Neither capital gain tax nor MAT on sum received towards Additional FSI

Facts of the Case

The assessee company is engaged in the business of manufacturing machine tools, textile machines, air conditioning and refrigeration work, casting and job work for air conditioning and humidification, air control equipment and trading in engineering. The original return of income was filed by the assessee on 26/09/2013 and revised return was filed on 14/05/2014 declaring loss of Rs.4,65,01,710/- under the normal provisions of the Act and book profit of Rs.61,77,000/- u/s.115JB of the Act.

The assessee company owned a constructed building on a plot of land in the city of Coimbatore. The said land along with the super structure was acquired by the company vide sale deed dated 15.04.1967. During the Financial Year 2012-13 relevant to Asst Year 2013-14, the assessee company proposed to sell the said land along with its super structure and therefore entered into negotiations with various parties. During the negotiations, the company became aware of the fact that post acquisition of the land and the constructed building, the Development Control Regulations Rules (DCR) in the city of Coimbatore had undergone a change. Consequently, the company engaged the services of Dadbhawala Architects, Engineers and Valuers Pvt. Ltd., to examine the amendments in the DCR and furnish a report giving the fair market value of the land, the constructed building and the additional FSI, if any.

In the meanwhile, the negotiations for sale of the immovable property in Coimbatore, culminated in an understanding on 15.09.2012 when the prospective purchasers visited the premises of the company. A letter of understanding was executed on the said date by the purchasers. The purchasers agreed on a total consideration of Rs.11,14,00,000/-. Further, the said consideration based on discussions and negotiations was broken up as Rs.5,72,84,600/- for the land, Rs.64,90,400/- for the constructed building and Rs.4,76,25,000/- for the additional FSI. The valuers also submitted three reports giving the fair market value of the land constructed building and the additional FSI on 21.09.2012. As per the report submitted by the valuers, the company had obtained an additional benefit of 0.8 by way of additional FSI. The valuers arrived at a fair market value of Rs. 5,01,79,800/- in respect of additional FSI of 0.8 whereas, the company had arrived at a negotiated price with prospective purchasers‟ for the additional FSI of Rs.4,76,25,000/-.

While filing the return of income, the company excluded the sum of Rs.4,76,25,000/- received towards additional FSI from its total income computed under normal provisions of the Act, treating the same as a capital receipt. However, while computing its book profit u/s.115JB of the Act, the said sum of Rs.4,76,25,000/- was included in the book profit.

During the assessment proceeding

The AO observed that FSI attached to the land is neither separable from the said land nor could be treated independently;

The availability of increase in FSI is merely a value addition to the land provided by the Government; that any buyer, while purchasing the land will also take over the FSI and that the purchase price is determined by the benefits attached to the land

He further observed that the assessee has neither maintained the land with it and transferred the FSI to a third party nor has transferred the land and FSI to different people.

He also observed that FSI is fastened to the land and is not separable there from, except in circumstances where only the FSI is permitted to be sold out by maintaining the title of land with the owner.

Accordingly, the AO brought the amount of Rs.4,76,25,000/- shown under the head "transfer of FSI" to tax under the head long term capital gain.

Before the CIT(A)

The ld. CIT(A) observed that assessee had sold the land, super structure situated in the said land and the FSI in lock, stock and barrel to only one purchaser for a total consideration of Rs.11,14,00,000/-. However, taking the help of the valuer, the same was broken into three parts and thereafter, sale consideration to the extent of Rs.4,76,25,000/- has been attributed on account of sale of additional FSI by the assessee.

The said additional FSI has not been sold separately as TDR and there has been no separate document for the same.

The inseparable FSI had been sold in one single deal by the assessee to the same party.

CIT(A) Distinguished the reliance placed on the decision of the Hon'ble Jurisdictional High Court in 370 ITR 325 supra by stating that in that case, the TDR was sold separately by the society after completion of construction as per the available FSI.

CIT(A) also observed that in that case, the land and building earlier in possession of the assessee continued to remain with it and even after the transfer of the right or additional FSI, the position did not undergo any change. Whereas, in the instant case, the land and building have been transferred together with additional FSI within a single deal to a single purchaser.

With these observations, the ld. CIT(A) upheld the action of the ld. AO.

Before the ITAT

The Tribunal Observed that “the bifurcation of the total sale consideration into land, building and additional FSI is not in dispute. What is in dispute before us is only whether the said sum of Rs.4,76,25,000/- received by the assessee on sale of additional FSI could be treated as a capital receipt and thereby making it nonexigible to tax both under normal provisions as well as in the computation of book profits u/s.115JB of the Act”

In the instant case, we find that the Development Control Regulations in the city of Coimbatore had undergone a change which had admittedly conferred a benefit or by virtue of which the assessee got vested with additional benefit of 0.8 by way of additional FSI.

Hence, the issue now boils down to the fact that when there is no cost incurred by the assessee for obtaining any additional benefit of 0.8 by way of additional FSI, then, whether any sum received by the assessee pursuant to a sale of such additional FSI could be brought to tax under the head “income from capital gains”. We hold that assessee could not have pre-empted any change in the Development Control Regulation Rules in the city of Coimbatore at the time of purchase or before the sale.

Admittedly no cost was incurred by the assessee for getting such benefit by way of additional FSI. Hence, it could be safely concluded that the additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a wind fall gain by operation of law, and which had not costed the assessee any money.

The tribunal followed the judgment of Jurisdictional High Court in the case of Commissioner of Income Tax vs. Kailash Jyoti No.2 CHS Ltd., in Income Tax Appeal No.1607 of 2013 and held that the sum received by the assessee in the sum of Rs.4,76,25,000/- on sale of additional FSI, is not exigible for long term capital gains.

The tribunal also held that the sum of Rs.4,76,25,000/- being a capital receipt from its inception, is to be excluded while computing book profits u/s.115JB of the Act and also on the ground that it does not form part of operational working results of the company by relying assessee’s own case in ITA No.5428/Mum/2015 for A.Y.2011- 12.