No Tax on Sale of Agricultural Land after its Conversion into ‘Industrial Land

The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) in ITO v. Meera Thapa Prop, held that the sale of Agricultural Land after its conversion to industrial land would not make the sale taxable under the head ‘Capital Gains’ under the provisions of the Income Tax Act. Assessee was carrying on agricultural activities in the land in dispute which was notified by the Government as industrial land. She later, sold her land and did not offer the income for taxation under a belief that the sale of agricultural land is exempted from taxation.

However, the Assessing Officer noted that the assessee has not shown agricultural income in her return of income for earlier years and made addition under the head capital gains. On appeal, the first appellate authority held that merely because the land is declared as ‘industrial land’ same cannot be held to be a ‘capital asset’ and ‘capital gain’ cannot be charged on sale of ‘agricultural land’. He further held that as the assessee’s land was very small and the income was also very negligible as it was not conducive to sell agricultural produce from the land in market after the consumption.

The Tribunal noted that an agricultural land which was cultivated by the assessee for agricultural purposes, on being notified by the Govt, the land was sold for industrial purposes. The question before the Tribunal was whether such land can be considered to be sale of agricultural land or not in absence of any agricultural income shown by the assessee because of the smallness of the income, is chargeable to tax or not?

Upholding the order, the bench noted that “the impugned land was sold by the assessee is an „agricultural land‟ as it is shown so in the land records and the assessee has given proper explanation about not showing the agricultural income in her return of income due to smallness.”


Capital gains – Section 54F deduction not available on construction work prior to transfer of property

Case Law Details
Case Name : Ushaben Jayantilal Sodhan Vs ITO (Gujarat High Court)
Appeal Number : Tax Appeal No. 393 of 2014
Courts : All High Courts (4096) Gujarat High Court (345)
Ushaben Jayantilal Sodhan Vs ITO (Gujarat High Court);

Section 54F of the Act carries the title “capital gain on transfer of certain capital assets not to be charged in case of investment in residential house”. Sub­section (1) of Section 54F of the Act provides for deduction in computation of capital gain arising out of transfer of long term capital asset if the assessee, within a period of 01 year or before 02 years after the date on which the transfer took place purchased or within a period of 03 years after such date constructed one residential house. If the cost of new asset is not less than the net consideration in respect of the original asset, the whole of the capital gain would not be charged. Otherwise, the deduction would be proportionate.

In the context of these provisions, the assessee’s case and the rival contentions have to be examined. We may recall that with respect to 03 out of the 04 flats sold by the assessee, the sale deeds were executed after the date of grant of Building Use permission. In plain terms, therefore, after the sale of these flats, no construction was carried out. Therefore, if the date of the sale deeds is considered the crucial date for transfer of the capital asset, the construction preceded the transfer. What sub­section (1) of Section 54 of the Act requires is that the assessee, after the date of transfer, purchases or within three years after such date, constructs a residential unit, only then the benefit of deduction would be granted. This provision, therefore, provides that construction of the residential unit should be done after the date of transfer but, within three years from such date. Under the circumstances, if the sale deeds are considered on the date on which the transfer of capital asset took place, the case of the assessee would not fall within the parameters of the said provision.

The assessee’s claim for deduction u/s.54F of the Act cannot succeed except in relation to the transfer of a flat in favour of Kankuben Mansingbhai Patel, which had happened before the completion of construction. In such a case, since construction can be stated to have been carried out after the transfer of the original capital asset, the claim of deduction u/s.54F of the Act cannot be denied. To this limited extent, the appeal succeeds. The Assessing Officer to re­compute the deduction accordingly. Subject to the above, the Tax Appeal stands disposed of.


Under a typical joint development agreement, land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost.

Joint Development Agreements (JDA) are prevalent in India as they are beneficial both for the owner and the developer. The owner gets a better built house and the developer gets his remuneration either in the form of a part of the building or money. Under a typical joint development agreement, land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost.

The deal
Thus, land is contributed by the land owner and the cost of development and construction is incurred by the developer. The land owner may get consideration in the form of either lump sum consideration or percentage of sales revenue or certain percentage of constructed area in the project, depending upon the terms and conditions agreed upon between them. In this manner, the resources and efforts of land owner and developer are pooled together so as to bring out the maximum productive result. However, as is the case with any business deal, there are various ifs and buts attached to a JDA as well. Real estate development is subject to approvals from various government authorities, owing to which the consideration under a JDA is also dependent of these approvals. With things still not in the clear, the owner is expected to assess the tax liability and pay it. Is that fair, when the owner is not even sure, whether the deal will go through or fall apart?

