2012 (12) TMI 421 - HC - Income Tax

Assessee wins on capital gains computation, fair market valuation, and Section 54 exemption for interconnected flats

THE COMMISSIONER OF INCOME TAX-12, MUMBAI Versus MR RAMAN KUMAR SURI

Bombay HC ruled in favor of assessee on three issues. First, capital gains tax was computed on actual Rs.6 crores received by assessee from inherited ... Application of income versus diversion of income at Source - Capital gain from sale of inherited property - settlement between two brothers - the sale consideration of Rs.14 crores was distributed between the respondent and his brother at Rs.6 crores and Rs.8 crores respectively. - AO observed that the sale consideration of the inherited property has to be distributed between the two brothers at Rs.7.00 crores each. - This was on the basis that Rs.1 crore received by respondent 's brother was in excess of that received by the respondent and is, in fact, an application of income received by the respondent and not diversion of income at source. - AO brought to tax the capital gain taxable in the hands of the respondent on the basis of the net consideration of Rs.7 crores as against Rs.6 crores declared by the respondent for sale of New Delhi property. - CIT(A) and ITAT deleted the addition Held that:- the appellant had received only Rs.6 crores for the sale of his rights in the New Delhi property and the same had been offered to tax. There is no provision to tax a person on the basis of the deemed income for the purpose of capital gain tax. - Decided in favor of assessee. Determination of cost of acquisition of inherited property - Fair Market value (FMV as on 1/4/1981) - held that:- the valuation done by an empaneled registered valuer of the Income Tax Department would certainly take precedence over Nabhi's Guide to House Tax. The valuation done by the registered valuer is with regard to the specific property and takes into account its various advantages and disadvantages all of which influence the valuation of the property. As against the above, the Nabhi's Guide to House Tax is generalized guide and does not take into account the peculiar features of the property being valued. Moreover, the determination of the fair market value as on 1/4/1991 is a question of fact which has been examined by both the Commissioner of Income Tax (Appeals) as well as the Tribunal and both have concluded that the fair market value as estimated by the registered valuer at Rs.47.74 lacs as on 1/4/1981 is acceptable. - Decided in favor of assessee. Exemption u/s 54 - purchase of two flats - inter connected by internal stair case. - held that:- two flats were joined together before the respondent assessee became the owner of the two flats. The Certificate from the society also established the fact that two flat Nos. 416A and 516A were joined together and were considered as one residential house. - Exemption allowed - Decided in favor of assessee. The core legal questions considered by the Court in this appeal under Section 260A of the Income Tax Act, 1961 relate to the computation and taxation of capital gains arising from the sale of inherited property and the applicability of exemptions under Section 54 of the Act. Specifically, the issues include:(a) Whether the Memorandum of Understanding (MoU) between brothers, which allocated sale proceeds unevenly, could be disregarded by the Assessing Officer (AO) to tax the capital gain on a deemed higher consideration;(b) The appropriate method and basis for determining the fair market value (FMV) of inherited property as on 1/4/1981 for cost of acquisition purposes, including whether the valuation by a registered valuer or the rates from Nabhi's Guide to House Tax should be preferred;(c) Whether the registered valuer's report could be accepted without explicit reasons for not adopting government-approved rates;(d) The correct date from which cost inflation indexation benefit under Section 48 of the Act applies, particularly whether indexation can be claimed from 1/4/1981 or only from the year the assessee inherited the property;(e) and (f) Whether two flats purchased and physically joined into a duplex flat should be treated as one residential house for exemption under Section 54, or as two separate units.Issue (a): Taxation of Capital Gain Based on Memorandum of UnderstandingThe respondent inherited a New Delhi property jointly with his brother as per their mother's Will dated 1987. The property was sold in 2005 for Rs.14 crores. A written MoU between the brothers provided that the brother would receive Rs.1 crore more than the respondent's half share, reflecting their late father's wishes. Accordingly, the sale proceeds were split as Rs.6 crores to the respondent and Rs.8 crores to the brother.The AO disregarded the MoU, treating the Rs.1 crore excess received by the brother as an application of income belonging to the respondent, thus taxing the respondent on Rs.7 crores instead of Rs.6 crores. The Commissioner of Income Tax (Appeals) and subsequently the Tribunal upheld the MoU as legally binding and recognized that the additional Rs.1 crore was diverted before income reached the respondent. The Tribunal emphasized that assessment must be based on the actual amount received by the assessee, not on a deemed amount.The Court found no error in these findings, noting that the sale deed itself referred to the MoU and recorded the respondent's