In a significant ruling, the ITAT, Hyderabad bench held that for computing Long Term Capital Gain of an assessee who transferred his land under a Joint Development Agreement, the cost of construction of the flats by the builder as the sale consideration received by the assessee. The division bench also clarified that in such cases, the Assessing Officer cannot apply section 50C of the Income Tax Act, 1961 and cannot adopt SRO value for computation of capital gain.
Assessee, alongwith his children, co-owned land which was later transferred to a builder under the Joint Development Agreement. As per the agreement, the assessees were entitled to receive flats built on 44% of the super built up area, whereas the builder would have rights to sell 55% of the area. Assessee said that the MOU entered with the builders was not a registered document and therefore, no capital gain arose on that day.
The AO, however, relied upon the sale deeds dated 27.12.2006 and 13.11.2006 whereby the constructed flats were sold and the sale consideration was received to charge the capital gain in the hands of the respective assessees for the A.Y 2007-08 and denied the exemption under Section 54F of the Income Tax Act. For computing long term capital gain, the AO applied section 50C of the Income Tax Act and adopted the SRO value of flats received by the assessee as consideration for the transfer of the land under the development agreement.
The bench noted that in the earlier proceedings, the Tribunal has held that the capital gain will arise in the year of executing the development agreement along with handing over of the possession of the property to the developer.
Though the bench upheld the assessment order, it was clarified that assessee was entitled to deduction u/s 54F of the Act in respect of more than one residential flats received by virtue of a development agreement.
With regard to the issue of applicability of section 50C of the Income Tax Act in the present case, the bench found the same as incorrect. “The cost of the constructed area received by the assessee should be taken as the consideration received by the assessee in lieu of the development agreement and not the SRO value. The SRO value u/s 50C of the Act would come into play when the assessees sell their share of the flats and if the sale consideration received by them is less than the SRO value. Therefore, the AO is directed to take the cost of construction of the flats by the builder as the sale consideration received by the assessee for transfer of land to the development for computing the long term capital gain.”
Read the full text of the Order below.
