By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Chartered Accountants
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Section 2(29A) – Capital gains on subsequent sale of flats received by the land owner from the developer under a development agreement needs to be computed separately for transfer of land and suprestructure.
Facts:
The assessee, owner of land since 1962, entered into an agreement with a developer in 2001. Under the agreement, while transferring interest in the land to the extent of 45 % for a consideration of Rs. 61 lakh, assessee retained the balance 55 % of land together with right to corresponding built up area thereon. As regards transfer of 45 % of land, assessee paid capital gains tax in A.Y.: 2002-03. Assessee was handed over possession of the built up area vide occupation certificate dated 24-2-2005. During A.Y.: 2007-08, assessee sold two flats and returned capital gains on sale of flats as long-term capital gains on the plea that it was under the right created under agreement of 2001 that assessee acquired and sold the flats. The Assessing Officer did not accept the computation of capital gain made by the assessee taking gain as long term capital gain. The Assessing Officer observed that the assessee had taken possession of the flats as per full occupation certificate dated 24-02-2005 and therefore, assessee was holding the said flats from the said date and since flats were sold in A.Y.: 2007- 08, the period of holding was less than three years and therefore capital gain had to be treated as short term capital gain.
Held:
Right to claim the flat as per agreement in the year 2001 was an asset but the assessee had not sold the right to acquire the flats. The assessee had sold the flats of which he was owner. The right to acquire the flats, no longer subsisted once the assessee acquired the flats and took possession of the same on 24-02- 2005. The right to acquire the flats and ownership of the flats are two different assets. The capital gain had therefore to be computed in respect of sale of flats and not in respect of right to acquire the flats.
However the assessee alongwith flats had also sold his right in the land which was an independent asset and which was being held by him since 1962 as an owner. Therefore sale consideration also included price paid in respect of right in the land in addition to price for superstructure. It would be reasonable to adopt a profit margin of 25% on the cost of construction of the flats to arrive at the sale consideration pertaining to the superstructure. The balance sale consideration of the flats will be appropriated towards the sale price for the transfer of right in the land.
Thus, the capital gain in respect of transfer of right of assessee in the land has to be computed separately as long term capital gains and gain in respect of sale of superstructure has to be treated as short term capital gain.
