K A SUJIT CHANDAN,BENGALURU vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE BENGALURU.-5(2)(1), BENGALURU

3.1 During the course of search operations u/s.132 of the Act at the residence of the assessee, several documents among which the material related to a joint development agreement with the developer, namely M/s. Renaissance Holdings and Developers Pvt. Ltd. were seized. On perusal of the seized material, it was seen that the assessee along with six other parties, in the capacity of land owners enter into a joint development agreement with the developer on 01/03/2007 for a land measuring 13 Acres 24 Guntas situated in Basavanpura Village, Bengaluru. As per the terms of the JDA, the landowners transferred 61.50% of their ownership in the land in lieu of 38.50% of the Super Built up Area in the form of villas. The assesses’s share in the flats to be received as part of the JDA was 15% of the Super Built up Area (SBA). The capital gain arising out of the JDA signed with the developer was assessed to tax in the hands of the assessee for AY 2007-08 vide assessment order passed u/s. 143(3) r.w.s. 147 of the Act dated 10/02/2015. The AO by considering the 38.50% of the Super Built up Area (SBA) to be constructed by the developer at the rate of Rs.760 persq. ft as fixed by the Government of Karnataka as sale consideration received in exchange of 61.50% of undivided share of land with developer. Further, the cost of acquisition for 61.50% of undivided share of land was considered at Rs.1,67,28,000/-( 2,72,00,000*61.5%). Considering the total area under JDA was 13 Acres 24 Guntas or 5,92,416 sq. ft, the cost of acquisition works out to Rs.45.91 per Sq.ft. The computation as adopted in the above-mentioned assessment order for the AY 2007-08 are given below for ease of reference and convenience- Particulars Amount (In Rs.) Sale Consideration for 38.5% of Super Built up 13,94,60,000.00 Area or 1,83,500 sq. ft whichever is higher at the rate of 760 per sq. ft Less: COA for 61.5% of undivided share of land 1,67,28,000.00 Capital Gains 12,27,32,000.00 Share of assessee- 15% 1,84,09,800.00 3.2 After the completion of the JDA, the assessee was handed over his share of flat as per the terms of conditions set out. During the year under consideration i.e. AY 2021-22 the assessee sold 4 villas i.e. B-77, D-103, B-13 and Villa No.15 for a total consideration of Rs.8,96,22,061/- and declared capital gain on the same. On examination of the calculation of cost of acquisition claimed by the assessee, the AO noticed that the assessee had taken different rates ranging from Rs. 45.85 to 49.74 as cost per sq.ft. for undivided share of land and a cost of Rs. 760 per sq.ft. for the total Super Built up Area. The claim of cost of Rs.760 per sq.ft. for SBA was the cost used to determine the sale consideration while computing the capital gains at the time of JDA and accordingly, the AO held this claim to be justified. However, with respect to cost per sq.ft. of undivided land, for determination of capital gains on JDA, the cost considered was Rs.1,67,28,000/- for an area of 3,64,335.84 sq. ft. (area given up by the landowner) and therefore in the opinion of AO the cost per sq.ft. is Rs.45.91 sq.ft. (Rs.1,67,28,000/364335.84 sq.ft.) and accordingly held that assesses’s calculation of cost per sq.ft was erroneous. During the course of assessment proceedings, the assessee provided his submission on 27/12/2022, the gist of which is reproduced below:-

• The total cost at which and was transferred to the partners was Rs.2,72,00,000 out of which the builder’s share was Rs.1,67,28,000(61.5%) and owner’s share being Rs.1,04,72,000 (38.5%). • There was exemption of Rs.2,50,000 towards STCG, hence the final value of land is Rs.2,69,50,000 (2,72,00,000 – 2,50,000) that is Rs. 20 lakhs/ acre • Hence the value of land for landowners is Rs.1,02,22,000 (Rs.2,72,00,000 * 38.5% - 2,50,000). As per the sharing agreement, the landowners have got UDS (land area) of 1,09,924 sq.ft. So final land cost per sq feet is Rs.92.99 (Rs.1,02,22,000 divided by 109924 sq.ft.) • The COA was erroneously calculated at from 45.85 to 49.74 as cost per sq ft while filing the ITR. The correct COA rate is Rs.92.99 per sq.ft. and this rate should be adopted for the purpose of computing capital gains during this assessment proceedings.

