2021 (2) TMI 29 - AT - Income Tax

Revision u/s 263 - revisionary jurisdiction u/s 263 against reassessment order passed by AO u/s 147 read with Section 143(3) - Computation of LTCG - assessee has claimed cost of conversion of land from leasehold to freehold and indexation by applying cost inflation index towards such freehold charges was also claimed which is not correct - HELD THAT - AO has made proper enquiries in the instant case. There was assessment proceedings going on for ay 2013-14 and during the assessment proceedings for ay 2013-14, two references were made by ITO Allahabad to ACIT both u/s 144A in connection with sale/transfer of this property , which references were disposed of by Addl. CIT which ultimately led to reopening of the assessment u/s 147/148 for the impugned ay 2012-13. As gone through the reassessment order passed by AO we are of the considered view that the AO has applied his mind before passing reassessment order. Also we are in agreement with ld. CIT-DR that mistake has crept in reassessment order as cost of improvement is indexed by taking cost inflation index base of financial year 2012- 13, while the entire payments were made for freehold charges / stamp duty etc in fy 2011-12. Thus, the cost inflation index base for fy 2012-13 to be 852 was adopted while computing income from long term capital gains, while the cost inflation index for fy 2011-12(ay 2012-13) was 785 which ought to have been applied to cost of improvement being freehold conversion charges, stamp duty etc. Since the payment for freehold conversion charges, stamp duty etc. is made in the previous year relevant to impugned AY , there is no necessity of applying cost inflation index and actual payment made towards freehold conversion charges, stamp duty etc. ought to had been claimed/deducted while computing income chargeable to tax under the head income from long term capital gains. Similar , error crept in while indexing the cost of acquisition of the property by applying cost inflation index of 852 instead of 785 . Thus, to this extent the reassessment passed by AO was erroneous so far as prejudicial to the interest of Revenue which requires to be revised by AO and proceedings u/s 263 - Decided partly in favour of assessee.

Summary

Issues Involved:

1. Assumption of jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Consideration of freehold conversion charges as cost of improvement.
3. Fair market value consideration for capital gains calculation.
4. Proper enquiry and application of law by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Assumption of Jurisdiction under Section 263 of the Income Tax Act, 1961:
The appellant contested the jurisdiction assumed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263, arguing that the AO had already conducted a detailed scrutiny and enquiry during the assessment stage. The Pr. CIT, however, found the reassessment order dated 24.06.2016 to be erroneous and prejudicial to the interest of the Revenue, leading to the issuance of a show-cause notice under Section 263. The tribunal acknowledged the detailed enquiry by the AO but upheld the Pr. CIT's jurisdiction to revise the assessment due to specific errors that were prejudicial to the Revenue.

2. Consideration of Freehold Conversion Charges as Cost of Improvement:
The appellant claimed that the conversion of leasehold property to freehold by paying conversion charges significantly increased the property's value and should be considered as a cost of improvement. The Pr. CIT disagreed, stating that these charges were borne by the buyers and merely reimbursed to the assessee. The tribunal, after examining the agreement to sell dated 15.07.2011 and the freehold deed dated 13.03.2012, concluded that the conversion charges were indeed part of the sale consideration and necessary for improving the title and marketability of the property. Thus, the tribunal held that the assessee rightly claimed the deduction for these charges as a cost of improvement.

3. Fair Market Value Consideration for Capital Gains Calculation:
The Pr. CIT observed that the AO failed to consider the fair market value of the property, which was ?6,02,01,000, while the sale consideration was ?4,53,62,000. The tribunal noted that the assessee adopted the higher fair market value for capital gains calculation, in line with Section 50C of the Income Tax Act, which should not cause any grievance to the Revenue.

4. Proper Enquiry and Application of Law by the AO:
The Pr. CIT argued that the AO did not conduct proper enquiries, particularly with the buyers, and did not apply the law correctly. The tribunal found that the AO had made adequate enquiries and applied his mind before passing the reassessment order. However, it identified an error in indexing the cost of improvement and acquisition using the incorrect cost inflation index for the financial year 2012-13 instead of 2011-12. The tribunal upheld the revisionary proceedings under Section 263 to correct this specific error, directing the AO to revise the assessment accordingly.

Conclusion:
The tribunal partly allowed the appeal, affirming the Pr. CIT's jurisdiction under Section 263 for correcting the cost inflation index error but upheld the assessee's claim for deduction of freehold conversion charges as a cost of improvement. The reassessment order was set aside for fresh assessment with directions to correct the cost inflation index error.