Capital Gains Taxation


LTCG from equity shares and equity mutual funds
from April 2018
In Budget 2018, LTCG was made taxable. This rule applies for transactions made on or after April 1, 2018 and will be applicable for FY 2018-19 onwards. 

Capital gains/losses arising from sale of equity shares and equity mutual funds are said to be long-term in nature if they are held for more than one year from the date of investment. If the investments are sold before one year, then gains/losses from such sale will be called short-term capital gains/losses. 

As per the new rule, tax will be levied at the rate of 10 per cent without the indexation benefit on LTCG arising from sale of equity shares and equity mutual funds if the gains in a financial year exceed Rs 1 lakh. 

Formula to calculate LTCG from equity shares and equity mutual funds w.e.f 01.04.2018 
To ensure that only gains/losses incurred from the date of announcement of February 1, 2018, till date of transaction are taken into account for taxation purposes, a grandfathering clause was introduced, using which long-term capital gains and losses were required to be calculated.

JOINT DEVELOPMENT AGREEMENT:

BACKGROUND
If a developer makes an outright purchase of land in the initial stages of the project, given the fact that the land prices have been ever-increasing at a sky rocketing speed, would lead to huge investment at the start of the project without any revenue generation for few years leading to cash crunch to the developer. Hence the model of JDA’s got fancied in the real estate market and the developer would join hands with the landowner leading to a two way win-win situation:
Benefit to Developer: No heavy initial investment. Payment to landowner can be made as and when collections are made from the customer or by sharing of the built up area with the landowner.
Benefit to Landowner: Landowner with low technical insights on real estate development can now reap the benefits of higher consideration on sale of developed estate than outright sale of land.
OPERATION OF JDA:
In JDA, the share of consideration with the landowner might be either of the following ways:
Monetary Consideration: Eg. The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the sale consideration of the project as and when the collections from the customers are made.
Non Monetary Consideration: Eg. The developer would give a lump sum to the landowner as refundable security deposit on entering into JDA and share a specified percentage of the built up area with the landowner.

TAXABILITY BEFORE 2017
The taxability of JDA in the hands of the developer is under business income and in the hands of the landowner it is under capital gain. (I would restrict the discussion to capital gains).
Determination of date of Transfer:
Capital Gains arise on “transfer” of a capital asset. As per Section 2(47) of the Income Tax Act 1961, the word “transfer” amongst other things includes:
“any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to insection 53A of the Transfer of Property Act, 1882 (4 of 1882)”
This clause gave a deemed effect of transfer on satisfaction of the following conditions:
1. There should be a contract for consideration in writing and same should be signed by the transferor;
2. The contract should be for transfer of immovable property;
3. The transferee should have taken possession of the property and has done something for furtherance of the contract;
4. The transferee should be ready and willing to perform his part of the contract; and
5. In this case even without execution of sale deed, the transferee acquires the right in the property and the transferor cannot claim any right in respect of property under consideration other than the rights expressly provided in the terms of contract.

The Budget 2017, has revamped the taxability of JDAs putting an end to the disputes. The proposed amendments are:
Determination of date of Transfer:
A new sub-section (5A) in section 45 is proposed to be issued to shift the capital gain arising on JDA to the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority in case of an assessee being individual or Hindu undivided family provided the assessee does not transfer his share in the project to any other person on or before the date of issue of said certificate of completion.
Determination of Consideration:
It is proposed to provide that the stamp duty value of land or building or both, in the project on the date of issuing of said certificate of completion given to the land owner as increased by any monetary consideration received, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.
Tax Deduction at Source:
A new section 194 – IC is introduced so as to provide that in case any monetary consideration is payable under the specified agreement, tax at the rate of ten per cent shall be deductible from such payment.
CONCLUSION:

These amendments are removing the considerable hardship faced by the assessees and are a welcome step which will improve the sentiments of the developers and land owners leading to increase in the supply of land to developers. Hope these amendments will numb the pain of demonetisation, the hit the real estate transaction hard.

Sec 54 - Investment on making the House Habitable


Income Tax Appellate Tribunal - Mumbai
Rustom Homi Vakil, Mumbai vs Assessee on 30 March, 2016

IN THE INCOME TAX APPELLATE TRIBUNAL "D"     BENCH,     MUMBAI

       BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND
          SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER

                 I.T.A. No.4450/Mum/2014
                  Assessment Year : 2009-10)

       This appeal, filed by the assessee, being ITA No. 4450/Mum/2014, is directed against the order dated 19-03-2014 passed by the learned Commissioner of Income Tax (Appeals)- 23, Mumbai (Hereinafter called "the CIT(A)"), the appellate proceedings before the CIT(A) arose from the assessment order dated 21-11-2011 passed by the learned assessing officer
(Hereinafter    called   "the   AO")      u/s.   143(3)   of   the   Income   Tax Act,1961(Hereinafter called "the Act"), for the assessment year 2009-10.


2.     The grounds raised by the assessee in the memo of appeal filed with the Tribunal read as under:-
             "1. The Order u/s 250 dated 19th March 2014, of the Commissioner of Income Tax(Appeals)-23 ,Mumbai , is bad in law, contrary to the facts of the case and evidence of record.

             2. The learned CIT(A) erred in upholding the disallowance from the costof acquisition of the new house property u/s 54/54F, of Rs.14,26,705/- incurred in making the house property habitable within  the time allowed under that section by wrongly relying on the provisions applicable to the same of the house property and thereby taxing the same as not exempt while calculating capital gains liable to tax on sale of house property."


3.    The brief facts of the case are that the assessee is a contractor.

4.    During the course of assessment proceedings u/s. 143(3) read with Section 143(2) of the Act, it was observed by the AO that the assessee has sold his tenancy right in a residential property for a total amount of Rs.2,00,00,000/- . Against this capital receipt ,the assessee invested in another    residential    property    in     Pune     and   claimed       deduction    of
Rs.1,31,78,257/-    u/s.    54   of   the    Act    and   offered   the   difference   of Rs.68,21,743/- as long term capital gains . The break-up of the investment in
Residential property of Rs.1,31,78,257/- was as follows:-


1. LongTerm Capital Gain                 Rs.2,00,00,000/-
          Less: Capital Gain exempt u/s. 54
          to the extent invested in residential
          house situated inPune                 Rs.1,10,00,000/-


          Add: Registration Charges Rs.30,380/-
          Stamp Duty                       Rs.5,32,700/-
          Transfer Charges                 Rs.33,640/-
          Brokerage Paid                   Rs.1,23,596/-
          Legal Charges                    Rs.20,000/-
          Add: Legal Charges           Rs.11,236/- Rs.7,51,552/-
              Add: Improvement to property
              Purchased(As per bills)            Rs.14,26,705/- Rs.1,31,78,257/-
                                                 ---------------------- -------------------
        Taxable long term capital gains          Rs.68,21,743/-
                                                                       ------------------
Thus, it was observed by the AO that the assessee has claimed Rs.14,26,705/- towards improvement of purchased property as a deduction u/s 54(1)(i) of the Act. The assessee was asked to explain why the improvement made to the purchased house and claimed as deduction should not be disallowed and added to income of the assessee.
The assessee submitted that soon after purchasing , to make the new house property , habitable by incurring further expenditure in July, 2008 to January, 2009 by engaging the services of a interior decorator , plumber, electrician to the extent of Rs.14,26,705/-. The assessee filed copies of bills for expenses made for improvement of the bought residential property.
The AO rejected the contentions of the assessee and held that 'cost of improvement' as provided under the Act will be taken into account at time of calculating capital gains when the property is sold. The assessee in the instant case is claiming 'cost of improvement' of Rs.14,26,705/- not at the time of selling his property but with respect of the property bought by the assessee against the receipt of selling the tenancy rights. Thus, the claim of the assessee towards cost of making a new house property habitable amounting to Rs.14,26,705/- was disallowed and added to the long term capital gains of the assessee, vide assessment orders dated 21-11-2011 passed by the AO u/s.143(3) of the Act.
5. Aggrieved by the assessment orders dated 21.11.2011 passed by the AO u/s 143(3) of the Act, the assessee filed first appeal with the CIT(A).
4 ITA 4450/Mum/2014
6. The assessee submitted before the CIT(A) that the assessee was a statutory tenant of a residential house being a cottage at Pune and surrendered the tenancy right therein for consideration of Rs.2.00 crores. The assessee filed bills / invoices from contractor of Rs.14,26,705/- and stated that all expenses incurred were only on repairs and restoration and painting and no asset was created. Therefore, these expenses of Rs.14,26,705/- should be allowed in determining the cost of purchase of new residential house. The assessee furnished copies of plan of the house and garage, sanctioned layout plan and proposed layout plan and description of the property certificates were furnished before the CIT(A). The assessee also submitted that on west side of the house purchased, there is a nala near to the garden which required protection by fencing. The assessee relied upon the decision of ITAT Mumbai in case of Saleem Fazalbhoy v. DCIT (2007) 106 ITD 167(Mum.) and judgment of Hon'ble Calcutta High Court in the case of B B Sarkar v. CIT (1981)132 ITR 150 (Cal. HC).
The CIT(A) called for remand report from AO. The AO submitted remand report stating that on perusal of the photographs of the property at the time of purchase , the property cannot be said to be completely inhabitable. However, it does seem to be in need of repairs, refurbishing and improvement. The exact amount of expenditure required to improve it to a state of habitability is a subjective matter, as it depends on the quality of material preferred and other such matters. The AO further reported in remand report that upon perusal of list of works done by the contractors, it was seen that some items involve dismantling and demolition of the existing structures, flooring, tiles etc. and laying new better quality items in place of them. Similarly , some items involve painting of furniture's, enameling of bamboo fencing, removal and re-fitting of frames, making of new cabinets etc which appear more in the nature of making the house more comfortable than what 5 ITA 4450/Mum/2014 is required to make it merely habitable. Further, as per sub-para (ix) of para 8 of the purchase agreement dated 23-07-2008 , the expenses of repairs and restoration are estimated at Rs.7,00,000/- by mutual agreement of the seller of the property and the assessee while the expenditure incurred and claimed as cost u/s. 54 of the Act is Rs.14,26,705/- . Thus, the AO stated in remand report that the excess expenses appears to be beyond mere repairs and restoration to a habitable condition, and rather make the house comfortable. Thus, the AO stated in remand report that out of the total expenditure of Rs.14,26,705/- claimed by the assessee , Rs.7,00,000/- (as per purchase agreement ) be treated as towards making the new house habitable , and the remaining Rs.7,26,705/- be treated as making the new house comfortable. Thus as per AO the amount eligible for exemption as cost u/s.54 of the Act is only Rs.7,00,000/- .
A copy of remand report was forwarded to the assessee for his comments and the assessee submitted before the CIT (A) in response to remand report that the expenditure was incurred to make new house habitable and not comfortable than what was required to make it habitable. It was submitted that remand report of the AO did not spell out the expenditure which could be considered as abnormal or expenditure and did not required to be incurred in making the house habitable. It was submitted that comfort in the house can come by comfortable bedding, air conditioning, furniture etc. and not by painted walls in a house will a proper flooring, bathroom and kitchen. The assessee submitted that house was bought in a dilapidated condition and to make it habitable , the assessee spent Rs.14,26,705/- which is actually spent by the assessee and the expenditure is supported by bills of the contractors , while the AO remand report is based on merely surmises.
The CIT(A) held that the assessee was aware that the extensive civil, plumbing, electrical and painting work was required to be done in the house.
6 ITA 4450/Mum/2014 With the said knowledge, the assessee bought the house for Rs.1,10,00,000/- towards the cost of the asset. The assessee did not paid the amount towards plumbing, electrical works etc to the seller but to the third party and the cost was borne by the assessee himself after purchase of the house. This cost towards extensive repairs cannot be considered to be cost of house purchase by the assessee. The flooring, plumbing work and electrical work etc. was already there in the house. These were merely repaired and renovated to suit the requirements of the assessee. Thus, action of the AO was confirmed with respect of not considering the amount of expenditure incurred of Rs.14,26,705/- for making improvements in the house for granting deduction u/s.54 of the Act, vide orders dated 19-03-2014.
It was also held by the CIT(A) without prejudice that the assessee has incurred expenditure of Rs.4,89,428/- on fixing marbonite flooring and marble skirting in the bedroom, dining rooms and sitting rooms . The expenses are towards repairs and renovation and not to make house habitable. No evidence is submitted that the flooring did not exist at the time of purchase of house. Thus, the entire expenditure of Rs.14,26,705/- was considered not allowable for deduction u/s.54 of the Act , vide orders dated 19-03-2014.
7. Aggrieved by the orders dated 19-03-2014 passed by the CIT(A), the assessee filed an appeal with the Tribunal.
8. Ld. Counsel for the assessee reiterated its submissions before the Tribunal as were made before the authorities below which are not repeated for sake of brevity. The ld counsel for the assessee submitted that the assessee sold tenancy rights for Rs.2.00 crores and purchased a residential house property in Pune which was in dilapidated condition for Rs.1.10 crore. The assessee has spent Rs.14.26 lacs for make the said new residential house property at 7 ITA 4450/Mum/2014 Pune habitable and claimed benefit u/s. 54 of the Act which has been denied by Revenue because as per authorities below the same is 'cost of improvement' which can be allowed as deduction u/s. 48 of the Act when the assessee will sell the new residential house but deduction u/s. 54 of the Act could not be allowed as per Revenue. Further, the Revenue is contending that the said expenditure has not been incurred to make the house habitable but renovation was carried out by the assessee which is to make house comfortable rather than habitable. The assessee's counsel submitted that expenditure of Rs.14.26 lacs was incurred to make the house habitable. Section 54 of the Act is a beneficial provision and should be construed liberally. The expenditure was incurred to make the house habitable from July 2008 to January 2009 , immediately after acquiring the house in July 2008. All the invoices for expenditure for making the house habitable were submitted before the authorities below and were also submitted before the Tribunal in paper book filed. The assessee relied upon the following case law to support its contentions :
1. Rahana Siraj v. CIT (2015) 58 taxmann.com 333(Kar. HC.)
2. Saleem Fazalbhoy v. DCIT (2007) 106 ITD 167(Mum.Trib.)
3. B B Sarkar v. CIT (1981)132 ITR 150 (Cal. HC).
4. Mrs Sonia Gulati v. ITO (2001) 115 taxman 232 (Mum)(Mag.)(Trib.)
5. Mrs. Gulshanbanoo R Mukhi v. JCIT (2002) 83 ITD 649 (Mum. Trib.)
6. Sh. Ashok Kumar Ralhan v. CIT 360 ITR 575 Del. HC
7. G Shiv Ram Krishna v. DCIT in ITA no. 755/Hyd/2013 dated 20-12-
9 Ld. DR relied upon the orders of CIT(A) and drew our attention to the details of expenditure of Rs.14.26 lacs incurred by the assessee to contend that these expenses are merely renovation expenses which cannot be allowed by way of benefit u/s. 54 of the Act.
8 ITA 4450/Mum/2014
10. We have considered the rival contentions and perused the material on record including case laws relied upon. We have observed that the assessee sold tenancy rights in a residential property for a total amount of Rs.2.00 crores . The assessee invested in another residential house property in Pune and paid Rs.1.10 crores for acquiring the said residential house in July 2008. The assessee further spent Rs.14,26,705/-, purportedly towards making the new residential house purchased at Pune habitable , immediately after purchase of the said residential house at Pune in July 2008 which continued till January 2009, as it is stated by the assessee that the residential house so purchased in Pune in July 2008 was in dilapidated condition and was un- inhabitable . The said amount was purportedly required to be spent for making the new residential house in habitable condition. The assessee, inter- alia, claimed benefit u/s. 54 of the Act also with respect to this expenditure of Rs.14,26,705/- to make the said house in habitable state , which benefit was denied by the Revenue as the same is not allowable because the amount was incurred after acquisition/purchase of the residential house property and is thus 'cost of improvement' and shall be allowable as deduction u/s. 48/49 of the Act when the new residential house property purchased by the assessee at Pune is sold by the assessee but no benefit u/s. 54 of the Act can be allowed to the assessee with respect to this expenditure incurred by the assessee which is post the purchase of the new residential house as according to the Revenue , only the cost paid for acquiring new residential house is to be taken for the purposes of granting benefit u/s. 54 of the Act. Secondly as per Revenue, these expenditure of Rs.14,26,705/- was incurred to make the residential house comfortable and was not incurred to make the house in habitable state as when the house was purchased/acquired by the assessee , it was already in habitable state and the assessee chose to replace existing floorings , plumbing, electricity work etc. with another floorings, plumbing and electrical etc. which can be said to be incurred to make the house 9 ITA 4450/Mum/2014 comfortable rather than making the house in habitable state. The assessee has thus undertaken repairs and renovation of the house as per needs of the assessee and is not cost of acquiring the new residential house property and hence as per Revenue, benefit u/s. 54 of the Act cannot be allowed to the assessee. The dispute between the assessee and the revenue is, thus, within this narrow compass.
It will be profitable at this stage to reproduce Section 54 of the Act , as under:
"Profit on sale of property used for residence.
54. [(1)] [ [Subject to the provisions of sub-section (2), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of a long-term capital asset [***], being buildings or lands appurtenant thereto, and being a residential house, the income of which is chargeable under the head "Income from house property" (hereafter in this section referred to as the original asset), and the assessee has within a period of [one year before or two years after the date on which the transfer took place purchased], or has within a period of three years after that date [constructed, one residential house in India], then], instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say,--
(i) if the amount of the capital gain [is greater than the cost of [the residential house] so purchased or constructed (hereafter in this section referred to as the new asset)], the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the 10 ITA 4450/Mum/2014 purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain .
[(2) The amount of the capital gain which is not appropriated by the assessee towards the purchase of the new asset made within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for the purchase or construction of the new asset before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme9 which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub- section (1), the amount, if any, already utilised by the assessee for the purchase or construction of the new asset together with the amount so deposited shall be deemed to be the cost of the new asset :
11 ITA 4450/Mum/2014 Provided that if the amount deposited under this sub-section is not utilised wholly or partly for the purchase or construction of the new asset within the period specified in sub-section (1), then,--
(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and
(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid."
Provisions of Section 54 of the Act are a piece of beneficial legislation being incentive provision which need to be strictly construed for bringing within its fold the entitlement of the tax-payer to the said benefit, but once the tax- payer establishes his/her entitlement to the benefit u/s 54 of the Act, thenSection 54 of the Act which is a piece of beneficial legislation being incentive provision is to be liberally construed to grant the benefit to the tax-payer to fulfill the mandate of legislation which is to promote investment in residential housing construction rather than in the manner which may frustrate the object . Reference can be drawn to the following observations of Hon'ble Supreme Court in the case of Bajaj Tempo Limited v. CIT (1992) 196 ITR 188(SC) :
"The provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; since the provision for promoting economic growth has to be interpreted liberally , restrictions on it too has to be construed so as to advance the objective of the provisions and not to frustrate it."
12 ITA 4450/Mum/2014 The afore-said section 54 of the Act provides for the benefit/deduction from payment of taxes with respect to long term capital gains earned on sale or transfer of long term capital asset being residential house property, if the tax-
payer purchases or construct a new residential house property within the stipulated period as prescribed u/s. 54 of the Act .
The word 'house' has been defined in Blacks Law dictionary 7th edition, page 743 as 'a home, dwelling or residence' . The 'residential accommodation' is defined in Wharton's Concise Law dictionary 15th edition(concise),page 909 as 'residential accommodation, simply means that the accommodation should be capable of being used as residence or should have been built as a residence'. Thus, in other words the property should be capable of being 'habitable' . This word 'habitable' is highly subjective words and vary from person to person and time to time depending upon the socio-economic status and standing of the tax-payer in the society .
We have observed that it is an admitted position between the parties and which is not disputed by the both the parties that sub-clause (ix) of clause 8 of the purchase deed dated 23-07-2008, through which the assessee purchased a new residential house property at Pune stipulate's that the said house required extensive civil, plumbing , electrical and painting works which is to be borne by the purchaser i.e. the assessee which was estimated to be Rs.7,00,000/-, as under:
"(8)(ix) The Purchaser is aware that the flat requires extensive civil, plumbing , & electrical , painting works & that as regards the same, it is being sold on an as is where is basis. The Purchaser is aware that expenses of repairs and restoration is estimated at Rs.7,00,000/- . Whatever may be the cost, the responsibility of the same is taken over by 13 ITA 4450/Mum/2014 the purchaser and he will carry out the same at his own cost and Vendors will not be liable for the same at all."
Thus, the new residential house property acquired/purchased by the assessee at Pune in July 2008 as contended by the assessee was in dilapidated condition which required extensive construction work to make it in a habitable state. As per assessee, he got the work done through contractors and incurred expenditure of Rs.14,26,705/- for making it habitable , for which necessary invoices were also produced by the assessee before the authorities below and also before us which are placed in paper book filed with the Tribunal. Thus, there is no dispute between assessee and Revenue as to incurring of this expenditure of Rs.14,26,705/- towards work done in the new residential house purchased by the assessee at Pune, which work is done post purchase of the said residential house , starting from the period immediately after purchasing the new residential house in July 2008 and concluding in January 2009. The new residential house at Pune was purchased in July 2008 and the work was started immediately there-after and completed in January 2009 , which is evidenced from the invoices produced by the assessee. Thus in other words, it could be said that this expenditure of Rs.14,26,705/- was part of a continuing transaction which started with purchase of the said new residential house property at Pune in dilapidated condition by the assessee in July 2008 and concluded with the extensive construction work carried out immediately post purchase of said new residential house in July 2008 and which concluded in January 2009 , comprising of civil, plumbing , electrical and painting works in the said new residential house property at Pune costing Rs.14,26,705/- , to make the house in a habitable condition with amenities fit for living for residential purposes by the assessee. The assessee has also substantiated by way of photograph's apart from corroboration with clause 8(ix) in the sale deed that the said new residential house property in Pune acquired by the assessee was 14 ITA 4450/Mum/2014 not in habitable condition and in-fact was in dilapidated condition when it was acquired by the assessee in July 2008.
The AO in his remand report also stated that on perusal of the photographs of the property at the time of purchase, the property cannot be said to be completely inhabitable. However as per AO , it does seem to be in need of repairs, refurbishing and improvement. The exact amount of expenditure required to improve it to a state of habitability is a subjective matter, as it depends on the quality of material preferred and other such matters. The AO further reported in the remand report that upon perusal of list of works done by the contractors, it was seen that some items involve dismantling and demolition of the existing structures , flooring, tiles etc. and laying new better quality items in place of them. The AO in remand report has also admitted that Rs.7,00,000/- be considered towards making the house habitable and the balance be treated as towards making the house comfortable.
In the instant case, the assessee has purchased the new residential house at Pune in July 2008 in dilapidated condition and immediately there-after undertaken extensive civil, plumbing , electrical & painting works to make it habitable , which tantamount to construction within the meaning of Section 54 of the Act , hence , the assessee cannot be denied the benefit u/s. 54 of the Act merely on the ground that the assessee has purchased the new residential house and there-fore benefit as available to construction of the new residential house cannot be extended to the assessee simultaneously . Perusal of Section 54 of the Act will reveal that no such restrictions are placed in the provisions of Section 54of the Act that purchase of new residential house is mutually exclusive to the construction of new residential house , provided other conditions as stipulated u/s. 54 of the Act are fulfilled. Rather, in the instant case starting from the purchase of new residential house at Pune in July 2008 in dilapidated condition by the assessee was immediately 15 ITA 4450/Mum/2014 followed by extensive civil, plumbing , electrical and painting works undertaken by the assessee which started immediately after purchase of the house in July 2008 and continued till January 2009 which tantamount to construction of the said residential house by spending Rs.14.26 lacs , to make the said new residential house habitable with amenities fit for living of the assessee for residential purposes . Section 54 of the Act does not stipulate any condition that if the new residential house is purchased by the tax-payer, then benefit associated with construction of the said new residential house cannot be extended simultaneously rather both purchase and construction of the same new residential house can co-exist , provided other conditions as stipulated u/s. 54 of the Act are complied with. For example, the tax-payer can purchase an residential house with one floor and later construct two more floor's on the same residential house and in this situation benefit u/s 54 of the Act cannot be denied to the tax-payer merely on the ground that the tax-payer has purchased the residential house and hence now benefits for construction of the same residential house property are ,therefore, denied . Our above view is fortified by the judgment of Hon'ble Calcutta High Court in the case of B.B.Sarkar v. CIT (1981) 132 ITR 150(Cal.HC) .
Similarly, Section 54 of the Act does not impose any conditions or restrictions as to what constitute 'habitable' to get the benefit of deduction u/s 54 of the Act. The word 'habitable' is highly subjective and has to be understood and interpreted in the context of the socio-economic status and standing of the tax-payer in the society. Section 54 of the Act only provides that the tax- payer has to purchase or construct a new residential house . One tax-payer can purchase or construct new residential house property for say even Rs 10 lacs and another tax-payer can purchase or construct new residential house property for say Rs 500 lacs, depending upon their socio-economic status and standing in the society . In the above cases, there will be substantial and significant difference in the quality of construction material used and 16 ITA 4450/Mum/2014 amenities required by both the tax-payer's to make the house 'habitable' fit for living for their residential purposes, but both the tax-payer's will be entitled for deduction u/s 54 of the Act provided other conditions as stipulated u/s 54 of the Act are fulfilled as section 54 of the Act does not stipulate any such restrictive conditions as to the ceiling on amount per-se of investment in purchase and /or construction of new residential house property which is rather linked to long term capital gain earned by the assessee on sale or transfer of residential house property , or as to type of residential house properties or quality of construction or amenities required by the tax-payer to make the house 'habitable' which would entitled the tax- payer for claiming the benefit u/s. 54 of the Act . The tax-payer keeping in view his socio-economic position and status in the society has to define as to what is 'habitable' residential house required to make the house fit for living/abode for the tax-payer for his residential purposes. Revenue cannot deny the benefit u/s 54 of the Act on the ground that expensive marble floorings or tiles are used in place of ordinary flooring or tiles etc. or a high quality expensive construction material is used by the tax-payer or more amenities are required by the tax-payer to make the house 'habitable' and more so when Section 54 of the Act itself does not stipulate any such restrictive conditions, thus, benefit u/s 54 of the Act cannot be denied to the tax-payer on these grounds as statute does not provide for such conditions/restrictions. Of course, the items of comfort purchased or installed in the new residential house so purchased or constructed by the tax-payer such as consumer electronic and entertainment equipments, air-conditioning equipments, furniture , beddings, electrical and other equipments etc. per-se does not fit into the definition of purchase or construction of the residential house entitling these items to the benefits u/s. 54 of the Act as these are items of comfort and are not part of the purchase or construction cost of new residential house property within the meaning of Section 54 of the Act and hence, benefits u/s 54 of the Act cannot be allowed for these items of comfort 17 ITA 4450/Mum/2014 so purchased/installed by the tax-payer in the new residential house so purchased or constructed. If the tax-payer is allowed to purchase or construct the residential house without any ceilings as to the amount of investment u/s 54 of the Act , then merely because the tax-payer has purchased a residential house and thereafter followed it with alterations , additions and modifications carried out to construct the said purchased residential house to make it habitable for the tax-payer, benefits cannot be denied by the Revenue u/s 54 of the Act. It will be like treating equals as un- equals and treating un-equals as equals which is not permissible. Our view is also supported and fortified by decision of Hon'ble Karnatka High Court in the case of Rahan Siraj v. CIT (2015) 58 taxmann.com 333(Kar. HC) whereby Hon'ble Karnatka High Court held as under:
"6. In the light of the aforesaid rival contentions, the substantial questions of law that arise for our consideration in this appeal are as under:
    "(i)    *****

