The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has held that consideration received from the sale of Transferable Development Rights (TDRs) is taxable as capital gains where the TDRs were acquired in exchange for surrendering identifiable land. 

The bench of Prashant Maharishi (Vice President) and Soundararajan K. (Judicial Member) rejected the assessee’s contention that the capital gains computation mechanism failed because the TDRs had no ascertainable cost of acquisition.

The bench held that the cost of the TDRs could be attributed to the land surrendered to obtain those rights. Consequently, the computation mechanism under Sections 45 and 48 of the Income-tax Act, 1961 remained workable and the subsequent sale of the TDRs attracted capital gains tax. At the same time, the Tribunal directed the Assessing Officer to allow the appropriate cost attributable to the land surrendered while computing the taxable capital gain.

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The assessee had disclosed ₹60,153,500 received from the sale of TDRs in his return of income and claimed the receipt as exempt, treating it as a capital receipt not chargeable to tax. The Assessing Officer, however, treated the TDRs as a capital asset within the meaning of Section 2(14) and held that their transfer attracted capital gains taxation under Section 45.

The assessment resulted in the assessee’s total income being determined at ₹10,53,04,555, compared with returned income of ₹4,63,12,620. The assessment included an addition of ₹6,01,53,500 on account of the TDR sale. The Assessing Officer had treated the receipt as long-term capital gains, while the assessee maintained that no taxable capital gain could arise because the cost of acquisition of the TDRs could not be ascertained.

The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, upheld the assessment. The assessee thereafter approached the ITAT.

The assessee owned land and a building measuring approximately 2,839.55 square metres at Harlur Village in Bengaluru. The property was required by the Bruhat Bengaluru Mahanagara Palike (BBMP) for road-widening purposes. Under the applicable government notification, the assessee agreed to surrender the land to the civic authority and, instead of monetary consideration, received transferable development rights.

The assessee subsequently sold those TDRs to a builder/developer for ₹60,153,500.

The Tribunal noted that Karnataka’s TDR framework permits development rights to be transferred from one property to another. TDR certificates are issued by the competent planning authority and can subsequently be transferred to a developer or owner of a receiving property, subject to the applicable regulations.

The assessee relied heavily on the principle laid down by the Supreme Court in CIT v. B.C. Srinivasa Setty, contending that where the cost of acquisition of an asset cannot be ascertained, the computation provisions under Section 48 fail and the charging provision under Section 45 cannot operate.

The assessee also relied on judicial precedents concerning self-generated TDRs, particularly the Bombay High Court’s ruling in CIT v. Sambhaji Nagar Co-operative Housing Society Ltd. In that case, TDRs had arisen from existing property by virtue of regulatory provisions without the assessee parting with an identifiable asset to obtain them. The courts had consequently found no ascertainable cost of acquisition for those TDRs.

The Bangalore Tribunal, however, found the factual foundation of those cases materially different from the case before it.

The Tribunal emphasised that the present TDRs were not self-generated development rights arising automatically from the assessee’s existing property.

Instead, the assessee had surrendered an identifiable capital asset—land measuring approximately 2,839 square metres—in exchange for the TDRs. The Tribunal therefore held that there was an actual cost attached to the acquisition of the TDRs.

According to the Tribunal, the cost of the TDRs was attributable to the land surrendered by the assessee. Since the assessee had effectively given up land as consideration for obtaining the development rights, the cost of acquisition was capable of being determined.

The Tribunal described this as the critical distinction between the present case and the earlier cases involving self-generated TDRs.

The Tribunal further analysed the transaction as involving two distinct taxable events.

The first event was the surrender of land in exchange for TDRs. Since Section 2(47) includes exchange and relinquishment within the concept of transfer, the surrender of the land itself constituted a transfer of a capital asset. The fair market value of the TDRs received could constitute the consideration for that transfer, with capital gains consequences arising in the year of surrender.

The second event was the subsequent sale of the TDRs by the assessee to the builder/developer for ₹60,153,500.

For this second transaction, the Tribunal held that the cost of acquisition of the TDRs would be the cost attributable to the land surrendered to acquire those rights. Thus, when the TDRs were subsequently sold, the sale consideration could not simply be treated as the entire taxable capital gain. The prescribed cost had to be deducted in accordance with Section 48.

