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Facts
The assessee, a builder, sold 12 flats during the year under appeal. The Assessing Officer (AO) made an addition under Section 43CA of the Income Tax Act, 1961, as the sale consideration was less than the Fair Market Value (FMV) determined by the Valuation Officer. The CIT(A) upheld the addition.
Held
The Tribunal held that Section 43CA is applicable only to the transfer of land or building. In this case, only agreements for sale were executed for flats that were under construction, and no actual transfer of land or building had occurred. Therefore, Section 43CA was not applicable.
Key Issues
Whether Section 43CA of the Income Tax Act, 1961, is applicable to agreements for the sale of flats under construction where no actual transfer of land or building has taken place.
Sections Cited
43CA, 142A(1), 50C, 54D, 5(1)
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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI RAJ KUMAR CHAUHAN, JM
O R D E R
Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre, Delhi [for short 'the CIT(A)] both dated 10.11.2022 for the AY 2015-16. The assessee raised the following grounds of appeal:
“On the facts and in law, 1. The Hon. CIT (A) erred in confirming the addition of Rs. 24,47,250/- u/s 43CA of the I.T Act 1961, on account of difference between the actual sale consideration and the fair market value determined by the Valuation officer in respect of 12 flats for which agreements for sale were executed with customers during the year under appeal, not appreciating that the provisions of section 43CA are attracted on transfer of land or building or both and as the appellant had not transferred any land or building in the year under appeal, the provisions of section 43CA were not attracted and therefore the addition of Rs.24,47,250/- was required to be deleted.
The Hon. CIT (A) erred in confirming the addition of Rs. 24,47,250/- u/s 43CA of the I.T Act 1961, on account of difference between the actual sale consideration and the fair market value determined by the Valuation officer in respect of 12 flats for which agreements for sale were executed with customers during the year under appeal, not appreciating that the differences in sale rates were on account of several genuine reasons and therefore no adverse inference was called for. The addition of Rs.24,47,250/-being unwarranted by facts and in law may please be deleted.
3. Without prejudice, the Hon. CIT (A) erred in confirming the addition of Rs.24,47,250/- u/s 43CA of the I.T Act 1961, on account of difference between the actual sale consideration and the fair market value determined by the Valuation officer in respect of 12 flats for which agreements for sale were executed with customers during the year under appeal, not appreciating that in respect of 2 of the 12 flats for which agreements for sale were entered into in the year under appeal, such difference was lower than 110% of consideration amount and therefore as per first proviso to sec 43CA, the addition to the extent of Rs. 3.93,750/- was not justified.
The appellant craves leave to add, alter, amend, delete and/or vary the grounds of appeal at any time before the decision of the appeal.”
2. The assessee is a partnership firm engaged in the business of construction of building and development of land. The assessee filed the return of income for AY 2015-16 on 09.10.2015 declaring the income of Rs. 44,60,550/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) noticed that the assessee has sold certain flats and that the consideration received is less than the stamp duty price / market price adopted by the Stamp Duty Authorities. The AO was of the view that there is a contravention to the provisions of section 43CA of the Income Tax Act, 1961 (the Act) and accordingly issued a show-cause notice to the assessee. The assessee raised objections regarding the valuation as per the stamp duty and therefore the AO made a reference under section 142A(1) of the Act to the Valuation Officer based on the valuation report determining the Fair Market Value (FMV) of the property the AO proposed to make an addition of Rs. 24,47,250/-. The assessee submitted before the AO that the sale value has been re-determined without placing any material or evidence on record that the amount other than actual sale consideration was received by the assessee and that the addition based on approximation / arbitrary valuation cannot be made. The AO however did not accept the submissions of the assessee and proceeded to treat the difference between the FMV as determined by the Valuation Officer and the sale consideration as per the registered agreement as an addition under section 43CA of the Act amounting to Rs. 24,47,250/-.
