In a significant ruling, a division bench of the Delhi High Court upheld the order of the ITAT that the value of land as declared and assessed under Section 7(4) of the Wealth Tax Act could not be adopted as market value of the asset as on 1.4.1981 for purposes of computing taxable gain under the Income Tax Act.
A bench comprising of Justice S.Muralidhar and Justice Pradhiba M. Singh held so while considering bench of appeals under Section 260A of the Income Tax Act, 1961.
While admitting the appeal filed by the revenue the HC had framed some question of law at the same time framed some question of law regarding the appeal filed by assesse too.
The brief fact about the case was that Mr. Sumer Chand had purchased a land comprising of a house situated at 6, Aurangzeb Road, New Delhi. Later after his death one of the co-owners, Mr. Pratap Chand, succeeded to the property and converted it into a HUF in 1953-54 consisting of himself, his wife, Ms. Vasavi Pratap Chand and his son, Mr. Sidharth Pratap Chand . It is stated that Mr. Sidharth Pratap Chand, after his marriage in 1977, held one-third share of the property in the status of HUF.
Co-owners entered into an agreement with Ansal Properties & Industries Ltd in order to overcome the restrictions under Urban Land Ceiling Act, 1976 (ULCA),as per the said agreement the building on the land want to be demolished and construct an apartment complex . 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 sold their flat during the year 1993-94 to 1995-96(AY) 18,636 sq. ft. of built up area for a total consideration of Rs. 4,72,98,075/-. Each co-owner disclosed a loss of Rs. 31, 30,663/- under the head “capital gains” in their individual returns.
Initially both the AO and appellant, Commissioner of Income Tax 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. However ITAT disagreed the statement and held that neither the flats nor the land could be considered stock-in-trade. They were capital assets and also added that profit on sale of the capital assets was taxable under the head “Capital Gains”. Again ITAT remanded the matter to the AO for calculation of “Capital Gains” in the normal course.
AO, while completing assessment, held that for computing capital gains, the inflation indices of 1985-86 (125) and 1995-96 (259) were used to arrive at the indexed cost of the asset. The AO held such a method of calculation of the cost of acquisition of the asset as put forth by the Assesses was not correct.
Accordingly AO adopted the computation of cost of acquisition in the manner indicated in Section 49(1)(i) of the WTA. It was held that “the cost of acquisition of the asset cannot be arrived at on the basis of its value which was adopted for periods many years after 1 st April 1981 and that too treating it as commercially valuable after the collaboration agreement.”
The Assesse contended before the ITAT that only the cost of flat has to be considered not the cost of land; the land had already been sold to the construction company which was equal to the value of flats. Alternatively, it was contended that the sale of property was an improved one. Then the cost will be equal to 44% of land plus improvement cost and also included that value of the land assessed under Section 7 (4) of the WTA did not represent the market value as on 1 st April 1981. It was the ‘frozen value”
Before the High Court, assessee argued that land was transferred on the date of collaboration agreement is rejected because the sale consideration of 44% land was in kind amounted to investment in the construction of built up area. Hence, the same will be taken as cost of acquisition of flats after examining the record of the builder.
Considering the facts and arguments, the bench ruled that the ITAT did commit an error by not reducing the land and development charges from the sale consideration received by the Assessee while working out the capital gains.
Read the full text of the Judgment below.
