Fair Market Value as on transfer date governs capital gains computation under Joint Development Agreements

By | October 28, 2026
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Fair Market Value as on transfer date governs capital gains computation under Joint Development Agreements

Issue

  • Whether the Assessing Officer was justified in adopting the developer’s future construction cost as the full value of consideration for computing long-term capital gains under a Joint Development Agreement (JDA), instead of adopting the Fair Market Value (FMV) of the property as on the date of transfer under Section 50D of the Income-tax Act.

Facts

  • The assessee entered into a Joint Development Agreement (JDA) on August 5, 2014 (Assessment Year 2015-16), with a developer for the construction of 20 flats, receiving entitlement to 8 built-up flats.
  • The assessee filed her return of income declaring long-term capital gains of approximately ₹1.54 crores by adopting the Fair Market Value (FMV) of the property as on the date of transfer as the full value of consideration.
  • The Assessing Officer (AO) rejected the FMV approach, recomputed long-term capital gains at ₹3.83 crores by adopting the builder’s construction cost as the full value of consideration, and made an addition of ₹2.29 crores.
  • The builder incurred construction costs over three financial years (F.Y. 2014-15 to F.Y. 2018-19).
  • The AO treated August 5, 2014, as the date of transfer for F.Y. 2014-15 while adopting unverified construction costs incurred by the builder in subsequent financial years over two years later.

Decision

  • The Assessing Officer is bound to adopt an authentic and reliable method when multiple methods are available for determining the full value of consideration.
  • Adopting the Fair Market Value (FMV) as on the date of transfer is the appropriate and reliable method for determining the full value of consideration arising from a property transfer under a JDA.
  • The approach of adopting FMV as on the date of transfer is supported by Section 50D and the beneficial principles underlying Section 45(5A) to safeguard taxpayers.
  • The computation of capital gains by the assessee using FMV as on the transfer date was in accordance with Section 50D, and the AO erred in using the builder’s construction costs.

