Section 43CA Inapplicable to Tenant Rehabilitation Area in Redevelopment: ITAT Mumbai Upholds CIT(A) Relief

Case Overview

Case Name: ACIT-8(3)(1) Vs Triple Securities Pvt. Ltd. (ITAT Mumbai)
Appeal Number: ITA No. 2270/MUM/2021
Date of Order: 20/12/2022
Assessment Year: 2016-17

The Mumbai Bench of the Income Tax Appellate Tribunal rendered a significant ruling in the matter of ACIT-8(3)(1) Vs Triple Securities Pvt. Ltd., dismissing the Revenue's appeal and affirming the relief granted by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi. Two key issues were adjudicated — the applicability of Section 43CA of the Income Tax Act, 1961 to the transfer of additional carpet area to tenants under a redevelopment arrangement, and the deductibility of interest expenditure of INR 1,55,42,291/- under Section 36(1)(iii) — with the Tribunal ruling in favour of the assessee on both counts.

Background and Facts of the Case

Triple Securities Pvt. Ltd., the assessee, is a private limited company engaged in the business of land development and building construction as a builder-developer. The assessee's sole project involved the redevelopment of an old tenanted residential building known as "Govind Niwas".

The No Objection Certificate for the redevelopment was issued by the Mumbai Building Repair & Reconstruction Board (MBR&RB) on 19.10.2001 vide Approval Letter No. R/NOC/F-10825/3274/MBRRD. Clause 1 of the Approval specified that all occupants of the old building were to be accommodated in the redeveloped structure, with each tenant receiving a minimum carpet area of 20.90 Sq. Mt. (225 sq. ft.) and a maximum carpet area of 70 Sq. Mt. (753 sq. ft.) as provided under the Maharashtra Housing and Area Development Act, 1976 (MHADA).

Permanent Alternative Accommodation Agreements (PAAAs) were initially executed with tenants in January 2002. However, redevelopment work could not commence for nearly four years because certain tenants — who had been occupying larger areas in the old building — refused to vacate or accept units with reduced carpet area.

To break the resulting deadlock, a meeting was convened on 07.08.2006 in the presence of the Deputy Chief Engineer (S), MBR&RB. A unanimous consensus was reached and recorded in the minutes of the meeting, signed by all attendees. The relevant extract of those minutes reads as under:

"In the presence of Deputy Chief Engineer MBR &B, the tenants/occupants have unanimously agreed to the suggestion of the Owner/Developers to avoid the delay in implementation of the project: (a) To allot flats with additional area to erstwhile Landlords and their family members who are present tenants of the building. (b) To allot flats with additional area to managing committee members from the entitlement of the Owner/Developers. (c) erstwhile Landlords and their family members and also managing committee members who are present tenants of the building will not be liable to pay construction cost (d) Tenants/occupants will be allotted flats as per the approved plan. Accordingly the Annexure "A" is prepared which reflects the flats number, area allotted to the tenants/occupants and the list of the Tenants/occupants liable to contribute for construction cost."

Following this meeting, construction resumed and the new building was completed. The final PAAAs with the tenants were registered during the Previous Year 2015-16 relevant to Assessment Year 2016-17.

Assessing Officer's Actions

The assessee filed its return of income for Assessment Year 2016-17 on 17.10.2016, declaring a loss of INR 1,56,22,487/-. Upon selection for scrutiny, the Assessing Officer completed assessment under Section 143(3) of the Income Tax Act, 1961 vide order dated 30.12.2018, making the following additions and disallowances:

  1. Addition of INR 2,18,84,138/- under Section 43CA — treating the stamp duty value of the additional carpet area allotted to six tenants (over and above 753 sq. ft.) as deemed consideration for transfer of stock-in-trade.
  2. Disallowance of interest expenditure of INR 1,55,42,291/- under Section 36(1)(iii) — on the ground that the assessee had not recognised any revenue during the year and the interest should have been capitalised with work-in-progress.

CIT(A)'s Decision

The assessee challenged both additions before the CIT(A), who granted relief on both issues. The CIT(A) held that providing flats in a redeveloped building to erstwhile occupants of the old building cannot fall within the ambit of Section 43CA. The relevant portion of the CIT(A)'s order reads as under: