Taxation of Joint Development Agreements: Deferral under Section 45(5A), Valuation via Stamp Duty, and Exemption for Multiple Flats

ORDER

Waseem Ahmed, Accountant Member.- These four appeals for the Assessment Years 2014-15, 2018-19, 2019-20, and 2020-21 were heard together. The appeals, filed at the instance of the assessee, are directed against separate orders passed by the Learned Commissioner of Income Tax (Appeals)-15, Bengaluru (hereinafter referred to as the learned CIT(A)) under section 250 of the Income-tax Act, 1961 (hereinafter referred to as the Act).

2. The dispute in all four assessment years is interconnected and revolves around the income arising from the Joint Development Agreement (JDA) entered into by the assessee for the development of land property.

3. The issues/grounds of appeal raised by the assessee in the memoranda of appeal for all four assessment years are identical and are primarily technical in nature, revolving around the question of whether the income arising from the JDA is taxable in the hands of the HUF or in the individual capacity of the assessee. In addition, the assessee has raised an additional ground of appeal for Assessment Years 2014-15, 2018-19, and 2019-20, challenging the validity of the assessments framed under section 153A of the Act.

4. Without going into the technical or legal grounds raised by the assessee, we proceed to adjudicate the issue on the merits of the additions made in the relevant assessment years, namely Assessment Years 2014-15 and 2018-19 to 2020-21, on account of income arising from the JDA.

5. The facts in brief are that Sri Gurappa purchased land measuring 9 acres and 28 guntas, bearing Survey No. 92, in the year 1951. Sri Gurappa had four sons, namely:

6. The eldest son, Sri Pilappa, executed a release deed dated 22 July 1955 in favour of his father, Sri Gurappa, and his three brothers, thereby relinquishing his rights in the impugned land property. After the death of Sri Gurappa, a registered partition deed dated 30 December 1960 was executed among his three sons, namely Sri Veerappa, Sri Munireddy, and Sri Hanumantha Reddy. As per the said partition deed, the land measuring 9 acres and 28 guntas was divided among them as under:

7. Thereafter, the RTC and other revenue records were mutated in their respective names in accordance with their respective shares. Sri Munireddy, who was allotted 3 acres and 24 guntas under the partition deed of 1960, was the father of the present assessee-appellant. Upon the death of Sri Munireddy, the assessee and his siblings, being the legal heirs, entered into a partition suit. The suit was decreed by the court vide order dated 16 May 2011, and as per the said decree, the assessee was allotted 1 acre and 8 guntas in the impugned property. Consequently, the RTC and other revenue records were mutated in the name of the assessee, and a new Survey No. 92/2 was assigned to his share.

8. Subsequently, the assessee entered into a Joint Development Agreement dated 26 October 2013 with a developer, namely M/s Ecstasy Projects Pvt. Ltd., for the development of a residential project known as “Trifecta Joli.” In the JDA, the assessee made his wife and two minor daughters parties as owners. However, in a subsequent clause of the JDA, it is clarified that the assessee is the sole and absolute owner of the impugned property and that his wife and daughters were included as parties only by way of abundant precaution.

9. The project was completed in the year 2017, and pursuant to the terms of the JDA, the assessee received 44 flats in the said project constructed by the developer. Out of these, the assessee sold one flat during the financial year 2017-18, relevant to Assessment Year 2018-19 for a consideration of Rs. 50,44,000/-, and 38 flats during financial year 2018-19, relevant to AY 2019-20 for a total consideration of Rs. 17,61,90,120/- only. The remaining five flats remained unsold.

10. For Assessment Year 2014-15, the assessee did not file a return of income. For Assessment Year 2018-19, the assessee filed a return of income under section 139(1) of the Act, declaring a total income of Rs. 23,26,290/-, which included income from house property amounting to Rs. 1,68,000/-, short-term capital gains of Rs. 11,08,542/-, long-term capital gains of Rs. 11,33,953/-, and income from other sources of Rs. 1,971/- only. The assessee also claimed a deduction under Chapter VIA of the Act amounting to Rs. 86,173/- only.

11. Similarly, for Assessment Year 2019-20, the assessee filed a return of income under section 139 of the Act, declaring a total income of Rs. 1,75,24,910/-, which included income from house property of Rs. 1,68,000/-, short-term capital gains of Rs. 1,55,59,066/-, and income from other sources of Rs. 19,71,844/- only. The assessee claimed deduction under Chapter VIA of the Act amounting to Rs. 1,74,000/- only.

