SRI. K. RAJANNA,BANGALORE vs. DCIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘ A ’ BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. A. No.928/Bang/2014 (Assessment Year : 2008-09) Sri K. Rajanna, Hoovadigara Beedhi, Hosuru Bagilu, Anekal Town, Anekal Taluk, Bangalore Dist. …. Appellant. Vs. Dy. Commissioner of Income Tax, Circle 9(1), Bangalore. ….. Respondent. Appellant By : Shri H. Guruswamy, ITP. Respondent By : Shri P. Dhivahar, JCIT. Date of Hearing : 21.07.2015. Date of Pronouncement : 4.9.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-V, Bangalore dt.24.12.2013 for Assessment Year 2008-09. 2. The facts of the case, briefly, are as under :- 2.1 The assessee filed its return of income for Assessment Year 2008-09 on 2.4.2009 declaring income of Rs.13,43,590 from business and Long Term Capital Gains (‘LTCG’). The return was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act'). The Assessing Officer observed that on verification of the return of income, it was seen that the assessee was in receipt of sale consideration of Rs.3,38,00,000 from sale of 12 flats received from the developer consequent to a joint development Agreement (‘JDA’)

2 ITA No.928/Bang/2014 K. Rajanna dt.18.1.2006 entered into between the assessee and Wing commander Santosh Kumar Sharma, the developer in respect of certain lands owned by the assessee comprising of 22 guntas situated at Survey Nos.372 & 373, Kalkere village, K.R. Puram Hobli, Bangalore. A GPA dt.18.1.2006 was executed by the assessee, empowering the developer to take possession and do such acts and deeds as required by the JDA. It was observed that in this regard ; the assessee computed LTCG of Rs.11,92,150, wherein the assessee claimed to have invested Rs.1,15,89,600 in the development of the said property and included the same in the cost of acquisition/construction of the transferred property. In addition thereto, the assessee also claimed to have invested Rs.1,99,14,953 in the purchase of land and construction of a residential house and claimed exemption in this regard under Section 54 of the Act. 2.2 The Assessing Officer observed that in order to verify the claims of the assessee, a survey under Section 133A of the Act was conducted on 20.1.2010, in the course of which it was found that the assessee has not made investments of the sale proceeds of the flats in purchase of land and construction of residential property thereon for the purpose of claiming under Section 54 of the Act. In these circumstances, the Assessing Officer initiated proceedings under Section 147 of the Act to bring to tax income of the assessee that had escaped assessment and issued notice under Section 148 of the Act to the assessee on 25.1.2010. In response thereto, the assessee filed a return of income on 9.6.2010, in the status of HUF, declaring income of Rs.83,24,480 which comprised of business income, income from LTCG and income from Short Term Capital Gains (‘STCG’). The Assessing Officer rejected the assessee's claim of HUF Status and assessed the income from LTCG and STCG in the assessee's individual lands. The assessment was completed under Section 143(3) rws 147 of the Act vide order dt.31.12.2010, wherein the total income of the assessee

3 ITA No.928/Bang/2014 K. Rajanna was determined at Rs.3,23,49,372. In this order, the Assessing Officer determined the LTCG on transfer of 60% of the undivided portion of land at Rs.1,85,10,384; STCG on sale of 11 flats was computed at Rs.1,34,13,797 and LTCG attributable to the sale of undivided interest of land in respect of the 11 flats at Rs.2,73,751. 3. Aggrieved by the order of assessment for Assessment Year 2008-09 dt.31.12.2010, the assessee preferred an appeal before the CIT (Appeals) – V, Bangalore. The learned CIT (Appeals), disposed off the appeal vide order dt.24.12.2013 allowing the assessee partial relief. 4. Aggrieved by the order of the CIT (Appeals) – V, Bangalore dt.24.12.2013 for Assessment Year 2008-09, the assessee is in appeal before the Tribunal raising the following grounds :- “ 1. The appellate order dt.24.12.2013 is opposed to law, facts and weight of evidence inso far as it is opposed to the interest of the appellant. 2. The learned CIT (Appeals) – V, Bangalore has erred in not admitting the additional ground urged by the appellant as regards the year of chargeability of the Long Term Capital Gains attributable to the deemed transfer of 60% of undivided portion of land in favour of the Developer, as per JDA and GPA dt.18.1.2006. 3. The learned CIT (Appeals) – V, Bangalore has erred in holding that the Long Term Capital Gains relating to the deemed transfer of 60% of undivided portion of the land were chargeable to tax for the Assessment Year 2008-09 without appreciating the fact that the transfer of land arose in the year ending 31.3.2006 relevant to the Assessment Year 2006-07, in view of the JDA and GPA dt.18.1.2006 as required under Section 2(47)(v) of the Act r.w.s. 53A of T.P. Act. 4. The learned CIT (Appeals) – V, Bangalore has erred in holding that the appellant has not received any refundable/non-refundable deposit without appreciating the facts that the appellant had received refundable/non-refundable deposit of Rs.23,00,000 as a result of which part performance of an agreement comes into play and the transfer of land became absolute in the Assessment Year 2006-07. 5. The learned CIT (Appeals) – V, Bangalore has erred in directing the Assessing Officer to disallow the deduction of Rs.5,00,000 being the cost of improvement of the flat retained which was originally allowed by the Assessing Officer under Section 54F of the Act without providing an opportunity to the appellant as required under Section 251(2) of the Act. 6. The learned CIT (Appeals) – V, Bangalore has erred in holding that the cost of construction was allowable in respect of 14338 sq. ft. as against the built up of area

