By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
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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).
