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April 15, 2022

Architect Fee Paid for Transfer of Development Rights is allowable under Income Tax Act

by CA Shivam Jaiswal in Income Tax

Architect Fee Paid for Transfer of Development Rights is allowable under Income Tax Act

Facts and Issue of the case

The present appeal is filed by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-8, Mumbai [in short ‘CIT(A)’], which in turn arises from the assessment order passed by the AO u/s 143(3) of the Income Tax Act, 1961, dated 14.12.2019 for the assessment year (AY) 2007-08.

The solitary ground of appeal of the assessee directed against the order of Ld. Commissioner of Income Tax (Appeals)-8, Mumbai in not allowing deduction for architect fees amounting to ₹ 33,67,200/- on sale of development rights of land situated at Prabha Devi.

The facts in brief is that return of income declaring income at ₹Nil was filed on 30.10.2007. The case was subject to scrutiny assessment and notice u/s 143(2) of the Act was issued on 12.08.2008. During the course of assessment, the AO noticed that assessee had sold development rights in respect of land situated at Prabha Devi for a consideration of ₹16 crores and claimed an expenditure of ₹33,67,200/- being architect fees as deduction. The Assessing Officer was of the view that the said expenditure was not wholly and exclusively related to transfer of asset (Development Rights of Land), therefore, same was disallowed and added to the total income of the assessee.

Aggrieved assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) has dismissed the appeal of the assessee.

During the course of appellate proceedings before us, the Ld. counsel has filed paper book comprising details of copies of documents furnished before the lower authorities at the time of assessment and appellate proceedings. The Ld. counsel has referred page No. 9 and page No. 15 of the Paper Book pertaining to the agreement entered into between the assessee and Sheth developer private limited for the transfer of development right of the land. The Ld. counsel has referred clause 4.1(i) and 4.1(ii) of the agreement pertaining to regulation of MHADA and MCGM for availablility FSI and surrendering of percentage of land for common facilities etc. The Ld. counsel also referred clause 23 of the agreement which clarify that any fees payable to the owners architect in respect of development land upto the date shall be borne and paid by the owner alone. The Ld. counsel has also enclosed copy of invoice dated 08.07.2006 issued by the architect in respect of fees charged for determination of FSI of the land component of the MCGM and TDR for the land component of MHADA.

Observation of the court

Court has heard both the sides and perused the material on record. The Assessing Officer has disallowed the claim of expenditure incurred towards the architect fees of ₹33,67,200/- while computing capital gain on transfer of development right. The Assessing Officer was of the view that architect fees cannot be considered as incurred wholly and exclusively in connection with the transfer as per the provision of section 48(1) of the Act. The assessee has made payment of ₹33,67,200/- for architectural services to the architect vide invoice dated 8th July 2006 for determining the F.S.I. of the land component of MCGM and T.D.R. for the land component of MHADA in accordance with the development and control regulation of MCGM and MHADA. The Ld. CIT(A) has also agreed that the above fees was inevitable in the case of transfer and development rights in accordance with the development control regulation area/portion which needs to be surrendered to MCGM and MHADA should be necessary identified. The assessee has paid the fees to the architect for determining the quantum of FSI available in order to determine the area to be transferred to MCGM and MHADA in accordance with the development control regulation without which it would not have been possible to transfer the development right. The assessee has demonstrated from the agreement and copy of invoice as referred above in this order that the impugned architect fees was inevitable in case of transfer of development rights. In the light of the above facts and material on record, we consider that Ld. CIT(A) is not justified in disallowing the claim of the assessee, therefore, we directed the Assessing Officer to allow the deduction of the expenditure incurred for the architect fees. Accordingly, this grounds of appeal raised by the assessee is allowed.

Conclusion

The court allowed appeal filed by the assessee and  ordered the Assessing Officer to allow the deduction of the expenditure incurred for the architect fees.

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