ITO (IT) -4(1)(1), MUMBAI vs. ZUBIN RUSSI JAL TARAPOREVALA, MUMBAI

The present appeal has been filed by the revenue against the order passed by the Ld. CIT(A)-58, Mumbai dated 14.01.2019 u/s 143(3) for the AY 2014-15 on the following grounds:-

The brief facts of the case are that the assessee filed his return of income on 15.07.2014 declaring total income at Rs. 2,62,19,020/-. The return of income was processed u/s 143(1) of the I.T. Act and subsequently re-opened u/s 147 of the Act after notice u/s 148 issued on 29.03.2017. The AO has stated that for the relevant year under consideration, the assessee, an individual and non-resident along with his brother Shri Cyrus Russi Jal Tarporevala transferred tenancy rights in a property which was inherited from their mother with 50% share each. The said property was a flat situated at Shakuntala, Worli Sea Face, Mumbai. The value of the property as per the deed of transfer of tenancy right is estimated to be Rs. 5,05,00,000/- being 50% share of the assessee and the value of the entire property for calculation of stamp duty was derived at Rs. 13,07,25,000/-. The Zubin Russi Jal Taraporevala AO contends that both the assessee as well as his brother has considered the agreement value as sale consideration instead of the value as per Stamp Valuation Authority for the purpose of registration of the said transfer deed while calculating the Long Term Capital Gain. The AO further states that during the assessment proceeding of the assessee’s brother Shri Cyrus Russi Jal Taraporevala, the defence that was taken was that section 50C of IT Act would not be applicable in the present case as it was only transfer of tenancy rights and not ownership right. The AO in the assessee’s brother case did not accept the plea and relied on the decision of Hon’ble Calcutta High Court reported in 79 ITR 161 (Cal) in the case of CIT vs. Chhotanagpur General Trading Co. and stated that various clauses in the transfer deed were akin to transfer of ownership rights like carrying out structural repairs without landlord’s consent which according to the AO was of ownership rights and not tenancy rights. The AO then added Rs. 6,53,62,500/- as per Section 50C as Long Term Capital Gain (LTCG) in the hands of the assessee’s brother. The assessee has also offered capital gain to the extent of Rs. 2,51,00,000/- similar to the assessee’s brother in considering the agreement value being Rs. 5,05,00,000/- which is 50% share on total consideration. The AO in assessee’s case issued notice for which the assessee’s reply dated 12.04.2017 was to treat the return of income filed on 15.07.2014 for AY 2014-15 to be considered as compliance to the notice u/s 148. The assessment was re-opened for which no objection was raised by the assessee. The AO contended that instead of the market value as per stamp Zubin Russi Jal Taraporevala valuation authority which amounts to Rs. 13,07,25,000/-, the assessee has taken into consideration only Rs. 5,05,00,000/- which is the agreement value. As per the AO, the assesse is said to have under stated LTCG to the extent of Rs. 4,01,12,500/-.

In the assessee’s brother case, a reference was made to the District Valuation Officer, Unit-II, Mumbai for the purpose of ascertaining the Fair Market Value (FMV) of the said property. In the Valuation report dated 10.07.2017, the FMV was determined at Rs. 12,98,00,150/-. The same was considered for in the case of assessee and was show caused as to why the said FMV was not to be considered to calculate LTCG as per Section 50C. The assessee alleged that the said transfer was only a tenancy right and not ownership right and hence Section 50C would not be applicable. The assessee replied to this, stating that though the valuation report determined total FMV at Rs. 12,98,00,150/- the FMV of tenancy right was determined only at Rs. 5,19,20,500/- which was not considered by the AO on the ground that the terms of the deed was more in the nature of tenancy rights in perpetuity akin to ownership rights which was not determinable by efflux of time and the said rights have been enjoyed by the assessee’s grandparent and then by his mother and subsequently by the assessee. Since the tenancy right was not determinable as per the terms of the deed, the AO concluded it to be in the nature of ownership right and recomputed the LTCG for the transfer of tenancy rights by determining the total consideration at Rs. 13,07,25,000/- being the value for the Zubin Russi Jal Taraporevala purpose of payment of stamp duty and the assessee’s share of 50% of LTCG at Rs. 6,49,00,075/-.

The assessee being aggrieved by the impugned order was in appeal before the Ld. CIT(A), who then considered the valuation of DVO for the fair market value of tenancy rights and determined at Rs. 5,19,20,500/- as against the value declared by the assessee at Rs. 5,05,00,000/-. The Ld. CIT(A) concluded that the difference between both the values determined by the AO and the assessee respectively was only a marginal difference of 2.81%. The Ld. CIT(A) further concluded that since Section 50C(2) is a mandatory procedure wherein the assessee objects to adoption of stamp duty value and in the present case, the AO himself has referred to the same provision for valuation and held that the valuation report was binding on the AO and that there is only a difference of 2.81% which was to be ignored, thereby allowing the assessee’s appeal.

Aggrieved by the said order, the revenue is in appeal before us. The Ld. DR argued that the said transfer though was for tenancy rights the implied nature of transaction was that the landlord was deprived of his right to interfere in the affairs of the property and that the tenants had the complete right to alienate the property even without the consent of the landlord and also to make structural changes as per their convenience. The Ld. DR further emphasized on the nature of right as per the agreement and reiterated the clauses of the agreement specified at page 6 para 3 of the assessment order. The Ld. AR on the other hand Zubin Russi Jal Taraporevala contended that it was merely a transfer of tenancy right and not ownership right and relied on the valuation report of DVO which was filed post the assessment order.

We have heard the contentions of both sides and perused the materials available on record. It is evident from the record that the AO has very much relied on the valuation report filed by the DVO which was sought for by the AO u/s 55A of the Income Tax Act in assessee’s brother case. The AO has specifically stated that the valuation is for the purpose of determination of the FMV (tenancy rights) of the property as on 17.09.2013 for capital gain tax and not for the purpose of determination of FMV of the cost of construction. That being so the ground no. 2 of the appeal raised by the revenue does not sustain and deserve to be dismissed.

With regard to ground no. 1, we are of the considered opinion that the terms of the agreement has to be construed in totality, though it has given the tenants absolute right to transfer the property and various other clauses favouring the tenants, Clause 11 of the deed specifies that in case of failure on the part of the transfer to pay rent the landlord is entitled to terminate the tenancy. This in itself has controverted the allegation of the revenue that the transfer is tenancy in perpetuity akin to that of ownership rights.

It is pertinent to point out that in the similar issue with regard to the other 50% share of the assessee’s brother, the Zubin Russi Jal Taraporevala Coordinate Bench of ITAT in dated 25.02.2021 has dismissed the appeal of the revenue on similar observation. We hereby quote the relevant part of the said order as below:-