12. Thereafter, a search under section 132 of the Act was carried out in the case of the assessee on 5 February 2020, and in consequence thereof, notices under section 153A of the Act were issued for Assessment Years 2014-15, 2018-19, and 2019-20. In response to the notices issued under section 153A of the Act, the assessee filed returns of income declaring nil income for Assessment Year 2014-15 and declaring total incomes of Rs. 83,800/- and Rs. 4,000/- for Assessment Years 2018-19 and 2019-20, respectively. Thus, in the return filed under section 153A of the Act for Assessment Year 2018-19, the assessee withdrew the short-term capital gains of Rs. 11,08,542/- and long-term capital gains of Rs. 11,33,953/-. Similarly, for Assessment Year 2019-20, the assessee withdrew the short-term capital gains of Rs. 1,55,59,066/-and income from other sources of Rs. 19,71,844/-.

13. The return of income for Assessment Year 2020-21, being the year of search, was filed under section 139 of the Act, as the said year was not covered by the provisions of section 153A of the Act. In the said return, the assessee declared income from house property and income from other sources amounting to Rs. 4,35,085/- and Rs. 20,37,262/-, respectively.

14. During the assessment proceedings under section 153A of the Act, the Assessing Officer observed that, pursuant to the JDA, the assessee had transferred possession of the land property to the developer, M/s Ecstasy Projects Pvt. Ltd. Therefore, as per the provisions of section 2(47)(v) of the Act, the transfer was deemed to have taken place in the previous year 2013-14, relevant to Assessment Year 201415, being the year in which the JDA was entered into, and possession of the land was handed over to the developer. In support of this view, the Assessing Officer placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. DR. T.K. Dayalu (Karnataka).

15. Accordingly, for Assessment Year 2014-15, the Assessing Officer computed long-term capital gains on transfer of the land property under the JDA at Rs. 1,28,60,000/-, by adopting the guidance value of the property at Rs. 1,29,60,000/- as sale consideration, and added the same to the total income. Thus, the total income for Assessment Year 2014-15 was assessed at Rs. 1,28,60,000/- as against nil income declared by the assessee.

16. In the assessment order for Assessment Year 2018-19, the Assessing Officer again computed long-term capital gains on account of transfer of land property under the JDA, holding that the assessee was required to offer capital gains either at the time of transfer of possession of land pursuant to the JDA, i.e., during Assessment Year 2014-15, or at the time of receipt of the occupancy certificate for 44 flats, i.e., during Assessment Year 2018-19. As the assessee had not offered income arising from the JDA either in Assessment Year 2014-15 or in Assessment Year 2018-19, the Assessing Officer proceeded to compute long-term capital gains as on the date of receipt of the occupancy certificate for the 44 flats.

17. However, while doing so, the Assessing Officer changed the approach for adopting the sale consideration. Whereas for Assessment Year 2014-15, the guidance value of the land was adopted as the sale consideration, for Assessment Year 2018-19, the Assessing Officer adopted the cost of construction incurred by the developer being Rs. 1585 per sq. ft. as the sale consideration. Accordingly, the AO computed the gross sales consideration of Rs. 8,44,82,085/- and after deducting deemed cost of acquisition of Rs. 1 lakh arrived at long term capital gain of Rs. 8,43,82,085/-. Hence the AO added long term capital gain of Rs. 8,43,82,085/- to the total income of the assessee.

18. Besides the above, the Assessing Officer also computed long-term capital gains on the sale of one flat sold by the assessee during Assessment Year 2018-19 for a consideration of Rs. 50,44,000/-. After deducting the deemed cost of acquisition of Rs. 1,00,000/-, the Assessing Officer determined the long-term capital gain at Rs. 49,44,000/-.

19. The Assessing Officer further added the short-term and long-term capital gains aggregating to Rs. 22,42,495/-, which were originally offered by the assessee in the return of income filed under section 139(1) of the Act for Assessment Year 2018-19.

20. In addition to the long-term capital gains added on account of transfer of property under the JDA on the occasion of receipt of the developed flats, the Assessing Officer also computed deemed rental income under section 23(5) of the Act in respect of the 44 flats that remained unsold from the date of receipt of the occupancy certificate till the end of the year. Accordingly, the Assessing Officer made an addition of Rs. 39,57,134/- under the head Income from House Property.

21. Likewise, for Assessment Year 2019-20, the Assessing Officer, based on the material and information collected during the search proceedings and the statement recorded under section 132(4) of the Act, computed the long-term capital gains on the sale of 38 flats in the following manner:

Long-term capital gains: Rs. 15,86,11,960/-

Less: Investment in residential house property: Rs. 1,50,55,000/-

Net taxable long-term capital gains: Rs. 14,35,56,960/-

22. Accordingly, the Assessing Officer added long-term capital gains of Rs.14,35,56,960/- to the total income of the assessee in respect of the sale of 38 flats out of the 44 flats allotted to the assessee pursuant to the JDA.

