Please note that I am entitled to sell the flats that are allotted to me and retain the proceeds.

Lalitasri

Reply

It has already been clarified that no tax will arise on a gift. On the transaction where the land is given by the reader to the builder who in turn gives the reader constructed flats, there is a clear case of transfer for the remaining flats along with undivided share of land will be sold to the nominees of the builder.

The point for consideration would be as to when the capital gains actually arise. This will purely depend on the terms of agreement between the builder and the landowner. Where the agreement is of such nature that possession is given in part performance of a contract, the liability to capital gains tax will arise on the handing over of such possession to the builder.

If the possession is not transferred but is deferred until the construction is completed the liability to capital gains tax will arise in the year in which the construction is completed by the builder. This will be so for in such a case the builder is given only a right to enter the premises for the purpose of construction, the ownership continuing to remain with the landowners. Even in this case capital gains will arise when the possession of the constructed area is given to the landowners or when conveyance is registered, whichever is earlier. In any event the capital gains arising out of such joint development cannot be deferred until the time of selling the flats, which are allotted, to the landowners.

Query

I have a plot of land in an industrial estate, which is given as collateral security to the bank for loans granted to a company. The bank has now come up with a restructuring programme for the company. Under the restructuring programme, I am required to dispose off this property and deposit the sale proceeds with the bank. Will capital gains arise on this sale of property, which is sold as a result of the banks stipulation? Kindly note that I hold less than 30 per cent stake in the company. If capital gains arise, will the full value of consideration be taken as the actual sale price, or will it be the guideline value taken for registration purposes?

K. R. Jayasri

Reply

Capital gains will arise not withstanding that the sale of the property in the industrial estate is being made in pursuance of a restructuring programme approved by the bank. There is no specific exemption in such cases and hence this view. The provisions of Section 50C of the Income-Tax Act will come into operation on transfer of immovable property. Section 50C provides that the full value of consideration in respect of immovable property shall be the guideline value adopted for stamp duty purposes.

If, however, the assessee were to claim that a value lesser than the guideline value be taken to be full value of consideration, the assessing officer may refer the valuation of the immovable property to a valuation officer whose valuation shall be binding on the assessing officer in so far as the value arrived at by the valuation officer exceeds the value claimed by the assessee to be the full value of consideration. However, if the value determined by the valuation officer is higher than the guideline value, the guideline value shall be adopted as the full value of consideration. This reference can be made only where the assessee in any appeal, revision or reference has not disputed the guideline value.

If the assessee in any appeal, revision or reference under the relevant Act has disputed the guideline value, then the value as determined by the appellate or revisionary authority under the relevant Act shall be taken as the full value of consideration for determining the capital gain. It may also be noted that if the assessee were to take value lower than the guideline value as the sale consideration and if the assessing officer were to refer the matter to a valuation officer, the lower of the guideline value or the value determined by the valuation officer will be taken as the full value of consideration.

Re-investing capital gains

I PURCHASED a commercial property in a multi-storeyed building in 1975. I was using this office premises to carry on my business. I have also claimed depreciation on the same. The written-down value (WDV) of this building, which is the only asset in the block of assets, is very small. I now propose to sell this commercial property. Can I invest the gain arising therefrom in another commercial property or in tax-saving bonds so as to enjoy capital gains exemption?

Arjun Das

Reply

The capital gains on transfer of a depreciable asset, where depreciation has been claimed based on the WDV method, is to be computed in accordance with Section 50. The Section provides for the computation of capital gains on the following basis:

(Full value of consideration on transfer of assets belonging to the block) - (expenses incurred wholly and exclusively in connection with the transfer) = Net consideration.

Net consideration - (opening WDV of assets belonging to the block + assets acquired during the previous year and falling within the same block) = Short-term capital gain.

It may be noted that on the transfer of a depreciable asset, the gain or loss that emerges is always treated as a short-term gain.

No exemption is available on reinvestment in another commercial property. It may, however, be possible to claim the exemption by making investments in accordance with Section 54EC in bonds of Nabard, National Highway Authority of India, Rural Electrification Corporation, National Housing Bank or SIDBI, redeemable after a period of three years.

This view is taken based on the following decisions: Weikfield Products Company (I) Pvt Ltd vs DCIT (2001 71 TTJ, Pune, 518); and ACE Builders Pvt Ltd vs ACIT (2001 76 ITD 389 Mumbai).

In both these cases, the Tribunal held that if the asset is long term the gain that arises would be a short-term capital gain in case of depreciable assets, but the benefit of exemption available to long-term capital assets, such as the erstwhile Section 54E, would be available. In the instant case a similar situation arises, where the asset is long-term (as it has been held for more than 36 months) but the gain is short-term by the deeming fiction of Section 50.

Though Section 54EC only contemplates an exemption on transfer of a long-term capital asset, based on the above decisions it is felt that the reader can get the benefit of exemption under the said section through reinvesting in the above-said bonds.

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