The assessee had also argued that the amendment to Section 55(2)(a) introduced by the Finance Act, 2023, which applies from April 1, 2024, could not be retrospectively applied to Assessment Year 2018-19.

The Tribunal agreed that the amendment operated prospectively but held that it did not assist the assessee. The amendment was directed at situations involving rights or assets for which no consideration had been paid and where the cost was conceptually absent.

Here, the assessee had effectively paid consideration for the TDRs by surrendering land. Therefore, the actual cost represented by the land surrendered could not be treated as nil merely because the statutory amendment was prospective.

The Tribunal reasoned that where an assessee has paid a price for acquiring TDRs, the computation mechanism does not suffer from the kind of impossibility contemplated by the Supreme Court in B.C. Srinivasa Setty.

The Tribunal explained that the doctrine of computation failure applies where the cost of acquisition is inherently incapable of being conceived or determined.

In the present case, however, the assessee had parted with a quantifiable capital asset to acquire the TDRs. Therefore, the computation mechanism under Sections 45 and 48 remained operative.

The Tribunal consequently rejected the argument that the absence of a separately stated monetary payment for the TDRs meant that their cost was incapable of ascertainment.

It held that the value attributable to the land surrendered represented the acquisition cost of the TDRs, and capital gains on their subsequent sale could therefore be computed after allowing that cost.

The assessee had raised another procedural challenge concerning the scope of scrutiny.

According to the assessee, the notice issued under Section 143(2) indicated that the return had been selected for scrutiny to verify the refund claim. Since the TDR receipt had been disclosed as exempt income, the assessee argued that the Assessing Officer could not travel beyond the stated issue and examine the taxability of the TDR sale.

The Tribunal rejected this contention.

It found that the notice did not state that the case had been selected under the limited-scrutiny framework. Merely mentioning refund verification as the initial issue did not, according to the Tribunal, restrict the Assessing Officer from examining the taxability of the TDR consideration. The Tribunal therefore held that the Assessing Officer was competent to examine the ₹60,153,500 receipt.

The assessee had also relied upon an assessment order in the case of his brother, where a similar TDR receipt had reportedly not been taxed.

The Tribunal declined to extend that treatment to the assessee.

It noted that the other assessment order had not conclusively established a binding legal position and its finality was itself uncertain. More importantly, an assessment order in one individual case cannot automatically constitute a binding interpretation of the Income-tax Act for every other assessee.

The Tribunal distinguished the Karnataka High Court decision relied upon by the assessee, observing that that case involved a situation where the Revenue had consciously accepted a particular legal position in several cases and sought to take a contrary position in another case.

In the present matter, there was no binding High Court ruling on identical facts holding that TDRs received in exchange for surrender of land were not taxable. What existed was merely another assessment order in which the Revenue had not taxed the receipt.

The Tribunal held that an assessment order in one case cannot be regarded as the Revenue’s final acceptance of a legal position in all other cases.

The Tribunal went further in discussing the principle of consistency.

It observed that an error, oversight or concession by an Assessing Officer in the case of another assessee does not create a vested right in the present assessee to demand identical treatment when such treatment is contrary to law.

The Tribunal also noted that an assessment order may remain subject to statutory mechanisms such as revision, reassessment or rectification. Consequently, the mere fact that another assessee escaped taxation in an earlier assessment could not prevent the Revenue from correctly applying the law in the present case.

The Tribunal distinguished situations where the Revenue consciously adopts contradictory positions from cases involving mere non-taxation through oversight or incomplete examination.

While dismissing the assessee’s substantive challenge to taxability, the Tribunal made an important qualification.

It confirmed that the ₹60,153,500 received from the sale of TDRs was taxable under the head “Capital gains.” However, it found that the Assessing Officer had failed to allow the cost of acquisition attributable to the land surrendered for obtaining the TDRs.

Accordingly, the Tribunal directed the Assessing Officer to recompute the capital gains after reducing the appropriate cost attributable to the exchanged land in accordance with Section 48(ii).

Thus, the Tribunal did not uphold taxation of the entire ₹6.01 crore as pure taxable gain. Instead, it upheld the principle of taxation while requiring the computation to properly account for the acquisition cost of the TDRs.

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