GOVINDAPPA JAYARAM DODDIAH (HUF),KODAGU vs. INCOME-TAX OFFICER, WARD-1, MADIKERI

For these and other grounds that may be urged upon, the order of CIT(A) may be reversed and that assessment order to be restored.”

In respect of the refundable security deposit, the assessee is in appeal with the following grounds: “The Appellant objects to the order passed by the CIT(A) on the grounds: 1) That the impugned order is opposed to facts and law of the case in so far as it is prejudicial to the interest of the Appellant 2) The Ld CIT(A) is not justified in treating the Refundable security deposit of Rs 1.25 crores as compensation received and as part of the sale consideration despite the fact that the arbitration has been set up, both the parties had submitted their responses and details to the arbitrator and the process was on going and in doing so, a. He failed to consider the fact that the appellant had made a claim for shortfall of area received by him from the project which wasn't in accordance with the joint development agreement and arbitration is under process. b. He failed to consider the fact that the arbitration is under process.

First we take up the appeal filed by the assessee in which the assessee had challenged the refundable security amount which was treated as income of the assessee.

At the time of hearing, the Ld.AR submitted that the assessee as well as the developer had already proceeded in the arbitration to solve the disputes arising out of the JDA dated 07/07/2017 and on the subsequent sharing agreement dated 05/10/2018 relating to the development of a commercial office space at No. 30, Crescent Road, Bangalore – 1. The Ld.AR further submitted that the assessee as well as the developer had arrived a compromise and based on that, the assessee is entitled to retain the security deposit of Rs. 1,18,30,789/- for compensating the shortfall in built-up area and the car park area are concerned. The Ld.AR also produced a copy of the award and undertook that the said Rs. 1,18,30,789/- will be added to the income of the current Assessment Year 2024-25 and on that basis, prayed to allow the appeal filed by the assessee.

On the other hand, the Ld.DR submitted that the refundable security deposit is finally arrived as income and therefore the order of the AO is correct and prayed to dismiss the appeal.

We have heard the arguments of both sides and perused the materials available on record.

We have also perused the arbitration award dated 01/07/2024 which is extracted as below:

From the above said award, we came to know that as against the security deposit of Rs. 1,25,00,000/-, the assessee as well as the developer had agreed to pay a sum of Rs. 1,18,30,789/- as reasonable compensation to the assessee for the shortfall in the built-up area and the car park.

Even though, in the award, no interest is awarded to the developer, the dispute between the assessee and the developer with regard to the security deposit amount came to end only on 01/07/2024. Before that, there is no certainty about the said security deposit and therefore the award 1283 & C.O. No. 31/Bang/2024 amount of Rs. 1,18,30,789/- could be taken as income on 01/07/2024. The assessee also accepted to include the same as income in the Assessment Year 2024-25 and also undertook to include the said income in the return filed for the Assessment Year 2024-25. We find that the said undertaking given by the assessee is a reasonable one and we record the above submissions made by the assessee and set aside the assessment made in respect of the security deposits and remit the issue to the AO to see that the award amount of Rs. 1,18,30,789/- is added in the income of the assessee for the A.Y. 2024-25 and thereafter make the assessment for the A.Y. 2024-25 in accordance with law.

The Ld.AR submitted that all the expenditure incurred are only to enhance the value of the property and therefore the cost of improvement should be added while calculating the capital gains. The Ld.AR further argued that the value of the property should be arrived by taking the actual area allotted by the developer to the assessee, based on the occupation certificate issued by the authorities and therefore the value arrived by the assessee is in order. The assessee also filed cross objection in which he objects the appeal filed by the revenue. The Ld.AR also draw our attention 1283 & C.O. No. 31/Bang/2024 to the explanations offered by the assessee before the AO as well as before the Ld.CIT(A) and contended that all the bills were made for the improvement of the property and therefore they are only capital in nature and only when the improvements are made on the property, the property would fetch more amount at the time of sale. Similarly, the Ld.AR submitted the guideline value taken for calculating the sale consideration is correct and also as per the area shown in the occupation certificate and therefore prayed to dismiss the appeal filed by the revenue before this Tribunal.

We have heard the arguments by both sides and perused the materials available on record.

