Section 50C Income Tax not applicable to transfer of development rights.

ORDER

Narendra Prasad Sinha, Accountant Member. – This appeal is filed by the Revenue against the order of the National Faceless Appeal Centre (NFAC)/Ld. Commissioner of Income Tax(Appeal), Vadodara, dated 27.10.2023 for the Assessment Year 2012-13.

2. The brief facts of the case are that the assessee is an individual and partner in partnership firm namely M/s. Sumangal Reality Creators. The return of income for AY 2012-13 was filed on 29.02.2012 declaring total income of Rs.6,09,610/-. Subsequently, the case was reopened u/s.147 of the Act on the basis of information received by the AO that the assessee had not disclosed capital gain to the extent of Rs.3,89,25,000/-. It transpired that a land was purchased by the assessee along with Smt. Hemlataben N Parmar for a consideration of Rs.1,45,75,000/- from Shri Rajendra D Patanwadia and others which was registered on 07.12.2011. Later on, the assessee and other co-owner Smt. Hemlataben N Parmar had given the rights of development of the said land to M/s. Sumangal Reality Creators, the partnership firm, vide notarized Banakhat dated 23.12.2011. M/s. Sumangal Reality Creators had undertaken a project named Shashwat Green and the project was started in the year 2011 and completed in 2014. As per the agreement dated 23.11.2011 between M/s. Sumangal Reality Creators as first part and Smt. Minal U Shah & Smt. Hemalaben Parmar (land owners) as second part, the right in land was released in favour of M/s. Sumangal Reality Creators for development purpose for which Smt. Hemalataben Parmar was paid Rs.50,00,000/- and also allotted four flats namely B/103, B/202, B/303 and A/501, the consideration of which was Rs.93,40,000/-. Thus, the total consideration paid to Smt. Hemlataben N Parmar was Rs.1,43,40,000/-. The AO determined the consideration rate for land transferred to M/s. Sumangal Reality Creators by applying the prevailing jantri rate @ 2650 per square meter at Rs.5,32,65,000/-(2650 20100). As the amount of Rs.1,43,40,000/- was paid to the other coowner i.e Shri Hemlataben N Parmar, the remaining sale consideration of Rs.3,89,25,000 (5,32,65,000 – 1,43,40,000) was considered as sale consideration in the hands of the assessee. The AO reduced 50% of cost of acquisition from the sale consideration (which was Rs.72,87,500/-) and the balance amount of Rs.3,16,37,500/- was considered as short term capital gain in the hands of the assessee. Accordingly, the assessment was completed u/s 143(3) of the Act r.w.s 147 on 30.12.2019 at total income of Rs.3,22,47,110/-.

3. Aggrieved with the order of the AO, the assessee had filed an appeal before the First Appellate Authority, which was decided by the Ld. CIT(A), vide the impugned order and the appeal of the assessee was allowed.

4. Now, the Revenue, aggrieved with the order of the Ld. CIT(A), has filed the present appeal before us. The following grounds have been taken in this appeal:

It is prayed that the order of the CIT(A) on the above issues be set-side and that of the Assessing Officer be restored.

5. Shri A P Singh, Ld. CIT.DR appearing for the Revenue has meticulously taken us through assessment order as well as the order of the Ld. CIT(A) and explained the facts of the case. He submitted that the land in question was purchased by the assessee along with another co-owner Shri Hemlataben N Parmar. According to the Ld. CIT.DR, the land was purchased by the assessee in her individual capacity and not as a partner of the partnership firm. He submitted that on transfer of development rights in favour of partnership firm the other co-owner Smt. Hemlataben N Parmar was paid Rs.50,00,000/- and also allocated four flats in the project which was worth Rs.93,40,000/-; whereas no payment was received by the assessee. According to the Ld. CIT-DR when the assessee had acquired the land in her individual capacity, she must be compensated for relinquishment of her rights in the land in favour of the partnership firm for development of the project thereon. Therefore, the balance sale consideration of Rs.3,89,25,000/-was rightly considered by the AO as belonging to the assessee. The Ld. CIT-DR submitted that if the entire payment for purchase of land was made by the partnership firm there was no necessity for paying compensation to the other co-owner Smt. Hemlataben N Parmar. He further submitted that if the land belonged to the partnership firm and the entire payment was made by the firm only, there was no necessity for a separate arrangement for transfer of development rights. The Ld. CIT-DR, therefore, strongly supported the order of the AO.

6. Per Contra Shri Vijay Patel, the Ld. AR of the assessee explained that the land in question was agricultural land which could not have been purchased by the partnership firm. Therefore, the land was purchased by the partnership firm in the name of the assessee who was partner of the firm. He further explained that Smt. Hemlataben N Parmar had to be made co-owner for the reason that the land-owner vide earlier agreement dated 12.02.2010 had agreed to sale land to Shri Narendrasingh Parmar. Therefore, Smt Hemlataben N Parmar, who was wife of Shri Narendrasingh Parmar, was made the co-owner for purchase of land. The Ld. AR further explained that even though the land was purchased in the name of two ladies, the entire purchase consideration was paid by partnership firm M/s. Sumangal Reality Creators and the land was recorded in the books of the partnership firm. The Ld. AR further submitted that the agricultural land was converted into non-agricultural land vide Govt. order dated 20.01.2011 and the amount of premium of Rs.1.66 crores as determined by the Govt. authorities was paid by the partnership firm M/s. Sumangal Reality Creators. It was further explained that since the land was purchased in the name of two ladies, the development agreement had to be made with them in order to develop of project by partnership firm. Accordingly, the development agreement dated 23.12.2011 was entered into and other co-owner Smt. Hemlataben N Parmar was compensated for initial payment made by her husband to the land owner. As regards the assessee, there was no question of any compensation to her for the reason that the entire payment for purchase of land was made by the partnership firm and the assessee was only a name- lender.

