India: Value Of FSI And TDR Not To Be Included In Land Value Under Section 50C Of Income Tax Act

Transfers of immovable property are required to take place at a fair valuation as per Indian tax laws. In a judgment that could have significant consequences for the real estate sector, the Mumbai Bench of the Income Tax Appellate Tribunal (‘ITAT’) has recently ruled, in Income-tax Officer v. Shri Prem Rattan Gupta1, that the Transfer of Development Rights (‘TDR’) and Floor Space Index (‘FSI’) cannot be subject of consideration under the fair valuation provisions of section 50 C2 of the Income Tax Act, 1961 (‘Act’). The ruling was based on the rationale that section 50C refers to ‘land and building’ and consideration in respect of other capital assets cannot be considered.

Background

The Taxpayer, Shri. Prem Rattan Gupta, was the joint owner of property which originally measured approximately 2242 Sq. m. A development agreement was entered into by the co-owners in 2005, with the Public Works Department and the Thane Municipal Corporation (‘Acquiring Authorities’), as per which the entire plot was agreed to be sold for development. However, the actual land acquired amounted to 860 Sq. m. for the Eastern Express Highway, 950 Sq. m. for the service road and 300 Sq. m. for the Old Agra Road, being 2110 Sq. m. The co-owners were thus left with 134 Sq. m. (67 Sq.m. belonging to the Taxpayer which was subsequently transferred and which formed the subject matter of this case). The transfer of the 134 Sq.m. was for ₹ 20 lakhs of which the Taxpayer was paid ₹ 10 lakhs.

The assessing officer was of the view that the property should be valued for more since it had development rights attached to it. The matter went up in appeal and the CIT(A) relied on the ITAT decision in Shakti Insulated Wires (P) Ltd. v. ITO3 to rule in favour of the taxpayer. He further rejected the computation of the AO on the basis that the stamp value of the entire property as per the development agreement entered into in 2005 was ₹  1,19,72,064, which prorated would have been ₹ 7,14,910 for 134 Sq.m, which was significantly lower than the payment to the co-owners of ₹  20 lakhs.

The key issue in this case therefore was the means of valuation of the 134 Sq. m. transferred by the co-owners (of which the taxpayer owned 67 Sq.m), and whether the value of TDR should be included in the fair value of land transferred by the taxpayer. 

ITAT’s Order

The ITAT observed that, as there had been no reference to the valuation officer (‘DVO’) as required under section 50C in situations where there is a dispute as to the appropriate value. The ruling of the CIT(A) was therefore set aside and the assessing officer directed to refer the matter appropriately to the DVO. The ITAT further observed that in arriving at a valuation, the DVO should consider the acquisitions already made by the Acquiring Authorities and consider only the net value of land transferred. It was further directed that the DVO should exclude value of FSI and TDR  for the purpose of section 50C of the Act as the section uses the expression ‘land or building’ and not ‘immoveable property’ which may have a wider connotation.

Analysis

The Explanatory Notes to Circular No. 8 of 20024 (‘Circular’) provide that Section 50C5 was to be a special provision for full value of consideration for transfer of ‘immovable property’. The Circular provided that where the sale consideration of ‘land or building or both’6 was less than the value adopted for the purpose of stamp duty, the value so adopted shall be used for computation of capital gains under the Act7. Further, in Kishori Sharad Gaitonde v. Income Tax The Hon’ble Tribunal8, while analyzing section 50C, the ITAT held that section 50C operated by way of fiction and therefore such provisions should be strictly interpreted. Consequently, only capital assets being land and building and not any capital asset could be considered for section 50C.9

Clearly there has been a difference in approach based on whether the term “immovable property” is used, as against the term “land and building” as contemplated in section 50C. Therefore the reasoning adopted by the ITAT in the present case is in corroboration of the position of law and in sync with other judgements of the ITAT under which rights similar to TDR and FSI have been held to not be subject to valuation under section 50C10. By dismissing the Assessing Officer’s presumption that external considerations such as TDR and FSI should be included in the value of property, over and above stamp value applicable to land and building, the ITAT has provided additional clarity that should hopefully prevent unnecessary litigation on valuation issues in real estate deals. It would also remain to be seen if the same benefit is accorded to joint development agreements.

Footnotes

1 ITA No. 5803 of 2009 pronounced on 28.03.2012 by ITAT “C” Bench.

2 Special provision for full value of consideration in certain cases.

3 ITA 3710/Mum/2007 dated 27.04.2009.

4 Circular available at http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=CIR&schT=&csId=7c1b8cd4-8f29-480f-9aab-9286b1b2f837&crn=8&yr=2002&sch=&title=Taxmann.

5 Section 50 C (1) - Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed [or assessable] by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed 11[or assessable] shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. Section 50C was inserted with effect from April 1, 2003.

6 Clause 37.2 of the Circular, supra note 4 above.

7 This intention was also reflected in the Finance Act, 2002.

8 ITA No. 1561 of 9 of 2009, Mumbai Branch, ITAT.

9 In this case, ITAT held that ‘tenancy rights’ even though a capital asset, was not covered by section 50C of the Act.

10 Supra note 8. See also Iqbal Abdul Kader Fazlani v. ACIT ITA No. 8831 of 2011 and ITA No. 8832 of 2012 where shares in immovable property was sought to be valued under section 50C of the Act.

11Inserted by the Finance (No. 2) Act, 2009, w.e.f. 1-10-2009.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Shreya Rao
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions