2016 (8) TMI 689 - AT - Income Tax

FMV as on 01/04/1981 as per the valuation Report of a registered valuer - assessee had calculated indexed cost of acquisition as per the relevant cost inflation index - AO had adopted the cost of acquisition based on the Wealth tax value mentioned in the probate application - Held that - For computing the LTCG provisions of section 55 of the Act have to be considered and not the Rule 1D, as envisageed by the Wealth tax Act. See Smt. B. Subhadra. Versus Income-Tax Officer 2004 (7) TMI 308 - ITAT HYDERABAD-B . Wealth Tax cannot be imported for determining the FMV for LTCG purposes. - Decided in favour of assessee. Exemption u/s. 54F - Held that - We find that the assessee had invested the entire consideration received on sale of the office premises for purchasing the plot of land and construction of a residential unit. The AO has not contravened both the facts-his only objection was that the unit was not completed within the period of three years of the sale. Here, we would like to refer to the case of Smt. Rajneet Sandhu (2010 (7) TMI 806 - ITAT CHANDIGARH ). In that matter, the Tribunal has held that there was no merit in the plea of Revenue authority that exemption u/s. 54F of the Act can be denied to an assessee on the ground that construction of the house had not been completed. It was further held that the requirement of section 54/54F was that the assessee should have either purchased a residential house being a new asset within a stipulated period or should have constructed a residential unit within 3 years from the date of transfer.

Summary

Issues Involved:
1. Determination of Long Term Capital Gain (LTCG) and its exemption under Section 54F of the Income Tax Act.
2. Adoption of Fair Market Value (FMV) for the purpose of calculating LTCG.
3. Claim of Short Term Capital Gain (STCG) exemption on a transaction between blood relatives.

Detailed Analysis:

1. Determination of Long Term Capital Gain (LTCG) and its exemption under Section 54F of the Income Tax Act:

During the assessment proceedings, the Assessing Officer (AO) found that the assessee had shown an office premises for a total consideration of ?2.31 crores and declared LTCG of ?81.85 lakhs. The assessee claimed exemption under Section 54F of the Income Tax Act based on investment in land acquired from CIDCO and expenses for constructing a house on the said land, showing an investment of ?1.92 crores. The AO held that the transfer of shares in the property was not legally valid as there was no legal document registered with any Government agency, and the property remained an undivided unit. Consequently, the AO denied the exemption claimed under Section 54F, adding ?1.02 crores to the assessee's total income.

The First Appellate Authority (FAA) held that the assessee had complied with the provisions of Section 54F by investing the entire consideration received on the sale of the original asset into purchasing a plot of land and starting construction of a new residential unit. The FAA directed the AO to allow the claim of the assessee for exemption under Section 54F.

2. Adoption of Fair Market Value (FMV) for the purpose of calculating LTCG:

The AO adopted the cost of acquisition based on the Wealth Tax value mentioned in the probate application, disregarding the valuation report of a registered valuer submitted by the assessee, which claimed FMV of ?17.02 lakhs as on 01/04/1981. The FAA held that the AO was required to adopt the FMV as per the valuation report of the registered valuer instead of the Wealth Tax value given in the probate. The FAA directed the AO to adopt the FMV of ?17.02 lakhs as on 01/04/81 as per the valuation report dated 11/09/2008.

The Tribunal found that for computing LTCG, the provisions of Section 55 of the Act have to be considered, not the Rule 1D of the Wealth Tax Act. The Tribunal referred to the case of B. Subhadra L/R B Paparaju and Madhu Tyagi, which held that the values adopted under the Wealth Tax Act are not applicable for determining FMV under the Income Tax Act. The Tribunal upheld the FAA's order, confirming that the valuation report of the registered valuer should be adopted.

3. Claim of Short Term Capital Gain (STCG) exemption on a transaction between blood relatives:

The assessee claimed that the STCG on the sale of property should be exempted as it was a transaction between blood relatives and thus exempt under Section 56(2) of the Act. The FAA dismissed the claim as it was not made before the AO and the assessee did not file a revised return of income.

The Tribunal, referring to the judgment of Pruthvi Brokers of the Hon'ble Bombay High Court, held that appellate authorities can allow claims made before them for the first time, even if a revised return is not filed. The Tribunal remitted the issue back to the FAA for fresh adjudication, directing the FAA to decide the issue after affording a reasonable opportunity to the assessee.

Conclusion:

The appeal filed by the AO was dismissed, and the Cross Objection (CO) filed by the assessee was partly allowed. The order pronounced in the open court on 12th August 2016 confirmed the FAA's decisions on the LTCG and FMV issues, while remitting the STCG exemption claim back to the FAA for reconsideration.