Income Tax Appellate Tribunal - Hyderabad
K Venkatram Reddy, Hyderabad vs Assessee on 30 August, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ' A ', HYDERABAD
BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI CHANDRA POOJARI ACCOUNTANT MEMBER
IT(SS)A-60/Hyd/2007 Block period: 1.4.1995 to 5.9.2001
Shri K. Venkatram Reddy Vs. ACIT, Circle 1(1), Hyderabad
Hyderabad
(PAN ANEPK 4373 K)
IT(SS)A.61/Hyd/2007 Block period: 1.4.1995 to
Shri K. Vishnuvardhan Reddy 5.9.2001
Hyderabad ACIT, Circle 1 (1),
(PAN ANJPK 0662N) Hyderabad
(Appellant) (Respondent)
Appellant by : Shri Rama Rao, Advocate
Respondent by : Shri K.V.N. Charya, D.R.
ORDER
Per Chandra Poojari, Accountant Member:
These two appeals by above assessees are directed against the common order of CIT(A)-VI Hyderabad dated 30.8.2007 for the block period 1995 to 2000-2001.
2. The first issue is with reference to validity of initiation of proceedings u/s 158BD of the IT Act. We have heard both the parties on this issue. According to the learned counsel for the assessee even if the assessee had not filed any regular income tax returns for the earlier assessment years information gathered during search operation of SMR builders relating to land transaction and financial transaction of the assessee would not result in assumption of jurisdiction for block assessment proceedings by the assessing officer.
1The learned counsel has attempted to make out a case that since according to the assessee own calculation there was no assessable total income either for the assessment year 2001-02 or for any of the earlier assessment years there was no statutory obligation on the assessee to file any income tax return in accordance with the provision of section 139(1) of the income tax Act, 1961. Similarly, since according to the assessee's own method of determination of long term capital gains from the transfer of land under development agreement no positive income had arisen in the hands of the assessee there was no question of any non disclosure of the assessable total income in the hands of the assessee out of such land transaction. In other words, in the considered view of the counsel it could not be held that but for search and seizure operations carried out in the business premises of SMR Builders the assessee would not have filed any return of income showing any taxable receipts and therefore, the provision of section 132 could not be applicable to the assessee case.
3. The arguments of the assessee counsel is not in accordance with the implication of the provision of sec.132 of the Act. It is an undisputed fact that the assessee had not filed any return of income for earlier assessment years. Even in respect of the transfer of land under development agreement the assessee had not filed any return of income voluntarily before search operation. The claim that according to the assessee is that the long term capital gains from the transfer of land jointly owned by the assessee was a negative figure cannot be considered as an acceptable reasoning to hold that the assessee could not be lawfully proceeded u/s 158BC of the Act. Whether such persons have to file income tax returns or not cannot be exclusively based upon certain understanding of the statutory 2 provisions of the IT Act and the rules made there under or the manner of computation of certain assessable income from financial transactions in particular may as understood by the concerned persons treating such approach to be justified under law and facts without any proper analysis and examination of the issues involved. In other words, it is only because certain persons have determined their taxable income to be negative, the Income Tax authorities vested with statutory powers cannot be required to simply accept such computation made by the persons without applying the proper provisions of statutes/rules. In the present case, admittedly notice u/s 158BD issued on 25.9.2003. The assessee required to file return of income u/s 139(1) of the IT Act on or before 31.10.2001 and u/s 139(2) of the IT Act on or before 31.3.2002. No return of income was filed till the issue of notice u/s 158BD of the IT Act. As seen from the facts of the case the assessee has no intention to file the return of income though there is an assessable capital gain on transfer of the land. There was an incriminated materials relating to the transaction in land had been detected during the search operation in the case of M/s SMR Builders (P) Ltd. on 5.9.2001. Thereafter the assessing officer having jurisdiction over the searched party communicated his satisfaction to the assessing officer of these assessees and the assessing officer has issued notice was u/s 158BD to these assessees on 25.9.2003 to file the return of income. In our opinion, where a person is search u/s 132 of the IT Act, 1961, and the assessing officer who is seized of a matter and has jurisdiction over such person must record satisfaction that any undisclosed income belongs to any other person, other than the person with respect to whom search was made u/s 132 of the Act and thereafter books of accounts or other documents or assets seized or requisitioned had to be hand over to the 3 assessing officer having jurisdiction over such other person and that concerned assessing officer shall proceed u/s 158BD read with 158BC against such other person. In the present case, there is no dispute that all these conditions fulfilled. In our opinion, taking recourse to block assessment in terms of section 158BD read with 158BC in respect of these assessees were duly complied with and the assessing officer within the power to frame the assessment accordingly. The action of the assessing officer is confirmed on this issue. Further, we place reliance on the judgement of Hon'ble Supreme Court in the case of Manish Maheshwari Vs. ACIT (289 ITR 341) (SC).