The AO in his order, which discussed the issue in detail and accepted that the same are expenditure incurred on the property but declined to take the same as capital expenditure for the reason that they are all small works done on the request of the buyers or tenants.

We have perused the reasoning given by the AO and also considered the fact that even though these are all amounts spent for the interior works, without doing such interior work, the property would not fetch more value. It is the normal practice that while transferring the property, the owner had to do all kinds of repair works etc. in order to enhance the value of the property. Therefore the expenditure incurred can be classified as capital in nature since the value of the property has been appreciated.

Further, as seen from the documents, the entire payments were made to the contractors through cheques and it is also a fact that the property is owned by the HUF along with the brother of the Karta and others and therefore some part of the payments were also made by the other members. Therefore on the basis of some payments made by others, the AO disallowed 1283 & C.O. No. 31/Bang/2024 the expenditure and treated the expenditure as revenue expenditure even though, the expenditure was incurred for improving the property.

There is no dispute that the entire expenditure has been incurred towards the property and therefore it can be treated as a capital expenditure and the same would be taken as cost of improvement of the property. The Ld.CIT(A) also observed that the assessee had submitted all the bills and apart from his share of 78.8%, others have also made payments on their shares and the payments were made through banking channels. The Ld.CIT(A) also decided the issue after going through the agreement and come to the conclusion that the property is co-owned by the assessee as well as co-owners. Therefore the finding of the Ld.CIT(A) insofar as the cost of improvement is concerned, even though it is cryptic, it is sufficient to understand the issue and on that basis we are giving our approval.

Insofar as, the next issue is concerned, it is about the fair market value considered as cost of acquisition and the area offered to tax. The assessee arrived the market value based on the actual sale value of the property in the second floor and also taken the area allotted to the assessee based on the occupancy certificate. The assessee multiplied the area with the fair market value to arrive the sale consideration. The assessee relied on the sale deed executed by the developer in respect of the property situated in 2nd floor and based on that, the assessee had worked out the market value and multiplied the same with the area allotted to them as per the occupancy certificate. The AO not accepted the said method and taken the area based on the super built-up area which is beyond the area allotted under the occupancy certificate. We feel that there is no logic in taking the area more than the area allotted in the occupancy certificate and the AO merely relied on the procedures under RERA and increased the area of the property by taking the super built-up area even though the assessee had received lesser area as per the occupancy certificate. The AO has no basis to arrive the extra area as against the area allotted under the occupancy certificate. We 1283 & C.O. No. 31/Bang/2024 feel that the assessee had rightly taken into account the area allotted under the occupancy certificate and also correct in taking the value adopted for the property in the 2nd floor for the purpose of arriving the market value of the property. The assessee had arrived the sale value based on some data whereas the AO has no evidence or documents to sustain his estimated sale consideration. Further, the assessee had considered the tolerable limit of 5% as provided in section 50 of the Act and therefore the value has been correctly arrived by the assessee. The AO without having any records, had added 14% on the area offered to tax, only for the reason that in the real estate parlance, the super built-up area of the premises is the saleable area. We are not agreeing with the above view of the AO since the assessee had offered the area to tax based on the occupancy certificate issued by the statutory authorities. There is also no logic to add more area when the documents establishes the fact that the assessee had received only lesser area as per the occupancy certificate. Further, the value arrived by the assessee is also not contradicted by the AO by giving some more references but the AO made a bald allegation that the value of the 2nd floor could not be taken for arriving the sale value of the property. This reasoning of the AO is also not correct when there is no other evidences available with him. The Ld.CIT(A) had considered the entire facts and the documents filed by the assessee including the occupancy certificate and the letter from the developer and correctly come to the conclusion that the fair market value arrived by the assessee is correct. In view of the above said discussions, we are also in full agreement with the findings of the Ld.CIT(A) and therefore we dismiss the appeal filed by the revenue.

Insofar as the cross objections filed by the assessee, it is like a counter filed by the assessee to the grounds raised by the department. Since we are not accepting the appeal filed by the revenue, the findings given in the above said appeal holds good insofar as the grounds raised in the cross objections.

In the result, the appeal filed by assessee is allowed for statistical purposes, the revenue’s appeal is dismissed and the Cross Objection filed by the assessee is allowed.