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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
Instant appeal by the assessee is directed against the order dated 3rd March 2014, passed by the learned Commissioner (Appeals)– 39, Mumbai, for the assessment year 2009–10.
Grounds raised by the assessee are as under:–
“1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in upholding the action of the Assessing Officer in taxing the compensation received from the Developer amounting to ` 26,23,238 as ”Income From Other Sources.
2 Rajnikant D. Shroff
“2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in not appreciating the fact that the aforesaid compensation received represents a capital receipt not exigible to tax.
Brief facts are, the assessee is an individual deriving income from salary, house property, capital gains and interest. For the assessment year under consideration, the assessee filed his return of income on 28th July 2009, declaring total income of ` 3,25,95,722. During the assessment proceedings, the Assessing Officer, on verifying the return of income as well as other materials found that during the relevant previous year, the assessee has received an amount of ` 26,23,238, but has not offered it to tax by treating it as capital receipt. When the Assessing Officer called upon the assessee to explain the reason for not offering the income, the assessee stated that he was the owner of flat no.202 in Parishram Co–operative Housing Society Ltd., Pali Hill, Bandra, Mumbai. Considering the fact that the building has become old requiring extensive repairing the members of the society decided to re–develop the existing property through a developer. Accordingly, the society entered into an agreement with the developer namely Altus Developers on 7th May 2008. It was submitted, in consideration of assessee vacating premises the developer paid an amount of ` 26,23,238. It was submitted by the assessee the amount received for vacating the premises having been paid for the discomfort of the 3 Rajnikant D. Shroff assessee, it is in the nature of capital receipt, hence, not taxable. It was further submitted by the assessee as per the terms of the agreement, the total amount receivable by the assessee was ` 1,73,75,487. It was submitted, every member was entitled to receive part amount on signing of agreement and balance amount on vacating the premises. Accordingly, the assessee received part amount of ` 26,23,238, on signing the agreement. It was submitted by the assessee, he has not received the balance amount till date in spite of vacating the premise due to dispute arising between the members of the society and developer. The assessee submitted, if the dispute is not resolved amicably, the agreement may have to be cancelled and in that event the amount received on signing of agreement is likely to be refunded to the developer. The Assessing Officer after considering the submissions of the assessee, however, did not find merit in the same. The Assessing Officer observed, as per clause–30 and 46 of the agreement, the developer is liable to pay charges along with interest to the society in the event of any default by the developer. He observed, that being the case, the claim of the assessee that amount has to be refunded to the developer in the case of cancellation of agreement is not tenable. The Assessing Officer observed, in the Balance Sheet, the assessee has not shown amount of ` 26,23,238 as liability which should have been the case if assessee’s claim that in the 4 Rajnikant D. Shroff event of cancellation the amount was to be refunded to the developer. The Assessing Officer, therefore, concluded that when the assessee himself is not treating receipt as liability his claim that it is a capital receipt cannot be accepted. Accordingly, he treated the amount as income of the assessee and liable to be taxed under the head “Income From House Property”. Being aggrieved of the aforesaid decision of the Assessing Officer, the assessee preferred appeal before the learned Commissioner (Appeals).
