement with a developer for development of a new building after demolishing the old building. As per the terms of the agreement, the developer has to provide a flat along with parking space to each of the member without charging any cost. As per the terms of agreement the developer is to construct the building by utilising area not exceeding 100% of the plot. However, as per the agreement, the developer was authorised to construct 100% more after obtaining TDR from third parties and loading the same to new building to be constructed. The agreement further provides for lump sum payment by developer to each of the members a part of which is to be paid on signing of the agreement and the balance amount on vacation of the premises. It is not disputed that the assessee has received an amount of Rs. 26,23,238 on signing of the agreement. Even though the assessee vacated the premises, however, admittedly, he has not received the balance amount from the developer due to the reason that all the members of the society have not vacated the premises and as a result dispute has arisen between the society and the developer. The dispute in the present appeal is confined to the amount received by the assessee on signing of the agreement from the developer. While the assessee claimed the amount received in the nature of compensation, hence, a capital receipt, the Department treated it as income. On a perusal of different clauses of the agreement, we have noted that the extra FSI / TDR to be loaded to the new ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 5 building is the responsibility of the developer and he has to purchase such TDR from third parties and load it to the building to be constructed. Therefore, the conclusion of the learned Commissioner (Appeals) that the members have sold TDR to the developer is not correct. At this stage, we may refer to certain observations of the learned Commissioner (Appeals). As can be seen from Para-6.1 of his order, he has held that the members being the owner of the TDR have transferred the same to the developer, hence, as per section 2(47)(ii), it amounts to extinguishment of rights in a capital asset, thereby liable to capital gain tax under section 45. Thus, prima-facie, it appears that the learned Commissioner (Appeals) accepts that the amount received by the assessee is on account of transfer of a capital asset. We find that this issue has been considered by the Tribunal in Jethalal D. Mehta v/s DCIT, [2005] 2 SOT 422. Following the aforesaid decision, the Tribunal, Mumbai Bench, in ACIT v/s Ishwarlal Manmohandas Kanakia, ITA no.3053/Mum./2010, etc., dated 8th February 2012, though, agreed that the receipts on assignment of FSI, including FSI originating from plot of land which is subject matter of transfer by the assessee, is a capital asset, however, the cost of acquisition in respect of such asset cannot be ascertained, therefore, the receipt towards transfer of said rights cannot be brought to tax as the said receipt will be capital receipt and not capital gain. Relevant observations of the Bench is reproduced below:- 28. In the case of Maheswar Prasad 2 CHS Ltd. (supra) the Tribunal had to consider a case where The assessee a co-operative housing society owned a building viz., Maheshwar Prakash-2 in Santa Cruz, Mumbai. This building had been constructed after utilising the entire FSI available to it and, therefore, no right was available for any further construction on this plot of land. However, the Municipal Corporation relaxed the development regulations in the year 1991 and on that account additional TDR FSI was allowed under the Development Control Regulation, 1991 (DCR). Thus, the assessee became entitled to construct additional space of 15,000 sq. ft. In view of the availability of such right, the assessee entered into an agreement with M/s. U.S. Magnet Pvt. Ltd. and M/s. Spartek Properties and Securities Pvt. Ltd. on 25-11-2002 for construction of additional floors on the existing structure of the society building and development of the said property against a consideration of Rs. 280 per ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 6 sq. ft. which amounted to Rs. 42 lakhs. The question before the Tribunal was taxability of the sum of Rs.42 lacs received by the Society. The Tribunal discussed the DCR for Greater Mumbai Regulations and the right of a receiving plot of land to load TDR over and above permissible normal FSI. The Tribunal held " ...by virtue of Regulation 14, the FSI of a receiving plot is automatically allowed to be exceeded by 0.8 as mentioned in the said Regulation. For example, a plot in the suburb of Mumbai had an existing FSI of 1 prior to the year 1991 which had already been exhausted by construction of various flats. However, by virtue of Regulation 14, the society in respect of that building automatically got extension of FSI by 0.8. That means, if the plot of land was 1,000 sq. mtrs. then additional floors could be constructed to the extent of built up area of 800 sq. mtrs. As per the new scheme, either the society could construct additional floors having total area of 800 sq. mtrs. by purchasing TDR from the market or could transfer such right to any other builder or developer who had the TDR or who could arrange the TDR from the market. However, it is made clear that the construction could not be made without loading the TDR on the receiving plot. The above discussion shows that two separate and distinct rights arose as per DCR, 1991 i.e., TDR and the right to construct additional floor. The former has inbuilt cost while the later one arose without any cost. Regulation 14 makes it clear that FSI of receiving plot shall be allowed to be excluded in the prescribed manner. Such right was made available automatically without paying anything either to BMC or to the Government. 