2019 (8) TMI 1817 - AT - Income Tax

Capital gain computation - whether the cost of improvement borne by the previous owner in the case of acquisition of the property by one of the modes specified u/s.49 of the Act is allowable deduction for the purpose of calculating gains? - HELD THAT - As relying on case of MANJULA J. SHAH 2011 (10) TMI 406 - BOMBAY HIGH COURT we direct the Assessing Officer to allow the cost of improvement borne by the previous owner as inflated by indexation. Penalty proceedings u/s.271(1)(c) - assessee had failed to disclose the capital gains on sale of immovable property and also made a wrong claim u/s.35(1)(iii) - HELD THAT - Admittedly, the penalty was levied in respect of addition made on account long term capital gains on sale of immovable property and the addition on account of alleged bogus claim u/s.35(1)(iii) of the Act. In respect of assessment of capital gains, the assessee has claimed exemption of capital gains u/s.54 of the Act, but the assessee had failed to produce evidences in respect of construction of a new house. In the circumstances, the Assessing Officer had made an addition of capital gains. Thus, the addition was made by the Assessing Officer for failure to prove the claim. Similarly the addition u/s.35(1)(iii) of the Act was made by the Assessing Officer only for assessee s inability to produce necessary approval from CBDT. Therefore, it is settled proposition of law that mere inability to substantial claim does not entail levy of penalty u/s.271(1)(c) of the Act, reliance in this regard can be placed on the decision of Supreme Court in the case of C.I.T Vs. Reliance Petroproducts Pvt Ltd. 2010 (3) TMI 80 - SUPREME COURT accordingly, we are of the considered opinion that it is not a fit case for levy of penalty. Assessee appeal allowed.

Summary

Issues Involved:
1. Assessment of capital gains including cost of improvement borne by previous owner.
2. Penalty levied under section 271(1)(c) for non-disclosure of capital gains and alleged wrong claim.

Issue 1: Assessment of Capital Gains
The appellant, engaged in two-wheeler financing, filed a return of income for AY 2010-11, disclosing total income. The assessment was completed initially, but the Assessing Officer later noticed an omission related to the cost of improvement to the asset incurred by the previous owner. The AO issued a notice under section 148, and upon filing a revised return, the assessment was completed at a higher income. The appellant contended that the cost of improvement by the previous owner was ignored. The key issue was whether the cost of improvement borne by the previous owner should be considered for calculating gains. The tribunal referred to a Bombay High Court case and held that the cost of improvement borne by the previous owner, inflated by indexation, should be allowed. Consequently, the appeal of the assessee was allowed.

Issue 2: Penalty under Section 271(1)(c)
The appellant's return for AY 2010-11 declared total income, but the AO made additions related to long-term capital gains and disallowed a claim under section 35(1)(iii) of the Act. Penalty proceedings were initiated under section 271(1)(c) for alleged non-disclosure of capital gains and a wrong claim. The appellant argued that the penalty was not justified as the additions were made due to failure to produce evidence for the claim. The tribunal noted that the additions were made based on the appellant's inability to substantiate claims. Citing a Supreme Court decision, it was held that mere inability to substantiate a claim does not warrant a penalty under section 271(1)(c). Therefore, the tribunal allowed the appeal of the assessee, concluding that it was not a fit case for the levy of a penalty.

In conclusion, both appeals of the Assessee in ITA No. 2680/Mds/2018 and ITA No. 2681/Mds/2018 were allowed by the tribunal in Chennai on 14th August 2019.