Capital gain tax on conversion of tenancy to ownership

Others 2601 views 2 replies

Imtiaz S F

Accountant

25 Points Joined May 2016

Dear Experts,

I need clarification regarding Capital Gain Tax on conversion of tenancy to ownership of a commercial property in Mumbai.

These are the details:

The landlord entered into a redevelopment agreement with a builder and the building was demolished and temporary alternate premises was provided.

After 4 years, the builder moved us back to the re-developed building and handed over peaceful possession of the premises 'free of cost' on ownership basis. We got the exact same area back from the builder that we had when we were tenants.

The firm is using the premises for conducting the business. It has not been leased out. The Permanent Alternate Accommodation Agreement has not yet been executed or registered.

My questions are as follows:

1) Is Capital gain applicable ?

2) Is Tenancy considered as a Capital Asset under the Income Tax Act?

If Capital Gains Tax is applicable, what is the date from which the tax is calculated:

1. The date of physical possession

2. Date of possession / allotment letter

3. Date of Registration of the Permanent Alternate Accommodation Agreement.

Thanks for your help

Regards

Imtiaz

Replies (2)

CA Rohan Dedhia

Practicing Chartered Accountant

83 Points Joined December 2009

Hello Imtiaz,

Tenancy is a capital right and redevelopment of tenanted premise amounts to Transfer of Capital asset and acquiring another capital Asset. Thus, Capital Gain arises. However, if you fulfill the conditions, exemption under sec. 54F shall be available.

The point of transfer of the capital asset shall depend upon the agreement with the developer. Normally, the date of signing of the initial agreement (regarding handing possession, alternate accommodation conditions etc.) is considered as the point when the asset is transferred.

The most tricky part is the quantum of 'Consideration' for the purpose of Capital Gains. as per the latest Mumbai ITAT judgement, the cost of construction of the asset receivable against the tenancy is the appropriate amount of Sale Consideration. This seems logical in cases where 54F exemption is not available. however, contradictory judicial positions exist and clarity is still awaited.

Imtiaz S F

Accountant

25 Points Joined May 2016

Thank you Rohan.

Should the re-developed property received on Ownership Basis be brought into the partnership firm's Books of Account based on the Ownership/Allotment Letter or can it be brought into the firms books of account only when the conveyance is done.