4. The next ground is with reference to computation of capital gain.
5. The brief facts relating to these issues are that the assessee herein is an individual when he is minor, he acquired a right over the property situated at Plot No.182, H.No.10-2-286 Road No.6 , West Maredpally, Secunderabad consisting of 789 sq. yards of land and 4,344 sq.ft of constructed area in the ground floor, vide agreement dated 6.6.1979. According to the said agreement, the total consideration for the property was fixed at Rs.2,47,000/- out of which Rs.1 lakh was paid on the date of agreement and the balance of Rs.1,47,000/- was paid by 17.10.1979. The property was registered in favour of the assessee and his brother on 17.10.1979. This property was in Secunderabad Cantonment area on which the Defence Estate Officer had the rights and all the owners enjoyed only tenancy rights. The Defense Estates Officer sanctioned ownership rights to the assessee and his brother vide his letter dated 2.11.1982, with the Defence Estate Officer. The assessee paid consideration of 4 Rs.1,28,982/- to the Estate Officer and incurred expenditure on registration charges for getting the conveyance deed executed. Though the conveyance deed was executed on 11.11.1997, the assessee became the absolute owner in October, 1979 itself when he took possession of the property on purchase. The total expenditure incurred by the assessee is the amount paid at the time of purchase of property, expenditure incurred on conveyance from the Estate officer. Beside, after the purchase of property, the assessee constructed the first floor of the building incurring an expenditure of Rs.5,00,240/ for construction of 3,848 sq. area. The property was leased out to St. Marks High School, Maredpally. The rent received from the said school was being admitted in the return of income filed by the assessee. From the assessment years 1993-94 and onwards no returns of income were filed as there was no taxable income.
5.1. On 2.6.1997, an agreement was entered into for development of the property into residential flats with M/s Satyam Creative Constructions, a partnership firm. According to the said agreement, the constructed area as per the plan sanctioned by the Municipal Corporation is to be divided among the assessee and the builder in the ratio of 40:60. A sum of Rs.10 lakhs was paid by the developer as a caution deposit to the assessee which is refundable to the developer. According to the agreement, the entire property including the building was subject matter of transaction. The builder agreed to demolish the building. It demolished the building and commenced construction but could not develop the property any further for various reasons. Later, as the builder Satyam Creative Constructions could not complete the construction, the assessee entered into a development agreement with another concern M/s SMR 5 Builders P Ltd. on 20.7.1998. The assessee also entered into a MOU executed on 20.7.1998 with the builder to the effect that an amount of Rs.14,50,000/- because due to Satyam Creative Constructions and in lieu of the amount payable, the assessee agreed to sell 2300 sq.ft. and pay the said amount to the earlier builder. The assessee virtually transferred the development rights from Satyam Creative Constructions to M/s SMR Builders P Ltd. In the mean time, the assessee gifted 25 sq. yards each of undivided share of land in favour of his four sisters namely S/Smt. Malathi, Madhavi, Manjula and Lakshmi. In turn, the four sisters entered into construction agreement with M/s SMR Builders P Ltd. and agreed to pay an amount of Rs.1,25,000/- each for constructing the flats on their behalf. On completion of the construction of the flats, M/s SMR Builders P Ltd. transferred the following areas to the persons mentioned against each:
a) K. Venkataram Reddy 3,515 sft. b) K. Vishnu Vardhan Reddy 3,515 c) Smt. Malathi 1,460 d) Smt. Manjula 1,050 e) Smt. Madhavi 1,460 f) Smt. Lakshmi 1,050
5.2. As the assessee agreed that he would sell about 2000 sft. of the constructed area and pay the amount due to the earlier builder, M/s SMR Builders P Ltd. on behalf of the assessee sold four flats with an aggregate constructed area of 4,200 sq.ft for a total consideration of Rs.28,55,000/-
5.3. In the entire transaction the capital gain arises at the time when the assessee received the constructed area in lieu of the land transferred by him. The capital gain has to be worked out taking into 6 consideration, the cost of construction to the builder as multiplied by the area allotted to the assessee. The second stage of capital gain arises when four flats have been sold and sale consideration was realized. Accordingly, it was submitted that the area constructed for the assessee sisters would not form part of capital gain for the assessee as the assessee gifted the land in the year 1998 itself and the construction area was handed over to four sisters separately by the builder.
