2020 (8) TMI 504 - AT - Income Tax

Capital gain computation - cost of acquisition as on 01.04.1981 for the land and building - AO referred the property to the Valuation Officer and adopted the value determined by the Assistant Valuation Officer and re-worked the indexed cost of acquisition and then determined the long term capital gain in the respective assessee s hands - HELD THAT - When the AO proposed to assessee the value of the land adopting the value shown by the registration authority and adopt the value of the super structure as per the valuation officer s report, the assessee submitted that the impugned property was given on rent for ₹ 4,000/- per month with a rental advance of ₹ 2,00,000/- and therefore, it is proper to adopt the value on rent capitalisation method as per the provisions of the Wealth Tax Act. AO did not agree with assessees plea and proceeded to compute the capital gains based on the value shown by the stamp authorities and the valuation officer. Before us, the assessee pleads that the guideline value does not reflect the market value and by the time the valuation officer went for inspection, the property was already demolished and hence the valuation made by him cannot be considered as a scientific one - we find merit in the submissions of the assessee. Existence of rental agreement, the receipt of rent and rental advance is not disputed. Therefore, we are of the view that the value of the land and building should be determined on the basis of rent capitalisation method. The assessee has quantified the value at ₹ 8,28,750/-, which may be rounded off to ₹ 10 lakhs. Therefore, we direct the AO to adopt ₹ 10 lakhs towards the cost of acquisition for the land and building as on 01.04.1981 and proceed to determine the cost of indexation accordingly, for the determination of capital gains in the respective assessee s hand. Assessee s appeal is treated as partly allowed

Summary

Issues: Assessment of capital gains based on valuation of property, determination of cost of acquisition, adoption of rent capitalization method for valuation.

Analysis:
1. Assessment of Capital Gains: The appeals were filed against the orders of the Commissioner of Income Tax for the assessment year 2005-06. The Assessing Officer adopted a lower cost of acquisition for land and building, leading to a dispute. The CIT(A) upheld the AO's decision, prompting the assessees to appeal further to the ITAT Chennai.

2. Determination of Cost of Acquisition: The assessees claimed the cost of acquisition as per their calculation, while the AO relied on the sub-registrar's guideline value for land and the Valuation Officer's report for the building. The assessees argued that the guideline value did not represent the correct market value, and the Valuation Officer's report was flawed as the property had been demolished before inspection. The ITAT agreed with the assessees' contention and directed the AO to adopt a higher value for the cost of acquisition based on the rent capitalization method.

3. Adoption of Rent Capitalization Method: The assessees presented evidence of rental income and advance rent received for the property. They argued that the value should be determined using the rent capitalization method as per the Wealth Tax Act. The ITAT found merit in this argument, considering the existence of the rental agreement and directed the AO to adopt a value of ?10 lakhs for the land and building as on 01.04.1981, to compute the capital gains accordingly.

4. Conclusion: The ITAT Chennai partially allowed the appeals, emphasizing the correct determination of the cost of acquisition based on the rent capitalization method. The decision highlighted the importance of considering actual market value and rental income in assessing capital gains.