2025 (7) TMI 18 - AT - Income Tax

Determination of Short term capital gain - question of deducting the fair market value from the sale consideration - transfer for capital gains purposes - CIT(A) / NFAC directed the AO to determine the capital gain in the case of the assessee by deducting the fair market value of the land from the sale consideration - HELD THAT -We find merit in the arguments of DR that when the cost of the asset is available there is no question of deducting the fair market value from the sale consideration so as to determine the capital gain either long term or short term. However on a pointed query by the Bench as to what has happened in the case of the other co-owners DR submitted that he is not having any details. Since the order of the AO is ex-parte order and since the fate of the other co-owners is not available before us therefore considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the AO with a direction to decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee. While doing so he shall take into account the fate of the other co-partners and decide the issue as per fact and law. The assessee if he so desires shall substantiate his case by filing the requisite details. We hold and direct accordingly. The grounds raised by the Revenue are accordingly allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

- Whether the Assessing Officer (AO) was justified in treating the entire sale consideration under section 50C of the Income Tax Act, 1961 as short term capital gain by taking the nominal payment made under the lease agreement as the cost of acquisition.

- Whether the Commissioner of Income Tax (Appeals) / NFAC was correct in directing the AO to recompute capital gains by deducting the fair market value (FMV) of the land at the time of acquisition instead of the nominal lease payment as cost of acquisition.

- Whether the AO's ex-parte order completed under section 144 of the Act, without the assessee's participation, can be sustained.

- Whether the reassessment proceedings under section 147 and notice under section 148 were validly initiated and completed.

- The applicability and interpretation of section 50C and section 2(47) of the Income Tax Act, 1961, particularly in the context of compulsory acquisition and subsequent transfer of land allotted under the 12.5% scheme by CIDCO.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity and correctness of cost of acquisition used for computation of capital gains

Relevant legal framework and precedents: Section 50C of the Income Tax Act mandates that where the consideration received or accruing as a result of transfer of land or building is less than the stamp duty value, the stamp duty value shall be deemed to be the full value of consideration for computing capital gains. Section 2(47) defines "transfer" for capital gains purposes. Section 48 provides the method for computation of capital gains, including deduction of cost of acquisition from sale consideration.

Court's interpretation and reasoning: The AO treated the nominal payment of Rs. 14,993/- made under the lease agreement dated 24.04.2007 as the cost of acquisition, and the stamp duty value of Rs. 2,23,09,000/- as the sale consideration, resulting in a short term capital gain of Rs. 2,22,94,007/- for the entire property. Since the assessee had a 50% share, the addition was made for Rs. 1,11,47,000/-. The AO reasoned that the initial acquisition was under a compulsory acquisition scheme and thus not a transfer attracting capital gains, but the subsequent transfer to a developer was a transfer under section 2(47) and section 45(1) applied.

The CIT(A) / NFAC disagreed with the AO's approach of taking the nominal lease payment as cost of acquisition. The CIT(A) observed that it was illogical for the value of the property to have increased 1487 times within 31 months and held that the AO should have adopted the FMV of the plot as on the date of allotment (21.04.2007) as the cost of acquisition. The CIT(A) directed the AO to recompute capital gains accordingly.

Key evidence and findings: The lease agreement dated 24.04.2007 evidences the nominal payment of Rs. 14,993/-. The registered sale deed dated 20.11.2009 evidences the sale consideration of Rs. 2,23,09,000/-. The absence of any evidence supporting the nominal payment as the true cost of acquisition was noted by the CIT(A).

Application of law to facts: The AO's reliance on the nominal lease payment as cost of acquisition without considering FMV was found to be unreasonable by the CIT(A). The CIT(A) relied on the principle that capital gains computation requires deduction of the actual cost of acquisition, which should reflect the market value at the time of acquisition, not merely the nominal payment under the lease.

Treatment of competing arguments: The Revenue argued that the cost of acquisition was available and hence the CIT(A) erred in directing deduction of FMV. The CIT(A) emphasized the illogicality and absence of evidence supporting the nominal payment as cost. The Tribunal noted merit in the Revenue's argument but also recognized the absence of details regarding other co-owners and the ex-parte nature of AO's order, leading to a direction for fresh adjudication.

Conclusion: The Tribunal found that the issue of cost of acquisition and capital gains computation requires fresh examination with proper evidence and opportunity to the assessee. The AO was directed to decide the issue afresh considering FMV and all relevant facts.

Issue 2: Validity of reassessment proceedings and ex-parte order under section 144

Relevant legal framework: Section 147 authorizes reassessment if income has escaped assessment. Section 148 requires issuance of notice before reassessment. Section 144 allows assessment in absence of return or non-compliance with notices.

