TMI Blog2002 (1) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 44,858.60 sq.mtrs. This land was covered by the provisions of Urban Land Ceiling Act, 1976. However, out of the said property the assessee had obtained no objection certificate under section 20, whereby it was permitted to use the excess vacant land for its own purposes. An area of 19508.42 sq. mts. was within the exemption limit. Out of this exempted property, the assessee converted the 9797 sq.mtrs. into stock-in-trade as on 1-4-1994 in the assessment year 1995-96, and sold development right for the built up area on FSI of 3676.83 sq.mtrs. at the rate of 1501 per sq.ft. to Suashish Diamonds Ltd. for a total consideration of Rs. 5,94,06,277 vide Development Agreement dated 29-3-1996. As the assessee had treated this land into stock-in-trade it had returned the sale of development rights as its business income and had claimed set off against the carried forward losses, whereas the department invoked the provisions of section 45(2) and sought to tax the market value of development rights as capital gains on the date of conversion of land into stock-in-trade in accordance with the provisions of section 45(2). The Assessing Officer has, in detail considered the various aspects and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t approval by any authority. 6. If the method of backward interpolation was upheld for finding the fair market value of development rights as on 1-4-1994, then the same method should be applied to find out the fair market value as on 1-4-1981 and the same should have been adopted by the assessee. 7. The cost of acquisition of development right could not be ascertained and therefore the capital gains could not be taxed as per the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Shetty [1981] 128 ITR 294. 8. Since the development rights had been held for more than 3 years, the tax ought to have been calculated by applying the rates applicable to long-term capital gains instead of those applicable to short-term capital gains. The assessee has also placed reliance on the decision of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, for claiming set-off of business losses." 5. The learned CIT(A) held that transfer of development right would amount to transfer of capital asset liable to capital gains tax and the cost of land would comprise of cost of development rights and the cost of residuary right of ownership. He furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Supreme Court in the case of Cocanada Radhaswami Bank Ltd. and inter alia, observed that the provisions of section 45(2) were not there when the apex court had pronounced the aforesaid judgment. 6. The learned counsel for the assessee submitted that the land which was converted into stock-in-trade was with various restrictions as per the Urban Land Ceiling Act. He submitted that the development rights which were granted to the assessee under the Government policy was business asset. The learned counsel for the assessee referred to the chronological chart of events which are as under:-- 7. The assessee acquired the land in 1963. On 19-9-1981 exemption under section 20 of the Urban Land Ceiling Act was granted to the assessee in pursuance of which the assessee was permitted to use excess vacant land for its own use for industrial purposes. On 4th May, 1993 there was change in Industrial Location Policy, in pursuance of which the assessee was permitted construction of industrial estates on an open land to have nonpolluting high tech industries. On 19th January, 1994, the assessee applied to Municipal Corporation of Greater Bombay for sub-division of plot and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the assessee also in regard to the valuation of the land, referred to page 10 of the assessment order and pointed out that the land transferred to stock-in-trade was the land covered by ULC Act with full of restrictions and limitations and was having a negligible value of Rs. 25 per sq. mt. as per the valuation report. The learned counsel submitted that the development rights sprouted from the land and it was a trading asset from the very beginning, so there is no question of applicability of section 45(2). He submitted that section 45(2) will apply only when the land is transferred. In this regard, the learned counsel for the assessee referred to section 2(14) which deals with capital asset and pointed out that the stock-in-trade has specifically been excluded from the term 'capital asset'. The learned counsel for the assessee referred to the exemption order under section 20 of the Urban Land Ceiling Act and pointed out there was specific condition imposed under the Exemption order that the exempted land could be used by the assessee for his own benefit for the purpose of industry and for no other purpose. It was also a condition that the assessee will not tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer wrongly resorted to backward interpolation of the sale consideration for arriving at the fair market value as on 1-4-1994 which is clearly against the principles laid down in Jogat Mohan Kapur v. WTO [1995] 211 ITR 721 (Cal.). The learned counsel for the assessee further submitted that if the Assessing Officer resorted to backward interpolation then the same method should have been applied for computing the fair market value as on 