Capital gains computation must respect disclosed improvement costs, while unsupported agricultural income claims may face partial addition

Earlier year investment and improvement costs disclosed in finalised returns could not be ignored in computing long-term capital gains, since no reassessment or revision had disturbed those returns. The full balance expenditure on agricultural land and a farm house was allowed where bank entries, sale deeds and a valuation report supported the claim and no diversion of funds was shown. The agricultural income addition was partly sustained because the record did not substantiate the entire income claimed. Exemption under section 54B was remanded for fresh consideration due to inadequate evidence on agricultural use, with liberty to produce further material.

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Issues: (i) Whether the cost of additions and improvements claimed in earlier years and reflected in accepted returns could be denied while computing long-term capital gains on sale of the properties; (ii) whether the balance cost of improvements incurred during the year on the agricultural land and farm house was to be allowed in full; (iii) whether the addition made on account of agricultural income was sustainable; (iv) whether exemption under section 54B was available on the material on record.

Issue (i): Whether the cost of additions and improvements claimed in earlier years and reflected in accepted returns could be denied while computing long-term capital gains on sale of the properties.

Analysis: The cost of development and improvement shown in the statements of affairs of the earlier assessment years had been disclosed in the returns filed for those years and those returns had attained finality. No action under section 147 or section 263 had been taken to disturb them. In that situation, the earlier year investments could not be ignored while computing capital gains in the year of sale.

Conclusion: The earlier year costs were allowable and could not be disallowed in the capital gains computation, in favour of the assessee.

Issue (ii): Whether the balance cost of improvements incurred during the year on the agricultural land and farm house was to be allowed in full.

Analysis: The expenditure was supported by bank entries, sale deeds and a valuation report. The evidence did not show that the withdrawals were diverted for any purpose other than the claimed development and construction work. Restricting the claim merely because part of the payments were made after the date of one sale deed was not justified on the facts found.

Conclusion: The entire claimed expenditure of Rs. 1,23,50,000 was allowable, in favour of the assessee.

Issue (iii): Whether the addition made on account of agricultural income was sustainable.

Analysis: The assessee owned agricultural land and some agricultural income had been declared in the preceding year. However, no satisfactory documentary evidence was produced for the full income claimed for the year under appeal. On that basis, the partial acceptance made by the first appellate authority was found reasonable.

Conclusion: The partial addition was sustained and the challenge by both sides failed, in favour of the Revenue to that extent.

Issue (iv): Whether exemption under section 54B was available on the material on record.

Analysis: The record did not contain adequate evidence regarding agricultural operations on the land for the required period, but the assessee sought an opportunity to produce evidence. The matter was therefore restored for fresh consideration in accordance with law.

Conclusion: The issue was remanded for reconsideration, in favour of the assessee for statistical purposes.

Final Conclusion: The cross appeals were disposed of by sustaining the core relief on capital gains, maintaining the partial addition on agricultural income, and remanding the exemption claim under section 54B for fresh adjudication.

Ratio Decidendi: Where earlier year investments or improvements are fully disclosed in returns that have attained finality, and no reassessment or revision has been undertaken, those costs cannot be ignored in computing capital gains on subsequent sale of the asset.

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