Fair Market Value of flat on surrender of tenancy right

An old lady was residing at Malad in tenanted chawl having about 1000 sq. ft. area. After her death her daughter-in-law became successor and continued to live there. Subsequently the building was re-developed and she was allotted two flats of 650 sq. ft. each in her name in exchange of surrender of tenancy right. Out of which one was sold by her at an handsome price. Now the ITO wants to tax the whole sum as long term capital gain without allowing any deduction as purchase value or cost price plus index cost. Is the AO correct ?

The Finance Act, 1994 has amended the provisions relating to capital gains for the purpose of taxing the capital gains arising from transfer of tenancy right. For this purpose, the amendment provides that the cost of acquisition of the tenancy right be taken at NIL.

From the facts, it is clear by surrendering the tenancy right, the lady got in exchange two flats. So on surrender of tenancy right the cost of tenancy right was Nil. But, here the consideration for surrender of tenancy right was in – kind i.e. by way of exchange of two flats. Therefore, the fair market value of the property exchanged to be ascertained in order to arrive at the figure of consideration as per the Bombay High Court in Baijunath Chaturbhuj v. CIT [31 ITR 643].

Out of the two flats received, the lady sold one flat at handsome price. So for purpose of calculation the capital gains the index cost of this sold flat has to be ascertained and deducted. The flat being long-term, the index cost has to be worked out on the basis of fair market value of the flat in exchange of tenancy right at the date of surrender. Therefore, the view of the AO is not correct.

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No Transfer U/s 2(47) if Joint Development Agreement (JDA) is not registered: Supreme Court

Case Law Details
Case Name : CIT Vs Balbir Singh Maini (Supreme Court of India)
Appeal Number : CIVIL APPEAL NO. 15619 OF 2017
Date of Judgement/Order : 04/10/2017
Related Assessment Year :
Courts : Supreme Court of India (894)

CIT Vs Balbir Singh Maini (Supreme Court of India): On and after the commencement of the Registration and Other Related Laws (Amendment) Act, 2001, if an agreement, like the JDA in the present case, is not registered, then it shall have no effect in law for the purposes of Section 53A. In short, there is no agreement in the eyes of law which can be enforced under Section 53A of the Transfer of Property Act. This being the case, we are of the view that the High Court was right in stating that in order to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Act, there must be a “contract” which can be enforced in law under Section 53A of the Transfer of Property Act.

A reading of Section 17(1A) and Section 49 of the Registration Act shows that in the eyes of law, there is no contract which can be taken cognizance of, for the purpose specified in Section 53A. The ITAT was not correct in referring to the expression “of the nature referred to in Section 53A” in Section 2(47)(v) in order to arrive at the opposite conclusion. This expression was used by the legislature ever since sub-section (v) was inserted by the Finance Act of 1987 w.e.f. 01.04.1988. All that is meant by this expression is to refer to the ingredients of applicability of Section 53A to the contracts mentioned therein.

It is only where the contract contains all the six features mentioned in Shrimant Shamrao Suryavanshi (supra), that the Section applies, and this is what is meant by the expression “of the nature referred to in Section 53A”. This expression cannot be stretched to refer to an amendment that was made years later in 2001, so as to then say that though registration of a contract is required by the Amendment Act of 2001, yet the aforesaid expression “of the nature referred to in Section 53A” would somehow refer only to the nature of contract mentioned in Section 53A, which would then in turn not require registration. As has been stated above, there is no contract in the eye of law in force under Section 53A after 2001 unless the said contract is registered.

This being the case, and it being clear that the said JDA was never registered, since the JDA has no efficacy in the eye of law, obviously no “transfer” can be said to have taken place under the aforesaid document. Since we are deciding this case on this legal ground, it is unnecessary for us to go into the other questions decided by the High Court, namely, whether under the JDA possession was or was not taken; whether only a licence was granted to develop the property; and whether the developers were or were not ready and willing to carry out their part of the bargain. Since we are of the view that sub-clause (v) of Section 2(47) of the Act is not attracted on the facts of this case, we need not go into any other factual question.

