Is 50C of I.T. Act applicable on development rights agreements?

Section 50C of the I T Act provides that in case a capital asset which is either land or building  or both is sold , the valuation for the purpose of stamp duty valauation can be taken as sales consideration for the purpose of computation of capital gains u/s 48 of the I T Act.

Mumbai Tribunal has delivered a judgement on 22/12/2010 in case of  Arif Akhatar Hussain and Jaffar Akhatar Hussain vs ITO ( ITA No. 541/Mum/2010, Assessment Years: 2006-07 and ITA No. 706/Mum/2010, ) in which the issue whether section 50C can be invoked in case of computation of  capital gains on  development rights given to developer of real estate.

Brief facts of the case are that

1. The assessee are co-owners along with other four co-owners of the inherited property in question. the assessee along with other co-owners entered into an agreement with the developer for development of the said inherited property against the consideration of Rs.63 lakhs shown in the said agreement.
2. The assessees had 2/7 and 1/7th shares respectively in the said property. Accordingly, the assessee’s share in the share value was admitted at Rs.18 lakhs and 9 lakhs respectively.
3. However, the Stamp Valuing Authority valued the property at Rs.4,73,48,0007-.
4. The AO  issued a show cause notice to the assessees to explain as to why the provisions of section 50C should not be invoked in their case.
5. The Explanation offered by the assessee was not accepted by the AO, however, he accepted the prayer of the assessee to refer the property for valuation to the DVO.
6. The AO  took the sale consideration as per the valuation made by Stamp Valuation Authority.
7. The assessee challenged the order of the AO before the CIT(A) and raised the issue of taking the stamp duty value as sale consideration for transfer of the development rights of the property.
8. In the mean time, the report of the DVO was received and accordingly, the AO passed order dated 20.11.2009 u/s 155 r.w.s.154 of the Act based on the DVO’s report whereby, the property was valued at Rs.1,81,34,749/-. Thus, the capital gain was re-worked out by the AO as per the valuation made by the DVO.

The LD Counsel for assessee raised following arguments before Tribunal

1.      The assessee is still owner of the property in question.

2.      He has pointed out that in Municipal Record, the property tax is still in the name of the assessee, therefore, there is no transfer of the land or building and only developments rights were transferred.

3.      The stamp duty was paid by the developer and the assessee was not concerned about the stamp duty valuation even when the assessee realized that the stamp duty value of the property was taken as full value of the sale consideration, the time limit for filing the appeal against the stamp duty valuation was already expired.

4.      He has pointed out that even the stamp duty authority has also distinguished between the transfer of land or building and transfer of the development rights. Accordingly, only one percent stamp duty was paid on the valuation of the property. Where in the case of transferring the property 5% of the valuation, stamp duty will have to be paid.

The Tribunal held

Under the Income Tax Act, 1961 by inserting Clause (v) to section 2(47), the definition of the term transfer includes the transaction which fulfills the conditions provided u/s 53A of Transfer of Property Act. Thus, the provisions of Section 53A of Transfer of Property Act does not provide any transfer but it talks about the situation when the right created in favour of the transferee cannot be defeated otherwise than the terms and conditions expressly provided in the contract itself. When the assessee has received the sale consideration and handed over the possession of the property in question vide development agreement then the condition prescribed u/s 53A of the Transfer of Property Act are satisfied and accordingly, as per the provisions of section 2(47)(v) of the IT Act the transaction of transfer is completed. Accordingly, we do not find any merit or substance in the contention of the assessee. Merely because the name of the assessee still stand in the record of the municipal record does not change the nature of transaction. Even otherwise the mutation of the property in the Property tax record of Municipal Authority does not give any title of ownership. Once, undisputedly, the assessee has handed over the possession of the property to the developer against the payment of share of sale consideration then the property is deemed to have been transferred as per the deeming provisions of section 2(47) of the IT Act. When the conditions of section 53A of Transfer of Property Act is fulfilled irrespective of the fact that it is not absolute transfer by way of execution of sale deed, the transaction is to be completed. The transfer of capital asset is completed if the certain conditions of section 53A of the Transfer of Property Act is satisfied.. Accordingly, we do not find any reason to interfere in the order of the lower authorities on this issue. As far as, demerits attached to the property are concerned, the DVO has already taken into account all aspects while making the valuation of the property. The assessee has participated in the proceedings before the DVO and accordingly, we do not find any error or illegality in the valuation made by the DVO which is much less to the valuation made by the Stamp Valuation Authority. The substantial relief has already been given by the DVO as well as by the AO while passing the consequential order as per the DVO’s report. Accordingly, the appeals of the assessee are devoid of merits on this issue”

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