2021 (1) TMI 407 - AT - Income Tax

Assessment of capital gains - deduction of indexed cost of construction of the building and the rejection of assessee s claim with regard to demolition charges - CIT(A) dismissed the appeal of the assessee and confirmed the addition made by the AO - HELD THAT - The assessee has received the sum of ₹ 76,32,000/- towards the sale proceeds of her share of 212 sq.yds of site and therefrom claimed the indexed cost of acquisition of land and building which was constructed in the F.Y. 1994-95. Similarly, she also has admitted the sale proceeds of scrap of ₹ 3.00 lakhs and also claimed demolition charges of ₹ 3.00 lakhs which the AO has disallowed. It is accepted fact that when the assessee has admitted the sale of scrap naturally assessee has to demolish the building and has to incur certain expenditure. We find from the order of the AO that he has not given any reason for disallowing the demolition charges. The scrap would generate only when the existing building was demolished. Having taxed the sale of scrap of demolished building, the AO also ought to have allowed the expenditure incurred on demolition, hence, we set aside the order of the ld. CIT(A) and allow the appeal of the assessee on this issue. Cost of construction and indexed cost of acquisition for construction of the building - AO disallowed the indexed cost of construction merely because the assessee could not furnish the evidences - HELD THAT - Since the construction of the building was completed in 1994-95 and sold in 2013-14, naturally assessee would not be in a position to furnish the evidences, because of longevity of time and therefore the issue needs to be considered on the basis of evidence available. In the instant case, for existence of building the assessee has furnished the municipal tax receipts and also admitted the sale of scrap of building which was taxed by the AO in the assessment. Thus, we do not find any justification for rejecting the claim of the assessee with regard to indexed cost of construction, hence, we set aside the orders of the lower authorities and allow the indexed cost of acquisition of the building. Accordingly, appeal of the assessee is allowed on this issue. Capital gain on sale of land and flats - LTCG and STCG - Period of holding - HELD THAT - There is no dispute that sale of land constitutes long term capital gain and sale of flats constitute short term capital gain. Since the flats were in possession of the assessee for less than 36 months, as the assessee constructed the building in the A.Y. 2014-15, for which agreement was entered on 12/02/2013. There was not much time gap between the construction of the building and sale of flats. Hence the AO rightly assessed the sale of flats under short term capital gains and the land under Long term capital gains. Apportionment of sale consideration towards the land and flats - cost of construction was ₹ 3,25,80,000/- for 9 flats consisting of 2850 sq.ft. each flat - assessee has objected for adoption of SRO value as sale consideration - HELD THAT - Once the assessee has objected the adoption of SRO value as sale consideration of the land, the AO need to refer the issue to the Departmental valuer for expert opinion. In the instant case, no such exercise was made by the AO. The registered valuer of the Income tax has valued the land at ₹ 60,000/- per sq.yard. and the department did not bring any evidence to controvert the valuation made by the registered valuer. The department also did not find any defect in the report of Registered Valuer. Registered Valuer is qualified engineer and approved by the Income Tax Department for valuing the properties and giving expert opinion. Since the department did not bring any material to show that the Registered Valuer s report is defective, we do not find any reason to not to accept the valuation made by the Registered Valuer. Therefore, we direct the AO to consider the land cost as determined by the registered valuer for sale of land and recompute the long term capital gain. The balance would be taken as short term capital gain for sale of flats. Accordingly, the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Assessment of capital gains.
2. Deduction of indexed cost of construction.
3. Rejection of assessee’s claim regarding demolition charges.
4. Apportionment of sale consideration towards long-term and short-term capital gains.
5. Valuation of land and flats for capital gains computation.

Issue-wise Detailed Analysis:

1. Assessment of Capital Gains:
The primary issue revolves around the assessment of capital gains for the Assessment Years 2013-14 and 2015-16. The assessee filed returns admitting total income which included capital gains from the sale of land and flats. The AO scrutinized the returns and made adjustments, leading to disputes over the correct computation of capital gains.

2. Deduction of Indexed Cost of Construction:
For A.Y. 2013-14, the assessee claimed indexed cost of construction of a building demolished before the sale of land. The AO disallowed the indexed cost of construction due to lack of evidence. However, the Tribunal noted that the building existed as evidenced by municipal tax receipts and the sale of scrap. It ruled that the indexed cost of construction should be allowed, setting aside the lower authorities’ orders.

3. Rejection of Assessee’s Claim Regarding Demolition Charges:
The AO disallowed demolition charges claimed by the assessee, despite taxing the sale of scrap from the demolished building. The Tribunal found this inconsistent, as the existence of scrap implies demolition. It ruled in favor of the assessee, allowing the demolition charges.

4. Apportionment of Sale Consideration Towards Long-term and Short-term Capital Gains:
For A.Y. 2015-16, the issue was the correct apportionment of sale consideration between long-term capital gain (sale of land) and short-term capital gain (sale of flats). The AO taxed the sale of land as long-term capital gain and the sale of flats as short-term capital gain. The Tribunal upheld this approach, noting that the flats were held for less than 36 months.

5. Valuation of Land and Flats for Capital Gains Computation:
The AO used SRO value for land and a derived value for flats, which the assessee contested. The Tribunal found the AO’s reliance on SRO value without referring to a departmental valuer inappropriate, especially since the registered valuer’s report was not contested by the department. The Tribunal directed the AO to use the registered valuer’s land valuation and recompute the capital gains accordingly.

Conclusion:
The Tribunal allowed the appeal for A.Y. 2013-14, recognizing the indexed cost of construction and demolition charges. For A.Y. 2015-16, it partly allowed the appeal, directing the AO to adopt the registered valuer’s land valuation and recompute the capital gains, appropriately distinguishing between long-term and short-term gains.