3.3 The AO did not accept the contention of per unit cost of Rs.92.99 per sq.ft. because of the following reasons: -

• Firstly, regarding the methodology of arriving at the cost of acquisition of Rs.2,69,50,000/- cannot be accepted as the actual cost of acquisition of the land which formed part of the JDA was Rs.2,72,00,000/-. For the purpose of computation of COA, only the actual cost of purchase incurred towards acquisition of and along with the expenses on purchase such as stamp duty and registration are to be considered. Assesses’s methodology of reducing the exemption of STCG of Rs.2,50,000/- is not provided for in the Act and is without any basis. • On selling flats obtained through a JDA, the cost of acquisition will necessarily be the sale consideration which was offered at the time of offering the capital gains on JDA • In the instant case, the rate considered for the purpose of calculating sale consideration was Rs.760 per sq.ft. for the total SBA to be received by the assessee as part of the JDA. Therefore, at the time of sale of flats, the cost of acquisition is to be considered by adopting Rs.760 per sq.ft. for the super built up area. • In the instant case, there is no dispute regarding the cost of Rs.760 per sq.ft. which has been adopted by the assessee. • In addition to the above, the assessee is also eligible to claim the cost of land for the undivided share of land. This rate will again be restricted to the cost which was considered at the time of offering capital gains on JDA to tax. In the instant case, the cost which was allowed to be claimed by the assessee as per assessment order dated 10/02/20215was Rs.1,67,28,000/- for an area of 3,64,336 sq. ft. thus cost per sq ft. being Rs.45.91 sq. ft. The assessee is eligible to claim the per sq.ft. rate. • However, the assessee has divided the cost already claimed during the AY 2007-08 by the undivided share of land in the flats sold as opposed to the total area of land given up in lieu of receiving the flats. • This calculation is erroneous as cost can be claimed only to the extent of what was actually incurred by the assessee and what was actually claimed in at the time the JDA was offered to tax. The cost of Rs.1,67,28,000/- which the assessee is not disputing, is the proportionate cost of the land which was given up as a result of the JDA. Therefore, this cost has to be divided by the proportionate area of the land given up by the assesseeand not by the undivided share in the constructed flats which has been adopted by the assessee. • Further, the assessee himself adopted a lower rate of Rs.45.85 per sq.ft. in the return of income filed for the AY 2021-22.

In view of the aforementioned facts, the AO did not accept the claim of the assessee for considering the cost of acquisition @ Rs.92.99 per sq.ft. and the AO considered the same at Rs.45.91 sq.ft. for every sq.ft. of undivided share in the flats sold.

3.4 Further, it is seen from the calculations adopted by the assessee, the guidance value of the properties sold have not been considered while determining the sale consideration as per the provisions contained in section 50C of the Act. The guidance value of the property was @ Rs.5,110/- per sq.ft. as seen from the SRO’s registry for stamp duty value. The guidance value prescribed by the SRO from 1/04/2018 till 31/12/2018 WAS Rs.48,000/- per sq.mt. and thereafter the value prescribed is Rs.55,000/- per sq.mt. Converting the same to sq.ft., it comes to Rs.5,110/- per sq. ft.

3.5 Further, as regardsto the claim of exemption u/s. 54 of the Act, it was seen by the AO that the assessee had invested an amount of Rs.75,47,933/- in constructing residential house property at vacant site owned by the assessee and accordingly claimed exemption u/s. 54 of the Act. The assessee was required to provide proof of actually having incurred the construction expenses and in response to the same the assessee submitted invoices for expenses to the tune of Rs.71,67,207/- and accordingly the AO restricted the claim of exemption u/s. 54 of the Act amounting to Rs.71,67,207/- only. Considering all the above, the AO reworked out the taxable capital gain in the hands of the assessee for the AY 2021-22 as follows:-