23. In addition to the above, the Assessing Officer invoked the provisions of section 23(5) of the Act and computed deemed rental income for the year under consideration on 43 flats out of the 44 flats received under the JDA. In respect of the five flats that remained unsold, deemed rental income was computed for the entire year, whereas in the case of the 38 flats sold during the year, deemed rental income was computed for the number of months they remained unsold during the year. Accordingly, the Assessing Officer calculated deemed rental income of Rs. 41,53,652/- for Assessment Year 2019-20 and added the same to the total income.

24. The AO also added the income from other sources for Rs. 19,71,844/- as offered by the assessee while filing return under section 139(1) of the Act for A.Y. 2019-20.

25. Similarly, for Assessment Year 2020-21, deemed rental income in respect of the five flats that remained unsold was computed at Rs. 8,50,271/- and added to the total income of the assessee.

26. The aggrieved assessee preferred an appeal before the learned CIT(A) against the assessment made by the AO for A.Y. 2014-15, 201819, 2019-20 and 2020-21 by contending the income if any is chargeable to tax, then the same should be taxable in the hands of HUF and not in the individual capacity of the appellant assessee. However, the learned CIT(A) confirmed the addition made by the AO for the respective assessment years.

27. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

28. The learned Authorised Representative (AR) appearing before us made various legal contentions. Apart from the legal submissions, the learned AR contended that no consideration was received from the developer at the time of entering into the Joint Development Agreement (JDA). Accordingly, it was submitted that there was no transfer of land during the assessment year 2014-15, and consequently, the question of computing capital gains in the year of execution of the JDA does not arise.

28.1 The learned AR further contended that the JDA was completed during the assessment year 2018-19, and therefore, capital gains, if any, could be computed only in that year in accordance with the provisions of section 45(5A) of the Income-tax Act, 1961. It was further submitted that the amount of such capital gains would be eligible for exemption under sections 54/54F of the Act, as the same shall be deemed to have been invested in the new residential property received under the JDA.

28.2 It was also pointed out that the assessee was not holding the flats received under the JDA as stock-in-trade and, therefore, the same could not be subjected to the provisions relating to deemed rental income.

29. On the other hand, the learned DR strongly supported the orders passed by the Assessing Officer as well as the Commissioner of Incometax (Appeals). The learned DR submitted that the execution of the Joint Development Agreement (JDA) coupled with the handing over of possession of the land to the developer clearly constituted a “transfer” within the meaning of section 2(47)(v) of the Income-tax Act, 1961, read with section 53A of the Transfer of Property Act. Therefore, the capital gains were rightly brought to tax in the assessment year 201415, being the year in which the JDA was entered.

29.1 The learned DR further contended that the provisions of section 45(5A) of the Act are not applicable to the assessee’s case, as the said provision was introduced with effect from 01.04.2018 and applies only prospectively. Since the JDA in the present case was executed prior to the insertion of section 45(5A) of the Act, the computation of capital gains had to be governed by the law as it stood at the time of execution of the JDA, and not by the subsequently introduced provision.

29.2 It was further argued by the learned DR that the contention of the assessee that no consideration was received at the time of entering into the JDA is devoid of merit, since the right to receive constructed area/flats itself constitutes valuable consideration. Once possession was handed over to the developer in pursuance of the JDA, the transfer stood completed, and the capital gains became chargeable to tax in that year itself, irrespective of the fact that the constructed flats were to be received at a later point of time.

29.3 The learned DR also submitted that the assessee was not entitled to claim exemption under sections 54 or 54F of the Act in the year under consideration, as the conditions prescribed under the said sections were not fulfilled in the relevant assessment year. According to the learned DR, mere entitlement to receive flats in the future cannot be equated with investment in a residential house for the purpose of claiming exemption under the said provisions.

29.4 With regard to the issue of deemed rental income, the learned DR contended that the flats received by the assessee under the JDA were capable of being let out and, therefore, the Assessing Officer was justified in bringing to tax the notional rental income under the head “Income from house property”, irrespective of whether the assessee actually let out the flats or treated them as stock-in-trade. Accordingly, the learned DR prayed that the appeal filed by the assessee be dismissed and the orders of the lower authorities be upheld.

30. We have heard the rival contentions of both the parties and perused the materials available on record. The issue before us revolving around the addition of long-term capital gain made in the A.Ys. 2014-15 and 2018-19 on account of transfer of land property in pursuance to the JDA and addition of long-term capital in the A.Ys. 2018-19, 2019-20 on account of sale of flats allotted in pursuance to the JDA as well addition of deemed rental income for the A.Ys. 2018-19 to 2020-21 on the flats allotted in pursuance to JDA for relevant unsold period.

