Cost of tenancy rights if determinable should be considered while computing capital gains

136 views
120 views

Published on

Recently, the Mumbai Bench of the Income-tax Appellate Tribunal in the case of Mrs. Tauqeer Fatema Rizvi held that once the cost of acquisition of tenancy rights is determinable, the benefit of such acquisition has to be given while computing the tax on capital gain. Accordingly, the market value of the flat received against tenancy rights, as on the date of its possession, would be the cost of its acquisition, and such cost is deductible while computing capital gains.

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
136
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Cost of tenancy rights if determinable should be considered while computing capital gains

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG INDIA Cost of tenancy rights if determinable should be considered while computing capital gains 13 May 2014 Background Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Mrs. Tauqeer Fatema Rizvi 1 (the taxpayer) held that once the cost of acquisition of tenancy rights is determinable, the benefit of such acquisition has to be given while computing the tax on capital gain. Accordingly, the market value of the flat received against tenancy rights, as on the date of its possession, would be the cost of its acquisition, and such cost is deductible while computing capital gains. Facts of the case  The taxpayer, an individual, was an old tenant, residing in the building admeasuring 1,200 sq.ft. under joint tenancy.  On 6 May 1982, an agreement was entered into by the builder whereby the builder has undertaken the tenancy property of the taxpayer for development. In lieu of the surrender of tenancy rights, the builder had offered two flats admeasuring 728 sq.ft. and 500 sq.ft. on ownership basis as permanent alternate accommodation. _______________ 1 Tauqeer Fatema Rizvi v. ITO (ITA No. 8862/Mum./2011) – Taxsutra.com  In terms of the agreement, the taxpayer was required to deposit INR2000 with the builder towards society deposit.  During the Assessment Year 2005-06, the taxpayer sold the said property for a consideration of INR3.87 million. While computing capital gain, the cost of acquisition of the flat has been taken by the taxpayer as amounting to INR0.364 million, which was computed on the basis of sale agreement entered into by the builder in the same month in the same building with other persons.  The Assessing Officer (AO) held that as per Section 48 of the Income-tax Act, 1961 (the Act), only amount actually incurred wholly and exclusively in connection with transfer of capital asset and actual cost of acquisition of the asset can be allowed to be deducted from full value of consideration. In the present case, since the taxpayer has not paid any consideration except for making security deposit of INR2000 with the builder, the AO rejected the cost of acquisition of the flat at INR0.364 million and the same was taken at INR2000.  The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the order of the AO.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Tribunal’s ruling  For determining the cost of acquisition under Section 48 and 49 of the Act, the tenancy rights have to be taken into consideration. This is also evident from Section 55(2) 2 of the Act.  The builder has given the alternate flat to the taxpayer only by virtue of surrender of tenancy rights by the taxpayer. Had there been no tenancy right, the builder would have not offered any flat to the taxpayer on ownership basis. Thus, it is a valuable right on which cost of acquisition has to be determined.  It is not a case that the cost of acquisition cannot be determined in lieu of the surrender of tenancy right at all. Once the cost of acquisition is determinable, the benefit of such acquisition has to be given while computing the tax on capital gain.  In the present case, the tenancy right got converted into acquisition of a flat, when the taxpayer must have got the possession of a new flat constructed by the builder. Thus, the market value of the said flat as on the date of its possession would be the cost of its acquisition and, accordingly, such cost is deductible while computing income by way of capital gains.  Accordingly, the Tribunal set aside the order passed by the CIT(A)’s order and directed the AO to take the value of the flat for the purpose of cost of acquisition from the year in which the taxpayer got the actual possession of the flat and only then he shall compute the capital gain. Our comments The Mumbai Tribunal in the case of Balmukund P. Acharya 3 has held that the consideration for surrender of tenancy right was the market value of the asset at the point of time when it was given to the taxpayer without consideration. The cost of acquisition may be 'nil' on the facts of a case, but yet the cost of acquisition may have been incurred (such as by surrender of tenancy rights on the facts of the case) and it may be capable of being determined i.e., market value of premises at the point of time when tenancy rights were surrendered. _________________ 2 For the purpose of Sections 48 and 49 of the Act, (a) Cost of acquisition in relation to a capital asset, being goodwill of a business, tenancy rights, stage carriage permits or loom hours – (i) in the case of acquisition of such asset by the taxpayer by purchase from a previous owner, means the amount of the purchase price; and (i) in any other case shall be taken to be nil (b) In relation to any other capital asset………….. 3 Balmukund P. Acharya v. ITO [2011] 48 SOT 385 (Mum) This is a welcome decision of the Mumbai Tribunal wherein it has reiterated the principle that once the cost of acquisition is determinable, the benefit of such acquisition has to be given while computing the tax on capital gain. Therefore, it has been held that since the flat was given free of cost to the taxpayer on surrender of tenancy right and its cost is determinable, the market value of the said flat, as on the date of its possession, would be the cost of its acquisition while computing capital gains.
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafones House, Corporate Road, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata – 700091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

×