DR.E.S.KRISHNAMOORTHY,CHENNAI vs. ITO NON CORPORATE WARD 1(4), CHENNAI

आदेश / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against the order of the

Commissioner of Income Tax (Appeals)-2, Chennai, dated 31.07.2017

and pertains to Assessment Year 2012-13.

Grounds w.r.t. adding back of book depreciation twice i. Book depreciation has been incorrectly added back twice, solely on the ground that the inasmuch as the original return dt. 30-Mar-13 was belated, the correction made in the revised return dt. 29-May-13 could not be considered. ii. The appellant cannot be precluded from correcting/rectifying an error apparent on the record.

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iii. Even if the appellant had not rectified the same through his return dt.29-May-13, the department, on its own was bound to process the return by adjusting the apparent error in the return.

iv. The CIT(A) has nowhere stated that the claim in incorrect and hence not allowable. Where on merits the assessee is entitled to the claim, the same cannot be defeated on hyper- technical grounds.

v. In any case, in as much as the assessment had been taken up for scrutiny, all issues are opened up.

Grounds w.r.t. computation of capital gains

vi. The CIT(A) failed to understand the nature of the transaction involving transfer of UDS and purchase of constructed flats in return.

vii. The CIT(A) erred in holding that the sum of Rs.2.25 crores formed the sale consideration in the hands of the "owners" i.e. the appellant, appellant's father and the appellant's wife, when the said sum was solely to the account of, and payable by the developer only to the appellant's father.

viii. The said Rs.2.25 crores was rightly offered to tax by the appellant's father and same as also accepted by the department; taxing the same in the hand's of the appellant would be double taxation.

ix. The CIT(A) erred in giving a lesser deduction u/s.54, when the appellant was entitled to the full value of one flat received by him as deduction.

Practitioner filed his return of income for the AY 2012-13 on 30.03.2013

declaring total income of Rs.14,43,930/- and said return has been

subsequently, revised on 29.05.2013 declaring total income of

Rs.13,00,840/-. The case was taken up for scrutiny and during the course

of assessment proceedings, the AO noticed that the assessee is a joint

owner (along with his wife and father) of the property being a residential

house bearing Old No.3, New Dr.No.22, South Mada Street, Srinagar

Colony, Saidapet, Chennai. The property was originally belonged to the

assessee’s grandfather who purchased the said property in the year 1962.

The grandfather of the assessee executed a Will and bequeathed the life

interest in the property to his wife (Grandmother of the assessee) and

vested remainder to his son Dr.Krishnamoorthy Srinivas (Father of the

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assessee). The assessee’s father Dr.Krishnamoorthy Srinivas, got the Will

probated subsequent to the death of his father. Later, Dr.Krishnamoorthy

Srinivas executed a Settlement Deed on 03.03.2008 in respect of the

property to the assessee. Therefore, the assessee become the absolute

and sole owner of the property by virtue of Settlement Deed dated

03.03.2008. The assessee has been subsequently executed a Settlement

Deed on 05.09.2011, and out of natural love and affection to his wife and

father, settled a portion of the property in their favour. Thus, post the

execution of the Settlement Deed, the ownership of the property pertaining

to the house stood as follows:

Name Relationship % of the property Dr.E.S.Krishnamoorthy Self 42.50% Dr.Krishnamoorthy Srinivas Father 15.00% Mrs. Gayathri Krishnamoorthy Spouse 42.50%

Development Agreement (in short “JDA") on 08.09.2011 for development

of the property with M/s.Coromandel Engg. Co. Ltd. As per the said JDA,

the developer agreed to construct 4 flats with total saleable area of 16,368

sq.ft. Further, the owners shall receive a consideration of Rs.2.25 Crs. as

non-refundable deposit and 50% of the constructed area being the 1st & 4th

Floor Flats along with car parks. The developer has discharged his

obligation by paying the entire non-refundable deposit of Rs.2.25 Crs. to

Dr.Krishnamoorthy Srinivas (assessee’s father) and one flat at 1st Floor

allotted and registered in favour of Dr.E.S.Krishnamoorthy (assessee) and

another Flat at 4th Floor to Mrs. Gayathri Krishnamoorthy (assessee’s wife).

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All three joint owners of the property individually filed their return of income

by offering their respective share of capital gains in their hands.

information furnished by the assessee and also information received from

the developer M/s.Coromandel Engg. Co. Ltd., u/s.133(6) of the Act,

noticed that the land owners have received a sum of Rs.2.25 Crs. non-

refundable deposit from the developer besides two flats each measuring

4092 sq.ft in lieu of 50% undivided share of the land sold to the developer.

