Venkatraman Lakshminarayanan, CHENNAI V. ACIT, CHENNAI

ITA 543/CHNY/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 7262 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 05-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Cost of acquisition; Fair market value; Benefit of exemption; Capital Gains
• Section: 191; 48; 13

Judgement Text

आयकर अपील य अ धकरण, ‘ए’ यायपीठ, चे नई IN THE INCOME TAX APPELLATE TRIBUNAL , ‘A’ BENCH, CHENNAI ी वी . द ु गा राव, या यक सद य एवं ी जी.मंज ु नाथ, लेखा सद य के सम% BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER आयकरअपीलसं./I . T. A. No. 5 4 3/ Chn y/ 2 0 1 7 ( नधा रणवष / A ss e ss m en t Yea r : 2 01 2 - 13 ) Mr. Venkatraman Lakshminarayanan H-402, Greshott 4, Bishop Garden Extn. R.A.Puram Chennai-600 028. V s Assistant Commissioner of Income Tax, Corporate Circle-3(1) Chennai. P AN: A BI P L 2 4 7 5P (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओरसे/ Appellant by : Mr. S.Sridhar, Advocate यथ क ओरसे/Respondent by : Mr. Sajit Kumar, JCIT स ु नवाईक तार ख/D a t e o f h e a r i n g : 28.02.2022 घोषणाक तार ख /D a t e o f P r o n o u n c e m e n t : 09.03.2022 आदेश / O R D E R PER G.MANJUNATHA, AM: This appeal filed by the assessee is directed against order passed by the learned Commissioner of Income Tax (Appeals)-13, Chennai, dated 05.12.2016 and pertains to assessment year 2012-13. 2. The assessee has raised following grounds of appeal:- “1. The order of The Commissioner of Income Tax (Appeals) 13, Chennai dated 05.12.2016 in l.T.A.No.101/CIT(A)- 13/2012-13 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case. 2. The CIT (Appeals) erred in sustaining the recomputation of Long Term Capital Gains arising from the JDA with M/s Vishranthi Builders which has entered into along with the 2 ITA No. 543/Chny/2017 appellant’s brother without assigning proper reasons and justification. 3. The CIT (Appeals) failed to appreciate that the sustenance of the recomputation of Long Term Capital Gains on various facets was wrong, erroneous, unjustified, incorrect and not sustainable in law. 4. The CIT (Appeals) erred in sustaining the disallowance of the claim of improvements as well as the rejection of the plea for grant of appropriate indexation in relation thereto in the said recomputation of Long Term Capital Gains without assigning proper reasons and justification. 5. The CIT (Appeals) erred in sustaining the disallowance of the claim of the encumbrance cleared on making the payment of Rs.20,92,7301- (the share of the appellant was quantified at Rs.6,97,577/-) in the transfer of the capital asset(s) under consideration in the said recomputation of Long Term Capital Gains without assigning proper reasons and justification. 6. The CIT (Appeals) erred in sustaining the disallowance of the claim of the encumbrance cleared on making the payment of Rs.17,16,000/- in the transfer of the capital asset(s) under consideration in the said recomputation of Long Term Capital Gains without assigning proper reasons and justification. 7. The CIT (Appeals) erred in sustaining the disallowance of the claim of the encumbrance cleared on making the payment of Rs.42 Lakhs in the transfer of the capital asset(s) under consideration in the said recomputation of Long Term Capital Gains without assigning proper reasons and justification. 8. The CIT (Appeals) failed to appreciate that the distinction between the pre-existing charge and self created charge in the context of the cost of acquisition as mentioned in section 48 of the Act for the purpose of computing the Long Term Capital Gains was completely overlooked and brushed aside while rejecting the plea for the deduction of such payments within the scope of section 48 of the Act. 9. The CIT (Appeals) erred in dismissing the grounds challenging the variation in the terms of the agreement 3 ITA No. 543/Chny/2017 entered into with the developer which had a direct bearing on the determination of the sale consideration for the purpose of computing the Long Term Capital Gains without assigning proper reasons and justification. 10. The CIT (Appeals) failed to appreciate that the determination of sale consideration on various facets in the said recomputation of Long Term Capital Gains was wrong, erroneous, unjustified, incorrect and not sustainable in law. 11. The CIT (Appeals) failed to appreciate that the reported Long Term Capital Gains pertaining to the share of the appellant was correct and in accordance with the computation mechanism prescribed in section 48 of the Act, thereby vitiating the recomputation on all facets. 12. The CIT (Appeals) failed to appreciate that the detailed submission supported by documents and workings filed before him in 86 pages were completely overlooked and brushed aside, thereby vitiating the recomputation of Long Term Capital Gains in all respects. 13. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.” 3. Brief facts of the case are that the assessee had his filed return of income for the assessment year 2012-13 on 31.08.2012 declaring total income of Rs.52,64,240/-. During the course of assessment proceedings, the Assessing Officer noticed that the assessee along with his two brothers entered into joint development agreement with Vishtranthi Builders for development of a property and agreed to share 60% constructed area, in pursuant to transfer of 40% undivided share of land. As per agreement between the parties, the 4 ITA No. 543/Chny/2017 developer had paid Rs.1.20 crores cash consideration and also five flats of 1500 sq.ft each for exchanging 40% undivided share in the land. Further, there was a change in terms & conditions with reference to sharing of constructed area, as per which 38.37% building along with UDS was accrued to the builder, as against 40% agreed in the joint development agreement. Therefore, the assessee has compensated the builder for less allotment of building @ Rs. 11,543 per sq.ft and paid a sum of Rs.22,04,873/-. The assessee has computed long term capital gain by taking into account his share of cash consideration received from the builder and consideration for five flats by adopting cost of construction at Rs.3500/- per sq.ft. Further, after claiming necessary cost of acquisition and indexed cost of improvement computed long term capital gain at Rs.35,24,225/-, after claiming benefit of exemption u/s.54 of the Income Tax Act, 1961. 4. During the course of assessment proceedings, the assessee had also filed revised computation with reduced long term capital gain of Rs.20,36,880/-, after claiming deduction for amount paid to builder to compensate allotment of lesser constructed area and also cost of improvement towards 5 ITA No. 543/Chny/2017 encumbrance charges paid for discharging mortgage on the property. The Assessing Officer did not accept computation of long term capital gain as claimed by the assessee and according to him, the assessee has not adopted sale consideration in respect of five flats constructed and handed over by the builder and therefore, by taking note of cost of reimbursement of 191 sq.ft of UDS and 554 sq.ft of super built up area to the builder @ 11,544 per sq.ft., the Assessing Officer, after reducing fair market value of UDS as on date @ Rs.5,000 per sq.ft has arrived at construction cost of Rs.6544 per sq.ft and computed total sale consideration at Rs.1,97,05,600/- The Assessing Officer further, allowed deduction towards indexed cost of land and indexed cost of building, however, did not allow encumbrance cost /cost of improvement as claimed by the assessee towards repayment of loans to bank to get mortgage discharged against the property. Thus, the Assessing Officer has finally computed long term capital gain from sale of property at Rs.77,77,918/-. 5. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the 6 ITA No. 543/Chny/2017 learned CIT(A), the assessee contended that the Assessing Officer erred in adopting Rs.6544 per sq.ft. as fair market value for five flats constructed and delivered by the builder in exchange of 40% UDS in land without appreciating fact that said amount involves profit element of the builder. The learned A.R for the assessee further referring to comparative chart explaining capital gains computation, submitted that the assessee has claimed amount paid to the builder as compensation for sharing less undivided share and super built up area in the building. But, the Assessing Officer did not allow the claim without giving any reasons, even though the Assessing Officer agreed that the assessee has received more constructed area than agreed in the joint development agreement. The learned AR further referring to chart submitted that the Assessing Officer did not allow encumbrance cost / cost of improvement, even though, he had acknowledged fact that there was encumbrance on the property. 6. The learned CIT(A), after considering relevant facts and also taken note of various reasons given by the Assessing Officer to adopt sale consideration for transfer of property, has 7 ITA No. 543/Chny/2017 upheld findings of the Assessing Officer and rejected arguments of the assessee in respect of adoption of cost of construction of Rs.3500 per sq.ft as against Rs. 6544 per sq.ft adopted by the Assessing Officer. The learned CIT(A) had also rejected arguments of the assessee in respect of amount paid to builder to compensate less super built up area shared by the assessee. The learned CIT(A) also rejected arguments of the assessee in respect of deduction claimed towards encumbrance cost / cost of improvement by holding that if previous owner mortgaged property and subsequent owner discharged mortgage by payment, then same partakes nature of cost of acquisition / improvement. Since, the previous owner was not mortgaged property, the assessee cannot claim benefit. Hence, the learned CIT(A) rejected arguments of the assessee and sustained additions made by the Assessing Officer towards recomputation of long term capital gain derived from transfer of property. 