ITO (EXEMPTIONS), CHENNAI vs. LIFE HELP CENTRE FOR THE HANDICAPPED, CHENNAI

आदेश / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER 1.0 This appeal of the Revenue is directed against the order of the Commissioner of Income-tax (Appeals)-VII, Chennai-34, dated 17.10.2014, in and pertains to the assessment year 2011-12.

ITA No.240/Mds/2015 ::2::

Therefore the delay is condoned and the appeal is admitted.

3.0 All the grounds of appeal are related to the addition made by the Assessing Officer on account of transfer of property. During the course of proceedings, the Assessing Officer found that the assessee had entered in to an exchange agreement vide exchange deed dated 03/09/2010 in Doc.

No.5392/2010 with M/s.Eskay Designs for exchange of its land at Sundeep Road, Neelankarai, Chennai, of an extent of 32.72 grounds against the land offered by M/s.Eskay Designs at Madura Devaneri Village of an extent of 5 acres and 90 cents. The land at Neelankarai belonging to assessee was valued at Rs.18.00 crores and that of the M/s.Eskay Designs was valued at Rs.17.00 crores as under:

Land Value Rs. 15.00 Cr. Building Value Rs. 2.00 Cr. Total Rs. 17.00 Cr.

In addition to the above, M/s.Eskay Design has paid the Stamp duty of Rs.1.40 crores and the guideline value of the property received in exchange was Rs.4.00 crores. The Assessing officer asked for the ITA No.240/Mds/2015 ::3:: justification for transfer of the property valued at Rs.18.00 crores for the property received as per guideline value of Rs.4.00 crores and the assessee submitted a valuation report from the valuer Dr.C.Sivaprakasam and Associates valuing the property received in exchange at Rs.18.53 crores, with a rider that patta for 26.924 cents was not received and 202 cents are classified as government others. Aggregating to 228.924(26.924+202.000) cents for which no patts is available. The assessing officer determined the FMV of the land received at Rs.17.70 crores (590 cents @Rs.300000/-), accepted the building value at Rs.83,00,000/-and reduced the value of land for which no patta was available (i.e228.924 cents) amounting to Rs.6,86,77.200/- and computed the taxable income at Rs.5,33,38,200/ as under:

FMV of the land received at Rs.17,70,00,000/- Building value at Rs. 83,00,000/- Total Rs.18,53,00,000/- Less: Value of land for no patta Rs. 6,86,77,200/- Exchange Value received Rs.11,62,22,800/- Value of Land offered in exchange Rs.18,00,00,000/- Taxable Income (Difference) Rs. 5,33,38,200/- 4.0 Aggrieved by the Order of the Assessing Officer, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) deleted the addition

ITA No.240/Mds/2015 ::4:: holding that the market value of the property given to M/s.Eskay Designs was valued at Rs.18.00 crores whereas the market value of the property received in exchange was valued at RS.17.00 crores and the stamp duty of RS.1.40 crores was also paid by the other party i.e. M/s.Eskay Designs, Chennai. Hence, there is no money forgone by the assessee society in the exchange of the land done. Therefore, the CIT(A) held that the alleged amounts foregone by the assessee cannot be brought to tax.The ld. CIT(A) also examined the capital gains angle in transfer of property and made an observation that the capital asset deemed to be exempt u/s 11 of Income tax act. For the sake of convenience relevant paragraph (Para-4) of the Ld.CIT(A) order is extracted here under:

A careful reading of the assessment order reveals that the AO attempted to tax the difference in value arising out of exchange of lands between the assessee and another party viz. M/s. Eskay Designs, Chennai. The lands received by the assessee were situated at Madura Devanery Village and 229 cents of the said land were classified as Government land and hence the AO reduced the value of the said land (228.924x3,00,000 = 6,86,77,200) from the value of land got on exchange. Thus the assessee got lesser value on exchange of land to the extent of Rs.5,33,38,200/- according to the AO. The said value of land was brought to tax as income of the assessee by the AO. Against the above conclusion of the AO, the assessee contended that it got land situated in an ideal location for future expansion of the institution to provide further services to the needy and the Tahsildar issued patta for 189.305 cents of land out of 202 cents classified as Government Others and only 12.695 cents only is without patta. The assessee also stated that the entire transferred land belongs to the society and not to the Government. The assessee also added that there was only exchange of land and no monetary consideration was passed on. Perusal of records produced before the AO as well as before the undersigned reveals that there is no consideration received by the assessee and also no money was paid by the assessee to the third party. The difference arrived at by the AO is not based on any authenticated records. Perusal of the exchange deed reveals that the market value of the property given to M/s.Eskay Designs was valued at Rs.18 crores whereas the market value of the property received in exchange was valued at RS.17 crores. The stamp duty of Rs.1.40

