ACIT 21(1), MUMBAI vs. DAYAL BAPULAL THAKKER, MUMBAI

The dispute relates to the determination of fair market value of “reserved plot” and computation of capital gain.

The facts relating to the issue are discussed in brief. M/s Bapulal M Thakkar (HUF) owned a property at Malad East, Mumbai having an extent of 27,729.40 Sq. Mtrs. On 28-08-2003, the above said HUF was partitioned between the assessees herein and HUF of their brother. The assessee M/s Dayal B Thakkar (HUF) got 25% share, M/s Nirmal B Thakkar (HUF) got 50% share and the HUF of another brother got 25% share and consequently they became co-owners of the property located at Malad East with the shares stated above (hereinafter referred as “Co- owners”). On 08th Sep. 2003 all the three co-owners converted the property into “Stock in trade” by making a declaration in writing. At the time of conversion into stock in trade, they obtained valuation report from an approved valuer named M/s Hemal Ganatra & Associates in order to determine the fair market value on the date of conversion. The above said valuer, vide his report dated 6th September, 2003, determined the value of land at Rs.2959.18 lakhs. The valuation report is attached in pages 1- 15 of the paper book filed by M/s Dayal Thakkar (HUF). The valuation has determined the fair market value of land at Rs.10,671/- per Sq. mt. or Rs.991/- per Sq. ft. (Rs.10,671/- divided by 10.764, i.e. 1 Sq. mt = 10.764 Sq. ft.).

The co-owners of the land had planned to enter into a development agreement with a builder at that point of time and hence they decided to convert the property into their stock in trade. Hence, in order to determine the fair market value of the property on the date of conversion referred above, they have obtained report from an approved valuer, who determined the value at Rs.10,671/- per Sq. mtr and Rs.2959.18 lakhs for the entire land. In the declaration dated 8th Sep. 2003, the co-owners declared the fair market value of land at Rs.2950 lakhs and accordingly they accounted for their respective shares in the books of account, i.e., M/s Dayal Bapulal Thakkar (HUF) accounted for 737.50 lakhs (25% of Rs.2950 lakhs) and M/s Nirmal B Thakkar accounted for 1475 lakhs (50% of Rs.2950 lakhs) as the fair market value of their respective share in the land and shown the land as “Stock in trade” in the books in FY 2003-04.

Thereafter, the co-owners entered into a development agreement with M/s K.Raheja Universal Private Limited on 14.10.2003 for development of the above said land. However, since the co-owners had converted their property into stock in trade, both the assessees and the assessing officer have agreed that the provisions of sec. 45(2) shall be applicable to these transactions. The said section reads as under:- “45(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock in trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.” In view of the provisions of sec. 45(2), both the parties have agreed that the tax incidence shall arise only in the year in which the “stock in trade” is sold or otherwise transferred.

As per the rules of Brihanmumbai Municipal Corporation (BMC), construction can be made upto the limit of applicable FSI. Further, the developer is required to surrender a portion of land to BMC towards public amenities like School, Play ground etc. In lieu of such surrender, additional FSI is given by BMC to the project. The said additional FSI is termed as “Reservation FSI”. Such additional FSI is transferrable and hence they are also called as “TDR”, i.e., “Transferrable Development Rights”. Further, the assessees/developers are also entitled to purchase TDR-FSI available on redevelopment of slum areas. Based on these rules, the co-owners and the developers have identified the potential construction area available on the above said land as under:- In Sq. ft. a. FSI available on the basis of physical area of the plot including set back area (Basic FSI) 1,94,304 b. FSI in lieu of handing over to BMC for muncipal primary school and play ground (Reservation FSI) 74,278 c. FSI by way of TDR (TDR-FSI) 1,00,157

During the year under consideration, the co-owners sold the “Reservation FSI” of 74278 Sq. ft. for a consideration of Rs.7,20,93,139/-, which was divided between the co-owners in their respective share ratio as under:- a. Dayal Bapulal Thakkar (HUF) - 25% - 1,80,23,285 b. Nirmal B Thakkar (HUF) - 50% 3,60,46,569 c. Suratchandra B Thakkar (HUF) - 25% - 1,80,23,285 The above sale proceeds were offered as business income by these assessees, since they had converted the property into stock in trade. It is pertinent to note that, as per the provisions of sec. 45(2), the tax incidence shall arise in the following manner:- (a) The difference between the sale consideration and the fair market value as on the date of conversion shall be assessed as Business income. (b) The difference between the fair market value as on the date of conversion and the cost of acquisition of asset shall be assessed as Capital gains.