Therefore, he opined that cost of two flats received by the assessee in lieu

of transfer of 50% of UDS in favour of developer and non-refundable

deposit of Rs.2.25 Crs. should be considered as full value of consideration

received as a result of transfer of property. Therefore, re-computed long

term capital gains derived from transfer of property by the assessee by

taking into account total cost of construction incurred by the developer for

two flats and determined long term capital gains of Rs.93,20,300/- in the

hands of the assessee. Similarly, the AO had also made additions towards

credit card payment of Rs.7,15,893/- when the assessee has not offered

any explanation as unexplained expenditure. The AO had also made

additions towards disallowance of depreciation on car on the ground that

the possibility of usage of car for personal purpose, cannot be ruled out.

The relevant findings of the AO are as under:

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In order to arrive at the capital gain in the case of the assessee, information was called for u/s.133(6) of the I.T.Act, 1961 from the Developer, M/s. Coromandei Engineering Co. Ltd, and it is stated by them vide letter dated Feb.5, 2015 filed in this office on 09.2.2015 that as per their books, the cost of the construction of four flats is Rs.9,31,42,101/- includes Non-Refundable One-time payment made to Shri Krishnamoorthy, amounting to Rs.2,25,00,000/-, the details are as under:

Date Cheque No. Amount (Rs.) 08.09.2011 549324 1,50,00,000 18.10.2011 004155 50,00,000 03.11.2011 550009 25,00,000

The assessee has received Rs.2,25, 00,000/- from the Developer M/s.Coromandel Engineers besides which he was also in receipt of 2 flats each measuring at 4092 sq. fts. in lieu of the 50% UDS sold to the Developer. As such the cost of these two flats should be considered as sale consideration as well as for the reinvestment into the residential house(s). The deduction claimed u/s.54 for the assessee's part of 42.5% has to be allowed after deducting the Indexed cost of acquisition for the assessee's share in the old property transferred. The long term capital gain is reworked as under: The cost of the built up area alone as reported by the developer is calculated as under: Total cost of consideration for the four flats Rs. 9,31,42,101 Less: Non-refundable one-time payment made Rs. 2,25,00,000 Cost of 4 flats excluding payment received Rs. 7,06,42,100 Cost of 2 flats Rs. 3,53,21,050 Amount of Consideration received Rs. 2,25,00,000 Add: Cost of 2 new flats as calculated above Rs. 3,53.21,050 Full value of consideration in respect of the transfer Rs. 5,78,21,050 Full value of consideration in respect of the transfer Rs. 5,78,21,050 Assessee's share of 42.5% of FVC Rs. 2,45,73,946 Less: Indexed cost of acquisition

42.5% of the Fair Market Value property of Rs.4,00,000/- as on 01.04.1981 as claimed by you = 1,70,000/- = 1,70,000 x 785/551 (u/s.48(iii)) Rs. 2,42,200 Rs. 2,43,31,746 Less: Deduction u/s.54 Cost of two flats as worked out = 3,53,21,050 Reinvestment worked out at 42.5% Rs. 1,50,11,446 Taxable capital gain Rs. 93,20,300

The assessee was issued with a show cause notice dated 10.03.2015, why the above LTCG should not be taxed in his hands. It was duly served on the assessee. The assessee was requested to file explanations, objections, if any, to the proposed assessment of LTCG on or before 16.03.2015. The assessee, till date, has not filed any objections hence it is observed

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that he has no objections to the proposed assessment. As such the Long Term Capital Gain is assessed at Rs.93,20,300/- in his case. (Addition: LTCG Rs.93,20,300/-) CREDIT CARD PAYMENTS The credit card statement of accounts in respect of credit card payments made through RBS and Standard Chartered Bank, for an amount of Rs.7,15,893/-during the financial year relevant to Assessment year may be furnished to ascertain the allowability or otherwise. The show cause notice dt. 10.03.2015 covered the above point also. The assessee, till date, has not filed any objections/ offered any explanations, hence it is observed that he has no objections to the proposed assessment. As such the credit card payments are assessed as unexplained at Rs.7,15,893/- in his case. (Addition: Credit Card payments Rs.7,15,893/-) DEPRECIATION ON MOTOR CAR The assessee has claimed an amount of Rs.1,12,955/- as Depreciation on Car. To cover the personal usage, 20% of the above i.e. Rs.22,590/-is disaliowed and added to the income. (Addition: Rs.22,590/-)

appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee argued

that long term capital gains computed by the AO by taking into account

cost of two flats and non-refundable deposit in the hands of three co-

owners is incorrect. The Ld.CIT(A) for the reasons stated in his appellate

order confirmed the re-computation of the capital gains made by the AO

and partially upheld the credit expenses disallowed by the AO. The

Ld.CIT(A) had also dismissed the ground of the assessee pertains to

disallowance of depreciation on car. Aggrieved by the Ld.CIT(A)’s order,

the assessee is in appeal before us.

