LEGAL HEIRS OF LATE SHRI SUNIL DUTT,MUMBAI vs. ACIT CIR 11(1), MUMBAI

Since the issues raised in both the appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed of by this consolidated order. Firstly, we are taking ITA No. 2972/Mum/2012 for AY 2004-05 filed by the assessee.

The brief facts of the case are that originally assessee filed its return of income for the AY 2005-06 declaring long term capital gain amounting to Rs. 1,69,97,842/-. During the assessment proceedings, assessee has not submitted any Legal Heirs of Late Shri Sunil Dutt, document in support of the above capital gain offered for tax. Since no evidence was furnished before the AO, the AO determined the long term capital gain of Rs. 12,44,78,990/- u/s 143(3) of the Act. Subsequently, assessee filed a letter dated 31.12.07, wherein development agreement between assessee alongwith his son and M/s Lokhandwala Construction Industries Pvt. Ltd. The above agreements were dated 06.02.04 and which falls under AY 2004-05. According to AO, the income is chargeable to tax in the year in which the development agreement was entered. In this regard, AO relied upon decision of Hon’ble Bombay High Court in the case of Chatrabhuj Dwarkadas Kapadia – 260 ITR 491 (Bom), in which capital gains should be charged to tax in the year in which development agreement was entered. Accordingly, AO issued notice u/s 148 of the Act and reopened the assessment for AY 2004-05 and assessed the income on protective basis as under:-

Aggrieved with the above order, assessee preferred appeal before Ld. CIT(A) and filed additional evidences before him against the additions made by AO. Ld. CIT(A) forwarded the additional evidence to AO to make necessary enquiries. After verification, AO filed a remand report dated 14.02.12, in which AO brought on record the following facts relating to the transactions, they are: (i) development agreement of property between assessee along with his son and developer M/s Lokhandwala Construction Pvt. Ltd on 06.02.2004 and (ii) an amount of Rs. 2.06 crore was received from the developer (iii) The income is chargeable to tax in AY 2004-05, the issue of chargeability of the order of taxation was settled i.e. the tax chargeable in AY 2004-05. (iv) Further, AO observed that assessee and his son having sharing ratio 73:29. (v) with regard to adoption of fair market value on 01.04.81, the AO strongly advocated the adoption of DVO value of Rs. 62,54,000/- instead of Rs 40,73,896/- adopted by the assessee in its calculation. This issue is not contested by the assessee before us as the assessee is not pressing the ground no 2, raised before us. Accordingly the value adopted by the AO reached finality.

The other issue which is contested before us are the the findings of AO on the issue of Sales consideration vis a vis cost of construction of the area allocated the Assessee and his son. With regard to cost of construction, AO observed that as per the agreement, 40 residential units were constructed by the Developer. Out of 40 units, 16 units were retained by the Developer to cover his cost of construction and 24 residential units were handed over to the owner. Subsequently, vide agreement dated 20.08.2004, two flats (No. 501 & 502) were Legal Heirs of Late Shri Sunil Dutt, purchased by the Developer. AO observed that there are four estimates available on record for computing the cost of construction.

Further the AO observed that the actual cost incurred by the Developer gives the most accurate cost for the purpose of estimating the value of sales consideration to the assessee.

In response, the developer who has declared the sales proceeds of Rs. 18,37,73,750/- for the sale of 18 flats and the cost of construction including the cost of purchase of 2 flats from the assessee was Rs. 15,47,58,845. The developer also informed that it has earned income of Rs. 2,90,14,905. Accordingly AO observed that actual cost of construction was at Rs. 13,44,21,345/- (i.e. Rs. 15,47,58,845 – 2,03,37,500 = cost of purchase of 2 flats.) and AO observed from the agreement that the total FSI of the property is 35,987.4 Sq. ft. and share of the owners is 22,511 Sq. ft. and share of the developer is 13,475 Sq. ft. Accordingly, he calculated the cost of construction per FSI at Rs. 3,735 (13,44,21,345 /35,987.4). By adopting the above value, the AO determined the capital gains as below:-

A copy of the remand report was forwarded to assessee and in response the assessee made the following objections, which are:

After considering the submissions of the assessee, Ld. CIT(A) confirmed and justified the capital gains determined by the AO in the remand proceedings are proper.