5.4. The assessee and his brother retained one flat each for their residence and therefore the cost of construction of each flat is exempt in view of sec. 54 of the IT Act. Taking into consideration all the factors, the assessee worked out the capital as under:
A. Sale consideration is the cost of 12,050 sq.ft Rs.48,20,000 allotted by the builder (12,500 x 400) Cost of assets Cost Index cost
a) property was acquired during 1979 and hence the market value of the land as on 1.4.81 is adopted @ 2,50,000 excluding the building (Rs.313.20) 2,50,000 10,15,000
b) Market value of the exiting building of the plinth area of 4344 sft. @ Rs.80 per sft. 3,47,520 14,10,931
c) cost of improvements in the year 1983-84 construction of first floor area of 3848 @ R.130/- sqft. 5,00,240 17,50,840
d) Cost of expenses in the year 1997 (Rs.1,28,992 + 79,644) 2,08,636 2,55,910 7
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34,17,681 Index cost of land 10,15,000 5,07,500 At 50% of there of -----------------
39,25,181
B =========
Capital Gain (A-B) 8,94,819
=========
In view of the payment of advances, four flats have been surrendered the sale price as recorded in the document 28,55,000 Cost of construction (4,200 sft. X Rs.400) 16,80,000 Land cost 5,07,500 X 100/ 399 1,27,193 Expenditure towards drainage, electricity, lift water supply generator etc. 4,00,000 22,07,193
-----------------
Capital gain 6,47,807
-----------------
6. According to assessee the transaction resulted in a gain of Rs.8,94,819/- and Rs.6,47,807/- which has been distributed among the six co owners as under:
Capital gain Capital gain Total
1. K. V. Reddy 3,515 sft. 2,61,020 3,23,904
5,84,924
8
2.K. Vishnuvardhan Reddy " 2,61,019 3,23,903
5,84,922
3. Malathi 1460 sft. 1,08,418 -
1,08,418
4. Manjula 1050sft. 77,972 -
77,792
5. Madhavi 1450 sft. 1,08,418 -
1,08,418
6. Lakshmi 1050 sft. 77,972
77,972
TOTAL 8,94,819 6,47,807 15,24,626
5.5. According to the assessee, the capital gain arising is
below the taxable minimum, the assessee did not file the return of income. It is submitted that in accordance with the provisions of sec.139 (1) the assessee is expected to file the return of income only when there is taxable income and when there is no taxable income, he need not file the return of income unless a notice u/s 148 and 142(1) is received. No such notices were received by the assessee. It is submitted that the income tax authorities conducted search and seizure operations at the premises of M/s SMR Builders P Ltd. . During the course of search, the agreement entered into between the assessee and M/s SMR Builders P Ltd. was found. Nothing new was found by the authorities at the time of search. All the documents found are the public documents either registered or complied with. Therefore, nothing new was found by the authorities to come to conclusion that the assessee would not have disclosed the said fact to the department but for the search.
95.6. However, the assessing officer issued notice u/s 158BD on 25.9.2003 in response to which the assessee filed the return of income on 16.12.2004. The assessee mentioned that there is no undisclosed income. A detailed letter dated 9.12.2004 was submitted along with return of income.
5.7. During the course of assessment proceedings, the assessee was asked to explain various details and the assessee filed all the details before the assessing officer. It was contended before the assessing officer that notice u/s 158BD was not valid as there was no taxable income for the years under consideration and, therefore, the assessee did not file the returns of income. No new information was found during the course of search and therefore, the provisions of sec.158BD are not applicable. The assessing officer is of the view that proceedings u/s 158BD were validly initiated.
5.8. The assessing officer is of the view that the assessee enjoyed only leasehold rights with restricted right of enjoyment of benefits and therefore, the property became the property of the assessee only on 11.11.1997 when the SRO, Maredpally registered the document and not earlier. Therefore, the assessing officer is of the view that the expenditure incurred prior to 11.11.1997 is not allowable as a deduction. As submitted earlier, the property is situated in Cantonment area wherein the government of Andhra Pradesh alone has right over the property leased out to various persons for being used. Such lease hold rights have been transferred from person to person based on the agreements. On obtaining the property on lease, a building was constructed by the earlier owners. The assessee purchased the land along with buildings. The rents were enjoyed by 10 the assessee and always the lease was beyond 12 yeas and therefore the assessee has to be considered as the owner of the property in view of sec.269UA (f) (i) of the IT Act and sec.27(iii) (b) of the Act. Further, the properties were allotted on lease under a scheme framed by the Government. and therefore, the assessee is deemed to be the owner of the property even in view of sec.27 (iii) (b) of the IT Act. Therefore, the assessee was the owner of the property and spent considerable amount of money to take possession of the property. It is submitted that but for the fact that allottee from the Government transferred the right to the assessee in the year 1979, the assessee could not have got the property on transfer from the Estate Officer in the year 1997. The allotment by Estate Officer is consequent to the taking over possession of the property from the earlier allottee. It is further submitted that he became the owner in the year 1979 itself when he acquired the right. This is clear from the fact that the Municipal Corporation permitted him to construct the first floor over the existing ground floor of the property. The Municipal taxes were collected from the assessee. The ownership is only regularized by entering into an agreement. It is further submitted that the Commissioner, Land Revenue passed an order on 15.10.1997 wherein it is mentioned that he permitted conversion of leasehold rights into the free hold rights on payment of Rs.1,28,982/- towards conversion charges. This clearly indicates that the assessee became the owner in the year 1979 itself but was conveyed in the year 1997. It is not correct for the assessing officer to mention that the assessee became the owner of the property only in the year 1997 and not earlier.