    (ii)    Whether the Tribunal is right in holding that the appellant is not entitled to
make a deduction in respect of additions/alterations made to the property after purchase in order to have a normal living in computing the deduction under Section 54F of the Act, when no such restriction has been provided under Section 54F of the Act?"
7. *****
8. Insofar as the second substantial question of law is concerned, it is not in dispute that the property purchased by the assessee was habitable but had lacked certain amenities. The assessee has spent nearly about Rs. 18 lakhs towards removal of mosaic flooring and laying of marble flooring, alteration of the kitchen, putting up compound wall, 18 ITA 4450/Mum/2014 protecting the property with grill work and attending to other repairs. Section 54F of the Act provides that if the cost of the new asset, which is to be taken into consideration while determining the capital gain, the words used is "cost of new asset" and not "the consideration for acquisition of the new asset". In law, it is permissible for an assessee to acquire a vacant site and put up a construction thereon and the cost of the new asset would be cost of land plus (+) cost of construction On the same analogy, even though he purchased a new asset, which is habitable but which requires additions, alterations, modifications and improvements and if money is spent on those aspects, it becomes the cost of the new asset and therefore, he would be entitled to the benefit of deduction in determining the capital gains. The approach of the authorities that once a habitable asset is acquired, any additions or improvements made on that habitable asset is not eligible for deduction, is contrary to the statutory provisions. The said reasoning is unsustainable. To that extent, the impugned order passed by the Tribunal as well as the Lower authorities require to be set-aside and it is to be held that in arriving at cost of the new asset, Rs. 18 lakhs spent by the assessee for modification, alterations and improvements of the asset acquired is to be taken note of. Thus, the second substantial question of law is answered in favour of the assessee and against the Revenue. Hence, we pass the following order:
Appeal is allowed in part"
We have also carefully perused the invoices of contractors submitted by the assessee in paper book filed with the Tribunal and we have found that the expenditure incurred by the assessee are towards the extensive civil, plumbing , electrical and painting works including new flooring , tiles , fittings in the new residential house property purchased by the assessee in 19 ITA 4450/Mum/2014 Pune in July 2008 and are not towards purchase or installation of items of comfort such as air-conditioners, consumer electronics and entertainment equipments, electrical and other equipments, furniture etc. We have also seen the photographs of the new residential house at Pune when it was purchased by the assessee in July 2008 which is also placed in paper book which clearly reflects that the said house was not in the habitable conditions and was in dilapidated condition when it was purchased by the assessee in July 2008, which is also corroborated by the clause 8(ix) in the purchase agreement dated 23-07-2008 entered into by the assessee for acquiring the new residential house property at Pune in July 2008. Thus based on the peculiar facts and circumstances of this case and on the basis of our discussion and reasoning above , we hold that the assessee is entitled for claim of benefit u/s 54 of the Act of expenditure of Rs.14,26,705/- incurred by the assessee to make the said new residential house purchased by the assessee at Pune in July 2008 'habitable' fit for living for residential purposes by the assesse. We order accordingly.
11. In the result, the appeal filed by the assessee in ITA N0. 4450/Mum/2014 for the assessment year 2009-10 is allowed.
Order pronounced in the open court on 30th March, 2016.