With regard to exemption u/s 54F of the Act claimed by the assessee before Ld CIT(A) at the time of appeal and in its submission, assessee submitted that out of 24 flats, 2 flats sold to the developer and out of remaining 22 flats, 2 flats are penthouse (i.e. flat no. 1101 & 1201 and 1102 & 1202). Further AR submitted that 6 flats were constructed for the assessee’s family and all the flats are eligible for deduction u/s 54 of the Act. However, in further submission, the assessee submitted that two combined flats which are actually used as one house is eligible for exemption u/s 54 of the Act. AO in his remand report observed that it has not been proved by the assessee that during the assessment year under consideration, 2 flats were combined as one single unit. Therefore, in the absence of evidence, the Legal Heirs of Late Shri Sunil Dutt, assessee was given benefit of re-investment u/s 54 of the Act for one flat only. Accordingly, Ld CIT(A) followed the remand report and allowed the deduction u/s 54 of the Act only on one flat after determining the total capital gains generated out of the project and then determined the capital gains belongs to the assessee i.e. 73% of the net capital gains determined.

For sustaining the above finding, Ld CIT (A) observed as below:

3 I have considered the facts and material on record. It is seen from the remand report and the assessment proceedings for AY 05-06 that the appellant had claimed exemption u/s. 54 in respect of construction of 6 flats on 10th, 11th& 12th floors which have been retained by the joint owners for their own and their family residence. However, the AO has considered the costof only 1 flat admeasuring 1560.23 sq. ft. on the ground that only 1 flat is eligible for exemption. The AO further examined and found that it has not been proved that during the present AY, 2 flats were combined to one single unit. It is further noticed that the claim of the appellant that all the 6 flats were intended for occupation of Shri Sunil Dutt and his family members and it is only on account of his demise Legal Heirs of Late Shri Sunil Dutt, shortly after the buildings was ready that the flats were divided amongst his family members. This itself shows that there was only intention to occupy the 6 flats but that intention was never materialized. Therefore, the AO was correct in holding that only 1 flat is eligible for exemption u/s. 54 of the Act. The exemption u/s. 54F is available in respect of which one residential house. It is also, noticed that flat No. 1002 was already let out and not occupied by the late assessee's children. Thus the appellant has used one single unit for his occupation. Therefore, exemption is available in respect of appellant. This view is also supported by the decision in the case of Spl. Bench ITAT in the case of ITO Vs. Sushila M Javeri 292 ITR 1 (Mum.). The case law relied by the AR is not applicable in the case of appellant as in the said case it was proved that both flats i.e. 301 & 302 were adjacent to each other and enteredinto and used as one residential house and the investment had been made by the assessee on his own account. Whereas in the instant case the appellant has not been able to prove that both flats were interconnected and used as one residential house at the relevant AY- and there was only intention to use all the 6 flats which did not appears to have been materialized during the year under appeal. In the light of these facts, the AO Is directed to allow exemption u/s. 54F amounting to Rs. 57,00,610/- out of total capital gain Legal Heirs of Late Shri Sunil Dutt, on redevelopment amounting to Rs. 9,20,05,772/-. Accordingly, the total capital gain works out to Rs. 8,63,05.162/- only and the share of appellant is 73% which comes to Rs. 6,30,02,768/-. Accordingly, the capital gain in the case of appellant should be considered at Rs. 6,30,02,768/- as mentioned in the remand report by the AO.

Aggrieved with the above order, assessee preferred an appeal before us with the following grounds:-

The learned Commissioner (Appeals) was wrong in accepting the computation of consideration adopted by the learned Assessing Officer in his remand report at Rs.10,28,48,571. 4. The learned Commissioner (Appeals) failed to appreciate that the value of the construction received Legal Heirs of Late Shri Sunil Dutt, by your appellant was not synonymous with the cost of construction to the developer.

