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Facts
The assessee, a Chartered Accountant, filed a return declaring income including capital gains from the exchange of old flats for new flats under a redevelopment agreement. The Assessing Officer (AO) made an addition to the capital gains and denied deduction under Section 54, treating additional area purchased as part of consideration and not eligible for deduction. The CIT(A) deleted the addition and allowed the deduction.
Held
The Tribunal held that the CIT(A) was correct in deleting the addition made by the AO. The additional area acquired under the development agreement for a consideration was considered part of the investment eligible for deduction under Section 54. The AO's arbitrary fixation of market rate was also found to be infirm.
Key Issues
Whether the additional area acquired during redevelopment and the compensation received are eligible for deduction under Section 54 of the Income Tax Act, and if the market rate adopted by the AO was justified.
Sections Cited
54, 143(1), 143(2), 142(1), 133(6), 54EC
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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI ARUN KHODPIA
Per: Smt. Beena Pillai, J.M.: The present appeal filed by the revenue arises out of order dated 20/02/2025 passed by NFAC, Delhi, for assessment year 2016-17 on following grounds of appeal :
“1. Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs. 5,01,48,428/- made by the Assessing Officer.
A.Y. 2016-17 Divyesh Ramniklal Muni 2. Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in rejecting the value of Rs. 27,193/- per sq. ft. taken by the Assessing Officer using the ready reckoner rates and by not referring back to the AO for verification by way of calling for a report from the Valuation Officer.
Whether on the facts and circumstances of the case, the Ld.CIT(A) erred in allowing the deduction u/s. 54 of the Income Tax Act, 1961 even though the conditions of section 54 were not fulfilled.
4. The department craves leave to add/delete/amend the grounds of appeal
2. The Ld. CIT (A)'s order is contrary in law and on facts and deserves to be set aside.
3. The appellant prays that the order of Ld. CIT (A) on the above ground be set aside and that of the AO restored. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary at the time of hearing The Appellate Order of NFAC, Delhi vide DIN & Order No. ITBA/NFAC/S/250/2024-25/1073529583 (1) dated 20.02.2025 in the case of Divyesh Ramniklal Muni for A.Y. 2016-17, has been received in the O/o. Pr. CIT-8, Mumbai through ITBA on 20.02.2025. The Last date for filing appeal is 30.04.2025. However, appeal should be filed immediately.” Brief facts of the case are as under:
2. The assessee is Charted Accountant by profession and during the year under consideration, he derived income from house property, income from business & profession, income from capital gains and income from other sources. The assessee filed its return of income on 17/10/2016, declaring total income of Rs.9,25,610/-. The return was processed u/s.143(1) and subsequently, the case was selected for scrutiny. 2.1 Subsequently, statutory notices u/s. 143(2) was issued to the assessee along with notice u/s.142(1). In response to the statutory notices, the assessee furnished various details as called A.Y. 2016-17 Divyesh Ramniklal Muni for. The Ld. AO observed that assessee entered into development agreement dated 31/10/2010 with M/s DB MIG Realtors and Builders P. Ltd. for redevelopment of his two old flats namely Flat no 1. D-18/155, Middle Income Group Co-op Housing Society, Gandhi Nagar, Bandra (East), Mumbai, where he is 100% owner and Flat No 2. D-19/170, Middle Income Group Co-op Housing Society, Gandhi Nagar, Bandra (East), Mumbai, where he has 1/3 ownership. As per the redevelopment agreement, assessee surrendered his development rights in these two old flats to the builder. 2.2 The builder against transfer of development rights received two new flats, Flat No 1. B5/4/A & B5/4/B in which he has 100% ownership and Flat No.
B5/3/A & B5/3/B in which he has 1/3rd ownership. Further, assessee also received hardship compensation of Rs. 1,25,55,313/- for the first flat and Rs.41,85,104/- for the second flat. 2.3 The Ld.AO noted that the assessee in his return of income, while computing the long term capital gain, shown the sale consideration (market value of two flats) at Rs. 5,57,46,457/-, and claimed deduction u/s 54 for Rs. 4,50,19,333/-, since the assessee has neither invested in the purchase of new flats nor constructed any property. Hence, the question of claiming deduction u/s 54 does not arise. 2.4 Accordingly, a show cause notice dated 03/12/2018 was issued to the assessee calling assessee to show cause as to why the capital gain income should not be recomputed and added back to the total income and as to why the exemption u/s.54 should not be denied.