1-4-1981. He submitted that the assessee had filed the valuation report from the approved valuer. Therefore, the Assessing Officer was to either adopt this valuation or should have referred the matter to the valuation officer as he was not an expert in this field. In this regard he relied on the decision of the Karnataka High Court in the case of CWT v. S.P.C. Murthy [1991] 191 ITR 189. He submitted that for the purpose of valuation restrictions and depressing factors have to be considered. For this purpose he relied on the decision in the case of CWT v. P.N. Sikand [1977] 107 ITR 922 (SC). He also referred to the decision in Gouri Prasad Goenka Family (HUF) v. CWT [1993] 203 ITR 700 (Cal.) and pointed out that restrictions of Urban Land Ceilin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the paper book. He referred to para 2 of the said agreement and pointed out that assessee had entered into the business of real estate with effect from 1-4-1994. By that date the assessee had submitted the plans of layout/sub-division of the said immovable property as per Development Control Rules and the BMC by its letter dated 27-1-1994 had approved the same. The learned Departmental Representative then referred to para 5 and pointed out that the owner had applied to the Urban Land Ceiling authorities and Directorate of Industries for grant of NOC for construction of industrial estate in Zone I to I/3 and the Directorate of Industries had given vide its letter dated 4-7-1994 permission for construction of new industrial estate in the said immovable property for bona fide use with a condition that in Zone I/3 such estate shall house only designated Schedule I industries and also subject to the condition that permission from BMC was to be obtained for constructing the new industrial estate and new NOC was also to be obtained by the owners/developers from the Directorate of Industries before commencement of construction. The learned departmental representative then referred to par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (a) the development rights a were there on 1-4-1994 when the land was converted into stock-in-trade; (b) the development-right was- capital asset within the terms of the definition as contained in section 2(14) of the Act; (c) if the development right is held to be a capital asset then how the capital gains is to be computed under section 48 of the Income-tax Act; (d) the rate of tax to be applied; and (e) whether long-term capital gains arising on transfer of the development rights should be set off against brought forward business loss. Before dealing with these issues it would be useful to refer to some important facts which had taken place by 17-5-1994 when the Board resolution was passed converting the land into stock-in-trade with effect from 1-4-1994. The assessee had been granted exemption under section 20 of the Urban Land Ceiling Act on 19-9-1981 on the condition that the exempted land was to be used by the assessee for his own benefit for the purpose of industry and not for any other purpose. This purpose was to be achieved by constructing on the land exempted buildings. The assessee as per exemption order was required to commence building construction within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drainage, sewerage etc. and recreation/amenity spaces were developed by levelling and adequate number of trees were provided. From this it is clear that the layout/sub-division was submitted in pursuance of Development Control Rules, 1991. At this juncture, we may refer to Regulation 34 of the Development Control Regulations which reads as under: "34. Transfer of Development Rights.--In certain circumstances, the development potential of a plot of land may be separated from the land itself and may be made available to the owner of the land in the form of Transferable Development Rights (TDR). These Rights may be made available and be subject to the Regulations in Appendix VII hereto." From the bare reading of this clause it is clear that Legislature has clearly made a distinction between the development potential of a plot of land and land itself. This development potential was treated as a distinct right which could be made available to the owner of the land in the form of transferable development right. These were subject to various regulations. These regulations were existing when the assessee had applied to Municipal Corporation of Greater Bombay for sub-division of the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee had converted the land into stock-in-trade and had intention of constructing new industrial estate on ULC exempted land. This construction was considered as bona fide industrial use as per instructions received from the Government, Industries, Energy Labour Department, vide letter dated 7-9-1993 as mentioned in letter dated 1-71994 at paper book page 130. 13. From these facts, it is clear that the assessee had converted the land into stock-in-trade as the developmental rights which were transferable as per Development Control Rules could also be exploited as business assets as the same were segregatable from the land. The assessee's contention that these developmental rights were none existent when the land was converted into stock-in-trade cannot be upheld because these rights were part and parcel of ownership of land and were valuable property rights. 