5 of assessee’s appeal is disallowance of 20% of depreciation on car on the

ground that the possibility of usage of car for personal purpose, cannot be

ruled out. The Ld.AR for the assessee submitted that the Ld.CIT(A) has

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erred in not considering the ground raised by the assessee challenging the

action of the AO in not considering the revised return filed by the assessee

correcting the mistake in depreciation without appreciating the fact that

even if the assessee makes a wrong claim, the AO is bound to compute

correct income after allowing necessary deductions/allowances in

accordance with law. The Ld.DR, on the other hand, supported the order

of the Ld.CIT(A).

record and gone through orders of the authorities below. Admittedly,

original return filed on 30.03.2013 was belated and as per Sec.139(5) of

the Act, if any person having furnished a return under Sub-Sec. (1) or Sub-

Sec.(4) discovers any omission or any wrong statement therein, he may

furnish revised return at any time before the end of the relevant AY or

before completion of the assessment, whichever is earlier. In this case, the

original return was not filed under Sub-Sec.(1) or Sub-Sec.(4) and thus,

the belated return filed by the assessee is an invalid return. Therefore, the

AO is not bound to consider invalid return. Hence, we are of the considered

view that there is no error in the reasons given by the AO in not considering

the revised return filed by the assessee for rectifying the mistake in claim

of depreciation. Accordingly, we reject the ground taken by the assessee.

Nos.6-9 of assessee’s appeal is computation of long term capital gains

derived from transfer of property in pursuant to JDA. The fact with regard

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to impugned dispute are that the JDA between the assessee and his wife &

his father with M/s.Coromandel Engg. Co. Ltd., is not in dispute. As per

the JDA between the parties, the developer has agreed to construct 4 flats

and also agreed to share 50% of the constructed area along with payment

of Rs.2.25 Crs., non-refundable deposit to the land owners. In terms of

JDA between the parties, the developer has paid a sum of Rs.2.25 Crs. non-

refundable deposit to the land owners and the same has been paid into the

account of Dr.Krishnamoorthy Srinivas (father of the assessee) and who is

also holding 15% of share in the property. The developer had also allotted

two flats in favour of the land owners and accordingly, registered 1st Floor

Flat in the name of Dr.E.S.Krishnamoorthy (assessee) and the another Flat

at 4th Floor to Mrs. Gayathri Krishnamoorthy (assessee’s wife). The

assessee had considered only a flat allotted in his favour for computation

of long term capital gains pursuant to JDA. However, not considered non-

refundable deposit paid by the developer by claiming that non-refundable

deposit had been offered to tax by his father (Dr.Krishnamoorthy Srinivas).

The AO has re-computed long term capital gains derived from transfer of

property in pursuant to JDA and has considered full value of consideration

by taking into account cost of construction of two flats plus non-refundable

deposit of Rs.2.25 Crs. paid by the developer. Accordingly, the AO has re-

computed long term capital gains by taking into account a sum of

Rs.5,78,21,050/- as full value of consideration and out of which, considered

42.50% of share in the hands of the assessee at Rs.2,45,73,946/-. From

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the above, the AO had allowed deduction for indexed cost of acquisition

and had also allowed deduction u/s.54 of the Act at Rs.1,50,11,446/-

towards 42.5% of cost of two flats at Rs.3,53,21,050/-.

sustaining the re-computation of long term capital gains by substituting

sale consideration by taking into non-refundable deposit of Rs.2.25 Crs.

