ITAT Chennai: Internal Family Arrangement Has No Bearing On Computation Of Capital Gains From Joint Property

The Assessee had filed his income tax return, which was taken up for scrutiny. The Assessing Officer (AO) had noticed that the Assesse, along with his wife and his father, was a joint owner of a residential property and had executed a Joint Development Agreement (JDA) for the development of the property with a developer. The Assessee and other joint owners had received non-refundable deposits and two flats from the developer in lieu of the share in the land sold. The AO, on the basis of this information, had recomputed the long term capital gains in the hands of the Assessee from the transfer of property by taking into account the total cost of construction incurred by the developer and the non-refundable deposits received by the Assessee's father. Against this order, the Assessee had filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)) who had upheld the order of the AO. The Assessee filed an appeal before the ITAT.

The representative for the Assessee before the ITAT submitted that the AO had erred in re-computing the long term capital gains by adding in the cost of construction the non-refundable deposits received by the Assessee's father in order to compute the total sale consideration. He submitted that since the Assessee's father had offered the cash component to tax in his return filed for the relevant assessment year, the CIT (A) had erred in sustaining the re-computation of long term capital. Also, it was submitted that the power of substitution of sale consideration for computation of long term capital gains under Section 48 of the Act was restricted and narrow. The Assessee also submitted that since one flat was allotted to the Assessee, the cost of only one flat should be considered for the purpose of exemption under Section 54 of the Act instead of two. The departmental representative submitted that the AO had rightly computed the capital gains from transfer of property pursuant to the JDA and the full value of consideration received as a result of the transfer should be shared proportionately with the right of the Assessee in the property.

Section 54 of the Income Tax Act, 1961 provides for exemption from long term capital gains arising from the sale of a residential property if the capital gains are invested in the purchase or construction of a new residential property within the prescribed time.

The ITAT observed that when there were three co-owners with specified share in the property, the full value of consideration received should be considered in their hands according to their share in the property. The ITAT held that the receipt of the entire non-refundable deposit by the Assessee's father and one flat each by the Assessee and his wife was an internal arrangement which had nothing to do with the computation of capital gains under the law. The ITAT ruled that as per law, when a property was transferred, the consideration received as a result of the transfer should be taken into account according to the share of the parties in the property and not as per the internal arrangement between the parties.

"The arguments of the assessee that, he had received consideration separately, as specified in the JDA, we find that receipt of entire non-refundable deposit by the assessee's father and one flat each by the assessee and his wife is an internal arrangement and which is nothing to do with computation of capital gains by adopting respective share of full value of consideration. As per law, when a property transferred, consideration received or accrued as a result of transfer should be taken into account according to their share in the property, but not as per the internal arrangement between the parties."

The ITAT however allowed the Assessee exemption under Section 54 of the Act to the extent of its share in the cost of one flat and not two, since the investment by the Assessee was with respect to only one flat.

The ITAT therefore partly allowed the Assessee's appeal.

Case Title: Dr. E.S. Krishnamoorthy Versus The Income Tax Officer, Non-Corporate Ward-I(4), Chennai

Representative For The Assessee: Mr.S.Sridhar, Advocate

Representative For Department: Mr.Ar.V.Sreenivasan, Addl.CIT

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