2022 (5) TMI 822 - AT - Income Tax

Capital gain computation - Short term capital - claim of proportionate cost of acquisition as well as cost of construction - AO disallowed the claim of cost of construction on the ground that the assessee has not produced any documentary evidence like purchase of construction material and other expenses except producing the valuation report which is also not based on any evidence indicating any improvement taken place in the property - AO doubted the claim of cost of construction of the second floor of the property in view of the fact that the assessee has sold the property within a period of two and a half months after it was purchased and therefore, how the property was constructed within such a short spam of time - HELD THAT - When the second floor of the property in question came into existence after the property was purchased by the assessee then the AO was required to get the fair cost of construction through the reference to the Valuation Officer. In the absence of such an exercise on the part of the AO, the cost of construction as determined by the registered valuer in the valuation report cannot be rejected - AO has also not given its finding about the proportionate cost of acquisition being cost of land attributable to the second floor and simply rejected the claim on the ground that the assessee has failed to support the claim by submitting documentary evidence. The determination of cost of land is not a complicated issue as prevailing rate of land as per the Government circulation or the valuation of the land by the Stamp Duty authority can be taken as cost of the total land on which the second floor is constructed. AO has not even attempted to verify the correctness of the cost of land and construction claimed by the assessee. Hence, in the absence of any proper verification and enquiry by the AO, the claim of proportionate cost of acquisition as well as cost of construction based on the valuation report cannot be denied. Accordingly, the addition made by the AO is deleted. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of cost of construction for short term capital gain.
2. Rejection of valuation report by Assessing Officer.
3. Failure to conduct proper enquiry by Assessing Officer.

Issue 1: Disallowance of cost of construction for short term capital gain:
The assessee declared short term capital gain on the sale of a property and claimed cost of construction. The Assessing Officer doubted the claim due to the short period between purchase and sale. The CIT(A) upheld the disallowance. The Tribunal noted the property's existing state at purchase and sale, supported by deeds and site plans. The second floor's construction after purchase was evident. The Assessing Officer did not dispute the second floor's existence. The Tribunal emphasized the need for a proper enquiry into the cost of construction. The assessee provided a valuation report, but the Assessing Officer did not verify it. The Tribunal held that without verification, the cost of construction based on the report could not be rejected. The Assessing Officer's failure to determine the proportionate cost of land and construction was also noted. As no proper verification was done, the Tribunal deleted the addition made by the Assessing Officer.

Issue 2: Rejection of valuation report by Assessing Officer:
The Assessing Officer rejected the valuation report provided by the assessee to support the cost of construction. The Tribunal highlighted the Assessing Officer's lack of enquiry into the actual cost of construction. It emphasized the necessity of verifying the valuation report before dismissing it. The Tribunal held that without proper verification and enquiry, the rejection of the valuation report was unjustified. The Tribunal ruled in favor of the assessee due to the Assessing Officer's failure to conduct a thorough examination of the valuation report.

Issue 3: Failure to conduct proper enquiry by Assessing Officer:
The Tribunal criticized the Assessing Officer for not conducting a proper enquiry into the cost of construction. It noted the Assessing Officer's failure to verify the cost of land and construction claimed by the assessee. The Tribunal emphasized the importance of a thorough investigation by the Assessing Officer to ascertain the actual cost of construction. Due to the lack of proper verification and enquiry, the Tribunal concluded that the Assessing Officer's disallowance of the cost of construction was unwarranted. The Tribunal allowed the assessee's appeal based on the inadequacy of the Assessing Officer's examination and verification process.

In conclusion, the Tribunal ruled in favor of the assessee, deleting the addition made by the Assessing Officer regarding the disallowance of the cost of construction for short term capital gain. The Tribunal highlighted the Assessing Officer's failure to conduct a proper enquiry and verify the valuation report, leading to the decision in favor of the assessee.