2025 (4) TMI 1480 - AT - Income Tax

LTCG - Indexed cost of construction - Evidence (Proof) of expenditure incurred on construction - CIT(A) deleted the additions against cost of construction - HELD THAT - Perusal of the order of the Ld. CIT(A) reveals that the remand report was called out by the appellate authority but the AO was failed to submit the report. CIT(A) has examined the issue that the assessee has furnished the valuation report issued by a government approved valuer who estimated the cost of construction. The assessee also filed the additional evidence before the appellate authority on which remand report was called out from the AO. CIT(A) has examined the issues in the correct prospective and rightly allowed the appeal of the assessee. The reasoning and findings of the CIT(A) while granting relief is on proper appreciation of law expounded by the judicial dicta. No reason to interfere with the findings of the CIT(A). Appeal of the revenue is liable to be dismissed.

Summary

Issues Presented and Considered

1. Whether the deletion of cost of construction claimed for the assessment year 2012-13 by the CIT(A) without verifying the identity, creditworthiness, and genuineness of the parties was erroneous.

2. Whether the deletion of cost of construction claimed for the assessment year 2019-20 by the CIT(A) without verifying the identity, creditworthiness, and genuineness of the parties was justified.

3. Whether the Assessing Officer (AO) erred in disallowing the cost of construction claimed by the assessee on the ground of lack of documentary evidence such as bills, vouchers, commencement certificate, and bank transactions.

4. Whether the AO failed to provide sufficient opportunity to the assessee to substantiate the claims during assessment proceedings, particularly by not issuing notices under section 133(6) or involving the Departmental Valuation Officer (DVO).

5. Whether the additional evidences filed before the CIT(A) should be accepted despite their non-filing during assessment proceedings.

6. Whether the AO's disallowance of cost of acquisition and construction costs on the basis of non-registration of sale agreements and cancellation deeds was justified.

Issue-wise Detailed Analysis

Issue 1 & 2: Deletion of Cost of Construction for AY 2012-13 and AY 2019-20 Without Verification of Parties

Legal Framework and Precedents: The cost of construction claimed by an assessee under capital gains provisions requires substantiation through reliable documentary evidence to be allowed as deduction from the sale consideration. Section 54 of the Income Tax Act provides relief on capital gains for investment in residential property, but the cost of construction must be established. Precedents such as Govind Gangadhar Sabane (2019) ITD 577 (Pune) affirm that relief under section 54 cannot be denied solely due to non-production of bills and vouchers if construction is accepted and supported by valuation reports from government-approved valuers.

Court's Interpretation and Reasoning: The CIT(A) examined the evidence submitted by the assessee, including an approved building plan dated 03.09.2012, valuation reports by government-approved valuers, and bills from construction consultants. The AO rejected these on grounds such as absence of PAN and Service Tax number on bills, lack of commencement certificate, and non-submission of bank statements evidencing payments. However, the AO did not issue notices under section 133(6) to verify the authenticity of these documents or to the valuer for explanation. Nor was the case referred to the Departmental Valuation Officer (DVO). The CIT(A) held that the AO's objections primarily concerned timing of construction, not the fact of construction itself, which was undisputed. The CIT(A) reasoned that the absence of commencement certificate might constitute a violation of local laws but could not be a basis for denying cost of construction for income tax purposes.

Key Evidence and Findings: The assessee produced an approved building plan, valuation reports estimating construction costs consistent with claimed amounts, bank statements showing payments through banking channels, and bills from construction parties. The AO accepted that the building was constructed but disallowed cost of construction due to lack of documentary proof of timing and genuineness.

Application of Law to Facts: The CIT(A) applied the principle that the cost of construction cannot be disallowed merely on technical grounds if the construction is established. The reliance on valuation reports and banking evidence satisfied the requirement of proof. The AO's failure to conduct independent inquiries or seek remand reports undermined the basis for disallowance.

Treatment of Competing Arguments: The Revenue argued that the identity and genuineness of parties were not verified and that documentary evidence was insufficient. The CIT(A) and subsequently the Tribunal found these objections unsubstantiated due to AO's inaction in verifying the evidence and the acceptance of construction factually.

Conclusions: The deletion of cost of construction for AY 2012-13 and AY 2019-20 was justified. The AO's disallowance was based on procedural lapses and insufficient inquiry rather than substantive evidence. The CIT(A) rightly allowed the claims supported by valuation reports and bank transactions.

Issue 3 & 4: AO's Failure to Provide Adequate Opportunity and Conduct Independent Inquiry

Legal Framework and Precedents: Principles of natural justice and procedural fairness require that the AO provide sufficient opportunity to the assessee to substantiate claims during assessment proceedings. Section 133(6) empowers the AO to summon persons or documents to verify facts. The failure to issue show-cause notices or remand reports undermines the assessment's validity.