14. In order to examine whether these development rights were capital asset or not we have to examine the concept of ownership property and effect of increasing regulations of the state on the concept of absolute ownership of property. The term 'property' can be defined as a thing which can be owned or right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and unlimited in the point of duration, over a determinate thing. The ownership may be absolute or restricted, corporal or in corporal, legal or equitable, bevested or contingent. In essence, it is based on a relationship dejure so that possession of the thing is not necessary. There may be many rights over the land. The rights depend on the existence of the land, but the rights of the owner are the most extensive. The full rights of the owner can be summarised as under: (a) The power of enjoyment (such as a determination of the use to which the land is to be put, the power to deal with the rights as the owner pleases, the power to destroy); (b) Possession which includes the right to exclude others; (c) Power to eliminate inter-rivals or to charge as security; (d) Power to leave the thing. Every owner does not possess of the rights set out above, a particular owner's powers may be restricted by law or by agreement he has made with another; as in the present case, the assessee's power of enjoyment of the property was restricted due to Urban Land Ceiling Act circumscribing the user of land for specific purpose. There are many rights which a person may possess. Ownership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained at page 154 of the paper book. Assessee had also submitted to the appropriate authority as constituted under Chapter XXC of the Income-tax Act, 1961 for obtaining necessary NOC under section 269UL(3) of the Income-tax Act. It is also pertinent to mention that for obtaining this NOC, the assessee had entered into a Memorandum of Intent dated 29-6-1995 with the developer as is mentioned in clause 11 contained at pages 8 and 9 of the Agreement. Under the Memorandum of Intent the owner had agreed to grant to the developer the development rights. No objection certificate was also issued by the appropriate authority in pursuance of the Memorandum of Intent. Chapter XXC of the Income-tax Act, deals with the purchase by Central Government of immovable properties in certain cases of transfer. Thus, the assessee himself treated the development rights as immovable property and took necessary clearance from the appropriate authority. It follows, therefore, that the contention of the assessee is contrary to its own stand. Under these circumstances, we are of the opinion that the development rights constituted capital asset and the provisions of section 45(2) were applicable to the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax proceedings. The facts of the case were that in the assessment year 1993-94 the assessee applied for 230A clearance showing the intended sale price of the property situated at Greater Kailash Part II, New Delhi, at Rs. 57.25 lakhs. Thus, the WTO on the basis of this declaration of price sought to reopen the wealth-tax assessments for earlier years applying the cost inflation index backwards. Under these facts, the Court observed that cost inflation index could be applied only to forward figures in time, i.e. the inflation is to be calculated by appropriately inflating the cost of acquisition of the capital in accordance with the declared index. It was observed that there is no warrant for reversing the operation of the cost inflation index and treating it in a reversed manner as a shrinkage index for the purpose of computing past land value. Thus, assessee's contention is that Assessing Officer was not justified in resorting to backward interpolation of sale consideration with reference to cost inflation index. 17. The assessee's alternate contention is that if Assessing Officer's action in regard to computation of FMV as on 1-4-1994 is to be upheld the same system should be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a depressing factor. The DVO is directed to ascertain the value after providing discount on account of the depressing factor. 18. The assessee has raised the following additional grounds stating that the same be admitted as it involves question of law which can be decided from the facts already on record: "The learned JCIT erred in levying interest under sections 234B and 234C without application of mind." 19. In regard to the additional ground raised by the assessee, we find that the issue is concluded by the decision of the Hon'ble Supreme Court in the case of CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1 wherein it has been held that sections 234B and 234C is mandatory. 20. As regards ground No.4 raised by the assessee in respect of non-allowability of set-off of capital gains against brought forward business loss. We do not find any infirmity in the order of the learned CIT(A) contained at page 11 (para 2.15), wherein he has pointed out that when the Hon'ble Supreme Court rendered its judgment in the case of Cacanada Radhaswami Bank Ltd. (supra) the provisions of section 45(2) were not there, which were introduced with effect from 1-4-1985 by Taxation Laws (Amendment) Act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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