2020 (2) TMI 826 - AT - Income Tax

Capital gain computation - addition on account of reducing the cost of acquisition FMV as on 01.04.1981 - what is the FMV of a property purchased in 1972 as on 1.4.1981 would be ? - HELD THAT - It can only be ascertained on the basis of some scientifically estimate formula. There are various methods provided under different enactments i.e. rent capitalization method, trend in the market, or what is the potential value on the strength of comparative sale instance. The ld.Registered valuer has adopted method on the basis of comparative sale instance. He thereafter made little adjustment considering peculiar facts of the land. This is an opinion of the expert, and contrary to this nothing has been collected by the Revenue. There is no justification to reject this study merely under the reasoning that a single instance which is little closure to the date of transaction is to be taken into consideration. To our mind, this approach is not justifiable hence we set aside the finding of the Revenue authorities on this issue, and direct the AO to compute capital gain by adopting the land rate of ₹ 150 per sq.meter as on 1.4.1981. He would thereafter give benefit of indexation on the alleged value of ₹ 8,24,000/-. Enhancment of the acquisition cost - Addition of ₹ 20 lakhs as assessee has given this piece of land on rent to PPP - AO has not justified in rejecting contentions of the assessee. It is pertinent to note that PPP has shown gains from business or profession at ₹ 13,31,916/-. It has shown short term capital gain on sale of shed under section 50. Its tax liability has been worked out at ₹ 5,93,419/-. Contrary to this, the assessee would show long term capital gain on sale of this shed. The assessee has disclosed sale value of the land at ₹ 7,92,00,000/-. Hardly inclusion of ₹ 20 lakhs or exclusion would make any difference to the assessee who is filing return of more than ₹ 7.76 crores. To our mind, sum of ₹ 20 lakhs was very small amount in comparison to ₹ 7.92 corees, and the assessee would not involve in manipulation of this small amount, when such huge sale consideration is available. Modus operandi at the end of the assessee could be construed, had there been a bigger allocation made by the assessee for reducing the tax liability. All these factors are to be weighed while appreciating the stand of the assessee vis- -vis reasoning given by the AO. He has not given any concrete reasons, rather simply disbelieved the version of the assessee. Therefore, we do not find force in the reasoning of the AO. We direct the AO to delete the addition of alleged ₹ 20 lakhs, and consider this amount as improvement cost of the capital asset whose sale has given rise to the capital gain. Appeal of the assessee is allowed.

Summary

Issues:
1. Computation of long term capital gain on sale of land.
2. Adoption of fair market value for indexation purposes.
3. Disallowance of alleged improvement cost in the computation of capital gain.

Issue 1: Computation of long term capital gain on sale of land:
The assessee declared long term capital gain on the sale of land in the return of income. The Assessing Officer (AO) disputed the valuation adopted by the assessee for indexation purposes and made adjustments leading to an enhanced capital gain. The AO disregarded the report of the registered valuer and adopted a lower purchase value for the land as on 1.4.1981. The dispute centered around the determination of the fair market value (FMV) of the property as on the relevant date. The Commissioner of Income Tax (Appeals) upheld the AO's decision. However, the ITAT held that the AO's approach was unjustified. The ITAT directed the AO to compute the capital gain by adopting the land rate of ?150 per sq. meter as on 1.4.1981 and provide indexation benefits accordingly.

Issue 2: Adoption of fair market value for indexation purposes:
The dispute revolved around the adoption of the fair market value for indexation purposes. The assessee contended that the rate of ?150 per sq. meter was justified based on the report of the registered valuer, considering various factors such as the property's location, development potential, and amenities. The ITAT agreed with the assessee's argument, emphasizing that the valuation should be based on a scientific estimate and expert opinion. The ITAT set aside the Revenue authorities' findings and directed the AO to consider the land rate of ?150 per sq. meter for indexation purposes.

Issue 3: Disallowance of alleged improvement cost in the computation of capital gain:
The AO disallowed an alleged improvement cost of ?20 lakhs claimed by the assessee in the computation of capital gain. The AO questioned the construction of a shed on the land by a third party to whom the land was rented. The ITAT observed that the AO's reasoning was not justified as the third party had shown gains from business activities and had declared short term capital gains on the shed. The ITAT concluded that the disallowance of the improvement cost was unwarranted, especially considering the insignificant amount in comparison to the total sale consideration. The ITAT directed the AO to delete the addition of the alleged ?20 lakhs and treat it as an improvement cost of the capital asset for the computation of capital gain.

In conclusion, the ITAT allowed the appeal of the assessee, emphasizing the importance of expert valuation, scientific estimation, and justified reasoning in determining long term capital gains on the sale of land.