5.9. He submitted that the assessing officer is of the view that there is no cost of the asset to the assessee. The assessing officer 11 mentioned that the joint owners of the property have acquired the property in their own name but incur any cost in acquiring the property. The assessing officer is of the view that the provisions of sec.49 have no application to the facts.
5.10 The assessee's counsel submitted that sec.48 provides for computation of capital gain. The said provision mentions that the capital gain shall be computed by deducting from the full value of consideration received, the cost of acquisition of the asset. No where it is mentioned in sec.48 that the cost should have been incurred by the assessee himself. When the parents have paid money at the time of acquisition in the name of the assessee it means that the assessee received the amount as gift from his parents and paid the same to the vendor. The transaction of receipt by way of gift and payment by the assessee to the vendor was not comprehensively understood by the assessing officer. The assessing officer misled himself by mentioning some quotations without understanding the facts. The assessing officer tried to rely on quotations without understanding the facts of the case. The amounts were provided by the parents or the family by way of gift. Such amounts were paid for purchase of property. The entire transaction was done by the parents as the assessee was a minor. In such circumstances, it has to be considered that the assessee received the amount by way of gift from the parents and paid the same to the vendor. Therefore, it is not correct for the assessing officer to mention that there is no cost. In respect of the construction of the first floor also, the assessing officer is of the view that the construction of the first floor taken place with the money belonging to the parents and, therefore, the cost has to be taken as NIL. This is not correct in view of the submissions made. The assessing officer 12 relied on the decision of Madhya Pradesh High Court in the case of Parmananda Bhai Patel Vs. CIT reported in (149 ITR 80). In the said case, the expenses were incurred by the tenant. A partnership firm in which the assessee was also a partner. The expenditure was incurred by the tenant and was not debited to the owner. Therefore, it is clear that the expansion was made by the tenant an therefore, in case of the owner such deduction was not allowed. However, in the case of assessee, the assessee himself incurred the expenditure though he received the amount as a gift. Therefore, the said decision has no application to the facts of the case.
5.11 He submitted that the assessing officer also relied on the decision of Karnataka High Court in the case of Emerald Vallery Estates Ltd. Vs. CIT (1966) 222 ITR 799 which is not applicable to the facts of the case. In the said case the assessee did not prove the cost of improvements claimed by him and therefore, the assessing officer did not allow the expenditure. In the case of the assessee, he constructed the first floor and therefore the expenditure was clearly proved. The cases cited by the assessing officer are not on the facts of the case.
5.12. It was submitted that the assessing officer agreed that the transfer arose at the point of extinguishing of the right i.e. when the builder handed over the constructed are to the assessee. The assessing officer further mentions that any instance that took place earlier cannot be considered for determining the capital gain. There is an incorrect observation. The capital gain arises on a particular date. One has to look at the circumstances of the case as were obtaining on the date of transfer which includes all the transactions that had taken 13 place prior to the said date. There may not be any effect of the transactions entered into after the date of transfer but the transactions prior to the date of transfer are to be considered therefore the assessing officer is not justified in holding that the entire constructed area including the constructed area provided to the sisters of the assessee has to be considered as consideration.
5.13. He submitted that the assessing officer is of the view that the gift given to the sisters is a gift of the super structure to be built. In so mentioning the assessing officer either not read the gift deed or intentionally avoided to mention the truth. The truth remains that the donor gifted 25 sq. yards of undivided share of land to the donee. There is no mentioned in the gift deed about the right of future construction of super structure. It is not correct for the assessing officer to have mentioned that a future right was transferred to them. What was transferred was 25 sq. yards of undivided share of land. This if followed by construction agreement between the donee and the builder who promised to provide the3 built up area on the said undivided share of 25 sq. yards of land. The transfer by way of a gift was effected before the development commenced by M/s SMR Builders P Ltd. the transfer is 25 sq. yards of undivided share of land, the transferee, i.e. the donee entered into a separate agreement for building the super structure thereon, in lieu of the developer handing over the built up area. From this it is clear that the built up area handed over to the sisters never belonged to the assessee. As rightly pointed out by the assessing officer the transfer by way of extinguishments was complete on the date of which the built up area was handed over. The gifts are complete and, therefore, the assessing officer is not justified in considering the area received by the sisters of 14 the assessee as the consideration received by the assessee. In so far as 3,100 sq.ft area allotted against payment of advance to M/s Satyam Creative Construction is concerned, the assessing officer considered the consideration to be Rs.28,55,000/-. The working of the capital gain to be made as was exhibited by the assessee. Therefore, the computation made by the assessing officer is totally incorrect and is not in accordance with the provisions of the Act, nor the working made by the assessing officer is in conformity with the facts of the assessee case.
6. It is submitted that the total area allotted according to the development agreement is 12,050 sq.ft Out of this 5020 sq.ft was received by the four sisters of the assessee in accordance with the construction agreement entered into. Therefore the cost of 7030 sft. only has to be considered.