Transfer of capital assets

Necessarily, there is a transfer of capital asset under the JDA and there should be a capital gain tax on the same, but various tax questions creep into the mind of the owner as to when to pay the tax? Would mere signing of a JDA lead to taxability in the hands of the owner? Is registration of the JDA is necessary for triggering the taxability? What if the consideration is not final at the time of signing the JDA and is actually dependent on an event/approval? Am I liable to pay tax on accrual basis or only when the consideration is received? There have been contradictory rulings on this matter till now and the income tax law was amended in this year’s Budget, which provides for taxation of such gains on completion of the project under certain circumstances. Till then, Indian tax authorities aggressively took the view that capital gains arise on signing of the development agreement and when the owner gives possession of the property to the developer.

Even the apex court of India has recently dealt with this matter and taken a favourable view. It laid down the law after considering the facts of the case and holding that the answer to these questions depends on two aspects:
Part performance of an unregistered agreement by the owner, by giving possession of the property for the limited purpose of development, would not amount to a transfer, and hence did not give rise to capital gains. Meaning thereby that where the owner continues to be the owner of the property throughout the development of the property, and did not seek to transfer rights similar to ownership to the developer, there was no transfer giving rise to capital gains.
As per income tax law, the income is liable to tax on accrual of receipt, whichever is earlier. But if the right of the owners to receive consideration is dependent on receipt of the necessary approvals and permissions for development of the property, the income can at best be called hypothetical income and hence cannot be taxed on accrual principle. This is an important aspect since these permissions need not necessarily come in and may lead to a situation where the JDA falls through. Accordingly, it becomes all the more important to agree to the terms of the JDA after a thorough analysis. The law on taxability arising on signing of a JDA is now clear and the court ruling makes it easier for the owners to assess their tax liability
Source : Financial Express

Loss on Short term capital gains

Assessee didn’t disclose equity STCG loss in ITR but was determined loss in scrutiny order. Next year STCG arised however the STCG was not reflected in ITR should AO allow to set off the previous year loss with the current year’s capital gain?

The assessee did not claim STCG loss in his Income tax return but you determined it and allowed the loss to be carry forward in the scrutiny order. It is fine. It is in order

Next year the short term capital gain (STCG) has arised. The assessee can set off the previous years losses which was allowed by the ITO in the Scrutiny order, and accordingly he can set of the losses on STCG to the extent of gain while filing the return of income. If he has not set off in the next year also and if the case is not on scrutiny, he will not be allowed to set off and in subsequent years he cannot reflect the reduced losses.

How ever if the ITO takes the case for scrutiny he can allow the losses like he did in previous year. This way he is benefitting the assessee. He has powers, and legally allowed to set off by the ITO. But you have your constraints, your will be selecting the case for scrutiny to get some revenue and not to loose. If the case is selected for scrutiny on some other ground for larger tax effect, then consequentially you can give the assessee this benefit, otherwise selecting the case just to allow the losses like previous year, may not be approved by your Addl CIT.

The next option, wrongly thought of by the assessee is to file a belated or revised return and claiming the losses. Please note that, if you file a belated return you cannot carry forward losses (except loss from house property). Losses under the following heads of income: Income from business and profession including speculation business, capital gains, and income from other sources cannot be carried forward in case a belated return is filed by the tax payer. The return filer will not be allowed to carry forward these losses even if all taxes have been paid in time if the return is belated.

The rule that belated returns cannot be revised comes from Section 139(5) of the Income Tax Act. However, it is to be noted that this section has been amended – w.e.f. April 01, 2017 – by Budget 2016 to allow even those who file a belated return to revise that return later. So it would be possible to revise belated returns filed after 1.4.2017 i.e. for FY2016-17 but returns filed for FY 2015-16 are not covered under this amended provision.

Even at this stage, The return filer will not be allowed to carry forward these losses even if all taxes have been paid in time if the return is belated and allowed to revise the return for FY 2016.17,. because the losses are not claimed in the original return filed before the due date.

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.

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)