G Siva Rama Krishna, Hyderabad vs Assessee on 16 December, 2013
       IN THE INCOME TAX APPELLATE TRIBUNAL
         HYDERABAD BENCHES "B" : HYDERABAD

         BEFORE SHRI CHANDRA POOJARI, A.M.
                        AND
          SMT. ASHA VIJAYARAGHAVAN, J.M.

                     ITA.No.755/Hyd/2013
                   Assessment Year 2007-2008

G. Siva Rama Krishna                     DCIT, C.C. 6
Hyderabad                         vs.    Hyderabad
PAN ACAPG4006C
(Appellant)                              (Respondent)

      For Appellant                : Shri DV. Anjaneyulu (FCA)
      For Revenue                  : Shri Solgy Jose T. Kottaram

      Date of Hearing       : 16.12.2013
      Date of pronouncement : 20.12.2013


                              ORDER
PER SMT. ASHA VIJAYARAGHAVAN, J.M.
This appeal by the assessee is directed against the Order of the CIT(A)-V, dated 20.02.2013 for the assessment year 2007-08. The assessee has raised the following grounds :
1. "The order of the learned Appellate Authority confirming the addition of Rs.24,75,787/- stating that the expenditure incurred in converting semi finished property into a habitable one for his living is not covered u/s. 54 is erroneous in law, contrary to facts, probabilities of the case and against the principles of equity and natural justice.
ITA.No.755/Hyd/2013 G. Siva Rama Krishna, Hyderabad
2. The CIT(A) further erred in law by stating that the expenditure incurred was not to make house habitable instead shows the living standards ignoring the fact that the property was purchased in a semi finished stage and further ignoring that the appellant disclosed taxable income of Rs.14,83,403/- which shows his reasonable standard of living is against the provisions of law.
3. The CIT(A) without going into the facts of the case and stating that such expenditure does not come under the purview of sec. 54 is mere with surmises, conjucture and without any proper base or evidence and therefore the observation made by the CIT(A) is contrary to law and as per settled case law Mrs. Gulshanbanoo vs. JCIT (2002) 83 ITD 649 (Mum.)
4. The appellant crave to submit that all the facts, contentions and case laws mentioned in the statement of facts accompanied these grounds, shall be treated as part and parcel of these grounds and shall be dealt with.
5. For these and other grounds that may be urged at the time of hearing, the appellant prays the Hon'ble Tribunal to kindly allow the appeal."
2. Briefly, the facts of the case are that for the A.Y. 2007-08, the assessee filed his return of income on 17.12.2007 admitting total income of Rs.14,83,403/-. Assessment under section 143(3) of the Act was completed determining the total income of the assessee at ITA.No.755/Hyd/2013 G. Siva Rama Krishna, Hyderabad Rs.14,83,403/- and long term capital gains of Rs.48,70,478/- (disallowance of capital gains exemption of Rs.24,75,787/- and LTCG on basis of development agreement of Rs.23,94,691/-). The assessee admitted Rs.51,70,829/- towards capital gains and claimed the same as exempt under section 54F of the Act. The Assessing Officer observing that the cost of house includes interior, carpentary works and furniture expenses will not go into the cost of house as contemplated under section 54F of the Act, disallowed the expenditure while computing the long term capital gains.
3. Aggrieved, the assessee filed appeal before the CIT(A). The learned CIT(A) observed that assessee has incurred the following expenditure on which the assessee has claimed deduction under section 54.
1. Kitchen modular, Memoriam shutters, S S Baskets, hardened glass of Rs.3,30,000/-.
2. Hall TV, showcase box type, plywood, teakwood, veneer finish, labour of Rs.1,75,000/-.
3. Master bedroom, Children bedroom, second children bedroom, guest bedroom - cupboard box type, veneer finish, hardware, labour of Rs.6,94,000/-.
4. Outside POP, sheets, wood frames, ceiling of Rs.93,000/-.
5. POP works for four bedrooms, hall, kitchen, drawing, pooja room, as per design light cutting of Rs.1,80,000/-.
6. Bathroom shower of Rs.1,95,000/- (each Rs.65,000).
4. According to the CIT(A), this expenditure are not necessary for making the house habitual and declined the ITA.No.755/Hyd/2013 G. Siva Rama Krishna, Hyderabad deduction under section 54 against which, the assessee preferred the present appeal before the Tribunal.
5. It was submitted before the Tribunal that part of the expenditure has been incurred towards modular kitchen, cupboards, wood frames, fans and paintings, glass work, bathroom shower and polishing work etc., to make the house more habitable one to suit the need of the assessee and to be allowable under section 54 of the I.T. Act, 1961.
6. On the other hand, the learned D.R. relied on the Order of the CIT(A).
7. We have heard both the parties and perused the material available on record. Admittedly, in this case, the assessee claims expenditure incurred after purchase of the flat. The flat was purchased by the assessee in semi finished state and vide sale deed dated 4th May, 2005. Thereafter, these expenditure was incurred. The learned Counsel for the assessee also relied on the Order of the Tribunal in the case of Mrs. Gulshan Banoo R. Mukhi vs. JCIT 83 ITD 649 (Mum.) wherein it was held that cost of new house for the purpose of section 54, include not only cost of purchase of new house but also includes other necessary expenditure to make house habitual. He also relied on the Order of the Ahmedabad Bench in the case of Shri Srinivasa R. Desai 90 DTR 346. The assessee after purchasing the flat has incurred further cost which are in the nature of cost of construction and it has been held that the cost so incurred will form an integral part of the qualifying investment under section 54.
ITA.No.755/Hyd/2013 G. Siva Rama Krishna, Hyderabad
8. We have carefully gone through the Orders of the Tribunal. We find that there is no dispute regarding proposition laid down by this Tribunal in the case of Shri Srinivasa R. Desai (supra). First of all, in order to allow deduction under section 54 on the expenditure incurred by the assessee, it should be relate to the new "house property" purchased by the assessee and if the assessee purchased the house in a semi-finished stage and incurred any expenditure for making house habitual then such expenditure incurred in relation to construction of the non- completed flat in order to reside is to be considered for deduction under section 54F of the I.T. Act, 1961. In the present case, the assessee is said to have incurred expenditure in the form of modular kitchen, TV, show case, bath room fittings and POP work. In our opinion, if these expenditure have been incurred for the purpose of remodeling of flat in normal course after purchasing the readymade flat, it is allowable expenditure. However, if it is for beautifying the flat by removing the previous one, it cannot be considered for deduction under section 54F. We, therefore, remit the issue to the file of the Assessing Officer to examine this issue with reference to the agreement entered by the assessee with the builder/developer (construction agreement) thereafter decide whether the developer has provided these things or not and decide the issue in accordance with law. Accordingly, this issue is remitted to the file of the Assessing Officer for fresh consideration.
9. In the result, appeal of the assessee is allowed for statistical purposes.
ITA.No.755/Hyd/2013 G. Siva Rama Krishna, Hyderabad Order pronounced in the open Court on 20.12.2013.
  Sd/-                          Sd/-
 (CHANDRA POOJARI)             (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER                JUDICIAL MEMBER

Capital Gains Tax on sale of securities- distinction between short term and long term- the complusion to be attractive for Foreign Investors- what to do, what not to do 

Capital Gains Tax

A Committee headed by Dr.Parthasarathy Shome has recommended removal of tax on transfer of shares in listed companies. It has been argued by the Committee that a number of countries exempt capital gains tax on listed securities. India is not the only location for foreign investment. It has to compete for capital internationally.

We should become capital friendly. The Revenue consideration is nothing much. To tide over our current account deficit, we need capital from the macro economic point of view as well. Th e Committee has gone one step further. It has suggested exempting capital gains tax for Residents also. According to the Committee, it will mean both efficiency and equity in the tax structure. The loss of Revenue can be made up by raising the Securities Transaction Tax. (STT)

The Present Law

Th e first Budget of the UPA Government was presented in July, 2004. Changes were made in the scheme of taxation of capital gains. None of the gains would be taxable to income tax if realized over a ‘long term’, i.e aft er a holding period of more than 12 months. For equities held for less than 12 months, the gains should be taxed @ 10% and will be known as short term capital gains. Th e STT was introduced along with the abolition of the LTCG. STT is essentially a tax on sales and brings with it all distortionary effect. It is not like a destination based VAT, Revenue-wise.

Th e Exclusion of long term capital gains from taxation had come in for stringent criticism from leading Economists. Prof. Amaresh Bagchi of the National Institute of Policy and Public Finance argued in a leading Article in the Economic and Political weekly in January 2007that from equity point of view income should include all ingredients of accretion to economic power and there can be no case for excluding capital gains from the income base for taxation. A conceptually pure income base should include capital gain on accrual itself and this was the rationale behind the comprehensive definition of income as made up of increments in the value of wealth between two points of time and the consumption of the taxpayer during the period, known as the Haig-Simons defi nition. “Exclusion of capital gains goes against this logic and off ends both horizontal and vertical equity”.

Income Tax systems all over the world proceed by taxing incomes when they are realized. But this results in ‘bunching’ and so under a system of progressive taxation, taking gains accruing over several years in the year of realization can give rise to inequity to taxpayers in lower income brackets. It was for this reason that long term capital gains are taxed at a lower rate with benefi ts of indexation for inflation. But this can lead to the peculiar phenomenon of dressing up of ordinary income as capital gains. Litigation mounts in deciding whether a particular receipt is income or capital. The practice of ‘bond washing’ will bear testimony to the problems that can arise when capital gains are treated differently from ordinary income               

Th e Kelkar Task Force

It was on the recommendation of the Kelkar Task Force that long term capital gains on listed securities came to be abolished. According to KTF, Corporate profits bear taxation in the hands of the companies. Capital gains are a reflection of retained profits. Levy of capital gains tax will amount to double taxation. This was the argument.