6.1. He submitted that the assessing officer adopted the cost of the constructed area at 416 per sq. ft. whereas the assessee adopted the rate of 400/- per sq.ft. It is submitted that the assessing officer considered the expenditure incurred by the builder for arriving at the cost of construction at Rs.416 per sq.ft. The actual expenditure incurred on construction alone would be considered received by the assessee and not other items of expenditure like finance charges, accounting charges, remuneration etc. which would not form part of the cost of office maintenance, construction of the building and the same cannot be treated as consideration. Therefore, the assessing officer should have limited the cost of construction at Rs.400/- per sq.ft as against Rs.416. The assessing officer did not provide the 15 assessee would be able to explain as to why the same should not be adopted.
6.2. It is further submitted that for making payment of advance received to Satyam Creative Constructions the assessee sold three flats and received consideration of Rs.28,55,000/- which was paid to Satyam Creative Constructions. The sale of the flats would not form part of the capital gain arising on the development agreement. The capital gain arising at the time of development agreement is the difference between the cost of constructed area received and the cost of land. The capital gain on sale of the constructed area allotted is different. It has to be considered as separate capital gain and the assessee worked out the same separately in the letter field before the assessing officer. In view of the above, the sale consideration arrived at by the assessing officer is not correct. He can only consider the cost of construction of the allotted area as the consideration and cannot consider the sale price of the allotted constructed area. It is submitted that what the assessee worked out is correct and workings made by the assessing officer is not in accordance with the provisions of the act. Therefore the assessing officer made be directed to work out capital gain correctly.
6.3. The assessing officer rejected the contention that the assessee effected the gifts. This is against the evidence available on record. Gift of the land is evidence by a registered document the donees entered into agreement with the builders and the builder allotted the constructed area direct to the donees.
166.4. The assessing officer mentioned that the agreement with the builder was entered into 20.7.1998 and gift to the sisters was effected later. Therefore, according to assessing officer it is diversion of the sale consideration of the flats. This is not correct. A copy of the gift deed is submitted for perusal. It can be seen from the gift deed that out of the total undivided land 25 sq. yards is transferred by way of gift deed to each of the sisters. The transfer in respect of development agreement is complete only when the construction was complete and the constructed area is allotted to the owners. As construction did not commence and the transfer by way of development agreement was not completed the gift was effected before commencement of the construction. The four sisters entered into separate agreement for construction of the property and copy of the construction agreement is submitted. According to the said agreement, they paid Rs.1,25,000/- to the building and got the flats constructed. The area allotted to them is in accordance with the construction agreement coupled with the gift deed and not in accordance with development agreement. The assessing officer is not justified in holding that the gifts cannot be considered for the purpose of arriving at the capital gains. The assessing officer ignored the facts of the case and did not consider the facts in their proper perspective. The CIT(A) may pursue the letter filed before the assessing officer during the course of the assessment proceedings. The building consists of land and the ground floor and first floor of 7,182 sft. each the assessing officer considered only the land value.
6.5. The assessee's counsel submitted that the indexed cost of the property to be applied as on 1.4.1981. The chronology of the ownership transferred from the lessees to the tenants is as follows:
1711.10.1937 Building lease for 30 years between Governor General and Mr.T. Venkatachalam 12.12.1942 Transfer agreement between T. Venkatachalam & Mrs. Leela Thanskote 23.4.1976 Rental lease Estate Officer AP State and A. Leela Thanskoti -
second term of 30 years from 3.3.1965 13.5.1976 Transfer agreement between Smt. A. Leela Thanskoti and D. Devakamma and four others. Purchased the property vide sale deed registered as document No.17781/75 dated 28.7.1975 6.6.1979 Agreement of sale between Devakamma and four others and Kethireddy Sudheer Reddy - sale consideration Rs.2,47,000/- 21.10.1982 Transfer agreement - Devakamma & 4 others Vs. K. Vishnuvardhan Reddy and K. Venkatram Reddy (Minors) Guardian (father) 2.6.1997 Development agreement between K. Venkatram Reddy and K. Vishnuvardhan Reddy Vs. Styam Creative Constructions 2.6.1997 Memorandum of understanding between K. Venkatram Reddy and K. Vishnuvardhan Reddy and Satyam Creative Constructions 11.11.1997 Conveyance deed by Estate Officer and K. Venkatram Reddy and K. Vishnuvardhan Reddy - Consideration Rs.1,28,982 2.1.1998 Authorisation of K. Venkatram Reddy and K. Vishnuvardhan Reddy in favour of K. Sudheer Reddy to represent them 20.7.1998 Development agreement cum GPA between K. Venkatram Reddy and K. Vishnuvardhan Reddy and SMR Builders 20.7.1998 MOU between K. Venkatram Reddy and K. Vishnuvardhan Reddy and SMR Builders.
6.6. It is submitted that originally the land is situated in the cantonment area and was in the custody of MEO, Secunderabad. No sale of the property within the said cantonment area can be made without the permission or approval of the MEO. There was a transfer agreement dated 11.10.1937 between the Governor General and one Sri T. Venkatachalam Pillai for a term of 30 years. Shri T. V. Pillai transferred the property to Mrs. L. Tanioshkoti on 12.2.1942. Smt. Leela T. and the Government. Andhra pradesh extended the term by 30 years from 1.3.1965. Smt. L.Tanishkoti transferred the rights to Smt. Devakamma and four others on 13.5.1976. Smt. Devakamma and four others transferred the property to the assessee in the year 1979. Therefore, the assessee became the owner on 6.6.1979 and 18 thereafter conveyance deed was executed on 2.6.1997 only to complete to formality of providing title to the assessee herein.
Therefore, the right to the property is to be valued at its market value as on 1.4.1981 itself and the market value as on 1.4.1981 is to be taken into consideration for the purpose of determining the capital gain. The market value as ascertained on 1.4.1981 has to be increased by proper indexation and the said amount has to be deducted.
6.7. The Authorized Representative submitted that the assessing officer applied the indexation of 406/100 which is not correct. The property was in the name of Shri Sudheer Reddy which was in turn transferred to Vishnuvardhan Reddy and Venkataram Reddy became the owner as per the agreement of sale and when the deed was executed on 21.10.1982 the same was executed in favour of the minor children. The property was acquired in the year 1979 itself and it cannot be said that it was acquired later. The agreement was prior to 1.4.1981 and the assessee herein were the owners even prior to 1.4.1981 and the assessing officer is not correct in adopting the indexation at 406/351. In the assessment order, the assessing officer allowed deduction u/s 54F of Rs.8,01,540/- In fact, the assessee is entitled for deduction u/s 54 and not 54F. The assessee transferred a building and in consideration thereof received a building and therefore exemption u/s 54 is allowable. Therefore, the assessing officer is not justified in considering the exemption at Rs.8,01,540/- Both the assessee are entitled separately for exemption u/s 54 of the IT Act.
6.8. It is further submitted that the tax on long term capital gain is to be charged in accordance with the provisions of sec.112 of 19 the IT Act. According to sec.112, the long term capital gain is to be taxed at 20%. In respect of block assessments made under 158BC, tax is to be calculated at 60% in accordance with the provisions of sec.113. Sec.112 mentions clearly that where the total income includes gain on long term capital asset, the tax payable is to be worked out in accordance with the provisions of sec.112. It is stated that in so far as other income is concerned, the same has to be taxed in accordance with the regular provisions and in so far as long term capital gain is concerned, it has to be taxed at 20%. Therefore, the regular tax rate applicable to other incomes cannot be applied in respect of long term capital gains even when such long term capital gain is assessed as the undisclosed income.
6.9. In the circumstances, the assessee counsel submitted that the assessing officer is not justified in determining the capital gain at Rs.24,23,586/- and taxing the same @ 60%. It is submitted that the order of the assessing officer is patently incorrect in view of the following:
a) the assessee acquired the right over the property prior to 1.4.1981 and the market value as on 1.4.1981 has to be considered which is not done by the assessing officer.
b) The assessee entrusted the development of the property along with the building. The development agreement with SMR Builders is in continuation of the agreement entered into with the earlier developers. In the process, the assessee lost the proportionate land and the entire building, and, therefore the cost of the land and the cost of the building is increased by the index has to be allowed by the assessing officer.
20c) The assessee transferred by way of gift 100 sq. yards of land to their sisters and the latter received constructed area to the extent of 5020 sq.ft therefore, the cost of construction of 5020 sft. Constructed area cannot be taken.
d) The sale price of the flat has to be taken as a separate sale and, therefore, the sale consideration derived on sale of 3 flats cannot form part of the sale consideration for the purpose of determining the capital gain on development.
e) The assessing officer denied exemption u/s 54 and granted exemption party u/s 54F of the IT Act. The assessing officer ought to have considered the fact that whaty was transferred is land along with the residential building and what was received is consideration as a residential building and therefore the provisions of sec.54 are applicable and not the provisions of 54F.
f) It is submitted that there is no material in the seized document which will lead to a conclusion that the assessee would not have disclosed the facts to the department particularly when all the agreements have been made public by the assessee. Therefore, the assessment u/s 158BD is not valid. The assessing officer ought to have considered the assessment only under the regular provisions of the IT Act and not u/s 158BD particularly when there is no indication in the material that the assessee would not have disclosed the consideration received to the department.
7. The Departmental Representative relied on the order of the CIT(A) and he relied on in the case of CIT Vs. Dr.V.V. Mody (218 ITR
1) (Karnataka HC) and order of this Tribunal dated 28.10.2005 in the case of Hindustan Metal Industries, Secunderabad for the purpose that the assessee is entitled indexation of cost of acquisition from the date 21 of acquiring the ownership. Further, regarding the gift to his sisters it was submitted that it was self imposed gift and cannot be deducted from the sales consideration.
