2015 (10) TMI 78 - AT - Income Tax

Disallowance of deduction on account of cost of acquisition and cost of improvement while computing long term capital gain (LTCG) - exemption u/s 54EC - assessee is a non-resident individual - Held that - As can be seen from the terms of the deed of settlement, the property given by father of assessee to her was out of natural love and affection and without any monetary consideration. That being the case, it cannot be said that it is not a gift so as to come within the purview of section 49 of the Act. Though, the property might have been given to assessee under a document termed as deed of settlement, but, the recitals in the deed to the effect that property was given out of natural love and affection and without monetary consideration suggest that it is in the nature of gift by father to a daughter. That being the case, the cost of acquisition to the previous owner i.e. father shall be deemed to be the cost of acquisition to assessee in terms of section 49 of the Act. Even otherwise also, if we accept the contention of ld. DR that the property came to assessee by way of settlement since another of property belonging to assessee was sold by her father, then, also it cannot be said that devolution of property in favour of assessee is without any monetary consideration. As could be seen from the facts on record and as well as the recitals in the deed of settlement, part of the subject property was given to the daughter as the property inherited by daughter from her grand father by virtue of a will was sold by her father without her knowledge. Thus, it is to be assumed that settlement of property in favour of assessee by her father was in exchange of property belonging to assessee at Delhi sold by her father without her knowledge. That being the case, it cannot be said that the transfer of property by assessee s father to his daughter was without any monetary consideration. As can be seen from the mode of computation of capital gain provided u/s 48 of the Act, income chargeable under the head capital gain shall be computed after deducting therefrom expenditure incurred wholly and exclusively in connection with such transfer of the asset and secondly, the cost of acquisition of the asset and cost of any improvement thereto. Therefore, unless there is cost of acquisition, computation provision as per section 48 will fail. In this context reliance can be placed on CIT Vs. B.C. Srinivasa Setty (1981 (2) TMI 1 - SUPREME Court ). Though, section 45(5) provides for considering cost of acquisition and cost of improvement at nil , under certain specified circumstances, those, conditions are absent in the present case. Therefore, considered in the aforesaid perspective, disallowance of cost of acquisition by AO, in our view, is not permissible in law. Accordingly, we allow assessee s claim of cost of acquisition As far as cost of improvement is concerned, it is evident from the deed of settlement that scheduled property received by assessee from her father is built up area of 2000 sft. comprising of ground floor and 1st floor over a land of 300 sq.yds., whereas, as per the schedule of property, which forms part of the sale deed executed by assessee, property sold is 3000 sft. of built up area consisting of ground floor and 1st floor over 300 sq.yds. land. Thus, the aforesaid facts, to certain extent indicates that assessee s claim that she has constructed some extra space both in the ground floor and 1st floor appears to be believable. However, since both these aspects have not been examined by AO or ld. CIT(A), and it is not forthcoming whether documentary evidences produced before us were specifically brought to the notice of the departmental authorities, we are inclined to remit the issue relating to claim of cost of construction to AO for deciding afresh after verifying documentary evidence submitted by assessee and only after due opportunity of being heard to assessee. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Disallowance of deduction on account of cost of acquisition and cost of improvement while computing long term capital gain (LTCG).

Analysis:

Issue 1: Disallowance of deduction on account of cost of acquisition
The assessee claimed deduction on account of cost of acquisition and cost of improvement while computing LTCG. The AO disallowed the claim as the property was received by the assessee through a settlement deed without any monetary consideration. The AO also questioned the lack of evidence to substantiate the claimed cost of improvement. The CIT(A) upheld the AO's decision, stating that the provisions of section 47 did not apply as the transfer was under a settlement deed, not a gift or will. However, the ITAT held that the property was given to the assessee out of natural love and affection, akin to a gift, and therefore, the cost of acquisition should not be considered as 'Nil'. The ITAT also highlighted that without a cost of acquisition, the computation provision under section 48 would fail. Therefore, the disallowance of the cost of acquisition was deemed impermissible in law, and the assessee's claim was allowed.

Issue 2: Disallowance of deduction on account of cost of improvement
Regarding the cost of improvement, the ITAT noted discrepancies in the built-up area received by the assessee and the area sold, indicating potential construction of extra space. However, as this aspect was not adequately examined by the AO or CIT(A), the ITAT remitted the issue back to the AO for reevaluation. The ITAT directed the AO to verify the documentary evidence submitted by the assessee and provide a fair opportunity for the assessee to be heard before making a decision on the claimed cost of improvement. Consequently, the ITAT allowed the appeal of the assessee for statistical purposes.

In conclusion, the ITAT's judgment favored the assessee by allowing the claim for cost of acquisition and directing a reevaluation of the cost of improvement, emphasizing the importance of proper verification and due process in such matters.