Before the first appellate authority, the assessee, apart from reiterating the stand taken before the Assessing Officer further submitted while assessing the receipt of ` 26,23,338 under the head “Income From House Property”, the Assessing Officer has not granted deduction @ 30% under section 24 of the Act. It was submitted, vide letter dated 22nd February 2012, when the assessee sought rectification of the order towards mistake committed by the Assessing Officer for not granting deduction of 30% under section 24 of the Act. The Assessing Officer in order passed under section 154 of the Act, rejected the petition filed by the assessee by observing that the amount received from developer has been wrongly assessed under the head “Income From House Property” instead of “Income From Other Sources”. It was submitted by the assessee as the change of head of income is a debatable issue the same could not have been done under 5 Rajnikant D. Shroff section 154. Thus, it was submitted by the assessee that the amount received from developer being a capital receipt, the same cannot be treated as income. Alternatively, it was submitted if at all it is treated as income, it should be taxed under the head “Income From House Property” and deduction under section 24 should be allowed. On the basis of submissions made by the assessee, the learned Commissioner (Appeals) called for a remand report from the Assessing Officer. After considering the submissions of the assessee and the observations of the Assessing Officer in the remand report as well as facts and materials on record, the learned Commissioner (Appeals) observed that as per the agreement between the society and developer a new building is to be constructed on the plot belonging to the society by demolishing the old building and utilising the FSI of the said plot and by availing FSI by way of transferrable development rights (TDR). He observed, the members were the owners of such TDR which were to be utilised by the developer for development of the new building on the said plot. The learned Commissioner (Appeals) observed, as per section 2(47)(ii), extinguishment of any right in a capital asset shall be regarded as transfer and liable to capital gain tax under section 45. The learned Commissioner (Appeals), referring to the terms of the agreement, observed that the developer will neither be responsible for providing any temporary alternate accommodation to the members
6 Rajnikant D. Shroff nor for paying any rent in respect of such temporary accommodation. He observed, developer shall be solely liable for any default on his part and for delay in developing the property and for which the developer will be required to pay necessary costs along with interest to the society and the members. Thus, from the aforesaid terms of the agreement, the learned Commissioner (Appeals) inferred that nowhere it is provided that in case of any dispute between the members and developer, the amount of compensation paid by the developer to the members for vacating the premises is to be refunded back to the developer. The learned Commissioner (Appeals) observed, on reading the agreement as a whole, it is to be understood that instead of providing any temporary accommodation and in consideration of TDRs received from the members of the society, the developer has paid the lumpsum compensation to the members. He also observed that the assessee has neither established that he has incurred any cost or has paid any rent for temporary accommodation nor there is any clause in the agreement providing for refund of the compensation to the developer in case of any dispute. He, therefore, agreed with the Assessing Officer that the compensation received by the assessee is not a capital receipt but in the nature of income and is liable to be taxed. As far as the proper head of income under which it is to be taxed, the learned Commissioner (Appeals) observed that looking at 7 Rajnikant D. Shroff the nature of receipt, compensation cannot be taxed under the head “Income From House Property” as it is not against letting out of property. The learned Commissioner (Appeals) observed, the amount received by way of compensation is liable to be taxed under the head “Capital Gain”. However, ultimately, he upheld the decision of the Assessing Officer assessing the income received under the head “Income From Other Sources”.
Learned Authorised Representative more or less reiterating the stand taken before the Departmental Authorities submitted that the learned Commissioner (Appeals) has misconceived the facts and thereby has come to an erroneous conclusion while observing that the members have sold TDRs to the developer. The learned Authorised Representative taking us through different clauses of the agreement submitted, as per the terms of the agreement, after vacation of old building by the members of the society, it was to be demolished and a new building was to be constructed by builders at its own cost as per the building plan approved by the MCGM. The learned Authorised Representative submitted, as provided in the agreement the developer without charging any monitary consideration will construct the building and allow to each existing member a flat in the new building specified in the annexure to the agreement along with free parking space. The learned Authorised Representative submitted, as per clause 10 of the 8 Rajnikant D. Shroff agreement in consideration of the development