INCOME TAX ACT, 1961

Section 45

Capital gains - Computation of capital gain - Assessee had not declared capital gain in the year in which JDA was entered - Sale of flats in the current assessment year

The financial year 2005-06, the assessees entered into a Joint development agreement (JDA). The JDA was registered on 6-1-2006. As per JDA, the assessee along with his brothers and sisters were entitled for 52,784.51 sq.ft. of super built up area. The assessees had handed over his possession of the land on the date of entering into JDA. In return the assessee had received 5 flats individually and 4 flats jointly in the Financial year 2011-12. During the financial year 2008-09, these three assessees along with one more brother entered into a JDA with M/s. Skylark Mansions (P) Ltd., to develop the land at Sy.No. 41/1C of Chikkathoguru village, Begur Hobli, Bangalore South Taluk, naming the project as 'Skylark Zenith'. The JDA was registered on 16-12-2008. As per JDA the assessees along with their brother are entitled for 37,537 sq.ft., of commercial super built up area and 36,301 sq.ft. of residential super built up area. The assessee had handed over his possession of the land on the date of entering into JDA. In return the assessees had received 32 flats jointly with their brother by the February 2013 and the commercial property is yet to be handed over. The assessees did not declare capital gains when they entered Joint Development Agreement in respect of two properties mentioned above, i.e., in financial year 2005-06 and in financial year 2008-09. During the financial year 2013-14 relevant to assessment year 2014-15, all these assessees sold 2 flats jointly in 'Kuteer Bill' and four flats jointly in 'Skylark Zenith'. Besides the above, each of the assessees sold one flat each individually in the financial year 2013-14 relevant to assessment year 2014-15. The assessees did not originally declared capital gains on sale of flats. During the course of hearing, the assessees filed a Statement of total income declaring capital gain on sale of flats. The AO noticed that the assessees have claimed deduction of cost of acquisition of flats ranging from Rs. 13,67,100 to Rs. 15,90,300 and also claimed cost of improvement of Rs. 6.5 lakhs in respect of each of the flats. The AO observed that the assessees have not disclosed capital gain in the year of entering Joint development agreement. Accordingly, the AO took the view that the cost of acquisition relating to the land alone can be deducted from the sale consideration. The AO also rejected claim of cost of improvement for want of evidences. Accordingly, the AO computed long term capital gain by adopting sale consideration mentioned in the 'Agreement to sale' and deducting indexed cost of acquisition of land only. Held : In the instant cases, the assessees herein have sold part of the constructed area received by them in the form of flats. When the capital gain is assessed/assessable at the time of entering the JDA, sale consideration has to be determined by taking Fair market value of the constructed area that will be received by the assessees. Since the fair market value so determined is liable for capital gains taxation, the said Fair Market Value shall become cost of the constructed area. When the constructed area in the form of flats are sold subsequently, the cost of acquisition/indexed cost of acquisition of flats are required to be deducted in order to ascertain the capital gain, which shall be the Fair market value, as discussed above. The AO did not allow the deduction of cost of acquisition of flats solely for the reason that the assessees have not declared capital gains in the year in which JDA was entered. It is well settled proposition of law that the income of a particular year is assessable in that year only. Hence the capital gain arising on entering JDA is assessable only in the year in which the JDA was entered. If the assessees have not declared capital gains in the appropriate year, the AO may take appropriate action to tax the same in accordance with the law. But, the failure of the assessees to offer capital gains in the appropriate year will not disentitle the assessee to claim cost of acquisition. Accordingly, the AO was also not right in law in rejecting the said claim of the assessees for deduction of correct amount of cost of acquisition/indexed cost of acquisition.

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