30.1 Under a JDA, the scheme of taxation for a landowner operates in two distinct stages, depending on the nature of consideration and subsequent events. The first stage of taxation arises on account of transfer of land under the scheme of JDA and second stage arose when the landowner sales the constructed flats or units received under the JDA to third parties.

30.2 Before the introduction of section 45(5A) of the Act, the taxation of income arising to a landowner at the first stage was governed by the general provisions of section 45(1) read with section 2(47) of the Act. In such cases, capital gains were sought to be taxed in the year in which there was a “transfer” of the capital asset. Hence, there was always a dispute between the assessee and the revenue regarding the year in which condition precedent to transfer is fulfilled. The Revenue generally took the view that execution of a JDA coupled with handing over of possession to the developer amounted to a transfer under section 2(47)(v) or (vi) of the Act. Accordingly, capital gains were assessed in the year of execution of the JDA or handing over the possession by the AO/revenue, even though the landowner had not actually received monetary consideration and the consideration was in kind, i.e., a share in the constructed area. This resulted in serious hardship for landowners, as tax liability arose on notional gains without actual cash inflow. In many cases, disputes also arose as to whether such transfer was completed when approvals were pending or conditions in the JDA were not fully complied with, leading to prolonged litigation.

30.3 To mitigate this hardship, section 45(5A) of the Act was introduced by the Finance Act, 2017 with effect from assessment year 2018-19. This provision carved out a special scheme for taxation of capital gains in the case of individuals and Hindu Undivided Families entering a JDA for development of land or building. Under this scheme, notwithstanding anything contained in section 45(1) of the Act, capital gains are chargeable to tax in the year in which the competent authority issues a completion certificate for the whole or part of the project. The full value of consideration is deemed to be the stamp duty value of the owner’s share in the project on the date of issue of such completion certificate, plus any monetary consideration received. Thus, taxation is aligned with the stage when the landowner actually receives the developed property and is in a better position to discharge the tax liability. The provision also provides clarity and certainty by deferring the point of taxation and by prescribing a clear mechanism for valuation of consideration, thereby reducing litigation.

30.4 In substance, prior to section 45(5A) of the Act, taxation under a JDA was linked to the concept of “transfer” under section 2(47) of the Act, often resulting in early and notional taxation at the time of execution of the agreement. After the introduction of section 45(5A) of the Act, a specific and beneficial regime applies to eligible landowners, under which capital gains are taxed in the year of completion of the project, based on the value of the constructed area received and any cash consideration, bringing both equity and practical relief to landowners.

30.5 At the second stage, when the landowner sells the constructed flats or units received under the JDA to third parties, such transaction constitutes a separate taxable event. The income arising at this stage is generally taxable as capital gains or business income, depending on the facts and intention of the landowner. The cost of acquisition of the flats for this purpose is taken as the value that was earlier considered as consideration for computing capital gains at the first stage (i.e., the value adopted under section 45(5A) or otherwise). Thus, the scheme of taxation under a JDA recognizes that while the transfer of land rights triggers capital gains at one point of time, the subsequent sale of constructed areas gives rise to an independent charge of tax, ensuring that income is taxed stage-wise and in accordance with real accrual in the hands of the landowner.

30.6 Coming to the facts of the case on hand, the JDA was entered in the year 2013-14 relevant to A.Y. 2014-15 and possession was given to the developer to carry out the proposed development work. The project was completed and the occupancy certificate issued by the competent authority in the month of June 2017 relevant to A.Y. 2018-19.

30.7 The allegation of the revenue is that in pursuance to the JDA the possession of the land property was transferred to the developer M/s Ecstasy Projects Pvt. Therefore, as per the provision of section 2(47)(v) of the Act, transfer took place in the previous year 2013-14 relevant to A.Y. 2014-15 i.e. the year in which JDA was entered and the possession of the land given to the developer. The AO holding so placed reliance on decision of Hon’ble Karnataka High Court in the case of DR. T.K. Dayalu (supra).