It ignores the fact that the effective tax rate on corporate incomes is always far lower than the statutory rate because of tax concessions. Prof.Bagchi concluded, “exemption of LTCG totally from tax does not stand to reason from any account, either Revenue or effi ciency or equity. Soft treatment of short term CG clearly violates equity. Some enhancement of tax on STCG is desirable to discourage FIIs from too frequent turn over of their holdings. That would also act as a check on the unhealthy volatility in the stock market which the operations of FIIs tend to generate.

All STCGs should be taxed as ordinary income, whether from Securities or other assets”.

Th e DTC Angle

Th e Direct Taxes Code sought to abolish the present distinction between short term investment asset and long term investment asset on the basis of the length of holding of the asset. The DTC also proposed abolition of STT. All capital gains arising from the transfer of equity shares will form part of the computation process. Roll over benefits were to be continued for investment in agricultural land, residential house and the capital gains savings scheme

Rollover of capital gains through reinvestment

Critics have pointed out that Roll over provisions are capable of misuse. Thus the proposal in 2012-13 Budget to exempt the proceeds of house sales from capital gains tax, provided the money is invested in a small business enterprise is considered as capable of easy abuse. After all, there are lots of defunct Companies that can be acquired and passed off as an investment in a small scale business  enterprise. Finance Ministry is yet to set guidelines and safeguards to ensure the purpose of exemption is achieved.

Th e scheme for exemption in respect of sale of residential house if the proceeds are utilized for subscription in the equity of a manufacturing small scale industry for purchase of new plant and machinery happens to be the brain child of the Industry Ministry. It is now realized that monitoring of exemptions that come with end use conditions is always a big challenge. Whether the scheme as announced in the Budget 2012-13 will be implemented at all is a matter of doubt.

The Shome Panel and Mauritius

Th e provocation for total exemption from tax in respect of all capital gains as suggested by the Shome Committee comes from the realization that India needs Foreign Direct Investment and also institutional fl ows into the capital market. Said Dr.Shome, “A number of countries exempt capital gains tax on listed securities. India is not the only location for foreign investment. It has also to compete for capital internationally. We, as a country, should become capital friendly”. The recommendation must be read in the light of the view expressed by the Committee that Foreign

Institutional Investors coming through Mauritius should be exempted from the operation of the General AntiAvoidance Rules.

The suggestion opens up immense possibilities. Our treaty with Mauritius was signed in 1982. It was meant to boost India’s investment in Mauritius. It however proved the other way. The treaty does not enable India to tax capital gains made on the bourses by Mauritian Entity. They are liable for tax only under the Mauritian law. Mauritius however does not levy capital gains tax.

Hence, this fondness for routing investments through Mauritius. India attracts maximum investments from Mauritius. It is now admitted that the FII flows from Mauritius include round tripping of money and return of black money through the FII route. This involves routing of resident Indian’s illicit money back to India, mostly through Mauritius to avoid taxes. Dr. Shome would like to solve this problem by abolishing capital gains tax itself on listed securities. In its place, he would like to have an enhancement in STT. Such a course will push up transaction costs in the stock exchanges and day traders will certainly be affected. Instead, Government should consider modifying the terms of our treaty with Mauritius. India’s Double Taxation Avoidance Treaty with Singapore concluded last year prescribes that a qualifying entity must be either listed in Singapore or have $200,000 of annual operating costs. There can be ways and ways of modifying our treaty with Mauritius without sacrificing Revenue considerations by total eliminating taxation of capital gains made on the stock exchanges.

Conclusion

Th e Shome Panel recommendations are fraught with serious consequences for our fisc. The recommendation for abolishing capital gains tax on listed securities, whether in respect of FIIs or even for residents, is opposed to all canons of equity, justice and fair play. It is retrograde and will only help in making the rich, richer at the cost of exchequer.
T.C.A. Ramanujam

 Chief Commissioner of Income Tax

(Retd) & Former Member, Income Tax  Appellate Tribunal


Income Tax Case Laws on Capital Gains: Section 54 of IT- exemption of capital gains on reinvestment in residential house- can be given a liberal interpretation 

Shri A. Kodanda Rami Reddy vs ITO



Assessee could not claim exemption under Section 54 on two disparately placed properties.



Assessee had sold a residential house at Film Nagar, Hyderabad, during the relevant previous year, for a sum of 6,50,00,000/-. After deducting indexed cost of acquisition, the long term capital gain came to 5,98,25,430/-. In the tax return filed, assessee claimed exemption under Section 54 on such capital gain for acquisition of a new residential house at Jubilee Hills, Hyderabad, for 1,86,15,220/- and acquisition of a land for 1,90,00,000/- for the purpose of constructing a residential house. Balance amount was placed in deposits in capital gains scheme. AO was of the opinion that exemption under Section 54 could be given to only one residential property. He, therefore, disallowed the claim of exemption with reference to first property, viz. 1,86,15,220/- and reworked the total income.



On appeal before Ld. CIT(A) contended that the term "a residential house" used in Section 54 of the Act, had to be construed in plurality. Reliance was placed on the decision of Hon'ble Karnataka High Court in the case (2010) 4 TaxCorp (DT) 47698 (KARNATKA), CIT v. D. Anand Basappa (309 ITR 329), CIT v. Smt. Jyothi K. Mehta (2011) 12 taxman 440, ITO v. P.C. Ramakrishna (108 ITD 251), and Prem Prakash Bhutani v. ACIT (2009) 31 SOT 38. However, CIT(Appeals) was not appreciative of these contentions. According to him, in all such cases, exemption under Section 54 was given for more than one residential unit for a reason that such residential units were situated within the same building or were adjacent or oppositely placed flats, amenable to a joint enjoyment. Reliance was placed by the CIT(A) on the decision of Hon'ble Punjab & Haryana High Court in the case of (2011) 5 TaxCorp (DT) 48080 (PUNJAB & HARYANA)



On appeal before ITAT , ld. AR on behalf of assessee, apart from relying on the decisions cited by the assessee before the CIT(A) , also placed reliance on a decision of Hon'ble Andhra Pradesh High Court reported in (2013) 7 TaxCorp (DT) 54945 (AP) and argued that decision of the Special Bench of this Tribunal in the case of ITO v. Ms. Sushila M. Jhaveri stood overruled by virtue of the above judgment of Hon'ble Andhra Pradesh High Court. According to him, it was not necessary that residential units purchased by an assessee should be placed or situated within the same building or should be adjacent flats for claiming exemption under Section 54 of the Act.



ITAT bench noted that, No doubt, the plethora of decisions relied on by the learned A.R. clearly mention that the term "a residential house" used in Section 54 has to be construed in plurality. But, as held by Hon'ble Hon'ble Apex Court in the case of CIT v. Sun Engineering Works Pvt. Ltd., judgment of a court cannot be seen divorced from the fact situation. Its relevance is only when facts are on all four squares. In each of the case, relied on by the learned A.R., the residential units were situated in the same building or were part of the same residential complex and were flats.    Either they were adjacently situated or were situated at upper and lower flats or situated in such a manner that the units could be construed together as "a residential house". Hon'ble Delhi High Court in the case reported in (2013) 7 TaxCorp (DT) 54446 (DELHI)  observed that,



There could also be another angle. Section 54/54F uses the expression "a residential house". The expression used is not "a residential  unit".  This  is  a  new  concept  introduced  by  the assessing officer into the section. Section 54/54F requires the assessee to acquire a "residential house" and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units   which   can,   if   the   need   arises,   be   conveniently   and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans and requirements. Most of the houses are constructed according to the needs and requirements and even compulsions. For instance, a person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. We are therefore, unable to see how or why the physical structuring of the new residential house, whether it is lateral or vertical, should come in the way of considering the building as a residential house. We do not think that the fact that the residential house consists of several independent units can be permitted to act as an impediment to the allowance of the deduction under Section 54/54F. It is neither expressly nor by necessary implication prohibited."



The above decision was rendered by their Lordships after considering the decision of Hon'ble Karnataka High Court in the case (2010) 4 TaxCorp (DT) 47698 (KARNATKA) . Tenor of this judgment would clearly show that plurality in interpreting "a residential house" would apply so long as the units were in the same building.



