Capital gain

This query is : Resolved

n ganesh (Querist)
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16 August 2014 My father in law died in the year 1995 leaving a house property in a prime locality. The house was constructed in the year 1965 for a value of Rs.2 lakhs. We, the legal heirs, continued to live in that house all these years. My wife , mother in law, wife’s brother are the legal heirs for this property. Since the house is very old, we wish to go thro a Developer for construction of New apartments. Developer is proposing to construct Six apartments permissible as per the local municipality norms, in that plot after demolishing the house, and is offering each of us One Apartment free as a consideration for the Land . The guideline Land value of the plot in local municipality in which house is situated is about Rs 3 crores and current market value of a flat (1200 sq ft) in that locality is Rs0.90 crores. Once we conclude the agreement with the builder , the project may take 18 to 24 months and New flat will be handed over after 18-24 months. In this context, I have the following queries :
(I) Whether the legal heirs are subject to capital gains tax under Income tax act?
(II) If, so, what is the cost of acquisition to be considered for each of the legal heirs? Is it Nil or cost at which it was acquired in 1965 subject to indexation till date?
(III) Whether any partition deed is required to be made and Registered amongst legal heirs before going ahead with builder’s project .
(IV) The builder is suggesting to specify current market value Rs.0.90 crores in the agreement, as he is going to sell other three flats to outsiders at this rate. Whether this market value of flat (Rs0.90crore) is to be taken as our investment in a house property, under section 54 of Income tax act.
(V) Since the project may take 18-24 months to complete and handover , which date is relevant for capital gains tax. Our agreement with the builder will be made in this month and in which case, whether agreement date or handing over date.

CA SUNIL K GARG

CA SUNIL K GARG (Expert)
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18 August 2014 according to me.
1 of course the legal heir are subject to capital gain tax , but in this case cost to previous owner i.e father in law will be considered
2 .The cost of acquisition will be MV as on 1-4-1981 with indexation till date
3 it is better to have a partition deed between the legal heirs

4 . the market value will be considered as your consideration for sale i.e rs 90 lac

5. the real test is , when the liability of capital gain tax will arise, whether at the time of entering in the agreement or at the time of final completion i.e after 18-24 month. this will depend on the terms of agreement entered with the builder.if the possession is handed over to the builder at the time of entering into the agreement , then liability of tax will arise immediately, but if possession is handed over after the completion of construction , then it will arise at that stage. you may refer to the decision of Bombay High Court in Chaturbhuj Dwarkadas Kapadia (2003 260 ITR 491 Bombay) and CIT v Geetadevi Pasari (2009 17 DTR 280 Bombay) as also the Advance Ruling in Jasbir Singh Sarkaria (2007 294 ITR 196 AAR).
hence while drafting the agreement, this should be taken care .
5. you will also get deduction u/s 54, when you will get the flat
this is a very complex issue, you should consult a professional before entering in agreement.