right granted, the developer shall pay to each member the lump sum amount as per the inter–se arrangement between the societies on the one hand and the developer on the other hand. The amount payable is partly on execution on the agreement and partly on members vacating their residential premises. Learned Authorised Representative submitted, though, the assessee received part of the compensation on signing of the agreement but in spite of the fact that he has vacated the premises, he did not receive the balance amount since many of the members of the society have not vacated the premises as a result of which the dispute arose between the developer and the society. The learned Authorised Representative submitted, as per clause 12 of the agreement, the development work envisaged to be constructed under the agreement shall not exceed 100% of the area of the plot and 100% by purchase of TDR at the cost of the developer and if there is any change in the D.C. regulation or any other applicable law, whereby, there is an increase in the basic FSI or if any construction is possible exceeding 200% of the total area of the said plot in any manner whatsoever the same shall be exclusively for the benefit of the society / existing members and the developer shall have no right, title or claim. He submitted, as per clause 15, the developer after obtaining basic approval to the building plan will load the TDR. He submitted, as 9 Rajnikant D. Shroff
per clause 26 of the agreement, the developer shall be liable to pay the purchase price for purchase of TDR for utilisation in the said property. Thus, it was submitted by the learned Authorised Representative that the members of the society did not sell any TDR to the developer, on the contrary the developer was supposed to purchase TDR from outside and load it to the new building to be developed by him. Therefore, the conclusion of the learned Commissioner (Appeals) that the members sold TDR to developer is factually incorrect. The learned Authorised Representative submitted, as there is no sale of TDR by the members to the developer the conclusion of the learned Commissioner (Appeals) that there is transfer of capital asset in terms of section 2(47)(ii) is totally incorrect. Learned Authorised Representative submitted, the amount received by the assessee from the developer is towards inconvenience caused for vacating premises, therefore, such receipt in the nature of compensation for the discomfort caused is capital receipt, hence, cannot be taxed. For such purpose, he relied upon the following decisions:–
i) Kaushal K. Rangia v/s ITO, ITA no.2349/Mum./2011, order dated 31.1.2012; ii) Jethalal D. Mehta v/s DCIT, [2005] 2 SOT 422 (Mum.); iii) ITO v/s Shri Hemandas J. Pariyani, ITA no.2508/Mum./2010, order dated 8.2.2012;
10 Rajnikant D. Shroff iv) ACIT v/s Shri Ishverlal Manmohandas Kanakia, Mum./2010, etc., order dated 8.2.2012; v) Maheshwar Prakash–2 Co–operative Housing Society Ltd. v/s ITO, [2009] 118 ITD 223 (Mum.); vi) Deepak S. Shah v/s ITO, [2008] 29 SOT 26 (Mum.)
Learned Departmental Representative on the other hand, supporting the decision of the learned Commissioner (Appeals) submitted that as per agreement, society has consumed 40% of the FSI which indicates that TDR rights were sold to the developer. He, therefore, relying upon the observations of the Assessing Officer and the learned Commissioner (Appeals), submitted that the amount is taxable at the hands of the assessee.
We have considered the submissions of the parties and perused the material available on record. Undisputedly, the assessee is a member of a society owning a building. The society has entered into an agreement with a developer for development of a new building after demolishing the old building. As per the terms of the agreement, the developer has to provide a flat along with parking space to each of the member without charging any cost. As per the terms of agreement the developer is to construct the building by utilising area not exceeding 100% of the plot. However, as per the agreement, the developer was authorised to construct 100% more after obtaining TDR from third parties and loading the same to new building to be 11 Rajnikant D. Shroff constructed. The agreement further provides for lumpsum payment by developer to each of the members a part of which is to be paid on signing of the agreement and the balance amount on vacation of the premises. It is not disputed that the assessee has received an amount of ` 26,23,238 on signing of the agreement. Even though the assessee vacated the premises, however, admittedly, he has not received the balance amount from the developer due to the reason that all the members of the society have not vacated the premises and as a result dispute has arisen between the society and the developer. The dispute in the present appeal is confined to the amount received by the assessee on signing of the agreement from the developer. While the assessee claimed the amount received in the nature of compensation, hence, a capital receipt, the Department treated it as income. On a perusal of different clauses of the agreement, we have noted that the extra FSI / TDR to be loaded to the new building is the responsibility of the developer and he has to purchase such TDR from third parties and load it to the building to be constructed. Therefore, the conclusion of the learned Commissioner (Appeals) that the members have sold TDR to the developer is not correct. At this stage, we may refer to certain observations of the learned Commissioner (Appeals). As can be seen from Para–6.1 of his order, he has held that the members being the owner of the TDR have transferred the same to the developer, hence,
12 Rajnikant D. Shroff as per section 2(47)(ii), it amounts to extinguishment of rights in a capital asset, thereby liable to capital gain tax under section 45. Thus, prima–facie, it appears that the learned Commissioner (Appeals) accepts that the amount received by the assessee is on account of transfer of a capital asset. We find that this issue has been considered by the Tribunal in Jethalal D. Mehta v/s DCIT, [2005] 2 SOT 422. Following the aforesaid decision, the Tribunal, Mumbai Bench, in ACIT v/s Ishwarlal Manmohandas Kanakia, ITA no.3053/Mum./2010, etc., dated 8th February 2012, though, agreed that the receipts on assignment of FSI, including FSI originating from plot of land which is subject matter of transfer by the assessee, is a capital asset, however, the cost of acquisition in respect of such asset cannot be ascertained, therefore, the receipt towards transfer of said rights cannot be brought to tax as the said receipt will be capital receipt and not capital gain. Relevant observations of the Bench is reproduced below:–
In the case of Maheswar Prasad 2 CHS Ltd. (supra) the Tribunal had to consider a case where The assessee a co-operative housing society owned a building viz., Maheshwar Prakash-2 in Santa Cruz, Mumbai. This building had been constructed after utilising the entire FSI available to it and, therefore, no right was available for any further construction on this plot of land. However, the Municipal Corporation relaxed the development regulations in the year 1991 and on that account additional TDR FSI was allowed under the Development Control Regulation, 1991 (DCR). Thus, the assessee became entitled to construct additional space of 15,000 sq. ft. In view of the availability of such right, the assessee entered into an agreement with M/s. U.S. Magnet Pvt. Ltd. and M/s. Spartek Properties and Securities Pvt. Ltd. on 25-11-2002 for construction of additional floors on the existing structure of the 13 Rajnikant D. Shroff society building and development of the said property against a consideration of Rs. 280 per sq. ft. which amounted to Rs. 42 lakhs. The question before the Tribunal was taxability of the sum of Rs.42 lacs received by the Society. The Tribunal discussed the DCR for Greater Mumbai Regulations and the right of a receiving plot of land to load TDR over and above permissible normal FSI. The Tribunal held “…by virtue of Regulation 14, the FSI of a receiving plot is automatically allowed to be exceeded by 0.8 as mentioned in the said Regulation. For example, a plot in the suburb of Mumbai had an existing FSI of 1 prior to the year 1991 which had already been exhausted by construction of various flats. However, by virtue of Regulation 14, the society in respect of that building automatically got extension of FSI by 0.8. That means, if the plot of land was 1,000 sq. mtrs. then additional floors could be constructed to the extent of built up area of 800 sq. mtrs. As per the new scheme, either the society could construct additional floors having total area of 800 sq. mtrs. by purchasing TDR from the market or could transfer such right to any other builder or developer who had the TDR or who could arrange the TDR from the market. However, it is made clear that the construction could not be made without loading the TDR on the receiving plot. The above discussion shows that two separate and distinct rights arose as per DCR, 1991 i.e., TDR and the right to construct additional floor. The former has inbuilt cost while the later one arose without any cost. Regulation 14 makes it clear that FSI of receiving plot shall be allowed to be excluded in the prescribed manner. Such right was made available automatically without paying anything either to BMC or to the Government.
10. In view of the above discussion, let us now deal with the contentions raised by learned counsel for the assessee. Section 45 of the Act is the charging section in respect of profits or gains arising from the transfer of capital asset. The expression „capital asset‟ has been defined in clause (14) of section 2 of the Act according to which „capital asset‟ means property of any kind held by an assessee whether or not connected with the business or profession. It excludes certain assets from the scope of the above definition with which we are not concerned. The word „property‟ not only includes tangible assets but also includes intangible assets as held by the Hon‟ble Supreme Court in the case of B.C. Shrinivasa Shetty (supra) wherein the goodwill was held to be a capital asset. Even the right to obtain conveyance of the property has been held to be as capital asset by the Hon‟ble Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR
14 Rajnikant D. Shroff