30.8 However, we find that the ratio of Hon’ble Karnataka High Court in the case of DR. T.K. Dayalu (supra) is distinguishable from the facts of the assessee. The facts culled out from the ruling of the Hon’ble High Court are that DR. TK Dayalu being owner of the land property, entered JDA with the developer as on 26^th January 1996. As per the terms of the JDA, DR. TK Dayalu was entitled to receive a sum of Rs. 45 Lakh as non-refundable advance and in addition also entitled to receive 5500 sq.ft. of built-up area in the project to be developed by the developer on the subject land property. The property was handed over to the developer as on 30^th May 1996 and developer completed the project in F.Y. 200203. In the given facts, the dispute arises in which year capital gain should be levied. The Hon’ble High Court held that the possession of the property was transferred in the year 1996-97 relevant to the A.Y. 199798 for a part consideration of 45 Lakh. Hence, the capital gain is chargeable in the A.Y. 1997-98 when possession was given and not in the year when project was completed. The relevant finding of the Hon’ble High Court in DR TK Dayalu reads as under:

7. So far as other substantial questions of law are concerned, it is clear that the finding of fact arrived at by the Tribunal is based upon the material on record. The contents of the agreement dated 26-1-1996, the second supplementary agreement dated 14-10-1998, the third supplementary agreement dated 26-11-1999 and also the affidavit filed by the assessee stating that the actual possession of the schedule property was handed over on 30-5-1996, the said finding on the question of fact that the possession was handed over on 30-5-1996 is based upon the material on record and cannot be said to be perverse or illegal. The question to be decided is the year in which Rs. 45 lakhs received by the assessee under the agreement dated 26-1-2006 (sic) as modified by the subsequent agreements to be taxed. It is not disputed that the assessee had received capital gain in the year 1997-98 and having regard to the finding of fact that the possession of the property has been handed over on 30-5-1996, we hold that appropriate assessment year in which the capital gain is to be taxed is 1997-98. There is no merit in the contention of learned counsel appearing for the assessee that since the entire project has been completed in the year 2003-04, the tax on capital gain has to be made in that year. It is now well-settled that the date on which possession was handed over to the developer is relevant and in the present case, it is not disputed that assessee has already received a sum of Rs. 45 lakhs in addition to the structures which would enable to put up construction.

30.9 However, in the present case of the assessee, there was neither such advance nor refundable payment. In the case of the assessee, the possession was given to developer only to carry out the development work in pursuance to the JDA without transferring the title and ownership and without any part performance as envisaged under section 53A of the Transfer of Property Act. In holding so, we draw support and guidance from the subsequent judgment of Hon’ble Karnataka High Court in the case of Pr. CIT v. Sri Sai Lakshmi Industries (P.) Ltd. (Karnataka) in which the facts involved are identical to the facts in the present case. The Hon’ble Bench, after considering the earlier decision in the case of DR. T.K. Dayalu (supra), decided the issue in the favour of the assessee.

30.10 In the case of Sri Sai Lakshmi Industries (P.) Ltd. (supra), the JDA was entered into as on 3^rd April 2013 with developer for development of its property and was entitled to receive 30% of built area in the developed project. The AO relying on the ruling in the case of DR. TK Dayalu brought the capital gain in A.Y. 2014-15. The dispute reached Hon’ble Court, and the Hon’ble Bench decided the issue in favour of the assessee by observing as under:

15. A combined reading of Clauses 3.1 and 13 shows that parties have specifically agreed that assessee shall continue to own entire JD property until conveyance deed tookplace. Clause 13 is in consonance with clause 3.1. There is no material on record to show that any conveyance had taken place in A.Y. 2014-15. Unless, there is material to establish that there was any conveyance, the view taken by the A.O. is perverse and the said view has rightly been reversed by both CIT(A) and ITAT.

30.11 Furthermore, as per the amended provision of section 45(5A) of the Act applicable w.e.f. A.Y. 2018-19 as discussed above, the capital gain on transfer of land under the scheme of JDA is taxable in the year in which the competent authority issues a completion certificate for the whole or part of the project. The provision of section 45(5A) of the Act is beneficial provision introduced with intention to mitigate undue hardship to the assessee.

30.12 In view of the above detailed discussion, we hold that there is no transfer of property taking place in the year 2013-14 relevant to A.Y. 2014-15 within the meaning of section 2(47)(v) of the Act r.w.s. 53A of Transfer of property Act. Therefore, the addition made by the AO for the A.Y. 2014-15 for Rs. 1,28,60,000/- of capital gain is not maintainable on the merit. Hence capital gain if any arises on the transfer of land property under the JDA shall be subject to tax in the A.Y. 2018-19 when the assessee received 44 constructed flats under the project.