We have earlier noticed that the fair market value of land was determined by the approved valuer at Rs.2950 lakhs. We have also noticed that a portion of land had to be handed over to BMC towards development of amenities. Accordingly, the co-owners have segregated the total area of land into two parts:- Part A 2,19,533 Sq.ft. – on which construction of the structure is Permissible. Part B 78,791 Sq.ft. - on which construction of the structure is not permissible. ------------------- 2,98,324 Sq. ft. equivalent to 27729 Sq. mtrs. ========== The co-owners allocated the value of open land determined by the approved valuer, i.e., Rs.2950 lakhs between Part A and Part B referred above. The value allocated to Part B on proportionate basis worked out to Rs.779 lakhs. The co-owners took the value relatable to Part B as the fair market value attributable to the sale consideration of “Reservation Plot TDR”. Accordingly they deducted the same against the sale consideration for the purpose of computing the Business income, i.e., Rs.194.79 lakhs for 25% share etc. They have also took the same value for the purpose of computing capital gains also.

The Ld CIT(A), however, held that the fair market value adopted by the assessees on the basis of valuation report is acceptable. He held that there is no basis for considering the fair market value of TDR instead of adopting the valuation of the reserved plot. Accordingly, the Ld CIT(A) set aside the order of AO on this issue. With regard to the issue relating to the indexation benefit, the Ld CIT(A) allowed the claim of the assessee by following the decision rendered in the case of DCIT Vs. Manjula J Shah.

We heard the parties and perused the record. The first issue relates to the determination of the fair market value of the property on the date of conversion of the property into stock in trade. There is no dispute with regard to the fact that the assessees got “Reserved plot TDR”, only upon surrender of a portion of land to BMC for utilizing the same for public purposes, i.e., there is no question of getting Reserved plot TDR without surrendering the portion of the land. Upon surrender of land, the assessees are deprived of their right to sell or transfer the land and instead they acquire a right over the Reserved plot TDR, which they are entitled to sell or transfer, meaning thereby the land surrendered by them to BMC is substituted by the TDR. Hence, we are of the view that the Ld CIT(A) was justified in observing that the TDR is only a consideration received by the appellants for having developed and transferred to BMC the reservation plot and accordingly what has to be valued as on the date of conversion is the Malad land. Accordingly, we are of the view that the Ld CIT(A) was justified in holding that the fair market value of land surrendered to BMC should be adopted as the cost price of the “Reserved plot TDR”.

With regard to the valuation of the land as on the date of conversion, we have earlier noticed that the approved valuer has valued the land at Rs.991/- per sq.ft. In the assessment order, the AO has referred to a value of Rs.800/- per sq.ft. as the value adopted for stamp duty purposes. It is a settled proposition that the fair market value is the price, which a willing purchaser is ready to pay to a willing seller. The said price is normally determined by various factors like extent of the land, the dimensions of the land, the location of the land, i.e., near the high way or inside, distance from the major roads, the frontage area available, the facilities available around the land, the development potentials, approach road facilities, ease of commutation etc. Hence for determining the fair market value, the stamp duty value can be only one of the factors and it cannot be the sole factor. In this regard, we may gainfully refer to the decision rendered by the Hon‟ble Allahabad High Court in the case of CIT Vs. Smt. Raj Kumari Vimala Devi (279 ITR 360), wherein it was held as under:-

The apex court in the case of Jawajee Nagnatham v. Revenue Divisional Officer has held that the Basic Valuation Register prepared and maintained for the purpose of collecting stamp duty cannot form the foundation to determine the market value mentioned thereunder in instruments brought for registration. Equally it would not be a basis to determine the market value underSection 23 of the Land Acquisition Act, of the lands acquired in that area or town or the locality or the taluk, etc.

This Court in the case of Dinesh Kumar Mittal v. ITO [1992] 193 ITR 770 ; [1991] UPTC 1209 has held that we cannot recognise any rule of law to the effect that the value determined for the purpose of stamp duty is the actual consideration passing between the parties to a sale. The actual consideration may be more or may be less. What is the actual consideration that passed between the parties is a question of fact to be determined in each case, having regard to the facts and circumstances of that case.” Identical view has been expressed by the Hon‟ble Punjab & Haryana High Court in the case of CIT Vs. Chandni Buchar (323 ITR 510).