plus estimated cost of construction of two flats at Rs.2,45,73,946/- based

on the construction cost details received from the developer u/s.133(6) of

the Act. The Ld.AR further submitted that the power of substitution of sale

consideration in computation of long term capital gains u/s.48 of the Act is

restricted and narrow and further, which can be substituted within the

scope of Sec.50C of the Act. The Ld.AR further submitted that the lower

authorities completely ignored the legal position and proceeded to estimate

the sale consideration for surrender of 50% of UDS in land on the basis of

information received from the developer without sharing the said

information to the assessee. Therefore, he argued that the lower

authorities exceeded their jurisdiction within the scope of Sec.48 of the Act

in re-computation of the long term capital gains. The Ld.AR further

submitted that the AO in computation of long term capital gains, has arrived

at the full value of consideration at Rs.5,78,21,050/- which included non-

refundable security deposit received by the assessee’s father directly from

the developer, even though, the assessee’s father had offered cash

component to tax in his return filed for the relevant assessment year. In

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this regard, he has filed revised computation of long term capital gains in

Page No.9 of the Paper Book and requested that the same may be

considered in the interest of justice.

indexed cost of acquisition of the UDS of land at 42.5% without appreciating

the fact that the assessee is having only 17.5% of UDS in land, because

the remaining 50% of UDS in land has been transferred to developer. The

Ld.AR further submitted that the AO also erred in determining the amount

of investment in new asset to claim the benefit of exemption u/s.54 of the

Act by taking into account 42.5% of cost of construction and further,

restricted to Rs.1,50,11,446/-. The Ld.AR for the assessee further

submitted that the AO ought to have considered total construction cost

incurred by the developer for 4 flats and as per which, one flat cost would

be around Rs.2,32,85,525/-. Since, one flat is allotted to the assessee, the

cost of same should be considered for the purpose of provisions of Sec.54

of the Act. The Ld.AR further submitted that the AO and the Ld.CIT(A)

erred in applying the cost of indexation from the AY 2007-08 being the year

of settlement in favour of the assessee by the father of the assessee,

whereas as per provisions of Sec.49(1) read with explanation (iii) below

Sec.48 of the Act, the AO should have considered the indexation from the

year 1981-82 as base year, because the assessee’s grandfather held the

property from the year 1962. In this regard, he relied upon the decision of

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the Hon’ble Bombay High Court in the case of CIT v. Manjula J. Shah

reported in [2013] 355 ITR 474 (Bombay).

submitted that the AO has rightly computed capital gains from transfer of

property pursuant to JDA, because as per the Settlement Deed between

the parties, the assessee owned 42.5% share in the property, his wife

owned 42.5% and his father owned 15% and thus, full value of

consideration received as a result of transfer should be shared

proportionate to their right in the property. The AO after considering the

relevant facts has rightly computed long term capital gains and also

exemption claimed u/s.54 of the Act and thus, there is no error in the

reasons given by the Ld.CIT(A) to sustain additions made towards re-

computation of capital gains from transfer of property.

record and gone through orders of the authorities below. The facts with

regard to ownership of property by three co-owners and their respective

share in right and interest in the property is not in dispute. As admitted by

the assessee himself, he owned 42.5% share in the property. The land

owners have received two flats measuring 4092 sq.ft. each plus Rs.2.25

Crs. non-refundable deposit from the developer in lieu of 50% UDS sold to

the developer. From the above, what is clear is that three co-owners have

specified share in the property and as a natural corollary, full value of

consideration received as a result of transfer of property in pursuant to JDA

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should be considered in the hands of three co-owners according to their

share in the property. Since, the assessee has 42.5% share in the

property, the AO is right in considering 42.5% of consideration in the hands

of the assessee for the purpose of computation of long term capital gains

as a result of transfer of property in pursuant to JDA. The arguments of

the assessee that, he had received consideration separately, as specified in

the JDA, we find that receipt of entire non-refundable deposit by the

assessee’s father and one flat each by the assessee and his wife is an

internal arrangement and which is nothing to do with computation of capital

gains by adopting respective share of full value of consideration. As per

law, when a property transferred, consideration received or accrued as a

result of transfer should be taken into account according to their share in

the property, but not as per the internal arrangement between the parties.

Hence, the arguments of the assessee is rejected.

The assessee has computed long term capital gains by taking into account

cost of one flat received from the builder as full value of consideration.

