By TIOL News Service

NEW DELHI, AUG 29, 2017: THE issue before the Bench is - Whether if assessee enters into development agreement with builder and exchanges certain part of land against some built up area, such a deal is to be treated only as transfer of possession as per Sec 2(47). YES is the answer from the High Court.

Facts of the case   

A residential property situated in New Delhi comprising of a house and open land admeasuring 2.85 acres was purchased in 1947 by Mr. Sumer Chand. After his death in 1951, one of the co-owners, Mr. Pratap Chand, succeeded to the property. Mr. Pratap Chand converted the property into a Hindu Undivided Family (‘HUF') property in 1953-54 consisting of himself and both appellants ( his wife and his son). In 1969-70, the property was partially partitioned among the three members of the HUF in equal proportion. The property thus came to be owned by the three co-owners. To overcome the restrictions applicable to the property under the Urban Land Ceiling Act (‘ULCA'), the three co-owners entered into an agreement with Ansal Properties & Industries Ltd. (‘Ansals') on 2nd May 1984. In terms of said agreement, the building on the land was to be demolished and an apartment complex was to be constructed thereon. It was agreed that the co-owners would get built-up area of 89,136 sq. ft. which constituted 56% of total built up area. 44% of the built up area would belong to Ansals. The entire cost of construction was to be met by Ansals.

The co-owners entered into agreements with various flat buyers and ultimately sold constructed flats during the AYs 1993-94 to 1995-96. During the AY in question, i.e. 1995-96, the three co-owners sold 18,636 sq. ft. of built up area and disclosed a loss under the head “capital gains” in their individual returns.

Both the AO and the CIT (A) treated the flats as stock-in-trade and the land as converted stock-in-trade. They then concluded that the transaction was an adventure in the nature of trade and the income therefrom had to be taxed as business income.

On appeal, the Tribunal by its order, disagreed with such conclusions and held that neither the flats nor the land could be considered stock-in-trade. They were capital assets. Therefore, in the view of the Tribunal, the profit on sale of the capital assets was taxable under the head “Capital Gains”. Having held as such, the ITAT remanded the matter to the AO for calculation of “Capital Gains” in by taking cost of aquisition at 44 percent of total value of land.

On appeal, the High Court held that,

++ it is seen that the order of the Tribunal correctly understood the nature of transaction. There was no transfer of the title to the land by the Assessees in favour of Ansals. Indeed, what was transferred under the collaboration agreement was only 44% of the land owned by them in exchange for 56% of the built up area and not the entire land as contended even before the Tribunal by the Assessees;

++ further, the Assessees not only transferred the flats to buyers but the proportionate right in the appurtenant land as well. The contention of the Assessees that the land was transferred on the date of the collaboration agreement was also rightly rejected. There was a transfer of possession of 44% of the land by the Assessees to the builder and possession of 56% of the built up area by the builder to the Assessees in terms of Section 2 (47) of the Act read with Section 53A of the Transfer of Property Act. The consideration for the transfer of 44% land was the cost of construction of the 56% built up area;

++ the Tribunal is right in accepting the alternative contention of the Assessees that it was improvement of assets and costs of acquisition would include the costs of flats as well as the cost of land. There was no difficulty as far as costs of flat was concerned as it would be equal to costs of construction of 56% of the built up area. As far as cost of acquisition of land was concerned, it had to be the market value of land as on 1st April 1981. It was noted that no exercise was undertaken for determining the costs of acquisition of land as on 1st April 1981.

(See 2017-TIOL-1697-HC-DEL-IT)