31. We find that the AO has adopted the developer’s cost of construction as the measure of consideration for the assessee’s share of built-up area. In our considered view this approach is legally untenable. The cost of construction incurred by the developer is not the price paid to the assessee, but merely the developer’s expenditure in fulfilling his contractual obligation to deliver the constructed area. In our considered view, the “consideration” refers to what is received or accruing to the assessee because of the transfer. It cannot be equated to the expenditure incurred by another party in fulfilling his obligation. The builder’s cost of construction is his outlay, not the assessee’s income. Adopting it would amount to taxing someone else’s expenditure in the hands of the assessee, which is contrary to the scheme of the Act. The Hon’ble Karnataka High Court in Pr. CIT v. CPC Logistics Ltd. (Karnataka) andPr. CIT v. Smt. Sarojini M. Kushe P.V.S. Beedies (P.) Ltd. ITR 327 (Karnataka) in identical facts have categorically held that adopting the developer’s cost of construction as the landowner’s sale consideration is impermissible, since the developer may inflate or manipulate such figures to suit his purpose. However, the fact is that the assessee for transfer of 60% of land in favour of the developer in pursuance to JDA has received consideration in kind being built-up unit (45 flats). Thus, the question arises what value of consideration should be adopted in the given facts and circumstances. In this respect, we find that the provision of section 45(5A) of the Act is relevant, which provide that the “stamp duty value, on the date of issue of the completion certificate of assessee’s shares of building in the project, as increased by any consideration received in cash or by a cheque or draft or by any other mode shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

31.1 We further note that AO for the computation of deemed rental income under section 23(5) of the Act has adopted stamp duty/guidance value at Rs. 3530/- per sq. ft. Therefore, in our considered opinion, the sale consideration for transfer of land should be Rs. 3530 per sq. ft for built up area received by the assessee. At this point it is also pertinent to note that AO has adopted cost of construction of developer as consideration which stands at Rs. 1585/- per sq. ft. which is less than the stamp duty value. A question may arise; can the Tribunal enhance the sale consideration adopted by the AO. In general, the Tribunal may confirm, reduce or set aside the order from lower authorities or remand the case for fresh assessment but cannot enhance the addition made by the lower authority. However, here we are not enhancing the addition made by the AO. We are only dealing with here what should be the correct value of sale consideration adopted in the given facts and circumstances.

31.2 Accordingly, we hold that sale consideration for the transfer of 60% of land to the developer in pursuance to the JDA should calculated adopting stamp duty value of built-up area (total 53301 sq. ft.) received by the assessee which stand at Rs. 3530 per sq ft. Thereafter, it is necessary to provide deduction of expenses if any incurred, indexed cost of acquisition and indexed cost of improvement if any. We note that AO has adopted cost of acquisition at Rs. 1 lakh in arbitrary manner which is contrary to provisions of the Act. We note that the AO in the A.Y. 201920 while computing the capital gain on sale of 38 flats has adopted indexed cost of acquisition at Rs. 1,46,36,160/-. Therefore, we direct the AO to adopt correct value of cost of acquisition to determine the value of long-term capital gain arising to the assessee on transfer of land property in pursuance to the JDA.

31.3 Now question arises whether the long-term capital arrived as per above laid procedure be brought to tax or whether the assessee shall be eligible for exemption/deduction under section 54/54F of the Act. The learned AR of the assessee before us contended whatever the capital gain arrived shall be considered as investment in the residential house. The learned AR contended entire 44 flats allotted to the assessee shall be considered as investment in a residential house. We find force in argument of the learned AR of the assessee which is supported by the ruling of Hon’ble Jurisdictional High Court of Karnataka in the case of CIT v. D. Ananda Basappa (Karnataka). In the said case, the assessee, HUF sold a residential house and purchased 2 residential flats adjacent to each other through two different sale deeds. The assessee claimed the claimed exemption u/s 54 of the Act on account of purchase of those two flats. But the revenue authority restricted the exemption u/s 54 of the Act to the extent of purchase value of 1 flat. On appeal before the Tribunal by the assessee, the tribunal decided the issue in favor of the assessee. On further appeal by the revenue before the Hon’ble High Court, the bench held as under:

A plain reading of section 54(1) discloses that when an individual assessee or an HUF assessee sells a residential building or land appurtenant thereto, he can invest capital gain for purchase of a residential building to seek exemption of the capital gain tax. Section 13 of the General Clauses Act declares that whenever the singular is used for a word, it is permissible to include the plural. [Para 5]

The contention ofthe revenue that the phrase ‘a residential house’ would mean one residential house, does not appear to the correct understanding. The expression ‘a residential house’ should be understood in a sense that building should be residential in nature and ‘a’ should not be understood to indicate a singular number. [Para 6]

That when an HUF’s residential house is sold, the capital gain should be invested for the purchase of only one residential house, is an incorrect proposition. After all, the property of the HUF is held by the members as joint tenants.