10. In view of the above discussion, let us now deal with the contentions raised by learned counsel for the assessee. Section 45 of the Act is the charging section in respect of profits or gains arising from the transfer of capital asset. The expression „capital asset‟ has been defined in clause (14) of section 2 of the Act according to which „capital asset‟ means property of any kind held by an assessee whether or not connected with the business or profession. It excludes certain assets from the scope of the above definition with which we are not concerned. The word „property‟ not only includes tangible assets but also includes intangible assets as held by the Hon‟ble Supreme Court in the case of B.C. Shrinivasa Shetty (supra) wherein the goodwill was held to be a capital asset. Even the right to obtain conveyance of the property has been held to be as capital asset by the Hon‟ble Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 594. In view of this legal position, it is held that the right to ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 7 construct the additional storeys on account of increase in FSI by virtue of Regulation No. 14 of the Appendix VII to DCR, 1991 was a capital asset held by the assessee. Therefore, assignment of such right in favour of the developers amounted to transfer of capital asset. The contention of the counsel for the assessee that there cannot be any transfer without having TDR is without force since right to construct additional floors and TDR are different and distinct rights which can be transferred for a consideration. 11. Now, the moot question which arises for our consideration is whether the sum of Rs. 42 lakhs received by the assessee can be treated as longterm capital gain chargeable to tax under the Act. The contention of the learned counsel for the assessee is that the right to construct additional floors was acquired by the assessee free of cost and automatically by virtue of DCR, 1991 and, therefore, the computational provisions under section 48 fail and consequently no capital gain can be said to arise under the head „Capital gains‟ in view of the judgment of Hon‟ble Supreme Court in the case of B.C. Shrinivasa Shetty (supra). On the other hand, the contention of the revenue is that as per the amended provisions of section 55, the cost of acquisition has to be taken as nil and, therefore, the lower authorities were justified in computing the long-term capital gains at Rs. 42 lakhs. Another contention of the revenue is that the right to construct is embedded in the land itself and accrual of such right is akin to issue of bonus shares and, therefore, it cannot be said that the additional right was without cost. 12. This aspect of the matter has been examined by the Tribunal in the case of Jethalal D. Mehta (supra). In that case, the assessee had acquired the leasehold rights in a plot of land in October, 1971 on which the assessee had constructed two storeys building containing some flats and the FSI available on that was fully exhausted. However, by a virtue of the Development Control Regulations, 1991, the assessee became the owner of the valuable right of availing additional floor space index through transfer development rights. Accordingly he entered into an arrangement with a developer who used TDR on assessee‟s flat to avail additional FSI against such consideration. The question arose whether the assessee could be chargeable to tax under section 45 of the Act in respect of the consideration received by him. The contention of the assessee before the authorities was that there was no cost of acquisition of the right obtained by him and therefore, the capital gain could not be computed in view of the Hon’ble Supreme Court judgment in the case of B.C. Shrinivasa Shetty (supra). The lower authorities did not accept such contention. However, the Tribunal upheld the contention of the assessee by holding that right to construct the additional floors under the ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 8 Development Control Regulation, 1991 was acquired without incurring any cost and therefore, assessee was not chargeable to tax in respect of such receipts in view of the aforesaid Hon‟ble Supreme Court judgment. The facts of the present case are similar to the aforesaid case and therefore, the said decision would squarely apply to the present case. Even as a rule of precedent, we are bound by the decision of a co- ordinate Bench in the absence of any decision of High Court or the Supreme Court." 29. The above decisions are directly applicable to the facts of the case of the Assessee in this appeal. The only reason for the CIT(A) to reject the claim of the Assessee was that in the cases referred to above the Assessee‟s as owners of receiving plot permitted loading of TDR whereas the Assessee in the present case sold not only right to load TDR but also the right to construct the original FSI on the plot of land. In our view this distinction sought to be projected by the CIT(A) is incorrect. The issue raised by the Assessee is that while computing capital gain cost of improvement should also be capable of being determined. The dispute in the case decided by Tribunal in the case of Jethalal D.Mehtha (supra) and Maheshwar Prasad-2 CHS Ltd. (supra) was while computing capital gain cost of acquisition of the capital asset was not capable of determination. As per the law laid down by the Honble Supreme Court in the case of B.C.Srinivasa Shetty (supra) both cost of acquisition and cost of improvement should be capable being ascertained and only then the machinery provisions of Sec.48 can be applied. Therefore if cost of improvement cannot be ascertained the principle laid down in the case of B.C.Srinivasa Shetty would equally apply. The decisions rendered by the Tribunal in the case of Jethalal D.Mehtha (supra) and Maheshwar Prasad-2 CHS Ltd. (supra) clearly lay down that right as owner of a receiving plot to load additional FSI in terms of Regulation 14 of the Regulations is a right for which there is no cost of acquisition. If