Particulars Amount (In Rs.) Total Capital Gains Chargeable to tax in 6,14,36,386 FY 20-21 Less: Exemption claimed u/s. 54 restricted to 71,67,207 Rs.71,67,207/- Less: Exemption claimed u/s. 54EC 50,00,000 Net Capital Gains on sale of villas for FY 20-21 4,92,69,179 As the assessee had declared a capital gains of Rs.4,74,72,475 in the ITR filed for AY 2021-22, therefore the additional capital gains of Rs.17,96,704/- (Rs.4,92,69,179 – 4,74,72,475) was added back to the income of the assessee and brought to tax.

3.6 With regard to the Notional rent on residential property owned, it was seen that the assessee owned one building and four residential villas during the year.On perusal of ITR filed, the assessee had declared rental income only from one building and claimed two residential house properties as self-occupied. The gross annual value of the remaining house properties had not been brought to tax during the year. In response to show cause, the assessee in his reply submitted that apart from the properties already declared and properties which are considered as self- occupied, the assessee owns villas 78, 104 and 04. The assessee suo-moto provided the details of Municipal value and notional rent in respect of above mentioned three properties. The main contention of assessee is that he had entered into agreement of sale for the above two villas on 07/08/2021 and 12/04/2021 and therefore these villa could not be put up for rent and the same should not be considered for calculation of notional rent. The AO did not accept the contention of the assessee since, the assessee being the owner of the House property during the year, the annual value of the property must be determined and brought to tax during the year. Further, the AO observed that the purchaser only agreed to purchase the property and ownership had not been transferred yet as the sale deed was not executed during the year. In view of the same, the notional rent of two properties, that is D-104 and D-04 (D-78 considered as self-occupied) are brought to tax as follows: - Particulars Gross Less: Annual 30% Income Annual Municipal Value Standard from HP Value Tax deduction D-104 62,958 10,493 52,465 15,740 36,726 D-4 59,322 9,887 49,435 14,831 34,605 TOTAL 71,331 Thus, the AO completed the assessment proceedings on a total assessed income of Rs.5,26,62,915/- against the return income ofRs.5,07,94,880/- under section 143(3) of the Act vide order dated 30/12/2022.

I) With regard to rate per sq. ft towards the cost of acquisition of land, the ld.CIT(A) observed that the cost per sq.ft. amounting to Rs.45.91 is correct and the assessee contention that the STCG of Rs.2,50,000 should be excluded is also not correct as there is no such provision under the Act. The cost of acquisition as considered at the time of JDA is Rs.760/ sq.ft. for the SBA and there is no dispute about adopting this rate. The ld. CIT(A) held that the assessee is also eligible for cost of land for the undivided share of land but this has to be restricted to the cost adopted at the time of offering the capital gain on the JDA to tax. As the assessment order for the AY 2007-08, the cost which was allowed to claim by the assessee was Rs.1,67,28,000/- for 3,64,336 sq.ft. of land which works out to be Rs.45.91/ sq.ft. The ld.CIT(A) was of the view that the calculation adopted by the assessee is erroneous asthe cost can be claimed only to the extent of what was actually incurred by the assessee and what was actually claimed at the time of JDA and offered to tax. Hence, the calculation which the assessee is now contending to be adopted @ Rs.92.99/ sq.ft. is not correct. Further, the assessee also did not adopt the guidance value of Rs.5,110/ sq.ft. as evident from the SRO’s registry for stamp duty valuation at time of computing the sale consideration and accordingly held that the same had been correctly adopted by the AO for computing the sale consideration. Further, the ld.CIT(A) did not accept the contention of the assessee of exclusion of the garden area of 906 sq.ft. of villa no.13 included by the AO to arrive at the sale consideration. Since at the time of JDA, the sale consideration was computed on SBA which includes all the common areas and accordingly held that the AO has correctly included the same in the sale consideration. II) With regard to claim of exemption u/s. 54 of the Act, as the assessee could provide evidences regarding cost of construction only to an extent of Rs.71,67,207/- during the course of assessment proceedings and even during the course of appellate proceedings, the assessee did not submit any further evidences and accordingly the ld. CIT(A) upheld the action of AO by restricting the claim u/s. 54 of the Act to Rs.71,67,207/-.