Aggrieved the assessee preferred further appeal before the CIT(A). The CIT(A) confirmed the addition made by the AO by holding that – “5. Decision: I have given my careful consideration to the rival submissions, perused the material on record and duly considered the factual matrix of the case as well as the applicable legal position for arriving at the following decision. 6. In the only ground of appeal, the appellant has agitated about the valuation report of DVO, over which AO has no control. It was stated that the valuation report was given on the basis of average price without any supporting evidence. Also, the value determined without considering the factors like market condition, inadequate infrastructure and other factors. Also, the actual consideration was not verified and addition made on estimated basis. As per AO, the Valuation Officer has made the valuation of the property after considering the merits and demerits of the subject property and also taking into consideration all the relevant factors such as physical, legal, social, and economical as well as all the affecting factors like location, size, time factor, amenities etc. and keeping in view the advantages and disadvantages of the property. The Valuation Officer has further adopted the average reasonable rate for valuation of the property
after considering and adjusting the sale instances of the properties with reference to time lag. floor, location, size etc. Thus, the Valuation Officer, who is the competent authority as well as technical expert, has made the valuation after considering all the aspects and also considering the objections of the assessee. The assessee's contentions in respect of stamp duty rates, the same are not relevant in this case, as considering the objections of the assessee regarding stamp duty rates, the valuation of the properties under consideration has been referred to the Valuation Officer and the valuation determined by the Valuation Officer is considered for the assessment and not the valuation as per stamp duty rates. The AO referred the matter to DVO as the appellant has raised objections regarding valuation as per the stamp duty value. Now the DVO has given report after visiting the property and on the basis of norms laid down for this purpose. Therefore, no comments can be made on the Valuation Report and the same has to be applied while making addition u/s 43CA of the Act. Further, in reply the appellant has stated that provisions of section 43CA are not applicable in its case. This issue was never raised before the AO and has not been raised in the grounds of appeal
. Therefore, there is no need of adjudicating the same. 6.1 In view of the above facts of the case, I am of the opinion that the AO rightly made addition u/s 43CA of the Act based on the report of the DVO. Accordingly, the addition is confirmed and the ground of appeal is 'Dismissed'.”
4. The ld. Authorized Representative (AR) submitted that ground no. 1 & 2 pertains to the legal issue that the provisions of section 43CA are not applicable for the year under consideration in assessee's case. The ld. AR drew our attention to the findings given by the CIT(A) (as extracted above) that the assessee raised the said contention before the CIT(A) and that the same has been rejected for the reason that no specific ground was raised in this regard by the assessee. The ld. AR accordingly prayed that the appeal may be considered firstly on these legal contentions and with regard to raising a legal issue for the first time before the Tribunal the ld. AR placed reliance on the decision of the Hon'ble Supreme Court in the case of Wipro Finance Ltd. Vs. CIT [2022] 137 taxmann.com 230 (SC).
The ld. AR on the applicability of section 43CA of the Act submitted that the provisions of the said section are applicable when there is a transfer of land or building or both. In assessee's case the building was under construction during the year and therefore, there is no transfer of land or building or both. In this regard the ld. AR drew our attention to the Occupancy Certificate (page 6 & 8 of Paper Book) issued by Gram Panchayat, Nandiwali, Thane dated 11.05.2016. The ld. AR further submitted that as per the certificate the project was completed only during the Financial Year (FY) relevant to AY 2017-18 and that the assessee has offered the income on sale of the impugned flats during the said AY as per the Project Completion Method which is regularly followed by the assessee. The ld. AR also drew our attention to sample agreement of sale entered into by the assessee with the flat buyers (page no. 21 to 104 of PB) to submit that as per the terms of the agreement the assessee would receive the final installment of the sale value only at the time of handing over the possession and that the assessee has received only a part payment at the time entering into the agreement. The ld. AR also drew our attention to various other clauses of the agreement to submit that the actual transfer of the flats happened only after completion of construction when the actual possession was given to the assessee. Our attention was also drawn to the fact that as per the terms of agreement if there is any breach of the terms of the agreement by the purchaser the assessee has the option to terminate the agreement and therefore the transfer did not happen when the agreement was entered into but only when the project was completed and handed over to the purchasers. The ld. AR relied on the decision of the Co-ordinate Bench in the case of Shree Laxmi Estate Pvt. Ltd. Vs. ITO [2019]108 taxmann.com 195 (Mum. Trib.) where it has been held that “5.7. We have heard the rival submissions.*****
