2018 (3) TMI 1076 - AT - Income Tax

Capital Gains - Valuation - determination of cost of acquisition - AO did not accept the fair market value and indexed cost applied by the assessee and obtained the D.L.C. Rates for village Kanakpura, Jaipur as on 19/12/1991 at ₹ 39,000/- per bigha as against the rate adopted by the assessee at ₹ 1 lacs per bigha. Accordingly, the AO applied reverse indexation method of D.L.C. rate of ₹ 39,000/- per bigha and worked out the fair market value as on 01/04/1981 at ₹ 20,000/- in round figure. Held that - The D.L.C. Rates are not representing the indexed cost over the years and therefore when the rates are revised by the Government on the basis of the prevailing fair market value of the land then there is no point in applying the reverse indexation - the AO is directed to compute the indexed cost by applying forward indexation from 1991 to till the date of sale on the fair market value of ₹ 70,000/- and then compute the capital gain - appeal allowed in part.

Issues:
1. Computation of Long Term Capital Gain (LTCG) based on fair market value of land.
2. Discrepancy in fair market value determination by the Assessee and the Assessing Officer (AO).
3. Application of D.L.C. Rates for determining fair market value.
4. Use of reverse indexation method by the AO.
5. Justification for determining fair market value at ?70,000 per bigha.
6. Direction to apply forward indexation for computing indexed cost.

Analysis:

1. Computation of Long Term Capital Gain (LTCG):
The appeal pertains to the Assessment Year 2007-08 where the Assessee, an HUF, sold ancestral agricultural land. The primary issue revolves around the computation of LTCG, with the Assessee adopting a fair market value of ?1 lakh per bigha as on 1.4.1991, while the AO used D.L.C. Rates of ?39,000 per bigha for a different location. This discrepancy led to a substantial difference in the calculated capital gain, resulting in a challenge by the Assessee before the Ld. CIT(A).

2. Discrepancy in fair market value determination:
Both the Assessee and the AO presented varying fair market values for the land in question. The Assessee's choice was based on a certificate from the Collectorate, Dausa, while the AO relied on rates from a different village. The lack of a definitive fair market value for the land prior to 1.4.1981 complicated the assessment process, leading to conflicting valuations.

3. Application of D.L.C. Rates:
The AO's use of D.L.C. Rates from a different location raised concerns regarding the comparability of the rates to the actual land being assessed. The Tribunal highlighted the importance of using rates specific to the land in question to ensure a fair determination of the fair market value for computing capital gains accurately.

4. Use of reverse indexation method:
The AO's application of reverse indexation based on D.L.C. Rates was deemed inappropriate by the Tribunal. Instead, the Tribunal directed the AO to compute the indexed cost using forward indexation from 1991 until the sale date based on a fair market value of ?70,000 per bigha, derived from a compromise between the Assessee's and AO's valuation.

5. Justification for fair market value determination:
The Tribunal justified the adoption of ?70,000 per bigha as the fair market value to resolve the valuation dispute. This decision aimed to strike a balance between the rates provided by the Assessee and the AO, ensuring a more equitable computation of LTCG and indexed cost.

6. Direction for forward indexation:
Instructing the AO to apply forward indexation from 1991 until the sale date based on the agreed fair market value of ?70,000 per bigha was a crucial aspect of the Tribunal's decision. This direction aimed to streamline the computation process and ensure a more accurate assessment of the capital gains involved.

In conclusion, the Tribunal partially allowed the Assessee's appeal, emphasizing the importance of using relevant and comparable rates for determining fair market value in the context of computing LTCG. The decision provided clarity on the valuation methodology and directed the AO to apply forward indexation for a more precise calculation of the indexed cost.

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