Tribunal confirms fair market value for cost of acquisition in capital gains case

The Tribunal upheld the CIT(A)'s decision that the cost of acquisition should be based on the fair market value at the time of dissolution in 1987. The Assessing Officer's computation of long-term capital gain was deemed incorrect, resulting in the deletion of an additional amount. The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objections, affirming the CIT(A)'s order.

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Issues Involved:
1. Computation of Long Term Capital Gain.
2. Determination of Cost of Acquisition.
3. Application of Sections 45(4) and 49(iii)(b) of the Income Tax Act.
4. Validity of Valuation Report by Approved Valuer.
5. Interpretation of Circular No. 495 dated 22 September 1987 by CBDT.

Detailed Analysis:

1. Computation of Long Term Capital Gain:
The primary issue was the computation of long-term capital gain arising from the sale of a property initially purchased in 1985 and subsequently introduced as capital in a partnership firm. The property was sold in 2008 for Rs. 3,03,00,000, and the assessee computed the long-term capital gain based on the fair market value (FMV) as of 1987, the date of dissolution of the partnership firm.

2. Determination of Cost of Acquisition:
The Assessing Officer (AO) contended that the cost of acquisition should be based on the original purchase price in 1985, not the FMV in 1987. The assessee argued that the property became an individual asset only upon the firm's dissolution in 1987, and thus the FMV at that time should be considered the cost of acquisition.

3. Application of Sections 45(4) and 49(iii)(b) of the Income Tax Act:
The CIT(A) and the Tribunal examined the provisions of Sections 45(4) and 49(iii)(b). Section 45(4) states that the FMV of the asset on the date of dissolution shall be deemed the full value of consideration received. Section 49(iii)(b) provides that the cost of acquisition should be the cost for which the previous owner acquired it, increased by any cost of improvement. The Tribunal concluded that since the dissolution occurred after 1st April 1987, the FMV at the time of dissolution should be the cost of acquisition.

4. Validity of Valuation Report by Approved Valuer:
The AO rejected the cost of construction incurred during 1986-87 due to a lack of evidence but accepted other parts of the valuation report. The CIT(A) and the Tribunal held that the AO could not partially accept and partially reject the valuation report without valid reasons. The Tribunal emphasized that the valuation report by an approved valuer, being a technical person, should be relied upon unless proven otherwise.

5. Interpretation of Circular No. 495 dated 22 September 1987 by CBDT:
The Tribunal referred to Circular No. 495, which clarified that the conversion of partnership assets into individual assets on dissolution forms part of a tax avoidance scheme. The circular supports the application of Section 45(4), indicating that the FMV at the time of dissolution should be the cost of acquisition for the partners.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the cost of acquisition should be based on the FMV at the time of dissolution in 1987. The AO's computation of long-term capital gain was deemed incorrect, and the addition of Rs. 34,27,520/- was deleted. The Tribunal dismissed the Revenue's appeal and the assessee's cross-objections, affirming the CIT(A)'s order.

Order pronounced in the open court on 11/04/2014.

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