4 ITA No.928/Bang/2014 K. Rajanna 18937 sq. ft. allowed by the Assessing Officer in the assessment order relating to the 11 flats sold. 7. The learned CIT (Appeals) – V, Bangalore has erred in not following the ratio laid down by the Hon'ble jurisdictional High Court in the case of CIT Vs. Dr. T. K. Dayalu as regards the year of chargeability of capital gains tax in respect of the land in favour of the Developer, in view of the JDA and GPA dt.18.1.2006. 8. The appellant craves leave to add, alter, amend and delete any of the grounds at the time of hearing.”

5 ITA No.928/Bang/2014 K. Rajanna of the LTCG attributable to the transfer of 60% of the undivided portion of the land in favour of the developer as per the JDA and GPA dt.18.1.2006. 7.2.1 According to the learned Authorised Representative for the assessee, the assessee owned 22 guntas of land in Survey No.372 and 373 at Kalkere village, K.R.Puram Hobli, Bangalore in respect of which he entered into a JDA dt.18.1.2006 with a developer, Wing Commander Santhosh Kumar Sharma for development of this vacant land by way of construction of flats. It is submitted that as per the JDA dt.18.1.2006, the assessee was entitled to 40% of the built up area measuring 21,552 sq. ft., consisting of 12 residential flats, plus corresponding car parking area, common area, etc. The developer was to get 60% of the undivided portion of the land and the built up area. 7.2.2 The learned Authorised Representative submits that an additional ground of appeal was raised before learned CIT (Appeals) vide letter dt.18.12.2013 on the issue of chargeability of LTCG attributable to the transfer of 60% of the undivided portion of land in favour of the developer by virtue of the JDA and GPA dt.18.1.2006. It was contended before the learned CIT (Appeals) that the LTCG in this regard was not chargeable to tax for Assessment Year 2008-09, but was chargeable for Assessment Year 2006-07, in view of the deemed transfer under the amended provision of section 2(47)(v) of the Act r.w.s. 53A of the Transfer of Property Act and since the JDA was entered into on 18.1.2006, which was relevant to Assessment Year 2006-07. It was further submitted that written submissions in this regard dt.24.1.2012 were also filed before the learned CIT (Appeals) (placed at page 05 of the Paper Book). It was contended by the learned Authorised Representative for the assessee that as per the impugned order, the learned CIT (Appeals) had, forwarded the assessee's written submissions to the Assessing Officer which, inter alia, was in respect of the issue of the year of chargeability of LTCG on transfer of 60% of land vide the JDA

6 ITA No.928/Bang/2014 K. Rajanna dt.18.1.2006; calling for his comments in the matter and remand report thereon. It is submitted that inspite of three reminders dt.11.2.2013, 4.6.2013 and 8.11.2013, the Assessing Officer failed to submit the remand report. The learned Authorised Representative contends that the issue regarding the year of chargeability of LTCG, relating to the said land in Assessment Year 2006-07; in view of the JDA and GPA dt.18.1.2006 was raised vide letter dt.24.1.2012 before the learned CIT (Appeals) about 13 months prior to the expiry of the period of limitation on 31.3.2013 for initiation of proceedings under Section 148 of the Act and the Assessing Officer being in possession of the relevant information in remand proceedings had enough time to initiate assessment proceedings for Assessment Year 2006-07 in the assessee's case. It is argued that in the above factual circumstances, the learned CIT (Appeals)’s observation, that the assessee had raised this additional ground with malafide and willful intention to escape the liability to pay tax on LTCG arising on transfer of 60% of share in land to the developer, is not correct as both the learned CIT (Appeals) and the Assessing Officer were aware and had knowledge of the facts of the issue of the year of chargeability of LTCG on transfer of 60% of land in view of the assessee's raising the issue in submissions dt.24.1.2012. It is submitted by the learned Authorised Representative that in the above circumstances, it is clearly evident that the learned CIT (Appeals) had erroneously rejected the admission and consideration of the additional grounds raised by the assessee and prayed that they be admitted since it goes to the very root of the matter. 7.3 Per contra, the learned Departmental Representative supported the impugned order of the learned CIT (Appeals) in not admitting the additional grounds raised by the assessee. 7.4.1 We have heard both parties and perused and carefully considered the material on record. The issue for consideration before us is the non-admission by the learned CIT (Appeals) of the additional ground of appeal raised by the assessee vide letter dt.18.10.2013