7. The learned A.R for the assessee submitted that the learned CIT(A) erred in not appreciating fact that even though the assessee has filed revised computation explaining each and every aspect of long term capital gain computed from transfer 8 ITA No. 543/Chny/2017 of property, but the Assessing Officer did not accept revised computation filed before completion of assessment. The learned AR further submitted that the learned CIT(A) erred in not appreciating fact that amount paid to builder to compensate lesser area taken by the builder, when compared to joint development agreement is on the market rate of property as on date, which includes profit element of builder and therefore, same cannot be considered for arriving at full value of consideration as a result of transfer. The learned AR further referring to chart explaining computation of long term capital gain filed along with return of income, revised computation filed before the Assessing Officer and long term capital gain computed by the Assessing Officer in the assessment, submitted that the Assessing Officer has not considered compensation paid to builder as expenses of transfer and further, not allowed benefit of deduction towards encumbrance cost /cost of improvement, even though he had acknowledged fact that there was encumbrance on the property. 8. The learned DR, on the other hand, submitted that the Assessing Officer as well as the learned CIT(A) have brought out clear facts to the effect that the assessee has not adopted 9 ITA No. 543/Chny/2017 fair market value of the property to determine full value of consideration for transfer of property and thus, the Assessing Officer, on the basis of compensation paid by the assessee, has determined cost of construction of Rs.6544 per sq.ft and hence, there is no reason for the assessee to agitate before the Assessing Officer, when the assessee himself has adopted fair market value of the property, including land was at Rs.11,543 per sq.ft. The learned DR further referring to computation filed by the assessee submitted that the assessee can claim deduction towards amount paid for discharging encumbrance against property, if encumbrance is created by previous owner. In this case, the assessee has failed to file necessary evidences to prove that encumbrance was created by the previous owner. Therefore, there is no error in the reasons given by the Assessing Officer as well as learned CIT(A) to reject claim of the assessee. 9. We have heard both the parties, perused material available on record and gone through orders of the authorities below. There is no dispute with regard to fact that the assessee along with his two brothers had entered into joint development agreement and agreed to share constructed building in the ratio 10 ITA No. 543/Chny/2017 of 60% & 40%, in lieu of transfer of undivided share in the land. The facts borne out from records clearly indicate that the assessee had agreed to transfer of 40% UDS in the land, in exchange of 60% constructed building. However, when final sharing was done, the builder was allotted 38.37% undivided share of land and building, which is lesser than 1.63%, when compared to 40% agreed between the parties in joint development agreement. The assessee has compensated the builder for loss in agreed share of building @ Rs.11,543 per sq.ft and has paid compensation of Rs.22,04,873/-. The assessee has adopted cost of construction of building to determine full value of consideration as per which the assessee has adopted a sum of Rs.3500 per sq.ft, whereas the Assessing Officer has adopted Rs.6544 per sq.ft., which is once again on the basis of compensation paid by the assessee to the builder. The assessee considered that cost of construction of building to determine full value of consideration. No doubt, what was received by the assessee in pursuant to joint development agreement is super built up area of building in exchange of undivided share in land and thus, to determine full value of consideration, either cost incurred by the builder for 11 ITA No. 543/Chny/2017 construction of building or fair market value of the