III) With regard to determination of notional rent by the AO in respect of two villas,the ld.CIT(A) observed that the assessee had although entered into certain agreement for sale but no sale deeds were materialized during the year. The ld.CIT(A) by relying on the decision of the coordinate bench of ITAT held that taxing statues are to be strictly construed and the notion of “intent to let out” or “proposed to be let” etc. cannot be imported into the provision which seeks to tax a notional sum. The ld.CIT(A) was also of the view that where the property was not let out at all during the entire previous year, no deduction for vacancy allowance is permissible.

9.1 Further, with regard toadoption of the guidance value over the actual sale consideration in respect of villa no.13, the AO had taken the guidance value of Rs.2,32,54,118/- and disregarded the actual sale consideration of property amounting to Rs.2,18,29,631/- while calculating the capital gains.We are of the considered opinion that as per the third proviso of section 50C of the Act, where the value adopted or assessed or assessable by the stamp valuation authority does not exceed 110% of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48 of the Act, be deemed to be the full value of consideration. In the present case, the sale consideration of villa no.13 was Rs.2,18,29,631/-. The 110% of the consideration received is Rs.2,40,12,594/- whereas the stamp duty value was only Rs.2,32,54,118/-and therefore we of theconsidered opinion that the actual sale consideration so received amounting to Rs.2,18,29,631/- shall be deemed to be the full value of the consideration for the purpose of section 48 of the Act. Accordingly we direct the AO to consider sale consideration of Rs.2,18,29,631/- instead of Rs.2,32,54,118/- as determined in respect of Villa No.13.

9.2 Now with regard to restriction of the claim of exemption under section 54 of the Act to Rs.71,67,207/- only instead of Rs.75,47,933/- as claimed by the assessee, the AO had discarded the balance amount of Rs.3,87,726/-since the assessee during the course of assessment proceedings had submitted the invoices for expenses to the tune of Rs.71,67,207/- only. The ld.CIT(A) also in the absence of bills and vouchers confirmed the disallowance of Rs.3,87,726/- as made by the AO. We are of the considered opinion that in case of construction and development ventures, it is not possible to maintain and preserve the bills/ invoices/ vouchers etc. for each and every component of expenditures such as labour expenses, transportation, petty materials, supervision and other miscellaneous expenditures. These type of expenses often do not carry formal bills and vouchers. Further, taking into consideration the assessee had produced almost 95% of bills and vouchers during the course of the assessment proceedings, the exemption u/s 54 of the act should not be denied merely for non-production of bills & vouchers for approx. 5% of expenditure in the absence of any adverse material on record. As the assessee had already substantiated the major portion of the cost through verifiable evidence, the marginal balance should not be refuted from claiming full exemption u/s. 54 of the Act.Since these expenses are incurred as wholly and exclusively for the purpose of improving the property and therefore eligible to be considered for exemption u/s 54 of the Act.

9.3 Now with regard to AO’s addition of notional income amounting to Rs.71,331/- as the annual rent of two villas kept for sale during the relevant FY, we take a note of the fact that assessee had entered into agreement of sale for the above two villas on 07/08/2021 and 12/04/2021 and therefore these villas could not be put up for rent. Further, before us the ld.A.R. of the assessee vehemently submitted that the assessee was unable either to let out or sale the properties solely due to the ongoing covid pandemic situation which severely degraded the assesses’s ability to advertise and find customers. However, the AO on the ground that as per section 23 of the Act, as long as the assessee is owner of house, the annual value of the properties must be determined and brought to tax.It is an undisputed fact that the assessee wanted to sell these two villas and he had entered into an agreement for sale and for this reason he kept the property vacant. We are of the considered opinion that for the application of section 23(1)(c) of the Act, it is not at all relevant as to whether the property was let out in past or not. If the property is held by the owner for let it out and efforts were also made to let it out, then the properties were covered by provision of section 23(1)(c) of the Act. We are also of the considered opinion that in case the property is vacant because of inability of the assessee to let out or sale due to the pandemic, then the notional rent should not be added as income of the assessee. In our opinion as the assessee clearly demonstrated that the same was kept for the sale and no one came forward to take on rent during the covid period due to the covid pandemic, the notional rent determined amounting to Rs.71,331/- is unwarranted and accordingly the same is deleted.

15. In all these three appeals, the brief facts of the case are that the assessing officer passed an order u/s. 143(3) r.w.s 147 of the Act on 10/02/2015 for the AY 2007-08 by calculating the short termcapital gains on transfer of land under the Joint development agreement dated 01/03/2007 as detailed belowfor ease of reference and convenience- Particulars Amount (In Rs.) Sale Consideration for 38.5% of Super Built up 13,94,60,000.00 Area or 1,83,500 sq. ft whichever is higher at the rate of 760 per sq. ft Less: COA for 61.5% of undivided share of land 1,67,28,000.00 Capital Gains 12,27,32,000.00 Aggrieved by the order passed by the AO, the assessee filed an appeal before the ld. CIT(A)-5, Bengaluru. The Appellate order for the AY 2007-08 was disposed of on 19/09/2016. Aggrieved by the order of the ld. CIT(A)-5, Bengaluru, the assessee preferred an appeal to ITAT. The first Appellate Order was set aside by this tribunal vide order dated 28/08/2020 for determining the quantum of capital gains computed in the hands of the assessee. The limited purpose for which the appeal was set aside by this ITAT to the ld. CIT(A)-5, Bengaluru was that the ld. CIT(A) had not adjudicated Ground No.9 and also the ground no.10 related to the interest.

15.1 Thus, the sole ground to be adjudicated on merits in the set aside proceedings was whether and gain accruing to the assessee on transfer of land under the joint development agreement is a long-term capital gain or a short-term capital gain. A capital asset is long term capital asset if it is held by the assessee for more than 36 months. The assessee submitted that the land i.e. the matter of joint development, was originally acquired a decade ago by the partnership firm M/s. Komarla Hatcheries, in which the assessee is one of the partners. It was contended that under the partnership law, the firm by itself has no formal existence. Further, the assessee hadsubmitted that, in case of gift or acquisition by will, the holding of the previous owner is considered and even in this case, the holding of the firm should be considered and taxed as LTCG. The period of holding is reckoned from the date of purchase of property owner who actually acquired the property, in this case of assessee, it is a partnershipfirm.

15.2 On going through the assessment order, the ld.CIT(A) noticed that the property was originally held in the name of the firm M/s. Komarla Hatcheries in which the assessee is one of the partners. Due to dispute between the partners the land which was owned by the partnership firm was distributed among the partners in their own respective sharing ratios on court settlement. The firm paid the capital gains on the distribution of land to the partners at the notified value of the land. The Partners then entered into a JDA with the developers. The assessee has not disputed the year of the taxability of the capital gains arising on entering into JDA. However, the AO’s action of treating the capital gain as short term capital gain @ 30% instead of long-term capital gain to be taxed @ 20% is the sole issue in the set aside appellate proceedings. The ld. CIT(A) held that thebasic ingredients required for attracting section 45(4) of the Act are: -

In the opinion of the ld. CIT(A), as per the provisions of 45(4) of the Act, when the capital asset of the firm are distributed on dissolution or otherwise, the firm needs to pay capital gain tax. For the purpose of paying capital gain tax, the fair market value of the assets on the date of such distribution is deemed to be the full value of the consideration u/s. 48 of the Act. In the present case once the assets are distributed by the firm to the partners, the partners have entered into JDA as co-owners of the property in the same FY 2006-07 relevant to AY 2007-08.