5.7.1. It is not in dispute that the assessee had not reported any sales from sale of units during the year under appeal in view of the fact that it is following project completion method and since the project was completed in Asst Year 2015-16, the assessee had reported the sale of units as its turnover in Asst Year 2015-16 by declaring the agreement value as the full value of consideration. It is not in dispute that the assessee had not sold any land or building or both in respect of any of the units during the year under appeal. We find that the assessee had only registered the agreement during the year under appeal, wherein, it is very clearly stated that the subject mentioned property (i.e the property proposed to be transferred by the assessee to the ultimate flat buyers) was still under construction and that the ultimate flat owners shall allow the assessee to enter upon the subject mentioned property premises to complete the construction of the flats as agreed upon in the said agreement which was subject matter of registration with the stamp duty authorities. In other words, the agreement that was registered with the stamp duty valuation authorities was only the 'property under construction' and not the property per se. In these circumstances, whether the provisions of section 43CA of the Act could at all be applied is to be seen. We are conscious of the fact that the provisions of section 43CA of the Act are applicable only when there is transfer of land or building or both. In the instant case, neither of those had happened pursuant to registration of agreement with the stamp duty valuation authorities. In respect of allotment of offices made prior to 31.3.2013, we find from the documents enclosed in the paper book that the assessee and the prospective buyer of flats had specifically agreed that till such time the agreement of sale is executed and registered , no right is being created in favour of the flat buyer and that the allotment letter is just a confirmation of booking subject to the execution of the agreement which is to be drafted at a later point of time. The said allotment letter also specifies that the relevant office has been allotted to the flat buyer with rights reserved to assessee to amend the building plan as it may deem fit. Accordingly, the flat buyer is bound to accept unconditionally and confirm that any kind of increase or decrease in the area of the said office or shift in the position of the said office, if arises, due to amendment in the plan etc and in case of variation of the area, the value of the office shall be proportionately adjusted. All these documentary evidences clearly go to prove that the assessee had not completed the construction of the office during the relevant year. It could also be inferred that pursuant to registration of agreement with the stamp duty valuation authorities, a right is created in favour of the flat buyer. Hence what the assessee had transferred pursuant to registration of the agreement was only the rights in the flat/ office (which is under construction) and not the property per se. Hence it could be safely concluded that there was no transfer of any land or building or both by the assessee in favour of the flat buyers pursuant to registration of the agreement in the year under appeal. Hence we hold that the provisions of section 43CA of the Act cannot be M/s. Shree Laxmi Estate Pvt. Ltd., made applicable to the same. Reliance in this regard is placed on the following decisions of co-ordinate benches of tribunals :- a) Ahmedabad Tribunal in the case of ITO vs Yasin Moosa Godil in dated 13.4.2012 wherein it was held as under:- "16. From the reading of Sec. 50C, it is evident that Sec. 50C is a deeming provision and it extends to only to land or building or both. Section 50C can come into play only in a situation where the consideration received or accruing as a result of the transfer by an appellant of a capital asset, being land or building or both is less than the value adopted or assessed or assessable by any authority of State Government therefore for the purpose of payment of stamp duty in respect of such transfer. It is settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. Clearly therefore, it is essential that for application of Sec.50C that the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as "land or building or both" then section 50C will cease to apply. From the facts of the case narrated above, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with the capital asset and therefore section 50C cannot be invoked." b) Jaipur Tribunal in the case of Mrs Rekha Agarwal vs ITO reported in (2017) 79 taxmann.com 290 (Jaipur Trib.) "2.9 On close reading of the above documents, the existence and contents thereof have not been denied by the Revenue, it is clear that firstly what has been purchased initially by the assessee alongwith her husband is the right of allotment in the office flat measuring 2500 sq.ft. in the Medi City project which was under development at Sector 38, Gurgaon. It is also clear that from the perusal of the agreement of Conveyance dated 23.07.2010 that what has been sold is again a right of allotment of the said flat in the Medi City project. The said fact is apparent from the fact that the balance 10% consideration of Rs. 3,75,000/- which was supposed to be paid to the developer at the time of possession of the flat in terms of the original MOU dated 22.12.2004 had still not been paid and it has now been agreed that the said 10% balance consideration shall be paid directly by the purchaser namely S.A.S. Servizio (P) Ltd., A-10/6 Vasant Vihar, New Delhi. Further, it has been agreed that the purchaser has gone through the MOU dated 22.12.2004 and shall agree with the contents thereof. Further, what has been physically handed over to the buyer of the M/s. Shree Laxmi Estate Pvt. Ltd., property is the original MOU as well as the original payment receipt issued by the developer M/s. Global Heal (P) Ltd. On a combined reading of all these clauses which are mutually agreed upon between both the parties, it is clear that what has been transferred is a right of allotment in the property which was under construction and possession thereof was not taken by the assessee and hence, there is no question of transfer of the possession of the said property. Further, other than these agreements and MOU, there is nothing in terms of any positive tangible evidence which has been brought on record by the Revenue to support its position that it is the flat which has been transferred by the assessee. After the assessee has submitted to the AO vide its letter dated 12.03.2014 that the property was under consideration at the time of the sale and no sale deed was executed, the AO has not carried out any further investigation with the developer to refute the contentions raised by the assessee. In result, on perusal of the documents available on record, the contention of the assessee remains uncontroverted. It is the right in the property by way of right of allotment which has been assigned by the assessee in favour of the buyer and not the property itself. 