Provision of Capital Gain Tax regarding selling a house or flat

Illustration – Mr.Ramdas has sold a flat at Bangalore at 20th April 2015 for a sale price of Rs.95 lakhs. He does not know the capital gain tax payable on such sale.

Scenario A – The above information is insufficient to calculate capital gain tax. One has to know when the property was purchased. Suppose, the property was purchased on or after 20th April, 2012 i.e., within 36 months prior to the sale, then the flat is considered as Short Term Capital Asset.

Tax on Short Term capital Asset – If Mr. Ramdas had purchased the flat for Rs.60 Lakhs in January 2013, then the capital gain is equal to (a) Sale price less cost of purchase price. So, the income tax is on Rs.35 Lakhs (i.e., Rs.95 Lakhs Less Rs.60 Lakhs) at the rate applicable as per tax slabs. (Means the basic exemption limit is allowed to be taken while paying short term capital gain)

Deduction under chapter VIA such as investment u/s 80 C, 80D etc. – The taxpayer is allowed to take the benefit u/s 80c, 80D, 80E etc., from the short tax capital gain earned during the year through sale of property. Suppose, Mr. Ramdas invests Rs.1,50,000 in ELSS mutual fund or 5 year Fixed Deposit in a bank, out of the taxable income of Rs.35 Lakhs, he can reduce Rs.1.50 Lakhs towards investments and then compute applicable taxes.

Scenario B – If Mr. Ramdas had purchased the flat prior to 20th April 2012 i.e., holding property over 36 months, then it is classified as Long Term Capital Gain (LTCG). In this case, the tax is computed as (a) Sale Price Less (b) Indexed cost of purchases. Even the tax rate is less for Long Term Capital Gain, currently it is at 20.6%

What is the indexed cost? As the cost of acquisition is historical value, one has to adjust it with the impact of inflation on the value. So, if the purchase price is adjusted with the inflation rate, it helps to counter the erosion in the value of the asset over a period of time.

Where to find inflation index (or indexed cost)? It is notified by the Central Government every year taking 1981-82 as base year. For example, the cost inflation index for 2011-12 is 785 and for 2014-15 is 1024.

Deduction u/s 80C – Like in the case of Short term Capital Gain, can one claim the deduction u/s 80C, 80D, etc., from LTCG? NO. Deduction under Chapter VI A will not be available in respect of long term capital gains.

What about basic exemption limit? Yes. Only a resident individual/HUF can adjust the exemption limit against LTCG. Thus, a non-resident individual and non-resident HUF cannot adjust the exemption limit against LTCG.

Is there any way, payment of tax on Long Term Capital Gain (LTCG) can be avoided or reduced? Yes. There is an option

Option – A: Reinvestment in another property: Where gain from one house property is reinvested in another house property, to the extent of investment, the capital gain tax is exempt. (Section 54) The points to be noted are –

The property transferred must be a long-term capital asset
Purchased 1 residential house in India within one year before the date of sale or
Within 2 years after the date of sale or
Construct one residential house within 3 years after the date of transfer.

Option – B: Investment in Bonds: Any long term capital gain shall be exempt if the whole of the amount of such capital gain is invested in long term specified Capital Gain Bonds (Section 54EC). This facility is in addition to reinvestment u/s 54. (Which means, one can avail both benefits together/concurrently)

Income from transfer of capital assets situated in India

Income from transfer of capital assets situated in India

Any gain arising from a capital asset whether movable or immovable shall be deemed to accrue in India in case the capital asset is situated in India at the time of transfer. It is immaterial that agreement is entered outside India or consideration is paid outside India.

Apportionment of profits [Explanation (d) to section 9(1)(i)]
In the case of a business of which all the operations are not carried in India, only that part of income shall be deemed to accrue or arise in India which is reasonably attributable to the operations carried on in India.