building as on the date of sharing should be considered. In this case, the Assessing Officer has adopted fair market value of the building at Rs.6544 per sq.ft by considering compensation paid by the assessee to the builder @ Rs.11,544 per sq.ft, including UDS, cost of land @ 5000 per sq.ft and determined value of building at 6544 per sq.ft. In our considered view, the method adopted by the Assessing Officer is incorrect, because amount paid by the assessee to the builder, includes profit element of the builder and therefore, same cannot be considered for the purpose of determining full value of consideration in the hands of the assessee. At the same time, though, the assessee claims to have taken cost of construction of building @ Rs.3500 per sq.ft, but no evidence has been filed to justify rate, including any confirmation from builder. In case, rate adopted by the assessee is supported by an evidence, then same may be considered for computing full value of consideration. Since, facts are not clear, we are of the considered view that the issue needs to go back to the file of the Assessing Officer to determine correct value of consideration received as a result of transfer of property. 12 ITA No. 543/Chny/2017 10. Coming back to deduction claimed by the assessee. The assessee claimed deduction towards amount paid to builder as compensation for sharing less constructed area. The Assessing Officer never disputed fact the assessee has received more than agreed constructed building for which it has suitably compensated the builder. However, did not entertain claim of the assessee, because the assessee has not claimed deduction in the return of income filed for the year. In our considered view, amount paid by the assessee to the builder to compensate lesser super built up area amounts to expenses of transfer which needs to be allowed as deduction, when the Assessing Officer has not disputed fact that the assessee has paid compensation to the builder. Further, although the assessee has not made claim in the return of income, but claim was made in the revised statement of total income filed before completion of assessment. Therefore, in our considered view, the Assessing Officer should have entertained claim of the assessee. Hence, we direct the Assessing Officer to allow claim of the assessee towards compensation paid to builder as expenses of transfer. 13 ITA No. 543/Chny/2017 11. Insofar as deduction towards encumbrance cost / cost of improvement, although the assessee claims to have discharged encumbrance on the property by paying loan availed from banks. But on perusal of details filed by the assessee, we find that previous owner did not create encumbrance on the property. In fact, the assessee’s father and mother have created mortgage and encumbrance on the property by availing loan from the bank and same has been discharged by the assessee and his brothers. It is well settled principle of law by the decision of the Hon'ble Supreme Court in the case of V.S.M.R. Jagadishchandran (Decd.) Vs.CIT [1997] 227 ITR 420 (SC), if previous owner creates encumbrance on the property and subsequent owner discharge encumbrance, then amount spent for discharging encumbrance amounts to cost of acquisition / improvement of the property. In this case, the assessee claims that there was encumbrance on the property and the same has been discharged by him, whereas, the authorities below recorded categorical finding that encumbrance was created by the present owner, but not previous owner. The facts are contradictory. Therefore, we are of the considered view that this issue also needs to go back to 14 ITA No. 543/Chny/2017 the file of the Assessing Officer to ascertain correct facts and also decide the issue in light of decision of the Hon'ble Supreme Court in the case of V.S.M.R. Jagadishchandran (Decd.) Vs. CIT (supra). 12. To sum up, the issue needs to go back to the file of the Assessing Officer to recompute long term capital gain derived from transfer of property, in pursuant to joint development agreement, in light of our discussions given hereinabove. Hence, we set aside this issue to the file of the Assessing Officer and direct the A.O. to reconsider the issue in accordance with law. 13. In the result, appeal filed by the assessee is treated as allowed for statistical purposes. Order pronounced in the open court on 9 th March, 2022 Sd/- Sd/- (वी.द ु गा राव) (जी.मंज ु नाथ) (V.Durga Rao) (G.Manjunatha ) #या यक सद&य /Judicial Member लेखा सद&य / Accountant Member चे#नई/Chennai, )दनांक/Dated 9 th March, 2022 DS आदेश क त+ल,प अ-े,षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आय ु .त (अपील)/CIT(A) 4. आयकर आय ु .त/CIT 5. ,वभागीय त न2ध/DR 6. गाड फाईल/GF.