7. As regarding the applicability of section 50C of the Act, the Ld. AR submitted that there was no transfer of land in the present case and the assessee had only assigned the development rights to the partnership firm. According to the Ld. AR, the provision of section 50C of the Act was not applicable in the case of assignment of development rights. In this regard, he relied upon the decision of Co-ordinate Bench of ITAT Bangalore in the case of Sowmya Sathyan v. ITO (Bangalore-Trib.).

8. We have carefully considered the rival submissions. There is no dispute to the fact that the entire payment for purchase of land in the name of the assessee and the other co-owner was made by the partnership firm. As explained, the land was registered in the name of assessee and Smt. Hemlataben N Parmar, the two ladies, to derive the benefit of reduced stamp duty. One has to pay reduced stamp duty if the sale deed was registered in the name of ladies. As regards including the name of other co-owner Smt. Hemlataben N Parmar, this aspect was examined by the AO in the course of assessment proceeding. It is found from the assessment order that the statement of the land owner Shri Rajendra D Patanwadia was recorded on 16.02.2016 who had stated that the land was initially sold to Shri Narendrasingh Parmar, husband of Shri Hemlataben N Parmar for consideration of Rs.71,00,000/-. It was further submitted that payment of Rs.59,00,000/- was also made by Shri Narendrasingh Parmar to Shri Rajendra Patanwadia till the year 2011 and the balance amount of Rs.12,00,000/- was to be paid subsequently in two instalments. The facts as recorded by the AO in this regard, is reproduced below:

5. Statement of land-owner Shri Rajendra D.Patanwadia was recorded on 16.2.2016. He has stated in his statement that he had orally sold this land to Shri Narendra Parmar, husband of Smt. Hemlataben Parmar for consideration of Rs. 71,00,000/-. This fact is also confirmed by Smt. Hemlataben Parmar in her statement dated 15.2.2016 & 24.2.2016 wherein she had stated that till 2011 they paid total amount of Rs. 59,00,000/- to Rajendra Patanwadia and the remaining amount of Rs 12,00,000/- was paid subsequently by two installments in cheque. He has further stated that he received an amount of Rs. 29,50,000/- through cheque and a flat valued Rs. 25,00,000/- from Shri Urmi Shah, partner of Sumangal Realty Creators as a consideration for the said land. Thus, the total consideration of the land actually received by the seller is Rs. 2,41,75,000/- as per working given hereunder:-

6. Thereafter, by an agreement dated 23.11.2011, between M/s. Sumangal Reality Creators through its partner Shri Urmit Shah as first part and Smt Minal U Shah and Smt. Hemalataben Parmar (the land owners) as second part, the right in land in question was released in favor of M/s. Sumangal Reality Creators for development of the same as per the terms and conditions mentioned therein. Against this agreement, Smt. Hemalataben N Parmar has been given Rs. 50,00,000/- and four flats namely B/103, B/202, B/303, and A/501. The above consideration was payable from time to time after 1.9.2012 as per clause No. 1 of page No. 4 of the said development agreement.

9. It is thus found that Shri Narendrasingh Parmar, husband of Smt. Hemlataben N Parmar, had already paid Rs.71,00,000/- to the land owner. Therefore, Smt. Hemlataben N Parmar was included as a co-owner while purchase of the same property by the partnership firm. When the partnership firm wanted to develop its project on the said land, the other co-owner had to be adequately compensated for the investment made by her family in the said land and the initial payment made to the land-owners. Therefore, the development agreement was entered into by the partnership firm and Smt. Hemlataben N Parmar was paid Rs.50,00,000/- and also allotted four flats. There was no question of compensating the assessee as no investment was made by her in her individual capacity. She was only a name-lender on behalf of the partnership firm and all the investments in the land were made by the firm and not by the assessee. Therefore, there was no question of making any payment to the assessee for assigning the rights in the property to the partnership firm for development of land.

10. The AO had applied the provision of section 50C of the Act on the transfer of development rights by the assessee and the other co-owner to the partnership firm. As already discussed earlier the investment in the land was made by the partnership firm only and the assessee was only a name-lender. Thus, there was actually no transfer of any development rights as the land belonged to the partnership firm only. Further, the provision of section 50C of the Act is not found applicable on the transfer of development rights. The said provision is applicable only on transfer of a capital asset being land or building or both. In the instant case neither any land nor any building has been transferred. The assessee had only notionally assigned the development rights in favour of partnership firm and there was no actual transfer of land or building. Thus, the provision of section 50C of the Act is not found applicable on such notional assignment of development rights. The Coordinate Bench of ITAT, Bangalore in the case of Sowmya Sathyam (supra) had held that the scope of section 50C was restricted only to two types of capital asset i.e. land or building or both. It was further held that the development rights in the land were not the land itself and, therefore, the provision of section 50C of the Act was not applicable on transfer of development rights in the land. An identical view was taken by the ITAT, Pune in the case of Smt. Vimal Baburaa Jadhav v. ITO (2021) taxcorp 91977, wherein it was held that section 50C of the Act applied only in the case of transfer of land and does not apply to the case of rights in land.

11. In view of the above facts and judicial precedent, we are of the considered view that the Ld. CIT(A) had rightly deleted the addition of Rs.3,16,37,500/- on account of STCG on deemed transfer of development rights in land. Considering the totality of facts as discussed above, no such addition was called for as the land belonged to the partnership firm only and the development rights was only notionally transferred by the assessee. Therefore, the order of the Ld. CIT(A), is upheld and the appeal of the revenue is rejected.

12. In the result, the appeal filed by the Revenue is dismissed.