Income Tax Appellate Tribunal - Mumbai
Jethalal D. Mehta vs Dy. Cit on 27 January, 2005
Equivalent citations: [2005]2SOT422(MUM)
ORDER
Pramod Kumar, A.M. The short and interesting issue requiring our adjudication in this appeal is the issue of taxability of receipts on account of sale of additional floor space index received by the assessee, by the virtue of 'transferable development rights' (hereinafter referred to as the TDRs,) under the 'Development Control Regulations for Greater Mumbai 1991'.
2. The scheme of the Development Control Regulations for Greater Mumbai 1991 (hereinafter referred to as the DCR,), so far as it pertains to the issue in appeal before us, is like this Regulation 34(1) of the DCR provides that the owner or lessee of a plot, which is reserved for public purposes under the development plan of the DCR, will be eligible for award of compensation by way of 'development right certificates' (hereinafter referred to as the DRCs) of equivalent floor space index (hereinafter referred to as the FSI). In other words, in consideration of plot being reserved for public purposes under the development plan, the person who so loses his plot gets certain development rights for availing additional floor space index equivalent to the floor space index so lost for public purposes. The development rights are transferable in nature in the sense that either the person receiving the DRCs can use these rights himself or transfer the same to any other person. However, these development rights cannot be used everywhere and certain limitations for the use of these development rights are set out in Regulation 34 itself. The plots on which these development rights can be used are termed as 'receiving plots'. On these plots, in addition to whatever floor space index was originally available to the owners or lessors of such plots, additional floor space index can be allowed to the owners or lessors, on using the transferable development rights contained in DRCs, for the purpose of construction of building.
3. The assessee before us is a person who is owner of, what is termed in DCR as a 'receiving plot'. The assessee had acquired the leasehold rights in that plot of land in the month of October 1971 and thereafter the assessee constructed the two storey building containing some flats. All these flats were given on monthly tenancy to several tenants. By constructing the said building, the available FSI was fully exhausted. It was in the year 1991 and by the virtue of 'Development Control Regulations for Greater Mumbai 1991' that the assessee became owner of the valuable right of availing additional floor space index under through transferable development rights. He has entered into an arrangement with a developer who has used TDRs on assessee's plot to avail additional floor space index. Additional storeys of the building were thus constructed, which, under the arrangements that the assessee had with developer, belonged to the developer. In consideration of allowing the said developer to construct on the said additional floor space, the assessee has received a consideration of Rs. 33,62,500. The right to construct this additional floor space have been thus assigned to the developer and in consideration of this assignment, the said sum of Rs. 33,62,500 is received. The dispute which has travelled in appeal before us is whether or not this amount is taxable in the hands of the assessee. The assessee's contention that there was no cost of acquisition of this right as 'receiving plot', and, therefore, the sale of this right cannot lead to a taxable capital gain in the hands of the assessee, did not find favour with the assessing officer. The assessing officer was of the view that 'it is not correct to say that there is no cost of acquisition of additional FSI under the transfer of development rights' and that' the assessee has incurred the cost of acquiring the lease hold land in 1971 as well as incurred the cost for constructing the building on the said land'. The assessing officer was of the view that 'the assessee has acquired the additional FSI under TDR only because he had receiving plot in his hand'. On this reasoning the assessing officer of the view that cost of acquisition of the receiving plot is to be spread over entire floor space including the additional floor space granted under the 'Development Control Regulations for Greater Mumbai 1991. The assessing officer also relied upon the decision of the Special Bench of this Tribunal in the case of Cadell Wvg. Mill Co. (P.) Ltd. v. Asst. CIT (1995) 55 ITD 137 (Bom.). It was in this backdrop that the assessing officer brought to tax the entire consideration on assignment of additional floor space index as long-term capital gain'. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) approved assessing officer's reliance on Special Bench decision in the case of Cadell Wvg. Mill Co. (P.) Ltd. (supra), as also the stand that the cost of acquisition of the rights assigned is the cost of acquisition of the plot in question. The CIT(A) also held that 'the assessee got his designs approved from the Corporation and constructed the building on that plot', and that 'only after so much of expenditure he got the tenancy rights to transfer the open portion of the property to some person as per the law'. The CIT(A) went on to observe that "As per the provisions of section 55, the provisions of section 55 the transfer of tenancy right is fully covered in the definition as per Finance Act, 1994, with effect from 1-4-1995". As regards the applicability of Hon'ble Supreme Court's judgment in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294(SC) the CIT(A) observed that "the person having TDR right had to surrender his land to the Government to purchase these rights and also the right to construct on the property of the assessee and, therefore, it cannot be said that there is no cost of acquisition. The CIT(A) thus approved the stand of the assessing officer. The assessee is not satisfied with the order of the CIT(A) and is in appeal before us.