31.4 The ratio of the Hon’ble Karnataka High Court in the abovementioned case was subsequently followed by the Hon’ble Delhi High Court in the case of CIT v. Gita Duggal (Delhi). In the said case the assessee was owner of property comprising of the basement, ground floor, first floor and second floor. She was deriving rental income from the property. On 08.05.2006 she entered into a collaboration agreement with M/s Thapar Homes Ltd. for developing the property. According to its terms, the assessee being desirous of getting the property redeveloped/reconstructed and not being possessed of sufficient finance and lacking in experience in construction, approached the builder to develop the property for and on behalf of the owner at the cost of the builder. The builder was to demolish the existing structure on the plot of land and develop, construct, and/or put up a building consisting of basement, ground floor, first floor, second floor and third floor with terrace at its own costs and expenses. In addition to the cost of construction incurred by the builder on development of the property, a further payment of Rs. four crores was payable to the assessee as consideration against the rights of the assessee. The builder was to get to the third floor. The assessee accordingly handed over vacant physical possession of the entire property along with 22.5% undivided interest over the land. The handing over of possession of the entire property was, however, only for the limited purpose of development; the undivided interest in the land stood transferred to the developer/builder only to the extent of 22.5% for his exclusive enjoyment. It was on these facts that the assessing officer first took the view that the sale consideration for the transfer of the capital asset should be taken not merely at Rs. four crores which was the cash amount received by the assessee, but the cost of construction incurred by the developer on the development of the property amounting to Rs. 3,43,72,529/- should also be added to the sale consideration. The assessee thereupon claimed that if the cost of construction incurred by the builder is to be added to the sale price, then the same should also be correspondingly taken to have been invested in the residential house namely the two floors which the assessee was to get in addition to the cash amount under the agreement with the builder, and the amount so spent on the construction should be allowed as deduction under Section 54 of the Act. It was at this stage that the assessing officer rejected the claim for deduction under Section 54 on the footing that the two floors obtained by the assessee contained two separate residential units having separate entrances and cannot qualify as a single residential unit. The AO agreed that the assessee was eligible for the relief under Section 54F in respect of the cost of construction incurred on one unit. The dispute reached the Hon’ble Delhi High Court through the revenue appeal. The Hon’ble High Court in the given facts held as under:

8. It is the correctness of the above view that is questioned by the revenue and it is contended that the interpretation placed by the Tribunal gives rise to a substantial question of law. The assessee strongly relies upon the judgment of the Karnataka High Court (supra) which, it is stated, has become final, the special leave petition filed by the revenue against the said decision having been dismissed by the Supreme Court as reported in the annual digest The judgment of the Karnataka High Court supports the contention of the assessee. An identical contention raised by the revenue before that Court was rejected in the following terms :

“A plain reading of the provision of section 54(1) of the Income-tax Act discloses that when an individual-assessee or Hindu undivided family- assessee sells a residential building or lands appurtenant thereto, he can invest capital gains for purchase of residential building to seek exemption of the capital gains tax. Section 13 of the General Clauses Act declares that whenever the singular is used for a word, it is permissible to include the plural.

The contention of the Revenue is that the phrase “a” residential house would mean one residential house and it does not appear to the correct understanding The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. The combined reading of sections 54(1) and 54F of the Income-tax Act discloses that, a non residential building can be sold, the capital gain of which can be invested in a residential building to seek exemption ofcapital gain tax. However, the proviso to section 54 of the Income-tax Act, lays down that if the assessee has already one residential building, he is not entitled to exemption of capital gains tax, when he invests the capital gain in purchase of additional residential building.”

This judgment was followed by the same High Court in the decision in CIT v. Smt K.G. Rukminiamma (Kar..

9. 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.

31.5 Therefore, respectfully following the ratio laid down by the Hon’ble Karnataka High court and Hon’ble Delhi high court in the abovementioned cases, we hold that the assessee will be eligible for deduction under section 54/54F of the Act on account of investment in a residential house considering the entire 44 flats as a residential house. Hence whatever the capital gain computed on transfer of land under the JDA as per procedure laid in the preceding paragraphs, is directed to considered as exempted under the provision of section 54/54F of the Act. Therefore, no addition is required to be on this account in the A.Y. 2018-19 for the capital gain on the receipt of flats in the scheme of JDA.

