The Chandigarh Bench of the Income-tax Appellate Tribunal held that Letters of Intent (LOIs) issued in the course of compulsory land acquisition do not qualify as land or building itself under Section 50C of the Income-tax Act, 1961. Therefore, capital gains arising from the transfer of such LOIs cannot be computed under Section 50C, and the actual sale consideration cannot be replaced by the stamp duty value adopted or assessed by the valuation authority.
Facts of the case
- The taxpayer had purchased land measuring 5,000 sq. yards for INR 1,100,000 in the financial year (FY) 2005-06, which was compulsorily acquired by the Greater Mohali Area Development Authority (GMADA).
- In lieu of the acquisition, the taxpayer was granted by way of a letter of intent (LOI), three residential plots measuring 500 sq. yards, 300 sq. yards and 200 sq. yards and one site of SCF in Sector 88–89, Mohali under the land pooling scheme of the GMADA.
- During the assessment year (AY) 2015-16, the taxpayer sold all the three residential plots for a consideration of INR 11,400,000 and computed long-term capital gains (LTCG) on such sale amounting Rs. 91,04,757/- as below:-
Sales consideration 1,14,00,000/-
Less: Indexed Cost of Acquisition 22,95,243/-
Capital Gains 91,04,757/-
Exemption calimed under Section 54 96,50,000/-
Net Long Term Capital gains NIL
- Applying the provisions of section 50C of the Act, the Tax Officer (TO) took the value of the above plots at INR 25,000,000, on the basis of the information called for under section 133(6) of the Act from the Estate Officer, GMADA.
- As the GMADA had acquired 5,000 sq. yards of land in return for three residential plots measuring 1,000 sq. yards, the TO computed the prorated cost of 1,000 sq. yards, and further, allowed a deduction under section 54F of the Act to the extent originally claimed by the taxpayer, thus, recomputing the LTCG to INR 1,54,39,951.
Analysis
Section 50C deems the stamp duty valuation of asset, being land /building, to be the consideration for transfer of the same, for the purposes of computing capital gains, in the situation where such valuation exceeds the actual consideration received.
Two major and relevant takeaways are that it is a deeming provision and applicable to transfer of land and /or building. Being a deeming provision, it is settled law, it can be applied only in the situation specifically given and cannot go beyond the explicit mandate of the section.
What is to be adjudicated therefore is whether LOI qualifies as Land and/or Building in terms of the said section.
After going through the LOI issued to the assessee the bench found, that:
1. The LOI's did not confer ownership of specific developed plot of land. They only state allotment of 500 /300/200 sq. yards of residential plot in sector 88/89 without mentioning specific plot number.
2. The specific allotment is to be done by draw of lots as stated in the land pooling policy of the government.
3. Point No.6 of the LOI states that possession shall be handed over after completion of development work. Thus, pending completion of the development of plots to be given in exchange of land acquired, LOI's were issued expressing intent to hand over developed plots on completion of development.
The LOI's therefore confer only a right to own developed land of specific area, to be developed and also to be identified at a future point in time . They do not confer owner ship of specific land in present. Strictly speaking therefore LOI's cannot be equated with land.
Tribunal's Ruling
Therefore, the Tribunal rejected Revenue’s contention because the LOI was not equivalent to the allotment of land, as an allotment conferred rights to a specific land/ building, whereas, in the present scenario, the allotment would occur only after the land was developed and by a draw of lots.
Accordingly, the LOI was only a right to possess a plot of land and not land itself. Thus, the provisions of section 50C of the Act should not be applicable to the present transaction of sale of LOIs.
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