4. We have heard Shri Jhaveri, learned counsel for the assessee, and Shri Bose, learned Senior departmental Representative. We have also perused the material before us and duly considered factual matrix of the case as also the applicable legal position,
5. We may mention that as far Cadell Wvg. Mill Co. (P) Ltd.'s case (supra) is concerned, the Special Bench decision of the Tribunal has since been reversed by the Hon'ble Bombay High Court in the judgment reported as Cadell Wvg. Mill Co. (P) Ltd. v. CIT (2001) 249 ITR 265(Bom). Suffice to say that for this reason alone revenue's rejection of assessee's claim, by relying upon Cadell Wvg. Mill Co. (P.) Ltd. case (supra) is no longer sustainable in law. We need not go further into this aspect of this aspect of the matter. The only other reason of rejecting the claim that the assignment of additional floor space index is that, according to the authorities below, this right has cost of acquisition which consists of cost of purchase of plot, costs of getting the designs approved and costs of constructing the building. In this context, however, what is necessary to appreciate is that the rights assigned to the developer are the rights to receive and apply the transferable development rights, and that these rights arose to the assessee by the virtue of introduction of 'Development Control Regulations for Greater Mumbai 1991'. Until the point of time these development regulation came into existence, the assessee did riot have right to receive and apply the transferable development rights. It is these rights on the assignment of which the assessee has received the impugned amount.
Therefore, the expenditure incurred on purchase of plot and construction thereon cannot be said to be the costs for acquisition of these rights. The rights are acquired by the virtue of being owner of the plot in the specified area but that does not mean that the cost incurred on the plot is the cost of acquiring these rights. The effect of the rights being relatable to the leasehold rights in the plot could at best be that the amount received by the assessee on assignment of rights to receive the transferable development rights ends up reducing effective cost of acquisition of the land and building in the said plot. Therefore, as and when the assessee transfers the said plot, building or any portion thereof and while determining capital gains arising on such sale, the cost of acquisition may stand reduced by the amount received by the assessee on assignment of rights to receive the TDRs. The CIT(A)'s observations that this right cannot be said to be without any cost of acquisition because the TDRs have been received on surrender of reserved plot to the government is ex facie incorrect inasmuch as what we are really concerned with is the right to receive the TDR on the plot owned by the assessee, and not with the right to receive the TDR from the government. The person getting TDRs from the government has to surrender the reserved plot but the person on whose plot such TDRs can be used, as is the case we are in seisin of, does not do anything more than owning the 'receiving plot'. The costs incurred by a third party for acquiring the TDR has nothing to do with the right to availing the said TDR on assessee's plot. Similarly, the costs of plot and costs of construction are also not the cost of acquisition of these rights. What the assessee has transferred is not the plot or the building, but a right parting with which does not result in parting with land or building. The costs of obtaining BMC approval for the building plan can also not be said to be the costs of acquisition of these rights as these rights do not arise by the virtue of getting these approvals but by the virtue of a legal right independent thereof. The law is trite, and there is no dispute on the said position, that when an asset has no cost of acquisition, the gains on sale or transfer of same cannot be brought to tax. The law laid down by the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294(SC) clearly holds so. For all these reasons, we are of the considered view that the receipts on sale of assignment of rights to receive TDRs are not liable to tax. The authorities below erred in law and on facts in holding to the contrary.
6. In view of the above discussions, we direct the assessing officer to delete the addition of Rs. 33,62,500 in the hands of the assessee. The assessing officer, however, will consider reducing the cost of acquisition of the related plot and building by the said amount, as and when and in case the assessee sells the same, partly or fully, and the capital gains are required to be computed in respect of the same.
7. In the result, the appeal is allowed in the terms indicated above.