The learned Commissioner (Appeals) failed to take into account the fact that such cost of construction collected by the Assessing Officer without the knowledge of your appellants could not have been adopted by the Assessing Officer without providing the appellants an opportunity to cross examine the developer and obtain full details in relation to such cost.

Without prejudice to the foregoing, the learned Commissioner (Appeals) failed to consider the mistakes pointed out by your appellant in the computation of the cost of construction of the developer, and to consider whether all such expenses could form a part of the cost of construction.

The learned Commissioner (Appeals) erred in confirming the computation of the exemption u/s 54F made by the learned Assessing Officer at Rs.57,00,610. 8. The learned Commissioner (Appeals) failed to appreciate that the appellants had already\ furnished evidence of the two flats being regarded as one house.

The learned Commissioner (Appeals) erred in not allowing exemption u/s.54F separately to I each of the joint owners for one house each.

Your appellants pray that the order of the learned Commissioner (Appeals) be modified by recomputing the capital gains by:

At the time of hearing, Ld. AR submitted that assessee is not pressing the ground no. 2 relating to determination of FMV as on 01.04.81, therefore ground no. 1 being general in nature and ground no. 2 is not pressed. Accordingly, both grounds 1 & 2 are dismissed. Ground no. 3 to 6 are inter connected / inter Legal Heirs of Late Shri Sunil Dutt, related and related to cost of construction and Ground no. 7 to 9 are relating to exemption u/s 54F and further Ground No. 10 is general in nature, accordingly Ground no. 10 is also dismissed.

Before us, Ld. AR brought to our notice the basic facts recorded by the AO and Ld. CIT(A) and briefly explained the facts relating to this case i.e. the Bungalow which is used for residence, was demolished and on 06.02.04, development agreement was entered by the assessee alongwith his son with M/s Lokhandwala Construction Industries Pvt. Ltd. for development of the above said property. As per the agreement, assessee has received 2.06 crores as initial consideration and developer has to built 40 flats, out of which, assessee will get 24 flats and balance 16 flats to the developer. In terms of area, he submitted that developer has constructed 35,907 Sq. ft for 40 flats and the owner’s share is at 22,511 Sq. ft and developer at 13,475 Sq. ft. Subsequently, the development agreement was modified on 31.08.04 and as per the modified agreement, out of share of 24 flats belongs to asssessee and his son, was modified to build 20 flats and 2 penthouse i.e. 4 flats were combined into 2 flats and as far as area is concerned, the area remained same i.e. 22,511 Sq. ft. He further brought to our notice the agreement dated 06.02.04 and 31.08.04 and submitted that aggrieved, the assessee is in appeal before ITAT and grounds nos 3 to 6 are calculation of cost of construction and further he submitted that with regard to methodology adopted by the tax authorities, assessee has no dispute and acceptable to the assessee. He further submitted that AO has adopted 2.06 crores received as cash component and added as part of the sale consideration for the land transferred to the developer. He further submitted that when the AO and Ld. CIT(A) preferred to adopt the cost of construction to the developer for making 40 flats, relied on the submission of the developer, then the cost of construction to the developer is inclusive of the cash component given to the assessee as the part of the development cost considering the fact that the developer has declared the total cost incurred to construct the whole project. The cash component given to assessee also a part of cost of construction. Now, the same cash component cannot be added once again in determining the sale consideration.

Ld. AR further submitted that the total project cost submitted by the developer which may include other cost which Legal Heirs of Late Shri Sunil Dutt, many not be part of the cost of construction. He brought to our notice at para no. 1.2.2 of the order of Ld. CIT(A), in which AO has adopted the above cost submitted by the developer, which may include cost of other expenditure like interest expenditure, stamp duty and registration charges, etc, which Ld. CIT(A) has not considered and the objection raised by the assessee was not adjudicated in his order. He prayed that it may be remanded back to the file of AO to determine the actual cost of construction and any other expenditure which is not part of cost of construction, should be eliminated and to determine proper cost of construction.