He relied on the following judgements:
1. S.B. Billmoria & Co. Vs. ACIT (317 ITR 203)(AT) (Mum)
2. CIT Vs. Sunil J. Kinariwala (259 ITR 10) (SC)
3. Motilal Chhadami Lal Jain Vs. CIT (SC) (190 IT 1 (SC)
4. CIT Vs. Roshanbabu Mohammed Hussein Merchant (275 ITR 231) (Bom.) & Fancy Corporation Ltd. Vs. DCIT & Others (Bom.) (275 ITR 231).
7.1. Regarding the enhancement of the assessment he submitted that it is only curable mistake. He relied on judgement of Orissa HC in the case of Pranakushana Swine Vs. CIT (52 Taxman
333).
8. We have heard both the parties and perused the material on record. In this case the land measuring 798 sq. yards bearing plot No.182, Municipal No.10-2 -286 situated at Road No.6 West Maredpally, Secunderabad which was the subject matter of developmental agreement jointly belongs to S/shi Venkatrama Reddy and Vishnu Vardhan Reddy both are sons of Shri Sudhir Reddy vide transfer agreement dated 21.10.1982 registered with sub registrar Maredpally by document No.2970/1982 executed by Smt. Devakammma and four others. These joint owners got the benefit of the lease rights over the land. At this time, land exclusively belong to government being military land located in Cantonment area and these owners entitled to enjoy the property w.r.t the super structure measuring 3000 sq.ft of building which was constructed by Smt. Leela Thanaskoti Mudaliar of Padmarao Nagar, Secunderabad prior to its 22 transfer to Smt. D. Devakamma & Others vide deed dated 28.7.1975.
The first floor of the property was set to be constructed by Shri Sudhir Reddy father of assessees. The property was coverted into free hold property vide commissioner land Revenues permission letter dated 15.10.1997. Thereafter conveyance deed was executed and registered on 11.11.1997 with SRO, Maredpally for a consideration of Rs.1,28,982/-. In the meanwhile, there was a development agreement on 2.6.1987 with M/s Satyam Creative Construction for construction of residential apartments. Later this agreement was rescinded and another development agreement was entered into with M/s. SMR Builders P Ltd. on 20.7.1998. Further, on 5.10.1998 the assessees is herein gifted 25.sq. yards undivided land out of 798 sqr.yards to their four sisters. As per development agreement 20.7.1998, the assessee will get 32.77 % of the built up area. Out of the share of the assessee has to give 1650 sq.ft. built up area and the developer SMR Builder to 650 sq.ft totally 2300 sq.ft to earlier developer M/s SCC towards the cost incurred by them before rescinded the earlier development agreement. The assessee's claim is to consider the cost of building transferred to the M/s Satyam Creative Construction and it is to be deducted from the consideration considered for the purpose of capital gain. We find merit in this argument since there is no dispute that the cost of construction of the said built up area included in the sale consideration offered for capital gain. Further, the development agreement with the SMR builder is in continuation with the agreement entered with the SCC. It is also admitted fact that there was a specific condition in the second development agreement entered by the assessee with SMR builders that both the parties involved with this agreement shall transfer 2300 sq. ft to M/s SCC and this is for the cost incurred by the M/s SCC in 23 carrying out the development work. In other words, the agreement entered with the M/s SMR Builders is in continuation of earlier development agreement and M/s SCC is to be compensated for the cost incurred by them. We do not find any infirmity in the claim of the assessee and the same to be allowed.
9. The next ground is with reference to date of acquisition of property by the assessee. The lower authorities was of the opinion that since the conveyance deed was executed as a free hold land only on 11.11.1997 for a consideration of Rs.1,28,982 it is to be considered as cost of acquisition. Originally the land was in the custody of Military Estate Officer, Secunderabad. No sale of the property within the said cantonment area without the permission of MEO. There was a transfer agreement dated 11.10./1937 between the Governer General and one Shri Venkatachalam Pillai for a term of 30 years. Shri Venkatachalam Pillai transferred the property to Mrs. Leela Tanioshkoti on 12.12.1942. Smt. Leela Tanioshkoti and the Govt. of Andhra Pradesh extended the term by 30 years from 1.3.1965. Smt. Tanioshkoti transferred the rights to Smt. Devakamma and others on 13.5.1976.Smt. Devakamma & Otrs. transferred the property to the assessee in the year 1979 and assessee become owner on 6.6.1979 and thereafter conveyance deed was executed on 2.6.1997 only to complete the formality of transferring the title. The absolute conveyance deed is only legal formality in this case and the assessee had already taken possession of the property and made part payment for the consideration and the assessee is the deemed owner of the property in question. Therefore, the property to be valued at its market value as on 1.4.1981 and capital gains to be determined after considering corresponding indexation of cost. For this purpose we place reliance on the 24 judgement of Hon'ble Supreme Court in the case of Mysore Minerals Ltd. Vs. CIT (239 ITR 775) (SC) wherein it was held that :
"though a document of title was not executed by the authority in favour of the assessee, the houses were allotted to the assessee by the Housing Board, part payment received and possession delivered so as to confer dominion over the property on the assessee where after the assessee had in its own right allotted the quarters to the staff and entitled to depreciation in respect of the houses in respect of which the assessee had not obtained a deed of conveyance from the vendor although it had taken the possession and made part payment of the consideration".