Where the goods are manufactured in India and were sold out side India, the profit will be apportioned in two parts—one for manufacturing operations and another for selling operations. The profits which could be reasonably attributed to selling operations will not be deemed to accrue in India. (C.I.T. v. Ahmedbhai Umerbhai 18 I.T.R. 472).

In cases where the income attributable to operations carried out in India cannot be ascertained, Rule 10 of Income-tax Rules 1962 provides

(a) such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable having regard to the facts and circumstances of the case; or

(b) any amount which bears the same proportion to the total profits and gains of the business of the assessee computed in accordance with the provisions of the Act as the receipts so- accruing or arising bear to the total receipts of the business; or

(c) in such other manner as the Assessing Officer may deem suitable.

What is capital Asset for Capital Gain Under Income Tax Act ?

Profits or gains arising from the transfer of a capital asset made in a previous year is taxable as capital gains under the head “Capital Gains”. The important ingredients for capital gains are, therefore,

existence of a capital asset,
transfer of such capital asset and
profits or gains that arise from such transfer.

we are discussing Meaning of Capital Asset for Calculation of Capital gain.
Capital asset means property of any kind except the following:

Assets Excluded from the definition of The Capital Assets

a) Stock-in-trade, consumable stores or raw-materials held for the purpose of business or profession.

b) Personal effects like wearing apparel, furniture, motor vehicles etc.., held for personal use of the tax payer or any dependend member of his family. However, jewellery, even if it is for personal use, is a capital asset. The Finance Act, 2007 has modified the definition of Personal effects w.e.f. 1.4.2008. ‘Personal effects’ now include movable property including wearing apparel and furniture held for personal use by the assessee or any member of his family dependent on him, but excludes:-

Jewellery
Archaeological Collections
Drawings
Paintings
Sculptures or
Any work of art

c) Agricultural land in India other than the following:
Land situated in any area within the jurisdiction of municipality, municipal corporation, notified area committee, town area committee, town committee, or a cantonment board which has a population of not less than 10,000 according to the figures published before the first day of the previous year based on the last preceding census.
Land situated in any area around the above referred bodies upto a distance of 8 kilometers from the local limits of such bodies as notified by the Central Government .

d) 6 1/2 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defence Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government.

e) Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt.

Though there is no definition of “property” in the Income-tax Act, it has been judicially held that a property is a bundle of rights which the owner can lawfully exercise to the exclusion of all others and is entitled to use and enjoy as he pleases provided he does not infringe any law of the State. It can be either corporeal or incorporeal. Once something is determined as property it becomes a capital asset unless it figures in the exceptions mentioned above or the Capital Gains is specifically exempted.

In the following cases, income from Capital Gains is specifically exempted:

UTI 64 :Income from transfer of a unit of the Unit Scheme, 1964 referred to in Schedule I to the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 and where the transfer of such asset takes place on or after 1.4.2002.
Equity Shares :income from transfer of an “eligible equity share” in a company purchased on or after 1.3.2003 and before 1.3.2004 and held for a period of twelve months or more. Eligible equity share means equity share in a Company
that is a constituent of BSE-500 Index of Mumbai Stock Exchange as on 1.3.2003 and is traded in a recognized stock exchange in India. allotted through a public issue on or after 1.3.2003 and listed in a recognized stock exchange in India before 1.3.2004 and its sale is entered into on a recognized stock exchange in India.

Capital Gains of a political party subject to provisions of Section 13A of the I.T Act, 1961

Agriculture Land :In the case of an individual or HUF, capital gains arising from the transfer of agricultural land, where such land is situated in any area falling within the jurisdiction of a municipality or a cantonment board having population of at least 10,000 or in any area within such distance, not being more than 8 kms, from the local limits of any municipality or cantonment board. Such land should have been used for agricultural purposes during the period of two years immediately preceding the date of transfer. Further, such transfer should be by way of compulsory acquisition under any law and the said capital gains should have arisen from the compensation received on or after 1st April, 2004.