In view of this legal position, it is held that the right to construct the additional storeys on account of increase in FSI by virtue of Regulation No. 14 of the Appendix VII to DCR, 1991 was a capital asset held by the assessee. Therefore, assignment of such right in favour of the developers amounted to transfer of capital asset. The contention of the counsel for the assessee that there cannot be any transfer without having TDR is without force since right to construct additional floors and TDR are different and distinct rights which can be transferred for a consideration. 11. Now, the moot question which arises for our consideration is whether the sum of Rs. 42 lakhs received by the assessee can be treated as longterm capital gain chargeable to tax under the Act. The contention of the learned counsel for the assessee is that the right to construct additional floors was acquired by the assessee free of cost and automatically by virtue of DCR, 1991 and, therefore, the computational provisions under section 48 fail and consequently no capital gain can be said to arise under the head „Capital gains‟ in view of the judgment of Hon‟ble Supreme Court in the case of B.C. Shrinivasa Shetty (supra). On the other hand, the contention of the revenue is that as per the amended provisions of section 55, the cost of acquisition has to be taken as nil and, therefore, the lower authorities were justified in computing the long-term capital gains at Rs. 42 lakhs. Another contention of the revenue is that the right to construct is embedded in the land itself and accrual of such right is akin to issue of bonus shares and, therefore, it cannot be said that the additional right was without cost. 12. This aspect of the matter has been examined by the Tribunal in the case of Jethalal D. Mehta (supra). In that case, the assessee had acquired the leasehold rights in a plot of land in October, 1971 on which the assessee had constructed two storeys building containing some flats and the FSI available on that was fully exhausted. However, by a virtue of the Development Control Regulations, 1991, the assessee became the owner of the valuable right of availing additional floor space index through transfer development rights. Accordingly he entered into an arrangement with a developer who used TDR on assessee‟s flat to avail additional FSI against such consideration. The question arose whether the assessee could be chargeable to tax under section 45 of the Act in respect of the consideration received by him. The contention of the assessee before the authorities was that there was no cost of acquisition of the right obtained by him and therefore, the capital gain could not be computed in view of the Hon‟ble
15 Rajnikant D. Shroff Supreme Court judgment in the case of B.C. Shrinivasa Shetty (supra). The lower authorities did not accept such contention. However, the Tribunal upheld the contention of the assessee by holding that right to construct the additional floors under the Development Control Regulation, 1991 was acquired without incurring any cost and therefore, assessee was not chargeable to tax in respect of such receipts in view of the aforesaid Hon‟ble Supreme Court judgment. The facts of the present case are similar to the aforesaid case and therefore, the said decision would squarely apply to the present case. Even as a rule of precedent, we are bound by the decision of a co-ordinate Bench in the absence of any decision of High Court or the Supreme Court.”
The above decisions are directly applicable to the facts of the case of the Assessee in this appeal. The only reason for the CIT(A) to reject the claim of the Assessee was that in the cases referred to above the Assessee‟s as owners of receiving plot permitted loading of TDR whereas the Assessee in the present case sold not only right to load TDR but also the right to construct the original FSI on the plot of land. In our view this distinction sought to be projected by the CIT(A) is incorrect. The issue raised by the Assessee is that while computing capital gain cost of improvement should also be capable of being determined. The dispute in the case decided by Tribunal in the case of Jethalal D.Mehtha (supra) and Maheshwar Prasad-2 CHS Ltd. (supra) was while computing capital gain cost of acquisition of the capital asset was not capable of determination. As per the law laid down by the Hon‟ble Supreme Court in the case of B.C.Srinivasa Shetty (supra) both cost of acquisition and cost of improvement should be capable being ascertained and only then the machinery provisions of Sec.48 can be applied. Therefore if cost of improvement cannot be ascertained the principle laid down in the case of B.C.Srinivasa Shetty would equally apply. The decisions rendered by the Tribunal in the case of Jethalal D.Mehtha (supra) and Maheshwar Prasad-2 CHS Ltd. (supra) clearly lay down that right as owner of a receiving plot to load additional FSI in terms of Regulation 14 of the Regulations is a right for which there is no cost of acquisition. If that be so, then the computation of capital gain in the case of the Assessee is not possible and therefore the receipt by the Assessee is a capital receipt which cannot be brought to tax as laid down by the Hon‟ble Supreme Court in the case of B.C.Srinivasa Shetty (supra). In that view of the matter we are of the view that the receipts on assignment of FSI including originating from the plot of land and/or married to it and right to load consume and use FSI credit by way of TDR which was the subject matter of transfer by the Assessee was a capital asset in respect of which 16 Rajnikant D. Shroff
the cost of improvement could not be ascertained and therefore the receipts of consideration for transfer of the said rights cannot be brought to tax as the said receipts will be capital receipts and not capital gain. The authorities below erred in law and on facts in holding to the contrary. We hold accordingly.”