7 ITA No.928/Bang/2014 K. Rajanna in respect of the year of chargeability of the capital gains on transfer of 60% of the undivided portion of the land in favour of the developer vide the JDA and GPA; both dt.18.1.2006 in the period relevant to Assessment Year 2006-07. Admittedly, this issue was first raised before the learned CIT (Appeals) by the assessee vide written submissions dt.24.1.2012, which, inter alia, was forwarded to the Assessing Officer for remand report thereon. In the submissions made it was contended that the capital gain on the transfer of land vide JDA dt.18.1.2006 was not exigible to tax in Assessment Year 2008-09; but was chargeable for Assessment Year 2006-07 in view of deemed transfer under the amended provisions of Section 2(47)(v) of the Act rws 53 of the Transfer of Property Act. It is in this regard, the assessee raised additional grounds. The learned CIT (Appeals) rejected the same, alleging mala fide intention on part of the assessee in raising the same after the period of limitation for reopening the assessment for Assessment Year 2006-07 expired on 31.3.2013. In our view, the additional ground raised is relevant as it would go to the root of the matter in deciding the year of chargeability of capital gains on transfer of the said land to the developer vide JDA dt.18.1.2006 and GPA dt.18.1.2006; which is in the period relevant Assessment Year 2006-07. We are therefore of the opinion that the action of the learned CIT (Appeals) in rejecting the admission of the additional grounds raised by the assessee on allegations of mala fide intention on the part of the assessee is without basis as the information in this regard was with the authorities below from 24.1.2012. The intention of law is that the income of an assessee is to be brought to tax correctly in the correct year. If an item of income is taxable in a particular year, then the Assessing Officer can tax that amount in that year only. The scheme of the Act does not envisage that if a particular item of income has escaped taxation in one year, it can be brought to tax in another year solely for the reason that the time limit to reopen the assessment in that year has expired.

8 ITA No.928/Bang/2014 K. Rajanna 7.4.2 On an appreciation of the facts of the matter on record, we are of the considered view that the additional ground raised by the assessee in respect of the year of chargeability of capital gains on transfer of 60% of land to the developer pursuant to JDA dt.18.1.2006 requires to be admitted as it goes to the very root of the matter. We, therefore, in the interest of justice and equity, admit this additional ground raised by the assessee. Since the same has not been examined by the learned CIT (Appeals), we remand the same to his file for consideration and adjudication thereon after affording the assessee adequate opportunity of being heard and to file details/submissions required. It is ordered accordingly. Consequently, Ground No.2 of the assessee's appeal is allowed for statistical purposes. 8. The Ground Nos.3, 4 & 7 (supra) are all raised in respect of and in connection with the year of chargeability of capital gains arising out of the said land by virtue of JDA and GPA dt.18.1.2006 within the ambit of the provision of Section 2(47)(v) of the Act rws 53A of the Transfer of Property Act. Since the issue of the year of chargeability of capital gains on transfer of land to the developer vide JDA dt.18.1.2006, raised at Ground No.2, in respect of additional ground, preferred by the assessee on 18.12.2013 and denied admission by the learned CIT (Appeals), has now been admitted for consideration by us and restored to the file of the learned CIT (Appeals) for examination and adjudication, we are of the view that the finding therein would have a bearing on the issues raised in the grounds raised at S.Nos.3, 4 & 7. We, therefore, deem it fit to refrain from adjudicating these grounds at this juncture. 9. Ground No.5 : Exemption u/s.54F – Rs.5,00,000. 9.1 In this ground, the assessee contends that the learned CIT (Appeals) erred in directing the Assessing Officer to disallow the exemption of Rs.5,00,000 being the cost of improvement of the flat retained by the assessee which was allowed in the order of assessment by the