Key Takeaways

  • Rejection of Unauthenticated Future Costs: Assessing Officers cannot adopt speculative or future-incurred construction costs of a developer as the full value of consideration for a transfer occurring in an earlier assessment year.
  • Primacy of Section 50D FMV: Where consideration received or accruing as a result of a transfer cannot be accurately determined at the time of transfer, the Fair Market Value of the asset on the date of transfer serves as the proper statutory benchmark under Section 50D.
  • Beneficial Interpretation: Beneficial legislative principles (such as those in Section 45(5A)) can inform the application of Section 50D to prevent unfair tax burdens arising from delayed project executions under Joint Development Agreements.
IN THE ITAT VISAKHAPATNAM BENCH
Sitha Mahalakshmi Katamaneni
v.
Income-tax Officer
VIJAY PAL RAO, Vice President
and MANJUNATHA G, Accountant Member
ITA No. 226 (VIZ) OF 2026
[Assessment year 2015-16]
AUGUST  31, 2026
C. Subrahmanyam, CA for the Appellant. A.P. Babu, Sr. AR for the Respondent.
ORDER
Manjunatha G., Accountant Member. – This appeal is filed by the Assessee is directed against the order of Learned Commissioner of Income Tax (Appeals), Visakhapatnam-3 [hereinafter in short “Ld. CIT(A)”] vide DIN: ITBA/APL/S/250/2025-26/1085992795(1) dated 13.02.2026 for the Assessment Year 2015-16.
2. The Assessee has raised the following grounds of appeal:-
“1. That the order passed u/s. 147 dt. 29.09.2021 and confirmed by the Ld.CIT(A), NFAC vide order dt. 13.02.2026 u/s. 250 is contrary to the facts of the case and the provisions of law and is therefore liable to be set aside.
2. That the Ld. CIT(A) erred in confirming the addition of Rs.2,29,25,510/- towards long-term capital gains by adopting the alleged cost of construction as per the developer’s books of account, without confronting the same to the appellant or independently verifying its authenticity, thereby violating principles of natural justice.
3. That the authorities below failed to provide adequate opportunity to the appellant to rebut the adoption of the developer’s construction cost, rendering the assessment proceedings vitiated in law.
4. That the Ld. CIT(A) erred in holding that the actual cost incurred by the developer over a period of six years (AYs 2015-16 to 2020-21) constitutes the full value of consideration for the purpose of computing capital gains in AY 2015-16.
5. That the adoption of the developer’s construction cost as the “full value of consideration” in the hands of the landowner is legally unsustainable and contrary to settled principles governing Joint Development Agreements.
6. That the Assessing Officer and the Ld. CIT(A) erred in rejecting the appellant’s computation of capital gains based on the registered value / stamp duty value (SRO value) as on the date of the Joint Development Agreement, which alone represents the legally recognized consideration in a transaction of exchange.
7. That the transaction being one of exchange under a Joint Development Agreement, the fair market value / stamp duty value as on the date of the agreement alone ought to have been adopted for the purpose of section 48 computation.
8. That for the above and other grounds to be urged at the time of hearing, the appellant prays that the addition sustained by the Ld.CIT(A) be deleted in the interest of justice.”
3. The brief facts of the case are that, the assessee is an individual filed her original return of income for the A.Y. 2015-16 on 13.07.2015 admitting total income of Rs.13,27,700/-. During the financial year, relevant to assessment year under consideration, assessee had entered into Development Agreement with M/s. Sri Vigneswara Civil Projects on 05.08.2014 and as per the Development Agreement, the assessee has received eight flats out of the twenty flats constructed on the land of the assessee given to the Developer. Since the assessee has entered into a Development Agreement and got eight flats, she was liable for capital gains for the A.Y. 2015-16 and since the assessee has not admitted the capital gains in the return of income filed for the year under consideration, the assessment has been reopened under section 147 of Income Tax Act, 1961 [hereinafter in short “the Act”] and notice under section 148 of the Act dated 20.03.2020 was issued and served on the assessee. In response to the said notice, assessee filed her return of income on 05.06.2020 admitting total income of Rs.1,67,14,720/- which includes long-term capital gains of Rs.1,53,87,027/-arising out of the transfer of property in pursuant of Development Agreement.
4. Thereafter, the case of the assessee was centralized to the ACIT, Central Circle, Vijayawada and notice under section 143(2) of the Act dated 25.03.2021 was issued and served on the assessee calling for various details. In response, the assessee submitted details of Development Agreement, Computation of capital gains and also relevant supporting evidences. The Ld.AO, after considering the submissions of the assessee and also taking note statement of computation of capital gains, referred the valuation of the construction to the District Valuation Officer and the Superintending Engineer (Valuation), Hyderabad on 24.09.2021 estimated the cost of construction of the apartment “Srinivasa Grant City” for Rs.11,18,04,400/- exclusive of finance cost and other overhead expenses. The Ld.AO, after considering the relevant valuation report submitted by the DVO and also taking note of the fact that the assessee has shown capital gains of Rs.1,53,87,027/-, issued a show-cause notice and called upon the assessee to explain as to why capital gains should not be recomputed by taking into account relevant materials and also by considering the DVO report. In reply, the assessee submitted that the Developer has incurred expenditure for construction of the building form the F.Y. 2014-15 to F.Y. 2018-19, whereas the transfer, as referred to under section 274 r.w.s. 53A of the Transfer of Property Act, 1882 has been taken place in the F.Y. 2014-15 and therefore cost of construction incurred by the builder as per the books of the Developer cannot be considered for the purpose of determination of full value of consideration. The assessee had also took support from the provisions of section 50D of the Act and argued that, where the consideration received or accruing as a result of transfer of capital asset is not ascertainable or cannot be ascertained, then for the purpose of computing income chargeable to tax as capital gain, the fair market value (FMV) of said asset on the date of transfer shall be deemed to be full value of consideration received or accrued as a result of transfer. The assessee had also referred to the provisions of section 45(5A) of the Act, and argued that, as per the above provisions of section 45(5A) taking stamp duty values as FMV for the purpose of section 48 on the date of issue of completion certificate should be adopted.
