Section 50C not applicable to builder assessee in Property Redevelopment case

Redevelopment projects are the real estate projects where old construction is destroyed on the grounds of the same being of obsolete and probably of risk to the members of the society. In such situations builders approaches members of the society or vice-versa to form an agreement for redevelopment of the society and offer flats to existing members either for the existing area or enhanced area as approved or offering them with additional area upon payment of consideration for such additional space.

An issue relating to income of such real estate developers was dealt by ITAT where assessing officers proposed to invoke provisions of Section 50C in relation to capital gains

Issues Involved:
The case of Assessee Tirupati Developers, a partnership firm engaged in the business of builders and developers was selected for scrutiny for the reason that specific information was received from sub registrar office that the assessee has sold immovable property on 29.07.2017 for consideration of Rs.10,00,000/- whereas the market value of the said property is Rs.40,42,000. Assessing officer made an addition of difference amount under section 50C of income tax act.

Contention of assessee was that he was involved in the business of builders and developers, hence the provisions of Section 50C will not apply in this case as those provisions are with respect to capital gains.

Facts of the case explained:
The case of assessee belongs to AY 2018-19, where assessee filed the return of income for assessment year 2018-19 declaring income at nil. The case was selected for scrutiny. Aggrieved assesssee filed appeal before CIT(A) which was dismissed by CIT(A). CIT(A) upheld the decision of AO to add the difference amount as income. Aggrieved assessee filed an appeal at Tribunal.

Assessee argued that addition is made on the basis of a misunderstood fact that the assessee has sold flat whereas the assessee has sold only the additional area of the flat purchased by the member of the society as per the agreement. Assessee submitted that the assessee is engaged in the business of builders and developers and declares the profit on sale of flats as income from business the provisions of section 50C of the Act are not applicable to the assessee. Accordingly it was submitted that the addition made by the assessing officer under section 50C is not tenable.

As per clauses mentioned in the agreement between the asssessee and the members of the society, it is clear that the consideration is received only for the additional area and not for the entire flat.

Conclusion:
Assessee being a Builder and Developer of property has offered the income from project of redevelopment under the head of and gains from business or profession following Project Completion Method and therefore the addition made by the assessing officer is not tenable. Mumbai Bench of ITAT has therefore expressed that provisions of Section 50C cannot be invoked in this case as the income of the assessee is through profits and gains from business profession and not through capital gains.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.