VENKATRAMAN LAKSHMINARAYANAN,CHENNAI vs. ACIT, CHENNAI

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.

“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.

ITA No. 543/Chny/2017

appellant’s brother without assigning proper reasons and justification.

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.

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.

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/-.

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.

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.

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.

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.

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

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

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).

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.

allowed for statistical purposes. Order pronounced in the open court on 9th March, 2022

Sd/- Sd/- (वी.दुगा� राव) (जी.मंजुनाथ) (V.Durga Rao) (G.Manjunatha) #या�यक सद&य /Judicial Member लेखा सद&य / Accountant Member

चे#नई/Chennai, )दनांक/Dated 9th March, 2022 DS आदेश क� ��त+ल,प अ-े,षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु.त (अपील)/CIT(A) 4. आयकर आयु.त/CIT 5. ,वभागीय ��त�न2ध/DR 6. गाड� फाईल/GF.