Income Tax Appeal Tribunal
Should a person earn a huge profit of Rs 11.8 crore by selling 17 apartments (flats) and not pay even Rs 1 tax on it? At first this may seem completely impossible or illegal. But a land owner from Bengaluru has proved it to be completely legal by using the rules of Income Tax Act properly. According to the ET report, the Income Tax Department had sent a demand notice to the taxpayer to pay zero tax on this huge long-term capital gain (LTCG). However, the land owner challenged this decision in court and won a major and historic victory against the department in the Income Tax Appellate Tribunal, Bengaluru. Let us understand what this whole interesting matter was and through which legal complications the taxpayer saved tax worth crores of rupees.
17 flats received in exchange of land
This matter is related to a joint development agreement. Mr. Aggarwal, who lives in Koramangala, Bengaluru, had signed a JDA with a builder, under which he gave permission to build an apartment on his land. In return, the land owner got his share in the newly constructed housing project i.e. 17 ready apartments. Sold 17 apartments between April 1, 2019 and March 31, 2020 and earned a profit of Rs 11.8 crore. The taxpayer claimed tax exemption on the entire profit under the provisions of Section 54 or 54F of the Income Tax Act and declared the tax liability as ‘zero’.
Income Tax Department’s objection
When the Assessing Officer (AO) of the Income Tax Department examined this tax return, he raised serious objections to it. The department argued that exemption from capital gains tax is available only for purchasing or constructing “a residential house”. The department said that the taxpayer has sold and bought not just one but 17 different apartments, hence he cannot claim tax exemption on all of them together. Considering it a case of tax evasion, the department issued a notice to the taxpayer to pay heavy penalty and tax.
How did the taxpayer roll the dice?
Instead of accepting this notice from the Income Tax Department, the land owner Mr. Aggarwal challenged it before the ITAT, Bengaluru. The taxpayer’s lawyer cited many old historical decisions and High Court decisions in the court. ITAT said many important things in favor of the taxpayer in its decision.
The tribunal clarified that if multiple flats are allotted to a land owner in the same land parcel or in the same residential complex under a JDA, then as per the legal interpretation, they can be treated as part of the ‘same residential unit’ for the purpose of exemption.
Since this entire transaction was done in exchange for ancestral land under a single agreement (JDA), it cannot be considered as commercial real estate trading. The court accepted that the taxpayer had claimed exemption within the ambit of the law, after which the ITAT completely rejected the Income Tax Department’s notice and upheld the land owner’s claim of Rs 0 tax.
Big lesson for landlords and investors
This case of Bengaluru is a precedent for those property owners across the country who give their land to builders for development. Three big things become clear from this decision. Whenever you enter into a joint development agreement with a builder, keep its legal terms very clear so that capital gains can be calculated correctly in the future. If a notice comes from the Income Tax Department, it does not mean that you are wrong. There are many sections in tax laws and judicial precedents that protect honest taxpayers. To save tax on real estate transactions worth crores or to deal with legal complications, always take the help of a good Chartered Accountant (CA) or tax lawyer.