Further ITAT bench also noted that, No doubt, Hon'ble Andhra Pradesh High Court in the case of (2013) 7 TaxCorp (DT) 54945 (AP), upheld the order passed by Ld.CIT (A) and ITAT, holding that the AO had acted too technically and had erroneously denied the assessee the deduction to the extent of 50% and that since the assessee had purchased two flats having adjacent kitchens and toilets which have a common meeting point, he is entitled to 100% deduction under section 54 for both the flats purchased by him. Nevertheless in this case also the flats were situated side-by-side and the builder had effected modification of the flats so as to make it one unit.   As against this, if we look at the case before us, the two properties purchased were disparately situated. There was no way they could be joined together.  Construction was to begin in one of the properties.   Being geographically disparate, there was no possibility of joining them together to form a residential house. Therefore, in our opinion, the said decision of Hon'ble Andhra Pradesh will not help the assessee's case in any way. As against this, Hon'ble Punjab and Haryana High Court in the case of (2011) 5 TaxCorp (DT) 48080 (PUNJAB & HARYANA) (supra), relied on by the ld. CIT(Appeals),



Held, that assessee could not claim exemption under Section 54 on two disparately placed properties. Ld.  CIT(A) was justified in confirming the view taken by the AO.



Applicability of Section 50C of the Income tax Act,1961 in respect of Asset held in Business

Provisions of Section 50C(1) reproduced under: 50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed 54[or assessable] by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed 54[or assessable] shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.
Analysis
The section prima-facie stating that, the provisions of the Sec.50C should apply in respect of land or building or both held as capital asset and not applicable if the same held as business asset. Since, the words used in the section “Capital Asset” Hence, provisions of Sec 50C should not invoked.
The above view has been supported by the Madras High court in the case of CIT v. Thiruvengadam Investments Private Limited, Appeal No. 1329 of 2009.
Grounds of analysis and ruling of the High court is furnished hereunder.
Background• The assessee was engaged in the business of property development and the activities of the assessee were treated as business.
• The assessee has obtained power of attorney from the owner of the property (primarily land) and the same was shown under the head “Current assets” and not under the head “Fixed assets” in the balance sheet.
• Such property was sold by the assessee for a consideration through a deed of conveyance. The assessee claimed a loss on the sale of such property in the return filed for the relevant assessment year.
• While registering sale deed, the Sub-Registrar took the guideline value which was much higher than the actual consideration for sale and levied stamp duty / registration charges on higher value.
• The Assessing Officer („AO?) invoked section 50C of the Income Tax Act („the Act?) and held that the higher guideline value as fixed by the Sub-registrar for the purpose of levying stamp duty / registration charges should be taken as the sale consideration and computed the profit on the sale of the property accordingly.
• Aggrieved by the order of AO, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [„CIT (A)?] contending that the AO is not correct in invoking the provisions of section 50C of the Act since that section would apply only to the computation of income under the head capital gains and not for the computation of business income. CIT (A) agreed with the contention of the assessee.
• Aggrieved by the order of CIT (A), the Revenue filed an appeal before the Income Tax Appellate Tribunal ├žITAT?). The ITAT held that the provisions of section 50C of the Act are not applicable when the income was treated as business income and on that ground dismissed the appeal. The revenue preferred an appeal before the High Court.
Issue
Whether, on the facts of the case, the provisions of section 50C of the Act are applicable when the property is held as business asset?
Ruling of the High Court
It is not in dispute that the activity of the assessee is of property promoter. As the property in the hands of the assessee was treated as business asset and not as capital asset, there is no question of invoking the provisions of section 50C of the Act. Section 50C of the Act pertains to determining the full value of the capital asset. The appeal is, therefore, dismissed.
Source: CIT v. Thiruvengadam Investments Private Limited, Appeal No. 1329 of 2009 (Madras High Court)
Authors note: This is for informative purpose only. For full details please go through the related appeal.


Capital Gains Tax liability of landowners under development agreements

Whenever an owner of any immovable property transfers his property, he has to pay income tax. If he is a developer or a builder, he has to pay tax on the income treating the same as his business income. If he is holding the im-movable property as capital asset or investment, then he is liable to pay capital gains tax. Till 31st March 1987, in the absence of a registered conveyance deed, if owner of an immovable property had put the purchaser in possession of immovable property, he was not required to pay capital gains tax. Many owners of immovable property used to take advantage of this legal position by postponing the tax liability by delaying the execution of conveyance deed in favour of purchaser. The law was amended to rectify this loophole and the following clause ‘v’ was inserted in S. 2(47) as under :

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in S. 53A of the Transfer of Property Act, 1882 (4 of 1882).

2. Till recently it was interpreted in layman’s language that possession is synonymous with transfer. It was believed that the possession of immovable property is a transaction and liability for capital gains tax arises when this transaction of possession takes place. However, recent decision of Mumbai High Court in the case of Chaturbhuj Dwarkadas Kapadia (260 ITR 491) has compelled many Advocates and Chartered Accountants to re-think as to the correct interpretation of clause (‘v’) of S. 2(47) whether transaction means transaction of possession or whether transaction means act of entering into an agreement laying down the terms and conditions about possession of immovable properties. This article deals with taxability in the hands of landowners in respect of development agreements with reference to the recent decision of Mumbai High Court inChaturbhuj Dwarkadas Kapadia v. CIT, reported in 260 ITR 491.

3. In the said case before the Mumbai High Court, the assessee being an individual entered into an agreement for the sale of his share in a property under which the purchaser had to pay a total consideration of Rs.1,85,63,220/- and, pending the completion of sale by execution of conveyance, he was to be given right to develop the property in accordance with the rules and regulations framed under the MHAD Act. For this purpose, the seller was to execute a limited power of attorney authorising the builder to deal with the property and also obtain necessary permissions and approvals from authorities. On receipt of necessary permissions, approvals and NOCs, the seller was to grant an irrevocable licence to the developer to enter upon the seller’s property, after which the builder was to undertake demolition work, subject to settling the claims of the tenants. The development agreement was dated August 18, 1994. Permissions from CRZ and ULC authorities were obtained in financial year 1995-96; a very major part of total consideration was paid by 31st March 1996; Commencement Certificate for construction of building was issued by the BMC on 15th November 1996, and the irrevocable licence was issued by the owner on 12th March 1999.

4. The issue as to whether a transfer is involved in such cases and whether such transfer gives rise to taxable capital gain, was not in question in the case since the assesseeviz. the seller did not dispute a transfer and taxability. The only issue involved was as to the year in which the transfer took place. The assessee, relying on issue of irrevocable licence in March 1999, took the stand that he stood divested of his proprietory rights only during the accounting year ending March 31, 1999 relevant to assessment year 1999-2000 as he granted irrevocable licence to the builder/purchaser only in that year. Till that date, the assessee had not parted with the possession. He, accordingly offered capital gain arising from the transfer in the assessment year 1999-2000. The Department, on the other hand, took the view that in this case, the agreement dated August 18, 1994 was a development agreement. There being no forfeiture or termination clause, the agreement, on execution, gave complete control of development over the property to the purchaser. It was also contended that substantial payment in terms of agreement was made during the F.Yr. 1995-96. Permissions from authorities regarding CRZ and ULC were received during the same year. According to the Department from the fact of payment, permissions and reading of agreement, it was permissible to infer possession in favour of the builder/purchaser during the accounting year 1995-96 relevant to assessment year 1996-97. The department, accordingly, taxed the capital gains in the year 1996-97.

5. The case was decided by the ITAT in favour of the Department on the basis of facts of the case holding transfer of possession in 1996-97. The ITAT, however, did not state the facts correctly. During the course of hearing, the counsel for the assessee pointed out several mistakes and argued that the decision of the ITAT having been based on incorrect facts and documents which do not even exist, was perverse.

6. It is not very relevant to mention the nature of mistakes made by the ITAT as the Hon’ble High Court did not decide the question on those facts treating them as not relevant. It was held that, in the cases of development agreements, one cannot go by substantial performance of contract as contended by the Department or by the date of granting of irrevocable licence as argued on behalf of the assessee. It was held by the High Court, the test of substantial compliance of contract, if adopted for determining the date of transfer, would result in anomaly because what is substantial compliance would differ from officer to officer. One of the questions referred by the ITAT was, whether the Tribunal’s conclusion was arrived at by considering the irrelevant circumstances, without appreciating and considering the relevant factual material and was contrary to the material and the evidence on record and was thereby vitiated. While the High Court answered the question in affirmative as claimed by the assessee, still the decision was in favour of the Department for an altogether different reason.