32. Moving to the addition made by the AO for Rs. 49,44,000/- on account of capital gain on sale of one flat out of 44 flats allotted during the assessment year 2018-19. In this regard we note that the assessee has sold the impugned flat of 1261 sq. ft. for consideration of Rs. 50,44,000/- only. The AO while computing capital gain deducted the cost of acquisition for Rs. 1 lakh only in arbitrary manner. On the contrary it is settled passion that in the scheme of JDA, while computing the capital gain at the second stage i.e. at the time of sale of flat/units the cost shall be considered as value of sale consideration adopted at the first stage of taxation i.e. transfer of land under the JDA. We, in the preceding paragraph, have held the sale consideration at the first stage of taxation shall be the stamp duty value of the flats received by the assessee which stand at Rs. 3530/- per sq. ft. Therefore, AO is directed to compute the short-term capital gain on sale of 1 flat during the A.Y. 2018-19 after deducting cost of acquisition at the rate of Rs. 3530/- per sq. ft.

32.1 We further note that the assessee has sold 38 flats in the year relevant to A.Y. 2019-20 for a consideration of Rs. 17,61,90,120/- on which the AO has computed the long-term capital gain of Rs. 14,35,56,920/-. The AO is directed to compute the short-term capital gain or long-term capital gain as the case may be considering the period of holding from the date of receipt of occupancy certificate till the date of sales. The capital gain on sale of those 38 flats shall be computed after computing the cost of acquisition at the rate of Rs 3530/- per sq. ft. as directed for sale of one flat during A.Y. 2018-19.

33. Now moving to the issue of deemed rental income computed by the AO under the provision of section 23(5) of the Act for A.Y. 2018-19, 2019-20 and 2020-21. In this regard it is pertinent to refer to the provision which reads as follows:

5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part ofthe property, for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.

33.1 From the bare perusal of the above provision, it transpired that the concept of deemed rental under section 23(5) of the Act is applicable to property being any building or land appurtenant thereto is held as stock in trade. In the present case, there is no material on record to suggest that the 44 flats allotted to the assessee in terms of the JDA were held as stock in trade by the assessee. As such, the assessee has treated the same as capital assets and AO also computed long term capital gain on sale of flats by treating the same as capital asset. Hence in our considered opinion, the provision of deemed rental income is not applicable in this case. In holding so, we find support and guidance from the decision of coordinate bench of this Tribunal in the case of Dy. CIT v. Ramesh Narayana Reddy (HUF) (Bangalore – Trib.) where it was held as under:

10. We have considered the rival submissions and the arguments advanced by both sides, we observe that it is settled position of law as propounded by the Hon’ble Supreme Court in the case of Union of India v. Kaumudini Narayan Dalal ITR 219 that the approach of the Revenue in respect of the assessees, who are party to same transaction should be uniform. It has been held by the Hon’ble Supreme Court that the Revenue cannot adopt the tactics of pick and choose while assessing the citizens of India, otherwise it would be violation of Article 14 of the Constitution of India. Therefore, we are of the view that the ld. CIT(A) is correct in deleting the addition of deemed rental income applying the rule of equality before law. Notwithstanding to this on merits also we observe that, whether deemed rental annual value is assessable in respect of the flats which were not acquired for self-occupation rather kept as investment for sale, we find that Coordinate Bench of the Mumbai ITAT in the case of Sachin R Tendulkar (supra) has decided the issue in favour of assessee. Further the decision relied upon by the Ld DR in the case of Dimple Enterprise (supra) is a decision rendered in completely different set of facts as in that case the unsold flats were kept as stock in trade. However, in the present case neither such facts are there nor the DR has argued that the assessee has been keeping these flats as stock in trade. Therefore, the decision relied upon by the Ld DR is not applicable to the facts of the case at hand.

33.2 In view of the above discussion, we hold that the provision of deemed rental income under section 23(5) of the Act is not applicable in the given facts and circumstances. Therefore, the AO is directed to delete the addition made on this issue in the A.Y. 2018-19, 2019-20 and 2020-21.

34. Now coming to the issue of short-term capital and long-term capital gain of Rs. 11,08,542/- and Rs. 11,33,953/- respectively originally offered by the assessee in the return of income filed under section 139(1) of the Act for A.Y. 2018-19 but not offered while filing return in response to notice under section 153A of the Act. In this regard fact is not clear whether the impugned short term capital gain and long-term capital offered in respect of JDA or with respect to some other capital assets. Hene, the AO is direct to verify this issue. If the impugned capital gain in the original return offered by the assessee is connection of JDA under dispute, then no further addition is required to be made for the same. In case the impugned capital gain offered in connection with some other property, the AO is directed to look into the issue afresh after affording proper opportunity to the assessee before confirming the same.

35. As we have already adjudicated the issues on the merits of the case, we do not consider it necessary to examine the technical issue raised by the assessee. Accordingly, the said technical issue is left open to be agitated before the higher forum, if so advised, and is dismissed as infructuous.

36. In the result, all the appeals of the assessee are partly allowed.