ITAT Mumbai: Sale Of TDRs Does Not Attract Capital Gains Tax

The Assessing Officer (AO) had issued a notice under Section 147 of Income Tax Act, 1961, reopening assessment. The AO had ruled that since transferable development rights (TDRs) arising out of an existing land is an immovable property, the transfer of such TDRs amounted to transfer of a long term capital asset, and hence the Assessee was liable to be taxed for the consideration received on them under the head "Capital gains." The Assessee had filed an appeal against the order of the AO reopening assessment and had challenged the additions made to his income before the Commissioner of Income Tax (Appeals) (CIT (A)). The CIT (A) had held that the sale of TDRs was not chargeable to capital gain tax and deleted the additions made to the income on account of the same. The AO filed an appeal against the order before the ITAT.

The departmental representative before the ITAT contended that a capital asset under Section 2(14) of the Act included not only physical property but also rights, title or interest attached to it and, therefore, the consideration received by the Assessee for transfer of TDRs gave rise to capital gains that was chargeable to tax under Section 45 of Act. The Assessee submitted that since no cost of acquisition could be computed with respect to the TDRs, the consideration received by him on the transfer of TDRs was a capital receipt and was not chargeable to tax under Section 45.

Section 45 of the Income Tax Act provides that any gain or profit arising on transfer of a capital asset shall be chargeable to income tax under the head "Capital gains". Section 48 provides that the cost of acquisition or improvement of the capital asset, or the expenditure incurred in connection with its transfer, shall be deducted from the consideration received for computing "Capital gains" under the Act.

The ITAT, placing reliance on the judgment of Bombay High Court in CIT versus Shambhaji Nagar Cooperative Housing Society Ltd. (2014), held that the sum received on transfer of TDRs which does not have any cost of acquisition cannot be charged to tax under the head "Capital gains".

In the case of Shambhaji Nagar Cooperative Housing Society, the Bombay High Court had observed that a capital asset that is capable of having an acquisition cost would fall within the purview of Section 45, however an asset whose acquisition cost cannot be conceived cannot be taxed under Section 45. In that case, the Bomaby High Court had ruled that since the TDR was generated by the property owned by the assessee itself, no cost of acquisition could be determined and hence the consideration received on its transfer could not be assessed as a Capital gain.

The ITAT, noting that the case of the Assessee was squarely covered by the case of Shambhaji Nagar Cooperative Housing Society, held that the receipts against the sale of TDR were not chargeable to capital gain tax, and dismissed the appeal of the AO.

Case Title: Income Tax Officer Versus Kirit Raojibhai Patel

Representative For The Department: K.K . Mishra

Representative For The Assessee: Rashmikant Choksey

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