2.10 The next question that arises for consideration now is whether the provisions of section 50C are applicable in respect of right of allotment in the property. In this regard, we refer to the provisions of section 50C(1) of the Act which reads as under: "Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed, or assessable by any authority of a State Government (hereafter in this section referred to as the 'stamp valuation authority') for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer." 2.11 On reading of sub-section (1) of section 50C, it is clear that the value of land, building or both adopted or assessed or assessable by the Stamp Valuation Authority shall for the purpose of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer. It is a deeming provision and it extent only to land, building or both. It therefore follows that where a capital asset being land or building or both is transferred and the consideration received or accruing as a result of such transfer is less than the value adopted or assessed or assessable by the Stamp Valuation Authority, the deeming provisions of sub section(1) of section 50C shall be applicable. In the instant case what has been transferred is a right of allotment in office flat and not the office flat itself. It is therefore clear that a deeming provision which is limited to land, building or both cannot be extended beyond the purpose for which it is enacted and is therefore not applicable in the instant case. The Ld. AR, has relied on the Coordinate Bench's decision in the case of Atul G. Puranik (132 ITD 499) (Mum Trib) supra which squarely supports the case of the assessee. In that case, the assessee was allotted lease right in a plot for a period of sixty years. The relevant finding of the Coordinate Bench contain at para 11.4 of its order is reproduced as under: "In view of the aforenoted judgements rendered by the Hon'ble Apex Court and that of the Hon'ble Jurisdictional High Court, it is clear that a deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. Turning to S. 50C, it is seen that the deeming fiction of substituting adopted or assessed or assessable value by the stamp valuation authority as full value of consideration is applicable only in respect of "land or building or both". If the capital asset under transfer cannot be described as 'land or building or both', then s. 50C will cease to apply. From the facts of this case narrated above, it is seen that the assessee was allotted lease right in the plot for a period of sixty years, which right was further assigned to M/s. Pathik Construction in the year in question. It is axiomatic that the lease rights in a plot of land are neither 'land or building or both' as such nor can be included within the scope of 'land or building or both'. The distinction between a capital asset being 'land or building or both' and any 'right in land or building or both' is well recognized under the IT Act. Sec. 54D deals with certain cases in which capital gain on compulsory acquisition of land and building is charged. Sub-s. (1) of S. 54D opens with 'subject to the provisions of sub-s. (2), where the capital asset, being land or building or any right in land or building, forming part of an industrial undertaking..." It is palpable from s. 54D that 'land or building' is distinct from 'any right in land or building'. Similar position prevails under the WT Act, 1957 also. Sec. 5 (1) at the material time provided for exemption in respect of certain assets. Clause (xxxii) of s/5(1) provided that "the value, as determined in the prescribed manner, of the interest of the assessee in the assets (not being any land or building or any rights in land or building or any asset referred to in any other clauses of this sub- section) forming part of an industrial undertaking" shall be exempt from tax. Here also it is worth nothing that a distinction has been drawn between 'land or building' on one hand and 'or any rights in land or building' on the other. Considering the fact that we are dealing with special provision for full value of consideration in certain cases under s. 50c, Which is a deeming provision, the fiction created in this section cannot be extended to any asset other than those specifically provided therein. As Sec. 50C applies only to a capital assets, being land or building or both, it cannot be made applicable to lease rights in a land. As the assessee transferred lease rights for sixty years in the plot and not land itself, the provisions of S.50C cannot be invoked. We, therefore, M/s. Shree Laxmi Estate Pvt. Ltd., hold that the full value of consideration in the instant case be taken as Rs. 2.50 crores." 2.12 In light of above facts and circumstances of the case and taking into consideration the decision of the Co-ordinate Bench referred (supra) we are of the view that what has been transferred by the assessee is a right of allotment in the property and not the actual property itself and in respect of such rights, the deeming provisions of section 50C are not applicable. The ground taken by the assessee is accordingly allowed. In the result the appeal filed by the assessee is allowed." We find that the aforesaid decisions are directly applicable to the facts of the case before us. In view of our aforesaid observations in the facts and circumstances of the case, we hold that the provisions of section 43CA of the Act could not be made applicable to the issue in dispute before us. In view of this finding, the other arguments advanced by the ld AR with regard to the fact that the ld AO ought to have made reference to the ld Departmental Valuation Officer (DVO) in the light of provisions of section 43CA(2) of the Act which is analogous to provisions of section 50C(2) of the Act need not be gone into as it becomes academic in nature. Accordingly, the grounds raised by the assessee are allowed.”
6. The ld. Departmental Representative (DR) on the other hand argued that the claim of the assessee to have followed Project Completion Method to recognize the revenue wherein the income from sale of the impugned flats are offered to tax in AY 2017-18 cannot be accepted since, there is nothing on record either in the order of the AO or in the findings of the CIT(A) that the assessee has followed Project Completion Method. The ld. DR further submitted that though the flat was under construction during the year as per the agreement of sale the undivided share of land is transferred to the assessee and therefore the provisions of section 43CA of the Act is very much applicable for the year under consideration. The ld. DR also strongly objected to the legal contention on the applicability of section 43CA being raised for the first time before the Tribunal. The ld. DR in this regard submitted that the assessee did not object to the applicability of section 43CA for the year under consideration before the AO/CIT(A) but objected only the valuation adopted for the purpose of addition under section 43CA. The ld. DR therefore argued that the assessee cannot now raise a fresh contention of section 43CA is not applicable for the year consideration.
The ld. AR in reply to the arguments of the ld. DR submitted that in the impugned transaction of sale of flats by the assessee the undivided share of land and the flats is a composite transaction and and that there is no separate transfer of land at the time of entering into agreement of sale. The ld. AR further submitted that the undivided share of land would be transferred only when the assessee takes possession of the flats and until then the assessee does not have any right on the undivided share of land. The ld AR also submitted that the terms of the agreement of sale would support this. Therefore, the ld. AR submitted that it is not correct to invoke the provisions of section 43CA of the Act based on the agreement of sale without appreciating the fact that the constructions of the flats were incomplete during the year under consideration. The ld. AR also submitted that section 43CA is a deeming provision and that the date of agreement of sale is crucial only for the limited purpose of determining the stamp duty value as on the date of agreement of sale. Accordingly the ld. AR submitted that section 43CA of the Act is not applicable for the year under consideration. The ld. AR fairly conceded that these arguments were not presented before the AO and that the CIT(A) did not allow the assessee to argue on these lines. Therefore, the ld. AR submitted that the issue of applicability of section 43CA of the Act for the year under consideration could be remitted back to the AO for the fresh consideration.
We have heard the parties and perused the material available on record. To recapitulate the facts, the assessee had entered into sale agreement in January & March 2015 for sale of flats in two properties namely Sanghavi Gardens and Smruti Tower. As per the terms of agreement, the assessee received 20% of the sale consideration upon booking the flat and the balance consideration was to be received at the time of possession given to the buyers. The contention of the AO is that the provisions of section 43CA is applicable for the year under consideration and based on the FMV determined by the Valuation Officer the AO made an addition under section 43CA of the Act. Before the AO the assessee contended the valuation done by the Valuation Officer but did not raise any objection with regard to applicability of section 43CA of the Act. From the findings given by the CIT(A) which is extracted in the earlier part of this order, we noticed that the assessee has raised the said contention which was not accepted by the CIT(A). Accordingly we see merit in the submission of the ld. AR that the issue is not a new claim but is a legal contention which goes to the root of the issue and therefore we are inclined adjudicate the issue of applicability of section 43CA of the Act in assessee's case for the year under consideration.
From the perusal of the orders of the AO and the CIT(A) we noticed that the agreements of sale have not been perused from the applicability of section 43CA to the year under consideration and that the finds were restricted only to whether the valuation given by the Valuation Officer is correct or not. We notice that the Co- ordinate Bench in the case of Shree Laxmi Estate Pvt. Ltd. (supra) has considered a similar issue and has held that the provisions of section 43CA of the Act could not be made applicable based on the agreement to sale for the reason that it was only the rights in the flat which is under construction was transferred and not the property per se. From the perusal of the clauses of the agreement of sale (refer clauses 4, 6, 14, and 16) entered into by the assessee with the buyers of the flat we notice that as per the agreement, the buyers get the right to buy the specified flat and that there would be a separate deed of conveyance would be executed after the completion of construction to transfer the flat and the land. In the light of this factual position we are of the considered view that the ratio laid down by the coordinate bench in the case of Shree Laxmi Estate Pvt. Ltd. (supra) is applicable to assessee's case also and accordingly we hold that the provisions of section 43CA of the Act could not be made applicable in assessee's case for the year under consideration. Accordingly the addition made by the AO is hereby deleted.
Through Ground No.3 assessee is contending that without prejudice even if section 43CA is applicable for year under consideration the difference between the FMV and the sale consideration in certain flats is within the tolerance limit of 110% as per the provisions of section 43CA of the Act. In view of our decision regarding the applicability of section 43CA of the Act, the without prejudice ground of the assessee AR have become academic and does not warrant a separate adjudication.
In the result, the appeal is allowed.