Long term capital gain of Equity Shares /Funds :Capital gains arising from the transfer of a long term capital asset, being an equity share in a company or unit in an equity oriented fund where such a transaction is chargeable to securities transaction tax and takes place on or after 1st October, 2004.
Source : Simpletaxindia

S. 54 benefit available for cost of house acquired despite non-payment

Case Law Details

Case Name : Gopal Saran Darbari Vs. Income Tax Officer (ITAT Delhi)
Appeal Number : IT Appeal Nos. 1248 & 1249 (Delhi) of 2013
Date of Judgement/Order : 25/10/2016
Related Assessment Year : 2007- 08
Courts : All ITAT (4167) ITAT Delhi (909)

Assessee is an individual aged about 76 years. During the year under consideration, the assessee has earned long-term capital gain of Rs. 4978349 on sale of residential flat No. A-30, Mandakini Enclave, New Delhi. The appellant claimed deduction under section 54 for amount of Rs. 5227000 (Rs. 36 Lacs for amount deposited in capital gain account scheme and Rs. 1527000 for payment made for purchase of New House prior to the due date of filing of return of income. Since the investment new house (including the deposit in capital gain was computed at Rs. NIL. The assessing officer has however reduce the deduction by Rs. 901349 on the ground that:–

(a) Amount deposited in capital gain account was Rs. 35 Lacs and not Rs. 36 lacs.

(b) That the amount of Rs. 1527000 claimed as investment in new house includes Rs. 950000 in respect of other house other than the “new house”.
During the year the assessee has made payment of Rs. 1527000 to the builder namely Ajay Enterprises Pvt. Ltd. from whom the “new house” was purchased. Out of this amount of Rs. 1527000 the builder has appropriated Rs. 950000 toward another flat No. C-408 booked by the assessee with the builder. It should not be reason for making dis allowance/ addition. The fact of the matter is that the assessee has invested a total sum of Rs. 6174683 in the eligible new house (A-907) upto 4-12-2008 i.e. well within the period specified under section 54 of Income Tax Act, 1961. The assessee being an old man of around 76 years could not keep track of the adjustment made by the builder. However, he made the substantive compliance of section 54 by making the required investment in the new house within the period specified under section 54 of Income Tax Act, 1961.
Legislature has required that the cost of new asset should be equal to or more than the capital gain. The main sub-clause (i) of section 54 providing for the exemption does not require that the whole payment for purchase of new asset should be made. In other words even if an assessee acquires a new house on credit i.e. the payment for which may be made in future, the assessee cannot be denied the benefit of deduction under section 54 because what is required by sub-clause (i) is that cost of new house should be equal to or more than the amount of long-term capital gain.

Income from transfer of capital assets situated in India

Any gain arising from a capital asset whether movable or immovable shall be deemed to accrue in India in case the capital asset is situated in India at the time of transfer. It is immaterial that agreement is entered outside India or consideration is paid outside India.

Apportionment of profits [Explanation (d) to section 9(1)(i)]
In the case of a business of which all the operations are not carried in India, only that part of income shall be deemed to accrue or arise in India which is reasonably attributable to the operations carried on in India.

Where the goods are manufactured in India and were sold out side India, the profit will be apportioned in two parts—one for manufacturing operations and another for selling operations. The profits which could be reasonably attributed to selling operations will not be deemed to accrue in India. (C.I.T. v. Ahmedbhai Umerbhai 18 I.T.R. 472).

In cases where the income attributable to operations carried out in India cannot be ascertained, Rule 10 of Income-tax Rules 1962 provides

(a) such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable having regard to the facts and circumstances of the case; or
(b) any amount which bears the same proportion to the total profits and gains of the business of the assessee computed in accordance with the provisions of the Act as the receipts so- accruing or arising bear to the total receipts of the business; or
(c) in such other manner as the Assessing Officer may deem suitable.

Source : Income taxmanagement