10. Further we place reliance on the judgement of Gujarat High Court in the case of CIT Vs. Jidas Panchand Gandhi (279 ITR 552 (Guj) (HC). In this case shares of cooperative housing society allotted to the assessee on 4/11/1980. Physical possession of the property handed over to the assessee on 12.12.1983 on completion of construction. On 30.4.1984 flat was sold by assessee. The assessee worked out the long term capital gain. However, the assessing officer did not accept this stand of the assessee that he become the owner of the property on 4/11/1980 and according to assessing officer, the assessee had held the property for a period less than 36 months and as such was liable to short term capital gains tax. On appeal to High Court, it was held as follows:
The assessee in the present case was allotted a share by the cooperative housing society on on Nov. 4, 1980 and the sale of the same took place on April 30 1984, i.e. after a period of 36 months. The Tribunal was therefore justified in holding that the capital gains arising were long term capital gains and the assessee was entitled to deduction from such gains as per law.' 10.1. Further, if any construction taken place from the date of 1.4.1981 to the date of transfer the same to be considered for determination of capital gain in addition to original cost of acquisition 25 incurred by the assessee's parents. The plea of the assessee is that there was a construction building in the said plot in the year 1983-84 and this value to be considered for determination of capital gain. The assessee's plea is that there is a building measuring 3848 sq. ft rented to M/s St. Marks High School, Maredpally and the rental income was offered to tax upto assessment year 1993-94. If these facts are correct, then the assessee claim to be allowed. Further, the assessee entitled for the cost incurred by them till the date of transfer of the capital asset. In the event, assessees are able to prove their case that there was construction and also expenditure incurred till the date of transfer the assessing officer shall consider the same for determining the cost of acquisition.
11. The next issue is with reference to deduction towards the property allotted to the assessee's sisters through gift deeds. For this purpose we have to look into the 'real income theory'. There is no dispute that there was actual gift to four sisters of assessee Viz., (1) Smt. V Malathi (2) Smt. V Manjula (3) R. Madhavi (4) K. Lakshmi . The gift deed was executed on 5.10.1998 gifting the 25 sq. yards to each of them. All the gift deeds are registered. Thereafter, these respective donees entered into construction agreement with SMR Builders and they paid Rs.1,25,000/- to the builder towards construction. Had these persons sisters of the assessee not received the respective shares, they would have stopped the construction and whole project would have been disturbed. They are being natural sisters of the assessee they are entitled a share in the property and it should be given to them even though there is no claim from them. In the instant case, it is nobody's case that the gift deed entered between the assessee and with these four sisters were not bona fide nor was it 26 the case of the Revenue that it was sham transaction. Accordingly, the Revenue authorities had no right to substitute their opinion when actually the assessee has parted portion of property in favour of their sisters. In our opinion, the lower authorities is erred in not considering the same as deduction from consideration received and the value of the property allotted to the sisters to be excluded from the valuation of consideration received by the assessee and it is to be excluded for the purpose of computation of capital gain. The tax to be computed on the income in accordance with the provisions of Sec.113 of the IT Act. For this purpose, we place reliance on the judgement of the Hon'ble Mandhya Pradesh High Court in the case of Smt. Harbans Kaur Bhatia Vs. CIT (274 ITR 298) and judgement Hon'ble Supreme Court in the case of CIT Vs. Suresh N. Gupta (297 ITR 322). Further, the claim of assessee u/s 54 of the IT Act, was examined by the CIT(A) in the light of order of the Tribunal Special Bench Mumbai in ITA.2865/Hyd/Mum/2002 in the case of Shusheela M. Javeri dated 17.4.2007 and observed that assessee is not entitled for deduction u/s
54. We do not find any infirmity in these findings. Accordingly, we direct the assessing officer to re-compute the income of the assessee and while passing the give effect order, the assessing officer shall give an opportunity of hearing to the assessee. IT(SS)A.No.60/Hyd/2007 partly allowed. Since facts of the case in IT(SS)A No.61/Hyd/2007 is simi lar to the facts in appeal No. in IT(SS)/Hyd/2007, applying the same ratio, this appeal is also partly allowed.
12. In the result appeals of the assessee partly allowed.
Order pronounced in the Court 31.3.2010
Sd/- sd/-
N.R.S. GANESAN CHANDRA POOJARI
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 31st March, 2010
27
Copy forwarded to:
1. Shri S. Rama Rao, Advocate, Flat No.103, H.No.3-6-542/Indiradevi Nilayam,. St. No.7, Himayatnagar, Hyderabad-29.
2. ACIT, Circle 1 (1), Hyderabad
3. CIT(A)-IV, Hyderabad.
4. CIT, Hyderabad
5. The D.R., ITAT, Hyderabad.
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