Court's interpretation and reasoning: The AO reopened the assessment under section 147 after approval, issued notice under section 148, but the assessee failed to respond. The AO proceeded under section 144 to complete assessment ex-parte. The Tribunal noted that the AO's order was ex-parte due to non-appearance and non-compliance by the assessee.

Key evidence and findings: Notices were duly served through the Departmental Representative. Assessee did not file return or appear. The AO recorded reasons for reopening and obtained approval.

Application of law to facts: The reassessment and notice issuance complied with statutory requirements. The ex-parte order was justified due to assessee's non-compliance.

Treatment of competing arguments: No submissions were made on behalf of the assessee. The Revenue supported the reassessment and AO's order.

Conclusion: The reassessment proceedings and ex-parte assessment were validly initiated and completed.

Issue 3: Interpretation of section 50C and its application to the facts

Relevant legal framework: Section 50C deems the stamp duty value as the full value of consideration if it exceeds the actual sale consideration, for capital gains computation.

Court's interpretation and reasoning: The AO correctly invoked section 50C as the registered sale deed consideration was Rs. 2,23,09,000/-. The Tribunal did not find fault with the application of section 50C to deem the sale consideration as Rs. 2,23,09,000/-. The dispute centered on cost of acquisition, not on the applicability of section 50C.

Key evidence and findings: Registered sale deed and stamp duty valuation supported the invocation of section 50C.

Application of law to facts: Section 50C was rightly applied to determine sale consideration for capital gains.

Treatment of competing arguments: None specifically challenging section 50C application.

Conclusion: Section 50C was correctly applied by the AO.

Issue 4: Treatment of the tripartite agreement and nature of transfer under section 2(47)

Relevant legal framework: Section 2(47) defines transfer to include sale, exchange, relinquishment, or extinguishment of rights in property.

Court's interpretation and reasoning: The AO held that the transfer to the developer under the tripartite agreement dated 20.11.2009 constituted a transfer under section 2(47)(v), attracting capital gains provisions under section 45(1). The Tribunal did not dispute this finding.

Key evidence and findings: The registered tripartite agreement transferring rights in land.

Application of law to facts: The transaction was a transfer as defined under section 2(47). Capital gains liability arose on the date of transfer.

Treatment of competing arguments: None contesting the nature of transfer.

Conclusion: The transfer was correctly characterized under section 2(47) and capital gains provisions applied.

3. SIGNIFICANT HOLDINGS

"Though the land acquired by the CIDCO was agricultural land but the land allotted by CIDCO under 12.5% scheme was not an agricultural land."

"The subsequent sale of land allotted by CIDCO under 12.5% scheme to a purchaser/developer is clearly an exploitation of land for commercial purposes."

"At the time of first transaction, it can be said that the assessee has received the consideration as a result of compulsory acquisition of agricultural land and hence the same would not attract capital gains."

"The second transaction clearly mounts to 'transfer' as defined under section 2(47) of the Income-tax Act, 1961. Therefore the provisions of section 45(1) of the Income-tax Act, 1961 attracted in this case accordingly."

"The market value of the property cannot be considered as cost of the property. The cost of property is necessarily be, the amount at which the same was acquired initially."

"It is quite illogical that the value of said plot has increased to Rs. 2,23,09,000/- (1487 times) when the same plot lease right is transferred to one Shn. Jayakrishnan on 20/11/2009 i.e., within 31 months."

"The AO is not justified in treating the entire 50C value as capital gains by adopting a meagre payment cost as cost of acquisition, without any concrete evidences or proof to the contrary."

"Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee."

"While doing so, he shall take into account the fate of the other co-partners and decide the issue as per fact and law. The assessee if he so desires, shall substantiate his case by filing the requisite details."

Core principles established include:

- The cost of acquisition for capital gains computation must reflect the actual market value or acquisition cost, not merely nominal payments, especially when there is a substantial increase in value within a short period.

- Section 50C applies to determine the sale consideration based on stamp duty valuation.

- Transfer under section 2(47) includes transfer of rights by tripartite agreement and triggers capital gains provisions.

- Reassessment and ex-parte assessment proceedings are valid if statutory requirements are met and notices are duly served.

- Where facts and evidence are incomplete or disputed, the matter should be remanded for fresh adjudication with opportunity to the assessee and consideration of co-owners' positions.

Final determinations:

- The AO's addition based on nominal lease payment as cost of acquisition was not sustainable without supporting evidence.

- The CIT(A) erred in directing deduction of FMV without considering the complete facts and other co-owners' positions.

- The matter is remanded to the AO for fresh determination of capital gains, cost of acquisition, and related issues after providing opportunity to the assessee.

- The appeal filed by the Revenue is allowed for statistical purposes, effectively setting aside the CIT(A) order and restoring the matter to the AO.