A perusal of the report given by the approved valuer would show that the valuer has stated that the land is located in residential cum commercial zone and all the facilities/civic amenities like schools, hospitals, offices, markets, cinemas etc. are available in the vicinity. The valuer has also pointed out that the plot is having good frontage on the Quarry Road now called Rani Sati Marg, though the plot is irregular in shape. The valuer has also reported that the land is well connected by rail and road transport. The Ld CIT(A) has further pointed out that the assessing officer has also not found out or pointed out any error in the value determined by the approved valuer. In view of the above, we are of the view that, no case has been made out by the revenue to disturb the fair market value determined by the approved valuer. In any case the difference between the stamp duty value of Rs.800/- per sq.ft and the value of Rs.991/- determined by the approved valuer cannot be considered to be extra ordinary, when we consider the positive aspects described by the approved valuer. Accordingly, we do not find it necessary to disturb the view taken by Ld CIT(A) on this issue.

During the course of hearing, the bench directed the Ld D.R to ascertain about the action taken in the hands of another co-owner named M/s Suratchandra B Thakkar (HUF). The Ld D.R furnished a copy of assessment order dated 31.3.2014 passed in the hands of the above said co-owner u/s 143(3) r.w.s. 147 of the Act and a perusal of the same shows that the assessing officer has made addition only with regard to the profits arising on sale of flats. Thus, we notice that there is no discussion about the fair market value adopted by the assessee on the basis of valuation report, meaning thereby the value declared by that assessee has been accepted by the assessing officer.

The Ld A.R appearing for M/s Nirmal B Thakkar (HUF) submitted that the assessing officer reopened the assessment relating to assessment year 2004-05, i.e., the assessment of the year in which the property was converted into stock in trade in the case of M/s Nirmal B Thakkar (HUF). He submitted that the assessing officer, in the reopened assessment, did not disturb the fair market value accounted for by the assessee in the books of account. It was submitted that the same value was carried over by the assessee over the years as closing stock and opening stock. Accordingly it was contended that the assessing officer, having accepted the closing stock value in the immediately preceding year, should not have disturbed the same during the year under consideration. It was also argued that the assessing officer should not have disturbed the value accounted for in the books of account without rejecting the books of account. In this regard, the Ld A.R appearing for M/s Nirmal B Thakkar (HUF) relied upon the decision rendered by the Hon‟ble Supreme Court in the case of Sargam Cinema (328 ITR 516). It was also submitted that the information obtained by the AO from the stamp value authority was not confronted with the assessees herein.

Since we have upheld the view taken by ld CIT(A) by examining the facts available on record, we do not find it necessary to address various legal issues urged by the assessees herein. In any case, the fact that the assessing officer has accepted the fair market value in the hands of another co-owner and the fact that the fair market value was not disturbed in the reopened assessment made in the hands of M/s Nirmal B Thakkar (HUF) for AY 2004-05 show that the approach adopted by the assessing officer was very much inconsistent and hence his order cannot be sustained.

The next issue relates to the computation of indexed cost of acquisition. We noticed earlier that the assessees adopted the fair market value as on 1.4.1981 as „Cost of acquisition‟ for the purpose of computation of capital gain and accordingly claimed indexation benefit from FY 1981-82. However, the AO took the view that the assessees became owners of the property from FY 2006-07 relevant to the year under consideration only and indexation benefit can be given from AY 2006-07 only. The Ld CIT(A) however allowed the indexation benefit from FY 1981-82, since the assessees had inherited the property and the previous owner had held the property since prior to 1.4.1981 by following the decision rendered by the Tribunal in the case of Manjula B Shah. The decision rendered in the case of Manjula B Shah by the Tribunal has since been upheld by the Hon‟ble jurisdictional High Court and the same is reported in 355 ITR 474. There should not be any dispute that the decision rendered by the jurisdictional High Court is binding on the department. Accordingly, we do not find any reason to interfere with the decision rendered by Ld CIT(A) on this issue.

In the result, the appeals filed by the revenue are dismissed. Pronounced accordingly on 18th November, 2015. घोषणध खुरे न्मधमधरम भें ददनधंकः 18th Nov, 2015 को की गई । Sd sd (PAWAN SINGH) ( B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER भुंफई Mumbai: 18th Nov, 2015. व.नन.स./ SRL , Sr. PS