ITA No.240/Mds/2015 ::5:: crores was also paid by the other party i.e. M/s.Eskay Designs, Chennai. Hence there is no money forgone by the assessee society on the exchange of land done. Hence alleged amounts foregone by the assessee cannot be brought to tax. Therefore, the order of the AO is not sustainable and hence addition made is directed to be deleted.

4.1 But the transaction between the assessee and the third party M/s. Eskay Designs, Chennai attracts provisions of section 2(47) of the I.T. Act which reads as under:

Definitions.

(1) . (2) .

(47) "transfer" in relation to a capital asset, includes, --

(i) the sale, exchange or relinquishment of the asset; or 4.2 According to section 45(1) of the Act, Any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under head capital gains and shall be deemed to be the income of the previous year in which the transfer took place. Section 45(1) read with sec.2(47) of the Act is applicable to the facts of the case and the exchange of land by the assessee definitely results in capital gains. Hence, M/s.Eskay Designs, Chennai, one of the parties to the exchange was asked to clarify whether it admitted capital gains or not? M/s.Eskay Design, Chennai in its letter dated 22.09.2014 addressed to the undersigned furnished the details regarding admitted LTCG of Rs.14,38,33,537/- in the return filed for AY 2011-12.

The assessee was also asked to clarify about the taxability of LTCG in its. hands in this office letter dated 24.09.2014. In response, the assessee in its letter dated 13.10.2014 stated. that capital gain arises on the exchange of land but claimed that no tax is payable by it as the assessee got another property (a capital asset) and no money was paid/received in the transaction done. The assessee's contentions seem to be acceptable. The capital gains arises by virtue of exchange of property and the same was exempted u/s 11(lA) of the Act as the investment in new property takes place simultaneously. The land got in exchange is deemed to be applied to charitable purposes during the previous year itself. The CBDT Circular No.72 dated 06.01.1972 also supports the investment in capital asset as an application of income. In view of the above discussion, I am of the considered view that LTCG arises to the assessee on the exchange of land done by the assessee and the same is exempted from tax as the investment in the capital asset is deemed to be exempt from taxation.

ITA No.240/Mds/2015 ::6::

Therefore, the assessee is entitled to exemption u/s 11 of the Act on the exchange of land made by the by the assessee. The AO is therefore directed to delete the addition made and accept the return filed by the assessee.

4.1 Aggrieved by the order of the Commissioner of Income Tax, the department is in appeal before us. Appearing for the department Mr.A.V.Srikant, Ld.DR, argued that the assessee has transferred the property of Rs.18.00 crores to M/s.Eskay Designs and part of the property was classified as government others and patta for 228.924(26.924+202.000) cents is not available and therefore, the Assessing officer has rightly reduced the portion of land for which patta was not obtained for the value of the landed property and worked out the income at Rs.5,33,38,200/-. According to the Ld.DR, the taxable income worked by the AO is correct.

4.2 On the other hand, Ld.AR of the assessee argued that the assessee has transferred the land of 32.72 acres located in Neelankarai, ECR, Kancheepuram District and acquired 5.90 acres of land located at Madura Devaneri Village on ECR, Kancheepuram District. The assessee’s land valued at Rs.18.00 crores and lands acquired by the assessee were valued at Rs.17.00 crores and the stamp duty was paid by the transferor. The valuer has valued property at Rs.18.53 crores and no consideration was exchanged between both the parties. The total land got exchanged was 5.90 acres, the assesse got patta

ITA No.240/Mds/2015 ::7:: for 5.63 acres and there was a difference of 27 cents which was acquired by the state government for road widening. In government website for 202.000 cents was classified as Govt. others instead of government and others for which assessee has no control. Further, the Ld.A.R argued that Ld.CIT(A) allowed the appeal holding that there cannot be any taxation where there is no gain. The Assessing Officer levied the tax on a wrong impression contrary to the fact, and contrary to government records.

