18 (2008) 24 SOT 366 (Mum.)
Maheshwar Prakash-2 CHS Ltd. v. ITO
ITA No. 34 (Mum.) of 2008
A.Y. : 2003-04. Dated : 15-5-2008
S. 48, read with S. 45 and S. 55 of the Income-tax Act, 1961 — Right to construct additional floors under Development Control Regulations, 1991, acquired by assessee without incurring any cost and, moreover, such right had no inherent quality of being available on expenditure of money — Such right is outside the scope of S. 45.
The assessee, a co-operative housing society established in the year 1962, owned a building in Santacruz, Mumbai. This building had been constructed after utilising the entire FSI available to it and, therefore, no right was available for any further construction on this plot of land. However, the Bombay Municipal Corporation (BMC) relaxed the development regulations in the year 1991 and on that account additional Transferable Development Right (TDR) of FSI was allowed under the newly enacted Development Control Regulations, 1991 (DCR). Thus, the assessee became entitled to construct additional space of 15,000 sq.ft. In view of the availability of such right, the assessee entered into an agreement with two developers on 25-11-2002 for construction of additional floors on the existing structure of the society’s building and development of the said property against a consideration of Rs.42 lacs. Under this agreement, TDR was to be arranged by the developers at their own cost. For the relevant A.Y. 2003-04, the assessee did not admit of any capital gain tax liability on the aforesaid amount of Rs.42 lacs. The Assessing Officer held that as per the amended provisions of S. 55(2) applicable to the year under consideration, the cost of acquisition was to be taken as NIL and, since the assessee had surrendered its right to the developers against the consideration, the income had accrued to it in the year under consideration. The Assessing Officer, therefore, assessed the entire sum of Rs.42 lacs in the hands of the assessee as long-term capital gain, holding that the right to construct was embedded in the land which was held by the assessee for more than three years.
The CIT(A) upheld the order of the Assessing Officer and also held that the instant issue was akin to the issue of bonus shares, which are issued only to the persons who own the original shares. He also held that the decision of the Supreme Court in the case of B. C. Shrinivasa Shetty (1981) 128 ITR 294/5 Taxman, relied on by the assessee was not applicable in the instant case.
The Tribunal set aside the orders of the lower authorities and held that the sum of Rs.42 lacs received by the assessee was not chargeable to tax u/s.45. Relying on the decision of the Mumbai Bench of the Tribunal in the case of Jethalal D. Mehta v. Dy. CIT, (2005) 2 SOT 422, the Tribunal noted as under :
(a) Clause (aa) and Clause (ab) of S. 55(2) deal with the case of shares or securities and, therefore, the same are not relevant for disposal of the instant appeal.
(b) The perusal of S. 55(2)(a) reveals that the cost of acquisition is to be taken at NIL in those cases where the capital asset transferred is either goodwill of business or a trademark or a brand name associated with business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carrier permits or loom hours. In the instant case, the assessee was not carrying on any business and the right to construct additional floors was not covered by any of the assets mentioned in the aforesaid Ss.(2) of S. 55. Therefore, the amended provisions of S. 55(2) did not apply to the instant case and the lower authorities were not justified in taking the cost of acquisition of the capital asset being a right to construct the additional floors at NIL.
(c) Further, the contention of the Revenue that right to construct the additional floors was embedded in the land and, therefore, the instant case was akin to the issue of bonus shares and, consequently, it could not be said that there was no cost of acquisition in respect of such right, was not acceptable for two reasons, firstly, because it was not the case of AO or the CIT(A) that the cost of acquisition was taken by them as NIL as per the amended provisions; secondly, because the theory of spreading over the cost of original shares over the original shares and bonus shares was based on the fact that bonus shares were issued to the detriment of the original shares. In the instant case, the right to construct attached to the land on the date of purchase of land had already been exhausted by construction of flats prior to 1991 as per the FSI available according to law as was in force. Therefore, there was no further right to construct any flat on that land. It was because of DCR, 1991 that additional right had accrued to the assessee, which was distinct and separate from the original right. Therefore, it could not be said that such right was embedded in the land. Even assuming, for the sake of argument, that such right was embedded in the land, there was no detriment to the cost of land by granting such right on the assessee-society. On the contrary, price of the land had increased because of the additional right made available to the assessee-society.
d) Ignoring the events involving the surrendered row house and on examination of the facts regarding the flat in Abhijit building, the assessee’s investment of capital gain in the purchase of block of shares of company, which, in turn, got him entitled to a flat in the Abhijit building, was within the period of three years. After all, the purchases of block of shares of company’S’ and procuring the entitlement to a flat were composite transactions which were interlinked. Therefore, the investment in block of shares of the company’S’ was the investment of capital gain in the flat.
e) On the issue of how the assessee’s case was a case of construction, the assessee’s reliance on Circular Nos. 471 and 672 was relevant. The combined reading of Circular Nos. 471 and 672 shows that investment as in the assessee’s case was to be treated as a case of construction for the purpose of 5. 54F. The assessee’s investment of Rs.30.50 lacs in the construction of the house in Abhijit building fell within three years of the first sale of the shares.
f) Therefore, the investment of the long-term capital gain in the flat in Abhijit building was a case of construction and applicable time limitation was three years and not two years as held in the impugned order by the CIT(A).