Section 54F exemption is available in case of Multiple Flats obtained under Joint Development Agreement

Fact and Issue of the case

The assessee is an individual. For Assessment Year 2009-10, the assessee filed return of income on 31.03.2010 declaring total income of Rs.1,84,980/-. The total income declared by the assessee comprised of income from 2 house properties totalling to Rs.29,400/-. Out of the 2 house properties one house property was property at Vishnuvardhan Road, Mysuru. The details of the income from house property declared by the assessee were as follows:

Income from House Property- Property 1
Let out properties Property 1089, Vishnuvardha raod,	24,000
Less – Municipal taxes	NIL
Gross annual value	24,000
Deductions Standard deduction u/s 24(a)	7,200
Net annual value	16,800
Income from House Property- Property 2	18,000
Less – Municipal taxes	NIL
Gross annual value	18,000
Deductions Standard deduction u/s 24(a)	5,400
Net annual value	12,600
Income chargeable under the head “HouseProperty”	29,400

Besides the above income, the assessee also declared income from business of Rs.2,54,250/-, income from other sources of Rs.1,100. After claiming deduction under Chapter VIA, the total income of Rs.1,89,980/- was declared by the assessee.

It is not clear from the orders of assessment as to whether this return of income was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter called the ‘Act’) or not. The AO issued a noticed under section 148 of the Act for the reason that as per information available with the department it came to light that the assessee had entered into a development agreement with M/s. Oceanus Dwelling Pvt. Ltd. on 10-04-2008 on a sharing ration of 67:33. Subsequently the assessee revised the agreement and the ratio of built up area to be received also revised to 71:29, the assessee was to receive 17226 sqft built up area in return however finally he received only 16819 sqft of built up area and there was deficiency of 407 sqft. The assesses had already received refundable amount of Rs. 25 lakhs at the time of original agreement which has not been returned by the assessee to the builder even after the completion of the construction and handing over of flats and till date the assessee not returned the amount. Thus the advance amount of Rs. 25 lakhs also requires to be treated as assessee’s income from the project. The assessee has received 17226 sq. feet of built up area in return of the portion of land surrounded. The assessee has not declared any capital gain on the transaction. For this reason, the notice u/s 148 dated 09.10.2013 was issued.

The asssessee filed return to notice u/s 148 on 26.08.2014 declaring a total income of Rs.1,23,99,990/-.

On 19.02.2015, the assessee filed a letter before the AO in which he submitted that in response to notice under section 148 of the Act, return of income was filed declaring Total Income of Rs. 1,17,59,366.00. The Total income comprised of Income from House Property, Business income and Income for Other Sources offered for taxation in the return of income originally filed earlier and Long Term Capital Gain amounting to Rs. 1,15,74,390.00.

After the return of income was filed in response to notice U/s 148, the assessee consulted Chartered Accountant in Bangalore in respect of the issue of Capital Gain arising for the relevant Assessment Year. After eliciting my case history and going through all my records thoroughly, the Learned Senior Chartered Accountant appraised me of certain major errors that had crept in, in the return of income originally filed and the return of income filed in response to the Notice U/s 148. The assessee submitted that the rental income from house bearing No. 1089 situated at Vishnuvardhan Road, Chamaraja Mohalla Mysore, was offered to tax in the hands of the assessee in his individual capacity. The fact remains that the said house belongs to the Hindu Undivided Family of H. Gangadharan & Sons consisting of assessee’s father H. Gangadharan — Kartha, assessee and assessee’s brother Ganga Rajendra Guruprakash. As such, the rental income from the said house constitutes the income of H. Gangadharan & Sons — HUF. However, the rental income from the said house was wrongly included in total income in return of income filed originally and in the return of income filed in response to Notice U/s 148. The assessee further pointed out that he has entered in to a Joint Development agreement with M/s. OCEANUS DWELLINGS (PVT) LTD., BANGALORE, on 10/04/2008 in terms of which the assessee was entitled to 13 flats with a total plinth area of 16,819 Sq Ft in lieu of transfer of 71% undivided share in the land situated at site No 26/B Industrial Suburb 3rd Stage Mysore, belonging to the assessee. Though the assessee is eligible for exemption U/s 54 F of the income Tax Act 1961 in respect of Long Term Capital Gain arising from the transfer of the 71% of undivided share in the said land, by inadvertence and lack of advice, Exemption U/s 54F was not claimed in the return of income filed in response to the notice U/s 148. The assessee pointed out that the law is clear to the effect that exemption U/s 54F is available in respect of investment in acquisition of more than one house by the assessee. The assessee relied on decisions of Karnataka High Court in Anand Basappa case and Smt K.G. Rukminiamma case and submitted that the entire Long Term Capital Gain of Rs. 1,15,74,390.00 is entitled to exemption U/s 54F of the Act of 1961.

In short, the assessee made two claims by way of the aforesaid letters viz., (i) deletion of income from House Property belonging to H. Gangadharan & Sons-HUF but wrongly offered for taxation in the hands of the assessee and (ii) allowance of exemption U/s 54F of the entire Long Term capital Gain amounting to Rs. 1,15,74,390.00.

Aggrieved by the order of the CIT(A), assessee preferred appeal before the CIT(A) contending as follows:

i. That the property at Vishnuvardhan Road, Mysuru, belonged to the HUF and not to the assessee and therefore the assessee was not hit by the prohibition contained in the proviso to section 54F(1) of the Act.

ii. Challenging the manner in which the AO computed the capital gain on sale of the property by the assessee by adopting the value of construction of the flats as against the claim of the assessee that guideline value of the land should be on the basis of the computation of long term capital gain.

Observation of the court

The Court has heard the rival submissions. It is clear from the perusal of the order of the CIT(A) that he has not rendered any findings on various issues raised by the assessee in its appeal. In these circumstances, we have no other option but to remand the issue to the AO for consideration of the issues afresh. We also notice from the perusal of the order of the AO that he has come to the conclusion that the assessee held the property that was subject matter of JDA as stock in trade and therefore the assessee was not eligible to claim deduction under section 54F of the Act. This finding of the AO is without any basis and is liable to be vacated. The issues to be considered afresh are whether the property at Vishnuvardhan Road, Mysuru, belongs to the HUF or the assessee. The second issue that the AO has to consider is as to whether the asssessee would be entitled to deduction under section 54F of the Act. In this regard, learned Counsel for the assessee placed reliance on the decision of the ITAT, Bengaluru Bench in the case of Smt. Nethravathi, Bengaluru vs ITO in ITA No.2630/Bang/2017 order dated 25.04.2018 wherein this Tribunal took the view that multiple flats obtained under JDA would be entitled to deduction under section 54F of the Act. The third issue that might require consideration by the AO is the methodology to be adopted while computing long term capital gain in JDA. Learned Counsel in this regard has brought to our notice the decision of the ITAT, Bengaluru Bench in the case of ACIT Vs. Shankar Vittal Motor Co.Ltd. ITA No.35/Bang/2015 order dated 18.03.2016 wherein this Tribunal took the view that while computing long term capital gain in a JDA, guideline value of the land transferred has to be taken as the full value of consideration. The third issue may become academic if the second issue is decided in favour of the assessee. With these observations, we allow the appeal of the assessee for statistical purposes. We may also clarify that we are remanding the issue to the AO for the reason that none of the documents filed by the assessee in support of his claim that the property at Vishnuvardhan Road, Mysuru, is a joint family property, has been considered by the AO. In the result, the appeal of the assessee is treated as allowed for statistical purposes.