15.3 On perusal of the relevant provisions of the Act and the written submission of the assessee, the ld.CIT(A) was of the opinion that assessee become the owner of the property once the asset was distributed by a court order and the assessee immediately entered into a JDA with the developer. Thus, the asset was held by the co- owners for a short period which is less than 36 months. Since, the asset was held with the co-owners for a short period, the AO had correctly computed the gain as short term capital gain which is confirmed by the ld.CIT(A). Accordingly Ground No.9 of the appeal was dismissed. Further, with regard to Ground No.10 related to chargeability of interest u/s. 234B of the Act, the ld.CIT(A) was of opinion that it is mandatory and consequential in nature and there is no need for any specific adjudication and accordingly dismissed the appeal of the assessee.

15.4 Aggrieved by the order of the ld.CIT(A), the assessee has filed present appeal before this Tribunal. The assessee has filed a paper book comprising 91 pages containing therein the copy of the court order along with the compromise petition as well as various case laws relied upon by the assessee.

18.1 During the course of assessment proceeding, the assessee firstly submitted that there was no transfer in the relevant year and there was no reason to tax the capital gain as the land was continued to be agricultural land and it was not a capital asset with the meaning of section 2(14) of the Act. Before us, the AR of the assessee neither argued this ground taken before the AO nor produced any details & evidence to show that the land in question was agricultural land. Anyway when the land were transferred from the partnership Firm to its partners, the firm had paid the capital gain tax on the Long term capital gain & the assessee had never objected the same. Further, it was also contended that even if the capital gain is computable, the same was nil in the case of the assessee since the land was acquired from the firm at the guideline value and even if the transfer is required to be considered at the same guideline value there weas no profit required to be considered for taxation under the head capital gains under the Act. This contention of the assessee is not at all acceptable as the partnership firm & partners are two separate & distinct person in the eyes of the income tax. Section 2(31) of the Act define person to include an individual as well as a firm. Therefore, merely because the land was acquired from the firm at the guideline value & the transfer under the JDA is also required to be considered at the same guideline value that does not mean the capital gain accruing as a result of JDA will not be taxed. We are of the considered opinion that the same person entered a two separate transactions. Once he received the land of the firm as the partner & thereafter he again transfer the same land as co-owner. The assessee after receiving the land from the firm had transferred the same under JDA within a very short span of time. Therefore the AO had correctly calculated the capital gain as short term capital gain. We also do not agree with the contention of the AR of the assessee that the asset which was owned by the firm in which the assessee was partner was long-term capital asset and by virtue of transfer in the name of partners, it does not lose the status of the asset. As stated above the assessee had entered two separate transactions i.e. one as a receiver of the land on distribution of asset by the firm & another as a seller by entering into JDA with the developer. Lastly, the contention of the AR of the assessee that, even in case of succession, inheritance, gift or acquisition by will, the holding of the previous owner is considered and even in this case, the holding of the firm should be considered and has to be taxed as LTCG is also not acceptable. It is neither a case of distribution of capital asset in the partition of HUF not it is a case of transfer of capital asset under a gift, will or by succession, inheritance & therefore the question of the consideration of the period for which the asset was held by the previous owner does not arise.

18.2 Undisputedly, the property was originally held in the name of the firm M/s Komarla Hatcheries in which the assessee was one of the partners. Due to dispute between the partners, the land which was owned by the partnership firm was distributed among the partners in their respective sharing ratio by virtue of compromise petition filed before the Civil Court. The partnership firm had paid the capital gains on the distribution of land to the partners which is also not disputed. The Co-owners thereafter entered into a JDA & executed the power of attorney with the developer namely M/s Renaissance Holdings and Developers Pvt. Ltd. on 01/03/2007 in their individual capacity as co-owners & not in the capacity of Partnership firm. Further, on going through the compromise petition, we also take a note of the fact that all the co- owners will receive their share of sales consideration directly from the developer. Thus, once the assets have been distributed to the partners, the partners/co-owners had entered into the JDA in the same year i.e FY 2006-07 relevant for the Asst. year 2007-08. Thus we are of the considered opinion that since the asset was held by the co-owners for a short period i.e. less than 36 months, the AO had correctly computed the gain as short term capital gain. We also agree with the contention of the ld. DR that the decision relied upon by the council of the assessee are totally distinguishable from the fact of the present case and therefore the contention of the A.R. of the assessee is not acceptable. Accordingly we dismiss all these three appeals.