the ITAT Chennai Benchcomposed of members V. Durga Rao (judicial member) and G. Manjunatha (accounting member), ruled that capital gains under the Income Tax Act 1961 should be computed on the basis of the respective share parties in a residential property and not under an internal family arrangement.
The assessee had filed his tax return, which was reviewed. The Assessing Officer (AO) had noticed that the Assesse, along with his wife and father, co-owned a residential property and had signed a Joint Development Agreement (JDA) for the development of the property with a developer. The Assessé and the other co-owners had received non-refundable deposits and two apartments from the promoter in lieu of the land sold. The AO, on the basis of this information, had recalculated the long-term capital gains in the hands of the Assessor of the transfer of ownership taking into account the total cost of the construction borne by the promoter and the installments not reimbursable received by the Father of the person being evaluated. Against this order, the Assessée had appealed to the Commissioner of Income Tax (Appeals) (CIT (A)) who had confirmed the order of the AO. The assessee lodged an appeal with the ITAT.
The representative of the Assessée before the ITAT argued that the AO had erred in recalculating the long-term capital gains by adding to the cost of the construction the non-refundable installments received by the father of the Assessed in order to calculate the total consideration for the sale. He argued that since Assessée’s father offered the cash component to the tax in his filed return for the relevant tax year, the CIT(A) erred in supporting the new capital calculation. long-term. Further, it was argued that the substitution power of the sale consideration for the calculation of long-term capital gains under section 48 of the Act was restricted and narrow. The assessee also argued that since an apartment has been assigned to the assessee, the cost of only one apartment should be considered for the purposes of the exemption under section 54 of the Act at the instead of two. The department’s representative argued that the AA correctly calculated the capital gains from the transfer of ownership in accordance with the JDA and that the total value of the consideration received as a result of the transfer should be shared proportionately with the right of the assessed on the property.
Section 54 of the Income Tax Act 1961 provides for the exemption of long term capital gains arising from the sale of residential property if the capital gains are invested in the purchase or construction of a new residential property within the prescribed time frame.
The ITA observed that where there are three co-owners with a specified share in the property, the total value of the consideration received should be considered in their hands according to their share in the property. The ITA considered that the receipt of the entire non-refundable deposit by the assessee’s father and one apartment each by the assessee and his wife was an internal arrangement that had nothing to do with the calculation of capital gains under the law. The ITA ruled that, by law, when property is transferred, the consideration received as a result of the transfer should be taken into account according to the parties’ interest in the property and not according to the internal arrangement between the parts.
“The assessee’s arguments that, he had received consideration separately, as specified in the JDA, we conclude that the receipt of the full non-refundable deposit by the assessee’s father and one apartment each by assessee and his wife is an internal arrangement and has nothing to do with the calculation of capital gains by adopting the respective share of the total value of the consideration.According to law, when property is transferred, the consideration received or accrued as a result of the transfer should be taken into account according to their share in the property, but not according to the internal arrangement between the parties.”
However, the ITA authorized the exemption of the Assessé under Article 54 of the Law to the extent of his share in the cost of one apartment and not two, since the investment by the Assessé concerned only one apartment.
The ITAT therefore partially upheld the appeal of the Assessée.
Case Title: Dr. ES Krishnamoorthy v Income Tax Officer, Non-Corporate Ward-I (4), Chennai
Representative of the assessee: MSSridhar, lawyer
Department Representative: Mr.Ar.V.Sreenivasan, Addl.CIT
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