that be so, then the computation of capital gain in the case of the Assessee is not possible and therefore the receipt by the Assessee is a capital receipt which cannot be brought to tax as laid down by the Hon’ble Supreme Court in the case of B.C.Srinivasa Shetty (supra). In that view of the matter we are of the view that the receipts on assignment of FSI including originating from the plot of land and/or married to it and right to load consume and use FSI credit by way of TDR which was the subject matter of transfer by the Assessee was a capital asset in respect of which the cost of improvement could not be ascertained and therefore the receipts of consideration for transfer of the said rights cannot be brought to tax as the said receipts will be capital receipts and not capital ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 9 gain. The authorities below erred in law and on facts in holding to the contrary. We hold accordingly." 8. The Tribunal, Mumbai Bench, in Kushal K. Bangia v/s ITO, ITA no.2349/Mum./2011, dated 31st January 2012, while considering the identical nature of dispute, held as under:- "4. In our considered view, it is only elementary that the connotation of income howsoever wide and exhaustive, take into account only such capital receipts are specifically taxable under the provisions of the Income tax Act. Section 2(24)(vi) provides that income includes "any capital gains chargeable under section 45", and, thus, it is clear that a capital receipt simplicitor cannot be taken as income. Hon’ble Supreme Court in the case of Padmraje R. Kardambande vs CIT (195 ITR 877) has observed that "..,, we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts, and, therefore, (emphasis supplied by us), are not income within meaning of section 2(24) of the Income tax Act...." This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same. As held by Hon‟ble Supreme Court, in the case of Dr. George Thomas K vs CIT(156 ITR 412), "the burden is on the revenue to establish that the receipt is of revenue nature" though "once the receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish". The only defence put up by learned Departmental Representative is that cash compensation received by the assessee is nothing but his share in profits earned by the developer which are essentially revenue items in nature. This argument however proceeds on the fallacy that the nature of payment in the hands of payer also ends up determining it‟s nature in the hands of the recipient. As observed by Hon‟ble Supreme Court in the case of CIT vs. Kamal Behari Lal Singha (82 ITR 460), "it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer". ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 10 The consideration for which the amount has been paid by the developer are, therefore, not really relevant in determining the nature of receipt in the hands of the assessee. In view of these discussion, in our considered view, the receipt of Rs.11,75,000 by the assessee cannot be said to be of revenue nature, and, accordingly, the same is outside the ambit of income under section 2(24) of the Act. However, in our considered opinion and as learned counsel for the assessee fairly agrees, the impugned receipt ends up reducing the cost of acquisition of the asset, i.e. flat, and, therefore, the same will be taken into account as such, as and when occasion arises for computing capital gains in respect of the said asset. Subject to these observations, grievance of the assessee is upheld." 9. The other decisions relied upon by the learned Authorised Representative also express similar view. Thus, on the basis of ratio laid down in the aforesaid decisions, if we examine the facts of the present case, it is to be observed that the learned Commissioner (Appeals) has given a categorical finding that the receipts from the developer are to be assessed as income under the head "Capital Gain". Thus, impliedly, he accepts that the receipt is towards transfer of a capital asset. That being the case, applying the principle laid down in the decisions referred to above, all receipts from sale of a capital asset cannot be treated as capital gain. As in this case, the cost of acquisition / cost of improvement is not ascertainable, therefore, it cannot be brought to tax under the head "Capital Gain" and has to be treated as capital receipt. Therefore, the issue has to be decided in favour of the assessee. Accordingly, we hold that the amount of ` 26,23,238 received by the assessee being a capital receipt is not chargeable to tax. However, we make it clear, the aforesaid amount received by the assessee has to be reduced from the cost of acquisition of the asset in terms of section 51 while computing capital gain arising from sale of such asset in future. Ground raised by the assessee is allowed, 10. In the result, appeal stands allowed.” 6. Considering, the aforesaid factual and legal view taken by various bench of Tribunal that where assessee was a flat owner in a housing society and he received certain sum from developer as corpus fund ITA No.153/Srt/2021 Ishwar Vithal Navadia Vs ITO 11 towards hardship caused to flat owners on redevelopment, impugned amount would be in nature of capital receipt simplicitor not includible in income as per section 2(24)(vi). Hence, we direct the assessing officer to treat such receipt as capital receipt. In the result, ground No. 3 of the appeal is allowed. 7. Considering the facts that we have allowed relief to the assessee and directed the assessing officer to delete the addition, therefore, adjudication of other grounds of appeal that is ground No. 1 &2 have become academic. 8. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 18 th October, 2022. Sd/- Sd/- (Dr. ARJUN LAL SAINI) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Surat, Dated: 18/10/2022 *Ranjan Copy to: 1. Assessee – 2. Revenue - 3. CIT(A) 4. CIT 5. DR 6. Guard File By order Sr.Private Secretary, ITAT, Surat