However, did not consider his share of non-refundable security deposit paid

by the builder and received by his father for computing full value of

consideration. The AO, on the other hand, considered cost incurred by the

builder for construction of two flats and non-refundable deposit of Rs.2.25

Crs. received by the land owners as full value of consideration agreed as a

result of transfer pursuant to JDA. Thus, the AO has taken 42.5% of full

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value of consideration of Rs.5,78,21,050/- and determined assessee’s

share of full value of consideration of Rs.2,45,73,946/-. From the above,

he had allowed deduction towards indexed cost of acquisition and

determined long term capital gains at Rs.2,43,31,746/-. We find that full

value of consideration determined by the AO by considering cost of two

flats plus non-refundable security deposit received from the builder is in

accordance with law, because when the assessee is having a specified share

in the property, which had been given for JDA, then, consideration received

from the builder also needs to be taken in proportionate to their share in

the property. To that extent, full value of consideration adopted by the AO

is in accordance with law and hence, the arguments of the assessee are

rejected. In so far as indexed cost of acquisition and the benefit of

indexation, the AO has considered Fair Market Value (in short “FMV") of the

property at Rs.4 lakhs as on 01.04.1981 and further, allowed benefit of

indexation from the AY 2007-08, when the assessee became the owner of

the property by way of Settlement Deed executed by his father. There is

no dispute with regard to the FMV of the property as on 01.04.1981,

because both the parties have not disputed in FMV considered by the AO.

The only dispute is with regard to method of computation followed by the

AO and the benefit of indexation. In this case, the AO has taken 42.5% of

FMV of property as on 01.04.1981 which works out to Rs.1,70,000/- on

which allowed the benefit of indexation from the AY 2007-08. We find that

the FMV of the property considered by the AO @ 42.5% in the hands of the

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assessee is incorrect. Admittedly, the assessee has transferred 50% of

UDS in the property in favour of the developer and the remaining 50% of

the UDS is with the land owners. Therefore, when 50% UDS only has been

transferred in favour of the developer, then the cost of acquisition in respect

of 50% UDS should be considered for the purpose of determining the cost

of acquisition in the hands of the assessee. Therefore, 50% of the FMV of

the property comes to Rs.2 lakhs. Out of which, the assessee’s share at

42.5%, works out to Rs.85,000/-. Therefore, the AO should adopt

Rs.85,000/- cost of acquisition in the hands of the assessee and further,

should allow the benefit of indexation from the year 01.04.1981, because

as per the provisions of Sec.49(1) read with Explanation (iii) below sec.48

of the Act, when a property is owned by the assessee by anyone of the

modes specified therein, then the benefit of indexation should be allowed

from the date when the previous owner held the asset. In this case, the

assessee has inherited property from his grandfather by one of the mode

specified u/s.49(1) of the Act and thus, he is entitled benefit of indexation

from the date his grandfather held the property i.e. from the year 1962.

Since, base year is 1981-82 for computing the benefit of cost of acquisition,

the AO is directed to adopt the cost of acquisition as arrived at herein above

and allow the benefit of indexation from the year 1981-82.

has claimed the benefit of exemption to the extent of cost of one flat at

Rs.1,76,60,525/-, because as per the terms of the agreement between the

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parties, the assessee had received one flat from the builder. The AO has

allowed the benefit of deduction u/s.54 of the Act to the extent of 42.5%

of cost of two flats which works out to Rs.1,50,11,446/-. We have gone

through the reasons given by the AO and we ourselves do not subscribe to

the reasons given by the AO to allow exemption u/s.54 of the Act to the

extent of 42.5% of cost of construction of two flats, because what was

invested by the assessee in new asset is cost of one flat, which is at

Rs.1,76,60,525/-. Although, the AO is correct in principle to allow the

benefit of exemption u/s.54 of the Act to the extent of 42.5% share of the

assessee, because one flat is registered in the name of the assessee, the

benefit of exemption should be allowed to the extent of cost of one flat

which is at Rs.1,76,60,525/-. Therefore, we direct the AO to allow

deduction u/s.54 of the Act to the extent of cost of one flat which is at

Rs.1,76,60,525/-. To sum up, the AO is directed to re-compute the long

term capital gains derived from transfer of property in pursuant to JDA in

terms of our observation given herein above.

Order pronounced on the 23rd day of February, 2022, in Chennai.

Sd/- Sd/- (वी. दुगा� राव) (जी. मंजूनाथा) (G. MANJUNATHA) (V. DURGA RAO) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER

ITA No.2529/Chny/2017 :: 16 :: चे�ई/Chennai, �दनांक/Dated: 23rd February, 2022. TLN, Sr.PS आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 4. आयकर आयु�/CIT 2. ��यथ�/Respondent 5. िवभागीय �ितिनिध/DR 3. आयकर आयु� (अपील)/CIT(A) 6. गाड� फाईल/GF