2011 (3) TMI 511 - AT - Income Tax

Computation of capital gains - fair market value - held that - there is a provision in the Act for reference to the DVO because AO has merely added 15% to the purchase cost for determining the fair value which may also not be correct. Further no purpose would be served if he matter is set aside for reference to the DVO because the valuation date is almost 30 years old. Therefore, it would fair to estimate some value and bring the matter to finality. Cost of construction - When an old building is redeveloped and there is an understanding with the tenants that they would be accommodated without additional cost and even the plans have been approved with the condition that existing tenants would get accommodated without additional cost, naturally, the assessee could not have recovered any sale consideration from such existing tenants, but at the same time assessee had incurred cost on the over all project including the area allotted to the existing tenants and, therefore, such cost has to be allowed.

Summary

Issues:
1. Recomputation of capital gains based on fair market value.
2. Deletion of addition made on account of cost of construction of flats for tenants.
3. Claim of Rs.15,00,000 under section 54F for retaining area.

Issue 1 - Recomputation of Capital Gains:
The Revenue challenged the deletion of an addition made on account of recomputation of capital gains based on the fair market value of a property. The AO had adopted a higher fair market value for the property as on 1-4-1981, which the CIT(A) accepted based on the claim that the property was purchased at a low price due to a distress sale. The AO argued that the property was tenanted, limiting the scope for appreciation. The tribunal noted that the property remained tenanted from the purchase date until 1-4-1981. The tribunal found that the AO's valuation method lacked expertise and set aside the CIT(A)'s order, determining the fair market value at Rs.2,50,000 as of 1-4-1981.

Issue 2 - Cost of Construction for Tenants:
The AO disallowed the claim for the cost of construction of flats for old tenants, stating that since no sale consideration was received from the tenants, the cost should not be claimed. The CIT(A) disagreed, noting that the government permitted redevelopment with the condition of providing free accommodation to existing tenants. The tribunal upheld the CIT(A)'s decision, emphasizing that the cost incurred for construction had to be allowed, leading to the deletion of the addition made by the AO.

Issue 3 - Claim under Section 54F:
The parties agreed that this issue was consequential to the first ground. Therefore, the tribunal set aside the CIT(A)'s order and remitted the matter back to the AO for reexamination in light of the decision on the first ground. The appeal was partly allowed based on the tribunal's decisions on the first two issues.

This judgment highlights the importance of expert valuation in determining fair market value for capital gains, the consideration of costs incurred in redeveloping properties for tenants, and the interrelation of different grounds in tax appeals.