2017 (10) TMI 686 - AT - Income Tax

Computation of long term capital gain on sale of a property at Koramangala, Bangalore by the assessee - determination of FMV as on 01.04.1981 - Held that - We find lot of loose ends in the statement given by the approved valuer before the AO. In this regard the Assessee has in her submissions dated 30.9.2013 specifically pointed out that the AO did not afford opportunity of cross-examination of the Registered Valuer and therefore the evidence in the form of statement of the Registered valuer has to be ignored. In arriving at the value on the basis of statement of Registered Valuer, the AO has not taken cognizance of the existence of the building and the cost to be attributed to the value of building as on 1.4.1981. Keeping these facts in mind and also taking note of the fact that the AO has not chosen to make a reference to the valuation officer u/s. 55A of the Act and also keeping in mind the fact that estimation of FMV as on 01.04.1981, in the absence of a good comparative sale instance, would be only an approximation, we deem it proper to conclude that the FMV as on 01.04.1981 should be fixed at ₹ 75/sq.ft. We hold and direct accordingly. The relevant grounds of appeal of the revenue are accordingly dismissed while that of the assessee is partly allowed. Interpretation of Explanation (iii) to Sec.48 of the Act, which defines the expression Indexed Cost of Acquisition - Whether indexed cost of acquisition has to be computed by taking 1.4.1981 or the year 1994 when the Assessee succeeded to the property as legal heir of her deceased husband? - Held that - As per the CBDT Circular No. 636 dt. 31st Aug., 1992 a fair method of allowing relief by way of indexation is to link it to the period of holding the asset. The said circular further provides that the cost of acquisition and the cost of improvement have to be inflated to arrive at the indexed cost of acquisition and the indexed cost of improvement and then deduct the same from the sale consideration to arrive at the long-term capital gains. If indexation is linked to the period of holding the asset and in the case of an assessee covered under s. 49(1), the period of holding the asset has to be determined by including the period for which the said asset was held by the previous owner, then obviously in arriving at the indexation, the first year in which the said asset was held by the previous owner would be the first year for which the said asset was held by the assessee. The Hon ble Court in the case of CIT Vs. Manjula J.Shah 2011 (10) TMI 406 - BOMBAY HIGH COURT finally concluded that while computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset. In view of the aforesaid decision of the Hon ble Bombay High Court, we are of the view that the CIT(A) was fully justified in allowing the benefit of indexation on FMV as on 1.4.1981 from 1.4.1981. We confirm the order of the CIT(A) and dismiss the relevant grounds of appeal of the Revenue.

Summary

Issues Involved:
1. Computation of long-term capital gain on sale of property.
2. Deduction of expenses incurred in relation to the transfer.
3. Deduction of payments made to agreement holders.
4. Computation of cost of acquisition and indexed cost of acquisition.
5. Determination of Fair Market Value (FMV) as on 01.04.1981.
6. Indexed cost of acquisition from the year 1994 or 01.04.1981.

Detailed Analysis:

1. Computation of Long-Term Capital Gain on Sale of Property:
The primary dispute in both appeals was the computation of long-term capital gain on the sale of a property in Koramangala, Bangalore. The assessee sold the property for ?6,15,00,000/- and computed the capital gain by deducting various expenses and costs, resulting in a net gain of ?15,82,583/-. The Assessing Officer (AO) computed the capital gain at ?3,72,43,612/-, leading to significant differences due to disallowances and different valuations.

2. Deduction of Expenses Incurred in Relation to the Transfer:
The assessee claimed ?85,00,000/- as expenses (brokerage and legal fees), while the AO allowed only ?25,61,492/-. The Tribunal noted the dispute and considered the evidence provided by both parties. The AO's disallowance of ?59,35,508/- was a significant point of contention.

3. Deduction of Payments Made to Agreement Holders:
The assessee claimed a deduction of ?1,96,25,000/- paid to agreement holders for cancellation of agreements to secure a clear title to the property. The AO disallowed this amount entirely. The Tribunal considered the necessity and validity of these payments in the context of securing the property title.

4. Computation of Cost of Acquisition and Indexed Cost of Acquisition:
The property was initially acquired by the assessee's husband in 1958 and later inherited by the assessee in 1994. The assessee claimed the Fair Market Value (FMV) as on 01.04.1981 at ?100/sq.ft., while the AO determined it at ?10/sq.ft. The CIT(A) fixed the FMV at ?50/sq.ft. The Tribunal reviewed these valuations and the relevant legal provisions under Section 55(2)(b)(i) of the Income Tax Act.

5. Determination of Fair Market Value (FMV) as on 01.04.1981:
The Tribunal analyzed the FMV determination process, considering the registered valuer's report, AO's examination, and the CIT(A)'s decision. The registered valuer initially valued the property at ?175/sq.ft. based on 1985 guidelines, later revising it to ?28/sq.ft. upon AO's confrontation with 1982 circulars. The CIT(A) fixed the FMV at ?50/sq.ft., but the Tribunal found inconsistencies and ultimately concluded that the FMV should be ?75/sq.ft.

6. Indexed Cost of Acquisition from the Year 1994 or 01.04.1981:
The Tribunal addressed whether the indexed cost of acquisition should be computed from 1994 (when the assessee inherited the property) or from 01.04.1981. The CIT(A) allowed indexation from 1981, which the revenue challenged. The Tribunal referred to the Bombay High Court's decision in CIT Vs. Manjula J. Shah, which held that the indexed cost of acquisition should be computed with reference to the year the previous owner first held the asset. Thus, the Tribunal upheld the CIT(A)'s decision to allow indexation from 01.04.1981.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, concluding that the FMV as on 01.04.1981 should be ?75/sq.ft. and upheld the CIT(A)'s decision on the indexed cost of acquisition from 01.04.1981. The Tribunal's detailed analysis emphasized the importance of accurate valuation and adherence to legal provisions in computing long-term capital gains.