With regard to exemption u/s 54F of the act, he brought to our notice page no. 17 of the order of Ld. CIT(A) and submitted that the property belongs to 2 owners i.e. present assessee and his son having a share of 73 : 27 and the tax authorities has allowed exemption u/s 54 only on one flat for the whole project without considering the fact that there are two assesses who had developed the present project, therefore he submitted that the capital gains should be determined separately for two individuals and section 54 deduction should be allowed individually. He Legal Heirs of Late Shri Sunil Dutt, further brought to our notice page 15 of the paper book which is part of the development agreement, as per which, the 3rd schedule refers to owner’s area and further brought to our notice page 32 of the paper book, as per which, assessee has to receive 24 flats. He further brought to our notice the modified agreement which is at page no. 39 of the paper book, as per the Clause ‘G’, it clearly indicates that the developer to construct 20 flats and 2 penthouses, out of the share of owners i.e., 24 flats and the same was also given in page 43 of the paper book, in which it clearly indicates that in the 11th and 12thfloor, the two flats were combined into one penthouse. He further submitted that this modified agreement was made on 31st Aug 2004 and further submitted that one of the penthouse is used by the other part of the owner i.e. assessee’s son and second penthouse is used by assessee’s daughter, both are still living in those combined flats. Further he brought to our notice at page no. 48 of the paper book, in which the AR of the assessee submitted in the remand proceedings, the details of the combined flats vide letter dated 29th Dec 2011. He submitted that the above 2 flats are penthouse and the assessee is eligible to claim deduction u/s 54F even when Legal Heirs of Late Shri Sunil Dutt, the assessee has two partitions but has only one kitchen in the above combined flats. In this regard, he relied upon the decision of Hon’ble High Court of Bombay in the case of CIT vrs. Raman Kumar Suri (2013) 212 Taxman 411/29 taxman.com 231 (Bom)and further relied upon the following case laws:-

On the other hand, Ld. DR submitted that it was not brought to the notice of authorities below about the combined flats and further he submitted that it is not proved by the assessee that the flats were combined during the assessment year under consideration. He supported the findings of Ld. CIT(A) which is in para 2.2 and 2.3 of the order of CIT(A). He further submitted that the case laws relied by the assessee are distinguishable and Legal Heirs of Late Shri Sunil Dutt, not relevant to the present case. With regard to sales consideration adopted by the AO, he supported and relied on the findings of Ld CIT(A).

Considered the rival submission and material placed on record, we notice from the records that assessee alongwith his son entered into development agreement with M/s Lokhandwala Construction Industries Pvt. Ltd. to construct 40 flats and distribute the above flats between them in the ratio of 24:16 and the development agreement was entered on 06.02. 04. Subsequently, the above development agreement was modified on 31.08.04 to construct 36 flats and 2 penthouse in 11th& 12th floors. The details of the above modification is placed on record at page no. 43 of the paper book and distributed between them 22 flats and 2 penthouse to the assessee alongwith his son and balance to the developer i.e. 16 flats. Subsequently, the developer has purchased 2 flats from the assessee for the consideration of Rs. 2,03,37,500/-.

With regard to total construction area of 35,987 Sq. Ft, they remain same in both original development agreement as Legal Heirs of Late Shri Sunil Dutt, well as modified development agreement. With the above background, there were different options on determination of capital gains in the above project i.e. determination of fair market value as on 01.04.81 and fair value of the constructed flats pertaining to the owners on the date of development agreement i.e. 06.02. 04. As far as fair market value as on 01.04.81 is concerned, it is already resolved and AO has adopted the value determined by the DVO and the same was accepted by the assessee by not pressing before for adjudication and relevant grounds of appeal i.e. Ground no. 2. 20. With regard to fair value for the flats constructed as per the development agreement for the constructed portion of the owners, there were 4 different valuation was available before the AO and AO justified in his order to select the value of cost of construction submitted by the developer for the construction of 40 flats. The developer has submitted the results of selling 18 flats vis a vis construction cost of 40 flats in response to the show cause notice issued by the AO. As per the above, the developer has received sale proceeds of Rs. 18.38 crores and total expenditure for completion of the project, which includes the Legal Heirs of Late Shri Sunil Dutt, cost of construction and cost of purchases of 2 flats, of Rs. 15,47,58,845 and developer earned a profit of Rs. 2.90 crores in the project. Considering the above information, AO calculated the total cost of project/making per Sq. Ft. at Rs. 3,735/- and determined the total cost of construction for the area constructed for the assessee at Rs. 8,22,48,571/-. Now before us, assessee makes representation contending that the cost the construction determined by the AO which was collected from the developer and the above cost of construction does not have the details of the particulars of the expenditure and the above expenditure may not be cost of construction alone but total cost to the developer, it may include other cost component like interest expenditure and other sale promotion expenditure, etc.