5.0 We heard the rival submission and perused the material placed on record. The assesse has transferred their own land of Neelankarai village, to M/s.Eskay Designs for exchange of the lands located at Madura Devaneri Village for an extent of 5.90 acres. The land of the assesse was valued at 18.00 crores and the Madura Devaneri Village land belonging to M/s.Eskay Designs was valued at Rs.17.00 crores and M/s.Eskay Designs borne the stamp duty of Rs.1.40 lakhs. The assesse submitted the valuation report from approved valuer for a sum of Rs.18.53 crores with a rider that patta for 26.924 cents was not received and 202 cents are classified as government others, aggregating to 22.924 cents for which no patta was available. The assesse accepted the land from M/s.Eskay Designs and transferred the assesse’s land of 32.72 acres to M/s.Eskay Designs. Further, the assesse has mentioned that there was a structure in the lands transferred from M/s.Eskay Designs valued at Rs.2 crores

ITA No.240/Mds/2015 ::8:: and the valuer has valued the same at Rs.83.53 lakhs. Though the guide line value was much less than the declared value, the value adopted by valuer is more or less the equal and the Assessing Officer has accepted the valuation made by the valuer. The Assessing Officer reduced the value of a portion of land for which patta was not available relying on the report of the valuer instead of making independent enquiries. The assessee submitted that there was a mistake in classification of the lands in the website as discussed for which assessee has no control. From the above information, it reveals that the assessee has received the equal value of land in exchange and there was no consideration foregone by the assessee as rightly observed by the Ld.CIT(A). Even if the Assessing Officer contention is considered to be correct, the assessee has received the less consideration in exchange which results in to loss rather than gain. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and we uphold the same.

5.1 The next issue raised in the grounds of appeal was capital gain and exemption of Income u/s 11(1A). The Ld.CIT(A) examined the capital gain issue also and given finding that the assessee is entitled for exemption u/s.11(1A) of the Act on the exchange of land made by the by the assessee. The transfer of property in the case of trusts capital gain and the application is dealt with in Sec.11(1A) of the Income Tax Act, which is produced here under:

ITA No.240/Mds/2015 ::9::

[(1A) For the purposes of sub-section (1),— (a) where a capital asset, being property held under trust wholly for charitable or religious purposes98, is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

(i) where the whole of the net consideration is utilized in acquiring the new capital asset, the whole of such capital gain;

(ii) where only a part of the net consideration is utilized for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilized exceeds the cost of the transferred asset;

(b) where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:—

(i) where the whole of the net consideration is utilized in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain;

(ii) in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilized for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

As per section 11(1A), if the assessee utilizes the net consideration for acquiring the new asset, the whole of such amount is deemed to have been applied. If any surplus is left the surplus would be taxed as capital gains. In this case firstly the A.O has accepted the value as per the exchange deed as declared by the assessee and taxed the gain on difference of lands for which no patta was ITA No.240/Mds/2015 ::10:: available aggregating to 228.924 cents, on the basis of valuers report without verifying the exchange deeds, link documents and the revenue records. The A.O has not made any independent enquiries also with regard to correctness of the valuers report. Hence, we are unable to accept the contention of the A.O that the assessee has received the lesser value of land in exchange and accordingly the Revenue’s ground on this issue lacks merit.

5.2 Further from the bare reading of Sec.11(1A) where a capital asset being a property held by trust for charitable purposes and transfer the whole or any part of the asset, the net consideration on such transfer is utilized for acquiring another capital asset, capital gain arising from the transfer shall be deemed to have been applied for charitable purposes to the extent of net consideration utilized in acquiring the new capital asset. In case, the amount of net consideration exceeds the cost of new capital asset, the excess amount should be brought tax as capital given. In the instant case, the assessee has transferred the property worth Rs.18.00 crores and in return received the property worth Rs.17.00 crores. Therefore, the assessee has received the property less than the value of property transferred to M/s.Eskay Designs and no additional consideration has been received in monetary terms. Since, the assessee has received the value of the property lesser than land transferred according to the AO, there is no case for assessment of any capital gains. Accordingly, we hold that there is no infirmity in the order of the Ld.CIT(A) on this ground also and We dismiss the appeal of department on this issue of capital gains u/s11(1A) also.

6.0 In Ground No.5, the department has raised an issue regarding not obtaining the approval from the DIT(E) for exchange of lands. This issue is neither born out of the Assessment Order nor from the CIT(A) Order. Therefore, this ground is dismissed as in fructuous.

7.0 In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open court on 30th November, 2016, at Chennai.