DHANRAJ DHADDA & SONS P. LTD,MUMBAI vs. ITO 5(1)(3), MUMBAI

The primary issue urged by the assessee relates to the validity of assessment of long term capital gains of Rs.38.46 lakhs. The assessee has also urged certain additional grounds, which are in the nature of alternative contentions which are required to be decided if the primary issue is decided against the assessee.

The facts relating to the issue are stated in brief. There is a diamond market by name “Bharat Diamond Bourse” (BDB) in Bandra. The shops and car parking were allotted to the aspiring persons by lottery system. The assessee herein got allotment of two shops and two car parking spaces and it paid initial

These facts came to the notice of the assessing officer during the course of assessment proceedings relating to AY 2005-06. The AO further noticed that the assessee has not declared any capital gain arising on transfer of the properties, referred above, in the return of income filed for AY 2007-08. Hence the AO reopened the assessment of AY 2007-08, i.e., the year under consideration. Before the AO, the assessee contended that it has transferred only Deposit amounts and hence the same does not give rise to any capital gain. However, the AO held that the assessee had held a right in the shop/parking space and the same has been transferred by it to its sister concern. The AO held that the right in the shop/parking space is a capital asset and extinguishment thereof shall give rise to capital gains. In support of this proposition, he relied upon the decision rendered by Hon’ble Bombay High Court in the case reported in 122 ITR 594 and also the decision rendered in the case of CIT Vs.Texspin engg. & Mft Works (263 ITR 345). Since the assessee did not declare any capital gain, the AO referred the matter of ascertaining market value to the DVO, who estimated the market value of office premise at Rs.56.12 lakhs and the market value of car parking spaces at Rs.16.00 lakh (Rs.8.00 lakhs each). Accordingly, the AO took the “full value of sale consideration” as Rs.72.12 lakhs. The AO computed the indexed cost of the shop and car parking

The Ld A.R submitted that the assessee cannot be considered to be owner of the shops/parking spaces, since it has only paid deposits. He submitted that these properties have not been transferred to the name of the assessee. He submitted that the assessee has obtained only a right of allotment of the shop/parking spaces. Accordingly he contended that, even if it is considered as a transfer, it has actually a transfer of a future right over the properties only. He further submitted that the assessing officer is not entitled to substitute the “fair market value” as full value of sale consideration for the purpose of computing capital gain. In this regard, he placed reliance on the decisions rendered by Hon’ble Supreme Court in the case of CIT Vs. George Henderson & Co. Ltd (66 ITR 622) and K.P. Verghese (121 ITR 597). He submitted that there is no allegation of understatement of consideration and hence the AO was not justified in taking the fair market value of the property as determined by the DVO as the alleged sales consideration. He further submitted that the provisions of sec. 50C alone in the Income tax Act provides for substitution of “Full value of sale consideration”. He submitted that the provisions of sec. 50C shall apply only to “land or building or both” and not to the rights over the property. Accordingly he submitted that the deposit amount received by the assessee can alone be considered as the sale consideration. Accordingly he contended that the AO was not justified in substituting the fair market value of the property for sale consideration for the purpose of computing capital gains.

The Ld D.R submitted that the assessee has obtained the allotment of the properties through lottery system and the same do command higher market value. This fact has been brought on record by the AO by making reference to the decision rendered by Mumbai bench of Tribunal in the case of DCIT Vs.

We have heard the rival contentions and perused the record. The assessee has contended that it has transferred only the deposit amount and not any property. However, the facts discussed in the preceding paragraphs would show that the assessee has obtained a right in the shops/parking spaces by way of allotment of them through lottery system. The decision rendered by the Tribunal in the case of Bombay Diamond Co. Ltd (supra) shows that the right over the properties allotted by BDB carry good market value. Hence, we are unable to agree with the submission of the assessee that it was a simple case of transfer of deposits. The fact remains that, by transferring the deposit amount, the assessee has actually transferred its right over the properties to its sister concern. Accordingly, we agree with the view taken by the tax authorities in this regard.

The Ld A.R contended that the assessing officer is not entitled to substitute the “fair market value” for “full value of sale consideration” for the purpose of computing capital gain. The Ld A.R submitted that the deposit amount should be taken as “full value of sale consideration”. In support of these contentions, the Ld A.R placed reliance on two decisions rendered by the Hon’ble Supreme Court, referred above. However, it is the contention of the assessee that it has not transferred any property and accordingly it did not declare any capital gain.

The Ld. A.R placed reliance on various case laws rendered in the context of provisions of sec. 50C of the Act. In our view, they are not applicable to the facts prevailing in the instant case, since the question of registering the transfer of properties with stamp duty authorities does not arise at all.

In view of the above, we confirm the view taken by the tax authorities that the transfer of the right held by the assessee over the impugned properties is exigible to capital gains.

The assessee has raised certain additional grounds. The first additional ground relates to the year of taxability of Capital gains. The contention of the assessee is that it has filed an application for transfer of properties with BDB on 6 M/s. Dhanraj Dhadda & Sons Pvt. Ltd.

The second additional ground raised by the assessee relates to the indexation benefit granted by the AO. According to the assessee, the AO has not considered the actual dates of payment of deposits for the purpose of ascertaining indexation benefit. Since the contentions made by the assessee in this regard require factual verifications, we set aside this issue to the file of the AO with the direction to examine the claim of the assessee and take appropriate decision in accordance with the law.

The third additional ground raised by the assessee relates to the determination of “full value of consideration”. The submission of the assessee is that the deposit amounts for the properties have been paid both by the assessee and the transferee. Accordingly it is being contended that the full value of consideration should be apportioned in the ratio of those payments and the assessee should be charged to capital gains tax on the proportionate amount only. We are unable to agree with the said contentions. It is the assessee who owns the right and what is transferred is only the right over the properties obtained by way of allotment. In consequent to the intended transfer of that right only, the transferee might have paid subsequent installments of the deposit. The payment of deposit by the transferee does not bring any right over the properties to the transferee and such payments should be considered as 7 M/s. Dhanraj Dhadda & Sons Pvt. Ltd.

In the result, the appeal of the assessee is treated as partly allowed for statistical purposes.