In our considered view that assessee has valid point that AO should have considered only the cost of construction, not the cost of the project, as per the submission made by the developer and the cash component will definitely be part of the project cost to the developer when the AO adopts the actual cost to the developer as the relevant cost for the fair value to the assessee. He should have restricted himself to calculate the sale consideration only to the portion of relevant cost of construction only relevant for the flats allotted to the assessee and he should have not considered the cash component which is already embedded in the cost of project. Accordingly, we direct the AO to remove the cash component from the sale consideration.

With regard to other cost of expenditure for which the developer has not provided the breakup of the cost of project/construction, we direct the AO to collect the breakup of the cost of the project/construction from the developer and calculate only the cost of construction and eliminate all those promotional expenditures and the expenditure which is not relating to the cost of construction. Therefore, we are inclined to remit this issue to the file of AO to re-calculate the cost of construction. Accordingly, this ground raised by the assessee is allowed for statistical purposes.

With regard to exemption u/s 54F, we notice that assessee has modified the development agreement for construction of the flats from 40 flats to 36 flats and 2 penthouses and distributed between them as per terms of original agreement. Therefore, the modified agreement and its schedule, which is placed on record at page no. 43 of the paper book clearly indicates that the intention of the developer and the assessee to make 2 penthouses in 11th and 12th floor as penthouses and assessee was regularly pleading that these 2 penthouses were constructed by combining 4 flats at floors 11th and 12th. However, we notice that AO has Legal Heirs of Late Shri Sunil Dutt, rejected the contention of the assessee with the observation that there is no record that this combing of flats were made during the impugned assessment year. We cannot accept the contention of the AO for the reason that the purpose of modification of the development agreement was to combine 4 flats and to make 2 penthouses. Therefore, we are in agreement with the submission of Ld. AR that there exist 2 penthouses at the site developed by the developer as per the terms of agreement in modified development agreement.

Coming to the exemptions, we notice that the development agreement was entered by the assesse along with his son with share of 73:27 between them and it is clear that there exist 2 penthouses and two individual assessees. Therefore, each assessee will get separate exemption u/s 54F of the Act. This benefit is legally available to both the assessees. There are catena of cases in which courts have held that when there exists two portion of flats with one ketchen then the whole combined portion of the area will be treated as one single unit for the purpose of granting exemption u/s 54 as well as 54F. Accordingly, we direct the AO to grant exemption u/s 54F of the Act to each assessee and as per their choice. On record, assessee prefers to get penthouse occupied by his daughter as exemption u/s 54F and by legally AO should allow this penthouse as exemption u/s 54F of the Act. Accordingly, this ground raised by the assessee is allowed.

Now coming to ITA No. 1112/Mum/2013 for AY 2005- 06 filed by the revenue on the following grounds:-

The brief facts of the case are, originally assessee filed its return of income on 31.07.06 declaring total income of Rs. 97,36,320/- and the return was selected for scrutiny and subsequently, AO has completed the assessment u/s 143(3) of the Act.

Aggrieved with the above order, assessee preferred the appeal before Ld. CIT(A) and ITAT.

As per the fact discussed in ITA No. 2972/Mum/2012 filed by the assessee, the capital gains determined by the assessee in AY 2005-06 were in fact relating to AY 2004-05 and accordingly, AO has reopened the assessment in AY 2004-05 and we adjudicated the appeal of the assessee in the above paragraphs (Nos. 18 to 24).

With regard to AY 2005-06, the matter reached ITAT and ITAT remitted this issue back to the file of AO as consequent to the determination and reassessment of taxable income in AY 2004-05. 30. In this AY, assessee has sold 4 flats and AO determined the capital gains at Rs. 3,11,37,788/- as short term capital gains and determined 73% of the above short term capital gain as capital gain of the assessee.

