Value Of FSI And TDR Not To Be Included In Land Value Under Section 50C Of Income Tax Act

Author:Mr M.S. Ananth and Shreya Rao
Profession:Nishith Desai Associates

Transfers of immovable property are required to take place at a fair valuation as per Indian tax laws. In a judgment that could have significant consequences for the real estate sector, the Mumbai Bench of the Income Tax Appellate Tribunal ('ITAT') has recently ruled, in Income-tax Officer v. Shri Prem Rattan Gupta1, that the Transfer of Development Rights ('TDR') and Floor Space Index ('FSI') cannot be subject of consideration under the fair valuation provisions of section 50 C2 of the Income Tax Act, 1961 ('Act'). The ruling was based on the rationale that section 50C refers to 'land and building' and consideration in respect of other capital assets cannot be considered. Background The Taxpayer, Shri. Prem Rattan Gupta, was the joint owner of property which originally measured approximately 2242 Sq. m. A development agreement was entered into by the co-owners in 2005, with the Public Works Department and the Thane Municipal Corporation ('Acquiring Authorities'), as per which the entire plot was agreed to be sold for development. However, the actual land acquired amounted to 860 Sq. m. for the Eastern Express Highway, 950 Sq. m. for the service road and 300 Sq. m. for the Old Agra Road, being 2110 Sq. m. The co-owners were thus left with 134 Sq. m. (67 Sq.m. belonging to the Taxpayer which was subsequently transferred and which formed the subject matter of this case). The transfer of the 134 Sq.m. was for ₹ 20 lakhs of which the Taxpayer was paid ₹ 10 lakhs. The assessing officer was of the view that the property should be valued for more since it had development rights attached to it. The matter went up in appeal and the CIT(A) relied on the ITAT decision in Shakti Insulated Wires (P) Ltd. v. ITO3 to rule in favour of the taxpayer. He further rejected the computation of the AO on the basis that the stamp value of the entire property as per the development agreement entered into in 2005 was ₹  1,19,72,064, which prorated would have been ₹ 7,14,910 for 134 Sq.m, which was significantly lower than the payment to the co-owners of ₹  20 lakhs. The key issue in this case therefore was the means of valuation of the 134 Sq. m. transferred by the co-owners (of which the taxpayer owned 67 Sq.m), and whether the value of TDR should be included in the fair value of land transferred by the taxpayer.  ITAT's Order The ITAT observed that, as there had been no reference to the valuation officer ('DVO') as required under section 50C in situations where...

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