9 ITA No.928/Bang/2014 K. Rajanna Assessing Officer u/s.54F of the Act, without providing any opportunity to the assessee as required under Section 251(2) of the Act. 9.2 In support of this ground, the learned Authorised Representative of the assessee submitted that in the order of assessment dt.31.12.2010, the Assessing Officer has allowed the assessee exemption of Rs.37,87,252 under Section 54F of the Act, which included the sum of Rs.5,00,000 on account of cost of improvement towards the flat retained by the assessee. It is contended by the learned Authorised Representative that, the learned CIT (Appeals), relying on the decision of the Hon'ble High Court of Kerala in Meera Jacob V ITO (2009) 313 ITR 411 (Ker), disallowed the exemption of Rs.5 lakhs under Section 54F of the Act, allowed by the Assessing Officer, holding that the cost of improvement claimed by the assessee and allowed by the Assessing Officer could not be considered as cost of improvement. It is contended that this action of the learned CIT (Appeals) resulted in the enhancement of the assessee's income by Rs.5 lakhs due to reduction in exemption granted under Section 54F of the Act and therefore in accordance with the provisions of section 251(2) of the Act, the learned CIT (Appeals) ought to have put the assessee on notice about his views on this issue and allowed the assessee adequate opportunity of being heard in the matter; which he failed to do. The learned Authorised Representative submitted that in view of this action of the learned CIT (Appeals) is illegal and unsustainable and requires to be reversed. 9.3. We have heard the rival contentions and perused and carefully considered the material on record. As contended by the learned Authorised Representative, we find that the learned CIT (Appeals) at para 11.3 of the impugned order, has directed the Assessing Officer to disallow the cost of improvement amounting to Rs.5 lakhs, which claim of the assessee, the Assessing Officer had allowed. On a perusal of the impugned order, it is evidently clear that

10 ITA No.928/Bang/2014 K. Rajanna the learned CIT (Appeals)’s action led to an enhancement of the assessee's income to the extent of Rs.5 lakhs whereby the exemption under Section 54F of the Act was directed to be reduced from Rs.32,87,252 to Rs.27,87,252. In such circumstances, as per the provisions of Section 251(2) of the Act, the learned CIT (Appeals) was required to afford the assessee reasonable opportunity of showing cause against such enhancement; which we find the learned CIT (Appeals) failed to do. In this factual matrix, we find that the action of the learned CIT (Appeals)’s action in disallowing the cost of improvement of Rs.5 lakhs, already allowed by the Assessing Officer to the assessee, to be in gross violation of the provisions of section 251(2) of the Act, rendering the same illegal and unsustainable in law. We, therefore, reverse the order of the learned CIT (Appeals) and restore that of the Assessing Officer on this issue. It is ordered accordingly. Consequently, Ground No.5 raised by the assessee is allowed. 10. Ground No.6 – Cost of Acquisition of 11 flats sold. 10.1 In this Ground, the assessee had contended that the learned CIT (Appeals) had erred in holding that the cost of construction of 11 flats sold was allowable in respect of only 14,338 sq. ft. as against 18,937 sq. ft. allowed by the Assessing Officer in the order of assessment. 10.2 It is submitted by the learned Authorised Representative that in the order of assessment, the Assessing Officer had computed the cost of construction of the 11 flats sold by the assessee with built up area of 18,937 in the year under consideration at Rs.1,97,32,354 @ Rs.1042 per sq. ft. as per the cost incurred by the developer. It is contended by the learned Authorised Representative that while computing the capital gains on sale 11 flats by the assessee, the learned CIT (Appeals) in the impugned order held that the cost of construction is allowable only for 14,338 sq. ft. of built up area and thereby reduced the deductible cost of construction from Rs.1,97,32,354 for 18,937 sq. ft. to Rs.1,49,40,196 (viz. 14,338 sq. ft. @ Rs.1,042 per sq. ft.) Before us, the learned Authorised

