ITAT rules inherited property cost indexation starts from original owner's acquisition year not current owner's receipt

ITAT Chandigarh allowed the assessee's appeal against revision u/s 263 regarding capital gains on residential property sale. The tribunal held that for inherited property, the cost of acquisition indexation should consider the year when the original owner first held the asset, not when the current owner received it through gift. The AO correctly applied the cost inflation index from April 2001. Regarding fair market value determination, the tribunal found the registered valuer's report acceptable, noting that comparative sales with different ownership percentages require appropriate adjustment. The tribunal concluded the AO's assessment was reasonable and not erroneous or prejudicial to revenue interest, making the PCIT's revision unjustified.

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ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 of the Income Tax Act to revise the assessment order passed by the Assessing Officer (AO) concerning the computation of long-term capital gains (LTCG) on the sale of a residential property.
• Whether the valuation of the fair market value (FMV) of the property as on April 1, 2001, as determined by the assessee's valuer, was appropriate and whether it was correctly accepted by the AO.
• Whether the AO's acceptance of the valuation report and the resultant computation of LTCG was erroneous and prejudicial to the interests of the Revenue.

ISSUE-WISE DETAILED ANALYSIS

1. Invocation of Section 263 by PCIT

• Relevant legal framework and precedents: Section 263 of the Income Tax Act allows the PCIT to revise an assessment order if it is deemed erroneous and prejudicial to the interests of the Revenue. The PCIT must demonstrate that the AO's order was not only erroneous but also caused prejudice to the Revenue.
• Court's interpretation and reasoning: The Tribunal examined whether the AO's order was erroneous or prejudicial. It emphasized that the AO had conducted a detailed inquiry into the FMV and accepted the valuation report after due consideration.
• Key evidence and findings: The AO had issued notices under Section 142(1) and thoroughly scrutinized the valuation report submitted by the assessee. The Tribunal noted that the AO had made a conscious decision to accept the FMV as determined by the registered valuer.
• Application of law to facts: The Tribunal found that the AO's decision was based on a plausible view and was not erroneous. The Tribunal held that the PCIT's invocation of Section 263 was not justified as the AO's order was not prejudicial to the interests of the Revenue.
• Conclusions: The Tribunal concluded that the AO's order was neither erroneous nor prejudicial, and the PCIT's exercise of revisional jurisdiction was unwarranted.

2. Valuation of Fair Market Value (FMV)

• Relevant legal framework and precedents: The FMV as of April 1, 2001, can be determined either by the cost to the previous owner or the FMV on that date, at the assessee's option. The Finance Act 2020 introduced a proviso limiting the FMV to the stamp duty value, but this was applicable from AY 2021-22.
• Court's interpretation and reasoning: The Tribunal noted that the assessee had the option to adopt the FMV as of April 1, 2001, and the AO had accepted this valuation after due consideration. The Tribunal found no error in the AO's acceptance of the valuation report.
• Key evidence and findings: The valuation report was prepared by a registered valuer, and the AO had accepted the FMV after considering the report and other relevant factors. The Tribunal found the AO's acceptance of the FMV to be a reasonable exercise of discretion.
• Application of law to facts: The Tribunal found that the AO's acceptance of the FMV was in line with the legal provisions and was not erroneous. The Tribunal disagreed with the PCIT's assertion that the FMV was inflated to reduce tax liability.
• Conclusions: The Tribunal concluded that the AO's acceptance of the FMV was appropriate and that the PCIT's concerns about the valuation report were unfounded.

SIGNIFICANT HOLDINGS

• Core principles established: The Tribunal reinforced the principle that an AO's order cannot be revised under Section 263 unless it is both erroneous and prejudicial to the interests of the Revenue. The Tribunal emphasized that a plausible view taken by the AO cannot be considered erroneous merely because the PCIT holds a different opinion.
• Final determinations on each issue: The Tribunal set aside the PCIT's order and sustained the AO's assessment order, allowing the assessee's appeal. The Tribunal held that the AO's acceptance of the FMV and computation of LTCG was not erroneous and did not warrant revision under Section 263.

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