Aggrieved with the above order, assessee preferred the appeal before Ld. CIT(A) and Ld. CIT(A) after considering the submission of the assessee determined the capital gains in 2 portions as sale proceeds attributable to the land and determined the capital gain of Rs. 2,06,40,826/- as long term capital gain and second portion as sale proceeds attributable to super structure and determined the capital gain at Rs. 30,77,282/- and classified as short term capital gains.

Aggrieved with the above order, revenue is in appeal before us on the grounds mentioned above.

Before us, Ld. DR brought to our notice the para no. 3 of the assessment order in which AO has observed that from the perusal of the agreement, it is seen that the flat purchaser has irrecoverably withdrawn his rights for any future FSI /TDR benefits awarded to the owners. Therefore, unlike in normal agreements the owners retained the land component and have not transferred the benefits appurtenant to the ownership of the land. There is no clause which states that part of the ownership of land has been passed on to the flat buyer. In fact all the rights for Legal Heirs of Late Shri Sunil Dutt, development, re-development or construction of additional structure are with the developer and the flat purchaser has irrecoverably consented to the same. Therefore, he rejected the contention of the assessee to bifurcate the sale proceeds between land and cost of flat. Further, he submitted that there is no mention in the sale deed entered by the assessee with the purchaser of the flats which indicates that assessee transferred the ownership of the land alongwith super structure. He contended that this case is special and different from the other transactions and therefore this capital gain earned by the assessee, can only be classified as short term capital gain and Ld. CIT(A) is not justified in classifying the transaction of sale into land and super structure.

On the other hand, Ld. AR brought to our notice the page no. 28 of the paper book filed by the assessee i.e. original development agreement in which Class-34, which states as, when the developer complete the construction of the flats and after completing, obtain occupation certificate of the above said constructed properties from concerned authoritiesand owners shall execute the convenience in respect of the above said Legal Heirs of Late Shri Sunil Dutt, properties in favour of the cooperative society that may be confirmed by the purchaser of the flats and other terms in the said new building. Further, he brought to our notice at page no. 17 of the sale deed and he brought to our notice at Clause 18 of the agreement, as per which the flat purchaser will be a member of the cooperative society and the ownership lies with the cooperative societies and also he brought to our notice Clause 24 of the above agreement, as per which the rights of the possession to the said properties or any part thereto with the registered cooperative society /corporate body. Therefore, he submitted that the purchaser of the flats become a member of the cooperative society and retains the ownership to the said land by virtue of being a member of the cooperative society and he relied upon the following case laws and supported the findings of Ld. CIT(A):-

254 ITR 152 (Cal) CITv Estate of Omprakash Jhunjhunwala

264 ITR 76 (Ker) CIT v Smt. Lakshmi B Memon

137 ITD 376 (Mum-Trib) Asst. CIT v Jaimal K Shah

176 TTJ 699 (Mum-Trib) DCIT v J B Engg. Works

Considered the rival submissions and material placed on record, we notice that in the case of CIT v Citibank 261 ITR 570 (Bom), the Hon’ble Bombay High Court, wherein it was held that as per the above ratio, the flat owners will get right of possession as well as right on portion of the undivided share in the land. We notice that as per the proportionate area of flats occupied by him in respect of the total area of the building i.e. undivided share, the owner of the flat will get an automatic membership in the cooperative society in proportion to the undivided share. Since cooperative society owns the total area of the land and being a member of the society, he gets the ownership of the undivided share. As per the sale deed, it is clear Legal Heirs of Late Shri Sunil Dutt, that assessee gets a membership on the cooperative societies, it does mean that flat owners not only owns a super structure and also ownership right on the undivided share, therefore we are inclined to accept the findings of Ld. CIT(A) in distributing the sale proceeds into sale proceeds attributable to the land and super structure. Accordingly, we reject the contentions of the revenue and dismiss the grounds of appeal raised by the revenue.

In the net result, the appeal filed by the assessee are partly allowed and appeal filed by the revenue stands dismissed.