11 ITA No.928/Bang/2014 K. Rajanna Representative contends that this reduction of the cost of construction has an impact of enhancement of income by Rs.47,92,158 without issue of appropriate notice. 251(2) of the Act, without putting the assessee on notice of his views on this issue and in affording the assessee adequate opportunity of being heard in violation of the principles of natural justice. 10.3 The learned Authorised Representative contends that, without prejudice to the above contention, the learned CIT (Appeals) was not justified in reducing the cost of construction of the 11 flats, which the Assessing Officer computed and allowed at Rs.1,97,32,354 after obtaining the details from the developer. In support of this proposition, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Smt. Jeeva Vadivelu V ACIT in ITA Nos.225 & 306/Bang/2011 dt.7.9.2012. It is submitted that the facts of the assessee's case are similar to the facts of the cited case and therefore the assessee is entitled to the cost of construction amounting to Rs.1,97,32,354 as allowed by the Assessing Officer. 10.4.1 We have heard both parties and perused and carefully considered the material on record. As regards the allowability of the cost of acquisition of property to the assessee, we find that the co-ordinate bench of the Tribunal in the case of Smt. Jeeva Vadivelu (supra) at para 31 thereof has held as under :- “31…………….We are now concerned with the question as to whether the assessee should get the benefit of cost of construction of the 5 flats sold during the previous year. In our view, the assessee should be allowed the aforesaid benefit. Admittedly, the assessee had to pay a cost for acquiring these 5 flats. The Assessing Officer in the order of assessment has not given any cost to these flats. In our view, therefore the cost of 5 flats has to be worked out and for this purpose of working out the cost of acquisition of 5 flats, the matter is remanded to the Assessing Officer. The AO will verify the cost from the developer, who developed the properties and arrive at the cost of 8664 sq.ft. ……………………… “

12 ITA No.928/Bang/2014 K. Rajanna 10.4.2 In the case on hand, the Assessing Officer had admittedly already obtained the cost of construction from the developer and accordingly allowed the assessee the cost of acquisition of 11 flats sold with built up area of 18,937 sq. ft. at Rs.1,97,32,354. The ratio of the decision of the case of Smt. Jeeva Vadivelu (supra) is applicable to the assessee's case to the extent that the assessee was entitled to the cost of acquisition of the flats sold during the year under consideration. In the case on hand, the Assessing Officer has allowed the cost of acquisition of the 11 flats with a built up area of 18,937 sq. ft. @ Rs.1,042 per sq. ft. at Rs.1,97,32,354. We find from the impugned order, that the learned CIT (Appeals), in computing the cost of acquisition of the 11 flats, has held that the cost of construction to the builder/developer need not be considered as the cost of acquisition to the assessee and rendered the cost of acquisition to the assessee at Rs.1,49,40,196. This, in our considered view, is not in accordance with the ratio of the decision of the co-ordinate bench in the case of Smt. Jeeva Vadivelu (supra), wherein the Assessing Officer was directed to ascertain the cost from the developer, who developed the property, to arrive at the cost of acquisition to the assessee. In the case on hand, we find that the Assessing Officer’s computation of the cost of acquisition to the assessee in respect to the11 flats sold in the year under consideration was done after obtaining the cost of construction from the developer to arrive at the figure of Rs.1,97,32,354 (i.e. 18,939 sq. ft. @ Rs.1,042 per sq. ft.), as allowed in the order of assessment, appears to be in order. We are of the view that the finding of the learned CIT (Appeals), in reducing the cost of acquisition of the 11 flats sold by the assessee in this year from Rs.1,97,32,354 to Rs.;1,49,40,196 by unilaterally reducing the built up area from 18,939 sq. ft. to 14,338 sq. ft. is not sustainable on facts and therefore set aside the same and restore the finding of the Assessing Officer in the order of assessment. It is ordered accordingly. Ground No.6 of the assessee's appeal is allowed.

13 ITA No.928/Bang/2014 K. Rajanna 10.4.3 Even otherwise, the action and finding of the learned CIT (Appeals) in reduction of the cost of construction of the 11 flats sold by the assessee in the year under consideration from Rs.1,97,32,354 to Rs.1,49,40,196 is not sustainable since it has led to an enhancement of the assessee's income to the extent of Rs.47,92,158. In such circumstances, as per the provisions of section 251(2) of the Act, the learned CIT (Appeals) was required to put the assessee on notice and afford the assessee adequate opportunity of showing cause against such enhancement; which we find the learned CIT (Appeals) has failed to do. In this factual matrix, we find that the action of the learned CIT (Appeals) in reducing the cost of construction of the 11 flats sold by the assessee in the period under consideration, to be in gross violation of the provisions of section 251(2) of the Act, rendering the same illegal and unsustainable in law. We, therefore, reverse the order of the learned CIT (Appeals) and restore the order of the Assessing Officer on this issue. Consequently, Ground No.6 of the assessee's appeal is allowed on this alternate argument also. 11. In the result, the assessee's appeal for Assessment Year 2008-09 is partly allowed. Order pronounced in the open court on 4th Sept., 2015.

Sd/- Sd/- (P. MADHAVI DEVI) (JASON P BOAZ) Judicial Member Accountant Member

*Reddy gp