Capital Gains of Sale of TDR

This query is : Open

niki (Querist)
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27 October 2009 Dear All,
Is the consideration received from sale of TDR liable to capital gains?
If yes, what is the cost of acquisition?
a)Nil
b)Purchase cost of land
c)?

What if the seller (of TDR) continues to be the owner of the land?
Thanx & Regards,
Niki

Rajeev

Rajeev (Expert)
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27 October 2009 TDR if received against surrendered of a portion of land , the cost of land surrendered will be cost of the TDR. Therefore, in my view TDR surrender will be subject to either short term capital gain or Long Term Capital Gains depending upon the holding period of the land. If the land is held for less than 3 years then it will attract short term capital gains tax and it is held for more than 3 years then it will attract Long Term Capital Gains Tax. The Department can interpret the case as falling within the definition of Capital Asset and rely on the decision of the of the Bombay High Court in CIT, Bombay City I vs. Tata Services Ltd. Wherein provisions of Section 2(14), (47) 45 were interpreted. It was held U/s. 2(14) of the Income Tax Act a capital asset means property of any kind held by an assesse, whether or not connected with his business or profession. The word property used in S.2(14) of the Act is a word of the widest amplitude and the definition of Capital asset.
Another view can be taken that the surrender of land for TDR acquisition is completely exempt because in case of acquisition of TDR the land which is transferred is different and the TDR right received is different for which there is no cost of acquisition and so when the TDR rights are surrendered there is no capital gains tax liability. The courts have consistently been taking the view that any amount received by an assessee from the transfer of an asset for which no cost can be identified cannot be made eligible for tax.
To substantiate the above points , rely on the following judgements. Though these cases pertain to surrender of tenancy rights issue the facts can be correlated to the facts of the surrender of TDR rights.
1. In CIT vs. B.C. Srinivas Setty 128 ITR 294, the Supreme Court laid down the proposition that a gain arising from the trnasfer of an asset for which no cost could be identified would be outside the computation provisions of Section 48 of the Income Tax Act, 1961.
2. The Delhi High Court in the case of CIT vs. Merchandison Pvt. Ltd. (1990) 40 Taxman 68 , held thant no tax on Capital Gains could be levied in respect of the consideration received on transfer of a tenancy right.
3. Syndicate Bank Ltd. Vs. Addl. CIT (1985), 155 ITR 681 (Kar.)
4. B.G. Shah vs. CIT (1986) 162.
5. CIT vs. H.H. Maharaja Sahib Shri Lokendra Singhhi (1986) 162 ITR 93 (M.P.).
6. CIT vs. Kark 165 ITR 336 (A.P.)
7. Rajabali Nazarali & Sons. Vs. CIT (1987) 163 ITR 7 (Guj.).
8. Godrej & Co. vs. CIT (1959) 37 ITR 381.
9. CIT vs. Panbari Tea Co. Ltd. (1965) 57ITR 422.
Though the aforesaid cases related to surrender of tenancy rights since the facts can be correlated with surrender of TDR rights by applying the principle of no cost no gain in both the cases. Thus there can be one view that no capital gains tax is attracted. However, hereto the revenue authorities in view of the judgements in A.R. Krishna Murthy & Anr. Vs CIT reported in 176 ITR 417 (S.C.) and Cadell Weaving Mills Pvt.Ltd. vs. Asst. Commissioner of Income Tax reported in 55 ITD 137 (Bom. Trib.) may held the same to be taxable. However different view is taken in the case of J.C. Chandok vs. Deputy CIT (1999) 69 ITD 75 (Del) S.B.
Source : CA Vimal Punmiyaji, Applicability of Chapter XXC