7. The Hon’ble High Court held that "in this case, the agreement is a development agreement and in our view, the test to be applied to decide the year of chargeability, is the year in which the transaction was entered into". The observation was based on the reading of S. 2(47)(v). In the Court’s view, the development agreement does not transfer the interest in the property to the developer in general law and, therefore, S. 2(47)(v) has been enacted. In such cases, even entering into such a contract could amount to transfer from the date of the agreement itself. S. 2(47)(v) reads as :

"transfer, in relation to a capital asset, includes, —

(i) ......

(ii) .......

(iii) ......

(iv) ......

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in S. 53A of the Transfer of Property Act, 1882 (4 of 1882)".

8. As to the genesis of this Section, the Court observed that S. 2(47)(v) was introduced in the Act because prior to its introduction, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of the conveyance. Consequently, the assessees used to enter into agreements for developing properties with the builders and under the arrangement with the builders, they used to confer privileges of ownership without executing conveyance and to plug that loophole, S. 2(47)(v) came to be introduced in the Act.

9. Analysing the reasons given for holding that the development agreement in this case gives rise to transfer in the year in which transaction took place and relating them to the provisions of S. 2(47)(v), it can be seen that allowing of possession to be taken or retained in this Section does not necessarily mean physical possession of the property, but any arrangement by which the transfer confers privileges of ownership without executing conveyance. Applying this to the facts of this case, when the agreement was executed accompanied with limited power of attorney authorising the builder to deal with the property and obtain necessary permission, approval or NOC with no forfeiture or termination provided, then even though the irrevocable licence was not granted and even though the conveyance was not executed, the builder was conferred with the privileges of ownership amounting to allowing the possession to be taken or retained. With this understanding of legal position, the fact of substantial compliance or grant of irrevocable licence relied upon by the Department and the assessee do not remain relevant. The following extract is relevant :

"In fact, the limited power of attorney may not be actually given, but once under clause 8 of the agreement a limited power or attorney is intended to be given to the developer to deal with the property, then we are of the view that the date of the contract, viz., August 18, 1994, would be the relevant date to decide the date of transfer u/s.2(47)(v) and, in which event, the question of substantial perfor-mance of the contract there-after does not arise".

10. In order to further read the mind of the court as to the understanding of the nature of agreement in respect of which the decision was given, the following extract from the judgement is relevant.

"Therefore, if on a bare reading of a contract in its entirety, an Assessing Officer comes to the conclusion that in the guise of the agreement for sale, a development agreement is contemplated, under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, then the Assessing Officer is entitled to take the date of the contract as the date of transfer in view of S. 2(47)(v).

The above observation makes it clear that the agreement, read as a whole, was taken to have passed complete control over the property in favour of the developer. In such a case, the date of the contract alone was held to be relevant to decide the year of chargeability.

11. The decision in the case will, therefore, be inapplicable where the development agreement is not a guise for sale. There are numerous shades of agreements with varying stipulations affecting their nature. There are development agreements under which the developer is given the right of developments for and on behalf of the landowner. There are agreements where the owner retains his control and ownership over the F.S.I. and the builder is simply empowered to acquire and load TDRs over it. There are agreements where the developer is authorised to acquire TDR and the ultimate purchasers of flats are required to become members of the co-operative society to whom the land belongs and continues to belong. In such cases, there may not be transfer at the time of the contract and the decision of Mumbai High Court may not be applicable.

12. The application of S. 2(47)(v) requires "allowing of the possession of any immoveable property to be taken or retained in part performance of a contract of the nature referred to in S. 53A of the Transfer of Property Act 1882". S. 53A of the T. P. Act applies where the transferee has, in part performance of the contract, taken possession of the property or any part thereof. In such a situation, notwithstanding that the transfer has not been completed in the manner prescribed therefor by the law, the transferor shall be debarred from enforcing against the transferee any right in respect of the property. Putting the transferee in possession of the land in part performance of the contract is an essential element in the deemed transfer of this kind. The Hon’ble Court seems to have taken a very broad view of possession. From the decision which is based on application of S. 2(47)(v), it can be inferred that the Court has considered the execution of development agreement as tantamounting to putting the developer in possession of land. How far such a finding is justified by the facts of the case needs to be considered. The execution of agreement in this case merely gave a right to be granted a limited power of attorney which only enabled the developer to seek necessary permissions from the authorities viz. ULC Authority, BMC and CRZ authorities. It was only after such permissions/approvals and NOC under Chapter XXC was obtained that the developer was to be granted an irrevocable licence which alone would have given him the right to enter upon the property and do further acts incidental to carrying on development work. The permissions required to be obtained may not be obtained. Under the circumstance, the builder was not able to exercise any right in respect of the land, not to talk of right of possession. Being able to exercise such rights was contingent upon obtaining permission/approvals and grant of irrevocable licence. The mere execution of agreement, therefore, cannot amount to grant of possession in part performance of contract as contemplated u/s.53A of the Transfer of Property Act.

13. There is another important aspect of the decision. While the Hon’ble High Court has held that transfer takes place on the execution of development agreement and has given detailed reasons for it, the operative part of the judgement is not in consonance with such finding. The assessee’s appeal has been allowed, which means that his contention about the year of transfer being the assessment year 1999-2000 on the basis of grant of irrevocable licence, has been accepted. The operative part of the order is, therefore, contradictory to what has been held as a legal principle. Even answer to question No. 1, as per the operative part, is stated to be in negative i.e. in favour of the assessee. This question was regarding justification of taking the year 1996-97 as the year of transfer. May be, it is in negative because the correct year as per the decision, should have been the assessment year 1997-98. Still the answer is not in favour of the assessee as even the assessment year 1997-98 is not the assessment year claimed by him. The contradictions between the reasons and the operative part needs to be resolved to give a clear understanding of the judgement.

14. In case such a broad view as enunciated by the High Court is taken, several problems are likely to arise. If transfer is held to have taken place on execution of contract and tax on capital gains is charged in the relevant year and, for whatever reasons, permissions are not granted or anything happens which makes implementation of agreement not possible, the transferor will not be left with any remedy. The year of taxability, according to the decision, being determined by the execution of contract and not implementation thereof, it does not appear possible to get the assessment modified under any provision of law. Instances of this type are not rare.

15. Further, in several development agreements, the consideration of land is not specified as a defined amount of money. The same takes the form of sharing arrangement, whereunder on completion of contract, the landowner is entitled to some constructed space in lieu of the land subject to development. If capital gain arises in the year of execution of agreement, the computation thereof will present serious problem, nearing impossibility, in determining the full value of consideration at that stage. It will be necessary to argue each case on its individual facts distinguishing the same with the facts of the case before the Court, even where the agreement involves ultimate transfer of land to the builder. It will be necessary to argue on the facts of individual case that execution of agreement will not bestow on the developer the right of possession making the provision of S. 2(47)(v) applicable to their cases.


16. The branch of tax law relating to taxation of development agreement is already beset with uncertainties. The judgement does not appear to remove such uncertainty. It is likely to generate more tax disputes, as the assessing officers are likely to go by it without considering the facts on which the decision is given.




CG on liquidation

Capital Gains on Distribution of Assets by Companies in Liquidation [Section 46]
As already discussed, as per section 46(1), where the assets of a company are distributed to its shareholder on its liquidation, such distribution shall not be regarded as a transfer by the company. Therefore, there will be no capital gain to the company. However, where a shareholder on the liquidation of a company, receives any money or other asset from the company in lieu of the shares held by him, such a shareholder shall be chargeable to income-tax under the head 'Capital gains' in respect of the money and the asset so received. In this case, the consideration price for capital gain purposes shall be money received and/or the market value of the other assets on the date of distribution minus deemed dividend within the meaning of section 2(22)(c).

Sale of Assets received on Liquidation:

As per section 55(2)(b)(iii), if the asset (other than cash) acquired by the shareholder, at the time of liquidation, is subsequently transferred by the shareholder; then for the purpose of computation of capital gain of such transfer, the cost of acquisition of such asset shall be the market value of the asset on the date of distribution. In this case, deemed dividend will not be deducted. In other words, for determining the consideration price of the shares transferred, deemed dividend will be deducted from the fair market value of the asset as on the date of distribution. But for determination of cost of acquisition in case of transfer of such asset, deemed dividend will not be deducted from the fair market value of the asset.