5. The Ld.AO, after considering the relevant submissions of the assessee ignored the objection filed by the assessee and adopted SRO value for the purpose of determination of full value of consideration and observed that, the provisions of section 45(5A) was inserted by Finance Act, 2017 w.e.f., 01.04.2018, and, it is a prospective legislation and hence not applicable in the present case. The Ld.AO further noticed that the Hon’ble Andhra Pradesh High Court in the case of Potla Nageswara Rao v. Dy. CIT  (Andhra Pradesh)has clearly held that handing over the possession of the property to the developer is a clear case of transfer by exchange within the meaning of section 2(47)(v) r.w.s 53A of Transfer of Property Act, and, hence the assessee is liable to pay capital gain, and, therefore, computed capital gains by taking into account full value of consideration as per the cost of construction incurred by the builder for construction of eight flats excluding finance cost and other overhead expenses which was at Rs.10,28,11,894/- and then considered assessee share in the project which was at 40% and worked out full value of consideration of Rs.4,11,24,758/- and then computed long-term capital gains of Rs.3,83,12,537/-. Since, the assessee has declared long-term capital gains of Rs.1,53,87,027/-, the difference amount of Rs.2,29,25,510/- has been added to the total income.
6. Aggrieved by the Assessment Order, the assessee preferred an appeal before the Ld. CIT(A). Before Ld. CIT(A), the assessee has reiterated her similar submissions made before the Ld.AO and claimed that when the laws specifically provided for adopting FMV as on the date of the Transfer of the asset, then the Ld.AO was erred in adopting full value of consideration, accrued as a result of transfer, as per the cost of construction incurred by the builder without even providing relevant details to the assessee and also without ascertaining the correctness of the cost of construction incurred by the builder. The assessee further, submitted that the additions made by the Ld.AO should be deleted. Ld. CIT(A) after considering the relevant submissions of the assessee and also taking into account the decision of the Hon’ble Andhra Pradesh High Court in the case of Potla Nageswara Rao (supra), observed that, where the real consideration is clearly ascertainable from the developer’s audited financial themselves, substitution of such concrete figures with hypothetical estimates or stamp values is wholly unwarranted. The assessee’s reliance on section 45(5A) is also misconceived, as the provision is expressly prospective and inapplicable to the A.Y.2015-16. Likewise, section 50D applies only, where consideration is not ascertainable, whereas in the present case, the consideration stood fully determinable on the basis of actual expenditure incurred and duly recorded in the audited accounts. Therefore, observed that, the Ld.AO has rightly considered the cost of construction incurred by the builder for the purpose of computing of full value of consideration to make additions towards difference amount of Rs.2,29,25,510/-. Thus, rejected the explanation of the assessee with a direction to the Ld.AO to adopt correct extent of built-up area relatable to the assessee and compute the capital gains.
7. Aggrieved by the Ld. CIT(A) order, the assessee is now in appeal before the Tribunal.
8. Learned Counsel for the assessee, Shri C. Subrahmanyam, CA, submitted that the Ld. CIT(A) erred in upholding the reasons given by the Ld.AO to adopt cost of construction, as per builders books of accounts for adopting full value of consideration accrued as a result of transfer, ignoring the fact, that as per section 50D of the Act, when the consideration received or accruing as a result of transfer of capital asset is not ascertainable or cannot be determined, then for the purpose of computing capital gains, the FMV of the said asset on the date of transfer shall be deemed to be full value of consideration received or accrued as a result of transfer. Learned Counsel for the assessee, further submitted that, although section 45(5A) has been inserted by Finance Act, 2017 w.e.f. 01.04.2018, but going by the purpose of insertion of the said provision, it is for the benefit of the tax payers, and, going by the above provision, it is very clear that for the purpose of determination of full value of consideration, FMV of the property as on the date of transfer should be considered. In the present case, the Ld.AO considered transfer of the property for the F.Y. 2014-15 whereas adopted cost of construction of the building incurred by the builder in subsequent years without any authenticity of said cost. Therefore, he submitted that computation of capital gains by the Ld.AO should be rejected and the additions made by the Ld.AO should be deleted. In this regard, he relied on the decision of the Hon’ble Karnataka High Court in the case of CIT, Central Circle v. Ved Prakash Rakhra   (Karnataka). He also relied upon the decision of the ITAT, Bangalore Bench in the case of Essae Teraoka Ltd. v. Dy. CIT, Circle 11(3), Bangalore  157 ITD 728 (Bangalore – Trib.).
9. Learned Senior AR for the Revenue, Shri A.P.Babu, Sr.Ar, on the other hand, supporting order of the Ld. CIT(A) submitted that, when a consideration received or accrued as a result of transfer is ascertainable from the records, it is incorrect to adopt the estimated or stamp duty value for the purpose of computation of full value of consideration. Further, the Ld.AO has adopted cost of construction of the builder as per audited books of accounts excluding finance cost and other overhead expenses. Since the data considered by the Ld.AO is reliable and which is one of the basis of adoption of full value of consideration, the Ld.AO has rightly considered the full value of consideration accruing as a result of transfer on the basis of cost incurred by the builder for computing the capital gains. The Ld. CIT(A) after considering the relevant facts has rightly sustained the additions made by the Ld.AO. Therefore, he submitted that the order of the Ld.AO should be upheld.
10. We have heard both the sides, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that the appellant had entered into Joint Development Agreement on 05.08.2014 for development of the property with M/s. Sri Vigneswara Civil Projects and as per the agreement between the parties, the assessee had received eight flats out of the twenty flats constructed on the project. The assessee has computed long-term capital gains arising out of the transfer of land in pursuant to the Development Agreement by adopting FMV of the property as on the date of transfer as full value of consideration and after deducting relevant cost of acquisitions and other expenses, computed long-term capital gains of Rs.1,53,87,027/-. The Ld.AO, recomputed the long-term capital gains arising out of the transfer of property in pursuant to Development Agreement by taking into account cost of construction incurred by the builder as basis of for adopting full value of consideration accruing as a result of transfer of property and after taking into relevant facts has computed long-term capital gains of Rs.3,83,12,537/- and thereby made addition of Rs.2,29,25,510/-.