consideration as Rs.6 crores. The Court held that there is no provision to tax capital gains on a deemed income basis and affirmed that the actual consideration received is the basis for capital gains tax. The Court dismissed the revenue's appeal on this issue, concluding no substantial question of law arose.Issues (b) and (c): Determination of Fair Market Value as on 1/4/1981For computing capital gains, the cost of acquisition was to be determined at FMV as on 1/4/1981. The respondent submitted a valuation report by a registered valuer empaneled with the Income Tax Department, valuing the property at Rs.47.74 lakhs. The AO rejected this and applied Nabhi's Guide to House Tax, arriving at Rs.17.33 lakhs as FMV.The Commissioner of Income Tax (Appeals) held that valuation inherently involves estimation and that the registered valuer's report was reliable and explained its basis, including the superior location of the property. The Commissioner rejected the applicability of Nabhi's Guide, which was a generalized reference, not tailored to the specific property.The Tribunal upheld the Commissioner's decision, emphasizing that the registered valuer's report, which considered property-specific factors such as size, location, road frontage, and corner plot advantages, should prevail over a generalized guide. The Tribunal noted that valuation is a question of fact and found no perversity or arbitrariness in accepting the registered valuer's higher FMV.The Court agreed with the Tribunal, holding that the valuation by the empaneled registered valuer takes precedence over the generalized Nabhi's Guide. The Court found no substantial question of law in this factual determination and dismissed the appeal on these points.Issue (d): Applicability of Cost Inflation IndexationThe question was whether the cost inflation index (CII) benefit under Section 48 of the Act could be claimed from 1/4/1981 or only from the year the assessee inherited the property (1999). The parties agreed that this issue was settled by a binding precedent of the Court in favor of the assessee, allowing indexation from the earlier date.The Court accordingly dismissed this question as not raising any substantial question of law.Issues (e) and (f): Treatment of Two Flats as One Residential House for Section 54 ExemptionThe respondent claimed exemption under Section 54 of the Act on investment in two flats (Nos. 416A and 516A) purchased in the same society, which were physically joined into a duplex flat. The AO restricted the exemption to the value of one flat, holding that Section 54 applies only to investment in one residential house and that two flats, even if joined, constitute two separate houses.The Commissioner of Income Tax (Appeals) allowed the full exemption, relying on a certificate from the Co-operative Society confirming that the two flats were interconnected by an internal staircase, had only one entrance and one kitchen, and were treated as one residential house. The Commissioner found that the duplex configuration predated the respondent's purchase and was not a post-acquisition modification.The Tribunal upheld this view, following a Special Bench decision which held that two flats with one entrance, one kitchen, and common passage constitute one residential house for Section 54 purposes.The Court found no fault with these concurrent findings of fact and legal reasoning. It held that the exemption under Section 54 applies to one residential house, and where two flats are joined and treated as one residential house, the exemption applies to the aggregate investment. The Court dismissed the revenue's appeal on these issues.Significant holdings and core principles established include:o The actual consideration received by an assessee for sale of property is the basis for capital gains tax; a personal agreement diverting income before receipt is binding and cannot be disregarded to tax a deemed higher amount.o Valuation of property for capital gains purposes is a question of fact; a registered valuer's detailed report considering property-specific factors prevails over generalized valuation guides.o Cost inflation indexation benefit under Section 48 applies from the date of acquisition or deemed acquisition, as settled by precedent, not merely from the date of inheritance.o For exemption under Section 54, two flats physically joined and treated as one residential house constitute one residential house; the exemption applies to the aggregate investment in such a combined unit.Verbatim from the judgment on the first issue: 'The assessment can only be on the actual amount received by the assessee, the respondent assessee has sold his share in the New Delhi property at Rs.6 crores only and that alone can be the sale consideration.'On valuation: 'The valuation done by the registered valuer is with regard to the specific property and takes into account its various advantages and disadvantages all of which influence the valuation of the property. As against the above, the Nabhi's Guide to House Tax is generalized guide and does not take into account the peculiar features of the property being valued.'On Section 54 exemption: 'Where two flats bearing Nos. 416A and 516A had only one entrance, one kitchen and common passage it has to be considered as one residential house and the respondent was entitled to exemption for the aggregate consideration of Rs.3 crores under Section 54 of the Act.'