2014 (2) TMI 1415 - AT - Income Tax

ITAT Upholds Fair Market Value Rules for Capital Gains

Asst. Commissioner of Income-tax, Circle 7 (1), Hyderabad Versus Shri Shaik Ahmed Banafe

The Revenue's appeal challenging the non-applicability of referring to the valuation cell under certain sections for capital gains computation was ... Capital gain computation - reference to Valuation Cell under S.50C, S.55A and S.142A - HELD THAT:- Under S.50C in determining the sale value of consideration according to stamp value, if the assessee objects to the valuation, then reference under S.50C can be made to Valuation Officer. This situation does not arise in this case. U/s 55A, with a view to ascertain the fair market value of a capital asset, AO can refer the valuation to Valuation Officer, but the fair market value under this Chapter is adopted for the purpose of cost of acquisition of an asset, while computing the capital gains and not for sale consideration. If S.55A could be invoked to arrive at the sale consideration, then there is no necessity to introduce provisions of S.50C which enables the AO to adopt the SRO value, where the sale consideration is not in accordance with the SRO value. While computing the capital gains, substitution of sale consideration with fair market value can only be done under S.50C. There is no other provision in the Act to do so. Even the reference u/s 142A of the Act for determining the value of any investment can only be done with reference to S.69, S.69B, S.69A or for the purpose of fair market value of any property under S.56(2). In the given facts of the case, these provisions are not applicable, nor can be invoked by the AO. What Revenue is contesting can be appropriate if the reference was made in the hands of the builder, who may claim the cost of acquisition to ascertain the investment in the building, but in the assessee’s case, who adopted the actual cost of construction for arriving at the sale consideration, these provisions do not apply. This is what the learned CIT(A) has decided. Therefore, we do not see any reason in the ground raised by the Revenue. Accordingly, the grounds are rejected, and the Revenue’s appeal stands dismissed. Deduction u/s 54 - proportionate capital gains on each house - HELD THAT:- While calculating the exemption on each of the flats eligible for each of the houses, the AO is directed to take into consideration, the capital gains arising on each of the house. As seen from the development agreement, the assessee is having a house having land of 940 sq. yards; another two houses in joint ownership with wife(items No.(ii) and (iii) on page 2 of the Development Agreement) of 222 sq. yards each; and a fourth house having land of 78 sq. yards, being item no (iv) in the Development Agreement. Since the proportion of capital gains vary according to the land included in the total land surrendered to the developer, AO is directed to work out the proportionate capital gains on each house, according to the land involved in that house and allow exemption under each of the houses under S.54. This aspect of working out of capital gains in respect of each of the houses has to be done by the AO, even though the assessee is entitled for exemption in respect of four houses, as part of the development agreement. Therefore, the computation aspect of exemption u/s 54 is restored to the file of the AO. Action of AO in including the value of three-bed room accommodation for a period of 24 months - HELD THAT:- As the learned counsel submitted that rent being compensation cannot be brought to tax. This contention, however, cannot be accepted, as bearing cost of rent for dispossessing the house used for residence is part of the same agreement, so it requires to be considered while arriving at the sale consideration of the land given for development agreement. Therefore, the action of considering/adopting the value of providing three bedroom accommodation as part of the agreement, in computing the capital gains is accepted. However, the valuation of the rent requires examination. AO is directed to obtain the actual rent payment by the builder and adopt the same value while computing the capital gains. The assessee shall provide the details of actual rent borne by the builder for this purpose. With these directions, this ground is considered as allowed. Issues Involved:1. Validity of referring to valuation cell under S.50C, S.55A, and S.142A for computation of capital gains.2. Correctness of the Assessing Officer's reworking of capital gains.3. Entitlement to exemption under S.54 on multiple residential units.4. Inclusion of the value of three-bedroom accommodation in computing capital gains.Analysis:Issue 1: Validity of Referring to Valuation CellThe main appeal was filed by the Revenue against the CIT(A)'s orders, challenging the decision that reference to valuation cell under S.50C, S.55A, and S.142A was not applicable in the case. The Assessing Officer reworked the capital gains by referring the property to valuation and making various adjustments. The CIT(A) corrected errors made by the Assessing Officer but upheld certain actions. The ITAT held that the Revenue's contention on referring to the valuation cell under S.55A for fair market value determination was correct. However, it clarified that S.55A is used to ascertain the fair market value for cost of acquisition, not for sale consideration. The ITAT concluded that the provisions of S.50C were more suitable for substituting sale consideration with fair market value while computing capital gains. The ITAT dismissed the Revenue's appeal, stating that the provisions invoked were not applicable in the given case.Issue 2: Correctness of Capital Gains ComputationThe Assessing Officer reworked the capital gains by adopting a higher value, making various adjustments, and raising unfounded allegations against the assessee. The CIT(A) corrected several errors but upheld some actions. The ITAT found no merit in the Revenue's grounds and dismissed the appeal, stating that the Assessing Officer's actions were not justified in referring to the valuation cell under the mentioned sections.Issue 3: Entitlement to Exemption under S.54The assessee contested the restriction of deduction under S.54 on a specific area and the valuation of a three-bedroom accommodation. The ITAT directed the Assessing Officer to allow exemption for the correct area covering five flats and to calculate the proportionate capital gains for each house involved, as per the development agreement. The ITAT allowed the assessee's grounds on this issue for statistical purposes.Issue 4: Inclusion of Three-Bedroom Accommodation ValueThe inclusion of the value of a three-bedroom accommodation in computing capital gains was contested by the assessee. The ITAT accepted the action of considering this value but directed the Assessing Officer to verify the actual rent payment by the builder and adopt that value for computing capital gains. The ITAT allowed this ground of the assessee.In conclusion, the Revenue's appeal was dismissed, and the assessee's cross-objection was allowed for statistical purposes. The ITAT provided detailed directions for the correct computation of capital gains and exemption under S.54, ensuring fairness and accuracy in the assessment process.