A.Y. 2016-17 Divyesh Ramniklal Muni 2.5 In response to the statutory notices the assessee vide letter dated 10/12/2018 submitted that, capital gains arose in the hands of the assessee during the year under consideration on account of exchange of existing residential flat to receive newly constructed flat from the developer. The assessee submitted that, vide development agreement entered into by society dated 31/10/2015, the old flats of the assessee were entitled to be exchanged with new constructed flat of identical area along with monetary compensation of hardship and cost incurred by the member was agreed to be payable. 2.6 The developer also provided for an option to acquire more area than the entitled area of the type of flat owned by each member on payment of an agreed sum of Rs.22,000/- per sq. ft. The assessee submitted that, he opted for the area of 205 sq. ft. for each of the flat. The assessee submitted that payment of the cost for the additional area was recovered by the developer from payment of the said monetary compensation. In lieu of which, a confirmation was issued by the developer for payment of hard ship compensation in the course of redevelopment and the flat of recovery all for the cost for the additional area from the compensation was recovered from the hardship compensation payable by the developer. The said confirmation is placed on record. 2.7 On considering the submissions filed by the assessee, the Ld.AO considered investment in the additional area of 205 sq.ft. by assessee as forming part of the consideration. As assessee submitted that, he was entitled for flat at 1381 sq.ft. as per A.Y. 2016-17 Divyesh Ramniklal Muni development agreement and hence realisation of old flat was only to the said extension. 2.7.1 The Ld.AO, treated the additional cost paid for 205 sq.ft. recovered by the developer form hardship compensation as cost of acquisition of the old flat. 2.7.2 In respect of determining value of the additional area purchased by the assessee considered at Rs.22,000/-, it was noted that the Ld.AO had treated the market value at Rs. 27,193/-. The Ld.AO had issued notice u/s.133(6) to the sub registrar calling for information concerning the market rate prevailing for the area. Based on the website of the department of the registration and the stamp, Government of Maharashtra the Ld.AO computed the rate at Rs.27,193/- for the location. The Ld.AO thus replaced the market rate consideration to compute the value of construction for additional area. 2.7.3 The Ld.AO further while computing capital gain in the hands of the assessee denied exemption under the section 54. 2.7.4 The Ld.AO also rejected the computation of the assessee, wherein the gross consideration of exchange of the old flat included monetary compensation by the developer and hardship compensation. The Ld.AO rejected the submissions of the assessee and taxed the said amount under the head income from other sources. The Ld.AO computed total capital gains at Rs. 5,01,48,428/- as against 4,55,86,344/- computed by the assessee.
Aggrieved by the order of the Ld.AO assessee preferred appeal before the Ld.CIT(A).
