2016 (6) TMI 326 - AT - Income Tax

Long term capital gain - dis allowance of cost of acquisition of proportionate land area sold during the year and cost of improvement incurred to the proportionate sale of flats - Held that - The main issue is, the assessee had built the five flats, two flats were sold during the current AY, two flats were sold in the subsequent AY and retained one flat for self occupation. AO, based on the statement of joint developer, treated the whole building as complete and ready for sale whereas the assessee controverted and submitted that only two flats were completed and sold. The balance flats were not completed, only the super structure of the building was completed with the interior work like flooring of tiles, kitchen and plastering etc. were not completed. AO has relied only on the statement of the joint developer and has not brought anything on record to prove that the building was completed in AY 2007-08 itself. Hence, we have no option but to rely on the submissions of the assessee.- Decided against revenue Determination of sources of funds to the above investment in the building for construction of the flats up to the end of the financial year 31/03/2007 - Held that - We find that the assessee has made investment in the building to the extent of cost involved. The assessee had sufficient funds to finance the investment in the building. There may be mismatch on the micro level but at the outset, it is established that the assessee had sufficient funds to make the investment. - Decided against revenue

Summary

Issues:
1. Determination of cost of acquisition for computing capital gains.
2. Addition made under section 69 of the Income Tax Act.

Issue 1: Determination of cost of acquisition for computing capital gains:
The appellant filed her return of income for AY 2007-08 declaring total income, including long-term capital gain. The AO determined the taxable income by disallowing the cost of acquisition of land area sold during the year and cost of improvement for the sale of flats. The appellant entered into an MoU for property development, and the AO disallowed the claimed cost of acquisition, leading to a dispute regarding the fair market value as on 01/04/1981. The CIT(A) observed evidence of building existence on the land, directing the AO to consider the cost of acquisition at ?4,60,197 for capital gains computation.

Issue 2: Addition made under section 69 of the Income Tax Act:
The AO disallowed an investment of ?33,12,500 as unexplained for construction of residential flats. The CIT(A) deleted this addition after considering the appellant's submissions and evidence, noting that only two flats were completed and sold in the relevant year. The remaining flats were under construction, with sale deeds executed in the subsequent year. The CIT(A) found the appellant's contentions acceptable, especially regarding the sources of investment. The revenue appealed, arguing that the building was complete based on the joint developer's statement. However, the Tribunal found no evidence to support this claim and relied on the appellant's submissions. The sources of funds for the investment were analyzed, and it was concluded that the appellant had sufficient funds to finance the building investment.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision on both issues. The judgment clarified the determination of cost of acquisition for capital gains computation and the addition made under section 69 of the Income Tax Act, emphasizing the importance of evidence and submissions in establishing the legitimacy of investments and sources of funds.