2014 (3) TMI 60 - AT - Income Tax

Determination of indexed cost of acquisition - Increase in capital gains computation Held that - The AO was of the view that fair value was very high since assessee was holding the property since 1979 - to make a reference under section 55A of the Act, Assessing Officer has to form an opinion that value claimed is less than the fair market value - the opinion of the Assessing Officer here is that the value shown was very high or in other words, more than the fair market value - the reference under section 55A could not have been made the decision in Commissioner of Income-tax Versus Umedbhai International P. Ltd. 2010 (2) TMI 631 - Calcutta High Court followed - where there was a substitution of the cost as on 1.4.1981, by value based by DVO on a reference under section 55A of the Act, such a reference could not be made unless and until the Assessing Officer formed an opinion that value shown by the assessee was less than fair market value thus, the substitution of cost of acquisition with the value fixed by the DVO set aside Decided in favour of Assessee. Claim of expenditure while computation of the LTCG Held that - Payment was directly made to Shri Nikhil Chanda and this was evident - Shri Nikhil Chanda had acknowledged receipt - it was a necessary outgo without which the sale would not have taken place - the computation of capital gains under section 48 of the Act - Sub-clause (i) of that Section states that expenditure incurred wholly and exclusively in connection with the transfer of capital asset has to be deducted from full value consideration received or accruing - Shri Nikhil Chanda was a confirming party who had nominated the buyers to the vendors. The vendors have contracted with the purchaser for sale and transfer of the said premises free from all encumbrances mortgages charges attachments liens lispendens leases tenancies occupancy rights uses debutters trusts acquisition requisition alignment claims demands and liabilities whatsoever or howsoever by the vendors to the purchaser at or for the consideration of Rupees four crores fifty lacs only paid to the vendors by the purchaser in the proportion as aforesaid and the confirming party has agreed to concur confirm and assure such sale - the payment could only be considered as an expenditure incurred only and exclusively in connection with the transfer of the property - thus, It was an allowable one under section 48(i) of the Act Decided in favour of Assessee.

Summary

Issues Involved:
1. Determination of indexed cost of acquisition and consequential increase in capital gains computation.
2. Legality of the reference to the Departmental Valuation Officer (DVO) under Section 55A of the Income Tax Act.
3. Addition of Rs. 20,00,000 claimed as expenditure while computing long-term capital gains.

Issue-wise Detailed Analysis:

1. Determination of Indexed Cost of Acquisition and Consequential Increase in Capital Gains Computation:
The assessee sold 27.69 Kattah of land along with a structure for Rs. 4,50,00,000, while the Stamp Valuation Authority valued it at Rs. 4,70,00,000. The assessee calculated the indexed cost of acquisition at Rs. 4,03,26,616, based on the cost as of 1.4.1981 for 12.97 Kattah of land and the purchase cost on 12.08.1997 for 14.72 Kattah of land. The Assessing Officer (AO) referred the matter to the Departmental Valuation Officer (DVO), who fixed the cost as of 1.4.1981 at Rs. 11.90 lakhs for 12.97 Kattah, leading to a revised indexed cost of Rs. 65,56,900. Consequently, the total indexed cost of acquisition was reduced to Rs. 2,18,70,871, significantly increasing the capital gains.

2. Legality of the Reference to the DVO under Section 55A of the Income Tax Act:
The assessee challenged the reference to the DVO, arguing it was illegal under Section 55A of the Act. The assessee relied on the jurisdictional High Court's decision in CIT v. Umedbhai International (P.) Ltd., which states that a reference under Section 55A can only be made if the value declared by the assessee is less than the fair market value. The AO's opinion that the value shown was very high did not satisfy this condition. The Tribunal agreed, noting that Section 55A(a) requires the AO to form an opinion that the value claimed is less than the fair market value, which was not the case here. Consequently, the reference to the DVO and the subsequent substitution of the cost of acquisition were deemed invalid.

3. Addition of Rs. 20,00,000 Claimed as Expenditure While Computing Long-Term Capital Gains:
The assessee claimed Rs. 20,00,000 paid to a confirming party, Shri Nikhil Chanda, as an expenditure under Section 48(i) of the Act. The AO and CIT(A) rejected this claim, questioning its genuineness. However, the Tribunal found that the payment was necessary for the sale, as evidenced by the sale agreement and receipt memo. The Tribunal concluded that the payment was an expenditure incurred wholly and exclusively in connection with the transfer of the property, thus allowable under Section 48(i). Therefore, the addition of Rs. 20,00,000 was deleted.

Conclusion:
The appeal of the assessee was allowed. The Tribunal quashed the substitution of the cost of acquisition based on the DVO's valuation and allowed the addition of Rs. 20,00,000 as an expenditure incurred in connection with the transfer of the property. The order was pronounced in the open Court on 19th December 2013.