A.Y. 2016-17 Divyesh Ramniklal Muni 3. The Ld.CIT(A) after perusing submissions of the assessee and the evidences furnished in support of the same observed and held as under : “Decision :I have carefully considered the facts of the case, above submission of the appellant as well as gone through the observation and findings of the AO ‘s assessment order. I find merit in the contention of the appellant in as much as it is stated the amount of consideration realizable by virtue of flat exchanged for redevelopment agreement to be 1176 Sq. Ft. but wrongly taken by the AO as 1381 sq. ft since the appellant purchased the extra 205 Sq. Ft area separately . Therefore I find infirmity in the order of the AO in making addition of 205 Sq. Ft while calculating the sale consideration of 1 st and 2 nd Old Flat . Therefore this ground is allowed .” 3.1 The Ld.CIT(A) while considering all the above contention of the assessee observed and held as under :
Appellant’s Contentions and Submissions regarding ground No. 3 of appeal: ……………………….. Decision :I have carefully considered the facts of the case, above submission of the appellant as well as gone through the observation and findings of the AO ‘s assessment order. I find merit in the above submission in as much as the AO, without referring the valuation cell and without providing opportunity to the appellant regarding higher value/rate adopted by him , arbitrarily has taken the decision of taken Rate as Rs. 27,193/- based on ready reckoner. In view of above after considering the submission of the appellant I find infirmity in the order of the AO in taking rate as Rs. 27,193/- while calculating the sale consideration of 1 st and 2 nd Old Flat . Therefore this ground is allowed . Appellant’s Contentions and Submissions regarding ground …………………… Decision :I have carefully considered the facts of the case, above submission of the appellant as well as gone through the observation and findings of the AO ‘s assessment order. I find merit in the contention of the appellant in as much as the hardship compensation is In view of above after considering the submission of the appellant ,it is stated that appeal has already been adjudicated in favour in the appeal for the A.Y 2011-12 . Therefore this ground is treated as allowed . Appellant’s Contentions and Submissions regarding ground No. 5 & 6 & 7 of appeal: ………………………. Decision :I have carefully considered the facts of the case, above submission of the appellant as well as gone through the observation and findings of the AO ‘s assessment order. After carefully considering the case history of the case on going through the entire submission , agreements and facts of the case I find merit in the contention of the appellant in as much as it is stated that the appellant is entitled to deduction u/s 54 for the investment made in acquiring/ purchasing new Flats , in exchange of old Flats , with added Sq. Ft. of 205 Sq. ft. at the rate of 22,000/- per sq. Ft. since the said investment being made by virtue of same development agreement . In view of above the AO is A.Y. 2016-17 Divyesh Ramniklal Muni directed to allow deduction u/s 54 for the investment in new Flats with added area of 205 sq. ft. Therefore these grounds are allowed . In the result, the appeal of the appellant is allowed .
Aggrieved by the order of the Ld.CIT(A) the revenue is in appeal before this Tribunal.
The Ld.DR while arguing this issue relied on the observation of the Ld.AO. However, the admittedly accepted position that there is an exchange of capital asset on surrender of old premises by the assessee.
We have perused the submissions advance by both sides in the light of record placed before us.
It is noted that the developer offered to all members additional area to the existing premises owned by each member upon redevelopment. The said condition was accepted by the assessee and accordingly, invested in additional area of 205 Sq. ft. at the rate of 22,000/- as per the development agreement. The assessee thus acquired additional area 205 sq.ft. for Rs.60,13,293/- in respect of two flats on exchange in the redevelopment. It is noted that, the Ld.AO allowed the deduction of Rs.60,13,293/- being the cost of additional space however, deducted the said amount while computing capital gain as cost of asset held. 5.1 The assessee had shown the said amount to be an investment in the new flat eligible for deduction u/s.54 as said area of 205sq.ft. was additional purchase by the assessee along with area that was exchanged by the developer with newly constructed area.
A.Y. 2016-17 Divyesh Ramniklal Muni 5.2 Reliance is placed on the decision of Hon’ble Bombay High Court in case of CIT vs. Mrs. Hilla J. B. Wadia reported in 216 ITR 376 wherein it has been held that acquisition of dominant right in the definite identified property is due compliance for eligibility or deduction u/s.54. The decision relied by the assessee of Hon’ble Bombay High Court in case of CIT(A) vs. Mrs. Hilla J.B. Wadia (supra) supports the above claim of the assessee. 5.3 It is further noted that the market rate adopted by the Ld.AO at Rs. 27,193/- is without referring to any valuation cell and arbitrary based on ready reckoner. It is also submitted by the assessee that the rate adopted by the assessing officer was provisional at Bandra (East) ward that is situated in special division 24/143 where as the impugned property is located in the special division 29/127 and therefore the said rate is not tenable to the property under consideration there is no doubt that the assessee exchanged old flat having area of 1,381/- sq.ft. for redevelopment with the area of 11176 sq.ft. that included additional area of 205 sq.ft. purchased separately. We therefore, do not agree with the Ld.AO in making addition of 205sq.ft. while calculating said cost of acquisition of the two old flats.
Therefore, on all issues that is been dealt with here in above, we do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld. Accordingly the grounds raised by the revenue stands dismissed. In the result the appeal filed by the revenue stands dismissed.