2020 (3) TMI 711 - AT - Income Tax

Capital gain computation - FMV determination - Computation of cost inflation index in reverse manner while computing long term capital gain on transfer of tenancy rights - HELD THAT - Assessee himself has furnished a valuation report of a registered valuer determining the FMV of the tenancy right as on 1st April 1981. That being the case, the cost of acquisition for indexation benefit has to be given as per the statutory provision contained under section 48 r/w section 49 and section 55(2)(a) and section 55(2)(b) - Commissioner (Appeals) has allowed indexation benefit of the assessee in relation to the cost of acquisition in terms of the aforesaid statutory provisions. Assessee should not have any grievance against the aforesaid decision of learned Commissioner (Appeals). As regards assessee s claim of reverse indexation benefit, it is to be noted that no such method has been provided under the relevant statutory provisions. Therefore, reverse indexation method applied by the assessee being contrary to the statutory provisions cannot be accepted. As regards the decision of the Hon ble Gujarat High Court in Shantadevi Gaikwad (Dec.) 2012 (5) TMI 149 - GUJARAT HIGH COURT relied upon by the learned Authorised Representative, the facts of the case clearly reveal that applicability of the reverse indexation in the facts of that case was accepted by both the assessee and the Revenue which is not the fact in the present case. In case of Jahanganj Cold Storage 2010 (4) TMI 765 - ITAT, AGRA the facts would so that the FMV of the asset as on 1st April 1981, was not available. Therefore, reverse indexation method was applied. In any case of the matter, the Tribunal, Ahmedabad Special Bench, in Vijay R. Rathore v/s ITO 2006 (10) TMI 174 - ITAT AHMEDABAD held that FMV as on 1st April 1981, has to be taken as cost of acquisition after allowing benefit of indexation. In the facts of the present case, the FMV of the asset transferred as on 1st April 1981 is available as per the valuation report of the registered valuer of the assessee. Therefore, when the FMV of the tenancy right as on 1st April 1981 is available, there is no valid reason to discard it and adopt the cost of acquisition as per reverse indexation method merely because it is more beneficial to the assessee. In view of the aforesaid, we do not find any merit in the ground raised by the assessee. This ground is dismissed. Disallowance of expenditure under section 14A of the Act r/w rule 8D - HELD THAT - assessee is a professional and his main source of income is from carrying out legal profession. From the assessment stage itself it is the claim of the assessee that the entire expenditure debited to the Profit Loss Account is integrally connected to the professional activity and no part of it is attributable to the investments on which he has earned exempt income. It is seen, the Assessing Officer has rejected the aforesaid submission of the assessee in a mechanical manner. As per section 14A(2), the Assessing Officer has to record a satisfaction that the claim of the assessee with regard to the expenditure incurred for earning exempt income is incorrect having regard to the books of account. In the facts of the present case, the Assessing Officer has not made any discussion as to which part of the expenditure can be attributed towards earning of exempt income. Considering the fact that the assessee is engaged in full time profession and out of the income earned has made some investment in exempt income earning assets, it cannot be said that the assessee is carrying on his investment activity in an organized manner by employing men and infrastructure. Unless the Assessing Officer refutes assessee s claim of non incurring of any expenditure for investment activity with cogent reasoning, no disallowance under section 14A r/w rule 8D(2)(iii) can be made - We delete the disallowance made under section 14A r/w rule 8D. This ground is allowed.

Summary

Issues:
1. Challenge to order of Commissioner of Income Tax (Appeals) for assessment year 2008-09.
2. Computation of cost inflation index in reverse manner for long term capital gain on transfer of tenancy rights.
3. Disallowance of expenditure under section 14A of the Income Tax Act.

Issue 1: Challenge to Order of Commissioner of Income Tax (Appeals)

The appeal was filed challenging the order dated 25th July 2011 by the Commissioner of Income Tax (Appeals) for the assessment year 2008-09. The appeal was initially disposed off but was recalled based on a misc. application by the assessee. The present appeal was then heard by the Bench.

Issue 2: Computation of Cost Inflation Index for Long Term Capital Gain

The assessee raised the issue of computing cost inflation index in reverse while calculating long term capital gain on the transfer of tenancy rights. The Assessing Officer did not accept the assessee's claim that the gain from the transfer of tenancy rights was not taxable. The Commissioner (Appeals) allowed indexation benefit for the cost of acquisition based on the fair market value as on 1st April 1981 determined by a registered valuer. The claim for reverse indexation was rejected as it was not provided for in statutory provisions.

Issue 3: Disallowance of Expenditure under Section 14A

The Assessing Officer disallowed expenditure under section 14A of the Act regarding exempt income earned through dividends. The assessee contended that all expenditure was for professional income and not related to earning exempt income. The disallowance was based on rule 8D(2)(iii). The Tribunal held that unless there is a nexus between expenditure and exempt income, no disallowance can be made. The disallowance under section 14A was deleted.

In conclusion, the appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the disallowance of expenditure under section 14A. The Tribunal dismissed the claim for reverse indexation in the computation of long term capital gain on the transfer of tenancy rights, as it was not supported by statutory provisions.