Court's Interpretation and Reasoning: The CIT(A) noted that despite repeated opportunities, the AO did not furnish remand reports or issue notices to verify the valuation reports or bills. The AO did not refer the matter to the DVO for independent valuation. The CIT(A) concluded that the assessee was not provided adequate opportunity to substantiate claims during assessment and accepted additional evidence filed during appellate proceedings under Rule 46A read with section 250(4).

Key Evidence and Findings: The assessee filed additional evidence such as bank statements, bills, and valuation reports during appellate proceedings. The AO's failure to respond or investigate was documented.

Application of Law to Facts: The Tribunal upheld the CIT(A)'s acceptance of additional evidence and held that the AO's procedural lapses warranted relief to the assessee.

Treatment of Competing Arguments: The Revenue contended that the AO's assessment was correct and that the CIT(A) erred in accepting additional evidence. The Tribunal rejected this, emphasizing the AO's failure to act and the principles of fair procedure.

Conclusions: The AO's failure to provide sufficient opportunity and conduct independent inquiry was a significant procedural defect. Additional evidence filed at appellate stage was rightly accepted.

Issue 5: Disallowance of Cost of Acquisition on Grounds of Non-Registration and Agreement Cancellation

Legal Framework and Precedents: Cost of acquisition under capital gains provisions must be established by valid documents. However, non-registration of agreements does not ipso facto invalidate transactions if payments are made through banking channels and the parties act in accordance with agreements. The genuineness of transactions must be judged on overall evidence.

Court's Interpretation and Reasoning: The AO disallowed Rs. 1,50,00,000 claimed as cost of acquisition on the basis that the sale agreement dated 03.12.2018 and its cancellation deed dated 25.09.2020 were not registered. However, payments were made through banking channels, and the cancellation deed stipulated compensation. The CIT(A) did not specifically overturn this disallowance in the order, but the Tribunal's overall findings indicate acceptance of the assessee's submissions regarding genuineness of transactions evidenced by bank payments.

Key Evidence and Findings: Unregistered sale and cancellation agreements with bank payment evidence.

Application of Law to Facts: The Tribunal implicitly recognized that non-registration alone cannot deny cost of acquisition if the transaction is genuine and supported by bank evidence.

Treatment of Competing Arguments: Revenue relied on formal registration requirements; assessee relied on substantive evidence of payment and transaction conduct.

Conclusions: While the AO disallowed cost of acquisition on non-registration grounds, the overall appreciation of evidence supports the genuineness of the transaction, and the Tribunal did not interfere with the CIT(A)'s findings favoring the assessee.

Significant Holdings

"Only for the reason that the assessee could not produce supporting bills and voucher and commencement certificate for construction, indexed cost of construction as claimed by the appellant cannot be disallowed."

"If she did not obtain commencement certificate for construction, it may be violation local construction bye laws, but on the basis of the same credit for cost of construction cannot be denied."

"Ld. AO has not denied the construction of the building, his only objection about timing of the construction but he has failed to establish conclusively that the building was not constructed partly in the F.Y. 2012-13."

"The appellant was not provided sufficient opportunity to substantiate her claim during the assessment proceedings."

"Additional evidences filed during the appellate proceedings are accepted."

"The relief granted by the Ld. CIT(A) is on proper appreciation of law expounded by the judicial dicta. We do not find any reason to interfere with the findings of the Ld. CIT(A)."

Core Principles Established

1. The genuineness of cost of construction claimed under capital gains provisions cannot be denied solely on technical grounds such as absence of commencement certificate or incomplete documentary evidence if the construction itself is established.

2. Valuation reports issued by government-approved valuers, coupled with bank statements evidencing payments, constitute sufficient proof to allow cost of construction.

3. The AO must conduct independent inquiries, including issuing notices under section 133(6) and involving the DVO, before disallowing claims on grounds of unverifiability.

4. Failure of the AO to provide adequate opportunity and to respond to appellate authority's remand requests justifies acceptance of additional evidence at the appellate stage.

5. Non-registration of agreements does not ipso facto invalidate cost of acquisition claims if payments are made through banking channels and transactions are genuine.

Final Determinations on Each Issue

(i) The deletion of cost of construction claimed for AY 2012-13 and AY 2019-20 by the CIT(A) was upheld as justified and proper.

(ii) The AO's disallowance of cost of construction on grounds of lack of documentary evidence and timing was rejected due to procedural lapses and insufficient inquiry.

(iii) The acceptance of additional evidence filed before the CIT(A) was upheld in view of the AO's failure to provide opportunity and respond to remand requests.

(iv) The AO's disallowance of cost of acquisition on non-registration grounds was not sustained in light of the evidence of payments through banking channels and genuineness of transactions.

(v) The appeal filed by the Revenue was dismissed, affirming the CIT(A)'s order in favor of the assessee.