11. The assessee disputed full value of consideration determined by the Ld.AO on multiple grounds including the adoption of cost of construction of builder and also in light of provisions of section 50D and section 45(5A) of the Act. Admittedly, the builder incurred cost of construction in three financial years starting from F.Y.2014-15 to F.Y. 2018-19. However, the Ld.AO has computed long-term capital gains for the F.Y. 2014-15 on the basis of the Development Agreement dated 05.08.2014 and considered the Development Agreement date for transfer and the cost incurred by the builder in the subsequent financial years for full value of consideration. There is a time gap of nearly more than two years and therefore without any authenticity of the cost incurred by the builder, the cost of construction of the builder cannot be basis for adopting of full value of consideration. Although it is one of the permissible methods for determination of the full value of consideration, but, fact remains that when other methods are available for the Ld.AO for determination of full value of consideration, then the Ld.AO is bound to go for the authentic and reliable method and if you go by the above principle adoption of FMV as on the date of the transfer of property is appropriate for determination of full value of consideration arising as a result of transfer of property. This fact is also further strengthened by the provisions of section 50D of the Act, where it has been clearly laid down that once the consideration received or accrued as a result of transfer is not ascertainable then the FMV of the property as on the date of the transfer of the property shall be considered as full value of consideration. Further provisions of section 45(5A) also deal with very similar analogy and held that for the purpose of determination of full value of consideration, FMV of the property as on the date of transfer of the shall be considered. Although section 45(5A) has been inserted by the Finance Act, 2017 w.e.f 01.04.2017, but going by the for the purpose of insertion of said section into the statute which is beneficial to the tax payers and therefore the analogy provided in the above section should be adopted and therefore going by the computation of capital gains by the assessee by taking into FMV as on the date of the transfer, in our considered view, the computation of the capital gains filed by the assessee is in accordance with the provision of section 50D and thus, the Ld.AO has completely erred in adopting full value of consideration on the basis of cost incurred by the developer.
12. The assessee has relied upon various judicial precedents, including the decision of the Hon’ble Karnataka High Court in the case of Ved Prakash Rakhra (supra). The Hon’ble Karnataka High Court in light of the identical set of facts of computation of capital gains by taking cost of construction of building held that, the cost incurred by the developer need not necessarily represent only a cost of construction. The detailed particulars are not given. The transaction of joint development is one of exchange. Consideration specified in the said document represents the market value on the date of entering into the agreement. Therefore, the FMV of the property as on the date of the transfer of property should be considered but not on the basis of cost of construction incurred by the builder. Relevant findings of the Hon’ble Karnataka High Court are as follow:
“Insofar as the property situated at Aga Abba Ali road is concerned, as per the Development agreement of the year 1994, the Developer was put in possession of the property on 6-3-1995 for construction of the Apartment and construction of the apartment was completed in the year 2000. The exchange value in consideration of 50 percent of the land was agreed to be conveyed to the Developer and/or his nominee/s valued at Rs. 1,16,70,000/-. The fair market value as on 01-04-1981 as per the Sub-Registrar valuation has to be taken into consideration. However, the Assessing Authority has not taken into consideration this aspect of the matter. Taking into consideration the project cost incurred by the developer on the basis of their letter dated 0102-2004, which includes all expenditure connected with the construction of the Residential Apartment. The exchange value as specified in the project development agreement can be taken as the basis for computation of the construction in joint development. The cost incurred by the developer need not necessarily represent only cost of construction. The detailed particulars are not given. The transaction of Joint development is one of exchange. Ibe consideration specified in the said document represents the market value on the date of entering into the agreement. The assessment made by assessing authority is contrary to law.
(Para 9)
Insofar as issue No.3 is concerned, as per the Development Agreement entered into between the parties, the assessee and his brothers have demolished the existing residential building and handed over the vacant space to an extent of 16800 sq ft. to the Developer for construction of the apartment. Since the residential building has already been demolished by the assessee and his brothers themselves, they are not entitled to claim benefit under section 54 of the Act. At the most they are entitled to benefit under Section 54F of the Act. The order passed by the Appellate Authority directing the Assessing Authority to allow the deduction under Section 54 of the Income Tax Act is contrary to law and the same cannot be sustained.
(Para 10)
13. In this view of the matter and considering facts and circumstances and also by following the decision of the Hon’ble Karnataka High Court, in the case of Ved Prakash Rakhra (supra), we are of the considered view that, the Ld.AO is erred in computing capital gains arising as a result of transfer of property in pursuant to Development Agreement by adopting full value of consideration on the basis of cost of construction incurred by the builder as against full value of consideration adopted by the assessee by taking into account FMV of the property as on the date of the transfer of the asset. The Ld. CIT(A) without considering relevant facts simply sustained the additions made by the Ld.AO. Thus, we set-aside the order of the Ld. CIT(A) and delete the additions made by the Ld.AO towards long-term capital gains of Rs.2,29,25,510/-.
14. In the result, appeal filed by the assessee is allowed.