The Tribunal, Mumbai Bench, in Kushal K. Bangia v/s ITO, ITA no.2349/Mum./2011, dated 31st January 2012, while considering the identical nature of dispute, held as under:–
“4. In our considered view, it is only elementary that the connotation of income howsoever wide and exhaustive, take into account only such capital receipts are specifically taxable under the provisions of the Income tax Act. Section 2(24)(vi) provides that income includes “any capital gains chargeable under section 45”, and, thus, it is clear that a capital receipt simplicitor cannot be taken as income. Hon‟ble Supreme Court in the case of Padmraje R. Kardambande vs CIT (195 ITR 877) has observed that “..,, we hold that the amounts received by the assessee during the financial years in question have to be regarded as capital receipts, and, therefore, (emphasis supplied by us), are not income within meaning of section 2(24) of the Income tax Act….” This clearly implies, as is the settled legal position in our understanding, that a capital receipt in principle is outside the scope of income chargeable to tax and a receipt cannot be taxed as income unless it is in the nature of revenue receipt or is brought within the ambit of income by way of a specific provision in the Act. No matter how wide be the scope of income u/s.2(24) it cannot obliterate the distinction between capital receipt and revenue receipt. It is not even the case of the Assessing Officer that the compensation received by the assessee is in the revenue field, and rightly so because the residential flat owned by the assessee in society building is certainly a capital asset in the hands of the assessee and compensation is referable to the same. As held by Hon‟ble Supreme Court, in the case of Dr. George Thomas K vs CIT(156 ITR 412), “the burden is on the revenue to establish that the receipt is of revenue nature” though “once the receipt is found to be of revenue character, whether it comes under exemption or not, it is for the assessee to establish”. The only defence put up by learned Departmental Representative is that cash compensation received by the assessee is nothing but his share in profits earned by the developer which are essentially revenue items in nature. This argument however proceeds on the fallacy that the nature of 17 Rajnikant D. Shroff payment in the hands of payer also ends up determining it‟s nature in the hands of the recipient. As observed by Hon‟ble Supreme Court in the case of CIT vs. Kamal Behari Lal Singha (82 ITR 460), “it is now well settled that, in order to find out whether it is a capital receipt or revenue receipt, one has to see what it is in the hands of the receiver and not what it is in the hands of the payer”. The consideration for which the amount has been paid by the developer are, therefore, not really relevant in determining the nature of receipt in the hands of the assessee. In view of these discussion, in our considered view, the receipt of Rs.11,75,000 by the assessee cannot be said to be of revenue nature, and, accordingly, the same is outside the ambit of income under section 2(24) of the Act. However, in our considered opinion and as learned counsel for the assessee fairly agrees, the impugned receipt ends up reducing the cost of acquisition of the asset, i.e. flat, and, therefore, the same will be taken into account as such, as and when occasion arises for computing capital gains in respect of the said asset. Subject to these observations, grievance of the assessee is upheld.”
The other decisions relied upon by the learned Authorised Representative also express similar view. Thus, on the basis of ratio laid down in the aforesaid decisions, if we examine the facts of the present case, it is to be observed that the learned Commissioner (Appeals) has given a categorical finding that the receipts from the developer are to be assessed as income under the head “Capital Gain”. Thus, impliedly, he accepts that the receipt is towards transfer of a capital asset. That being the case, applying the principle laid down in the decisions referred to above, all receipts from sale of a capital asset cannot be treated as capital gain. As in this case, the cost of acquisition / cost of improvement is not ascertainable, therefore, it cannot be brought to tax under the head “Capital Gain” and has to be treated as capital receipt. Therefore, the issue has to be decided in 18 Rajnikant D. Shroff favour of the assessee. Accordingly, we hold that the amount of ` 26,23,238 received by the assessee being a capital receipt is not chargeable to tax. However, we make it clear, the aforesaid amount received by the assessee has to be reduced from the cost of acquisition of the asset in terms of section 51 while computing capital gain arising from sale of such asset in future. Ground raised by the assessee is allowed,
In the result, appeal stands allowed. Order pronounced in the open Court on 23.09.2016