Historical land valuation and section 54F relief accepted for inherited property investments in residential assets

For computing long-term capital gains on sale of ancestral agricultural land, a higher 01.04.1981 historical value was accepted where no direct contemporaneous valuation existed; the underlying comparable land rate from a Supreme Court determination was treated as a reasonable guide, though solatium was excluded, and indexed cost was to be recomputed on Rs. 150 per sq. yd. On section 54F, relief was allowed on investments in residential properties, including a house registered in the mother's name, because the inherited property was treated on the facts as devolving on the assessee and the mother and the sale proceeds were held to have been applied for acquisition and construction of residential assets.

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Issues: (i) Whether, for computing long-term capital gains on sale of ancestral agricultural land, the assessee could adopt a higher historical value as on 01.04.1981 based on the rate determined by the Supreme Court for nearby land acquired compulsorily; and (ii) whether the assessee was entitled to deduction under section 54F on investments made in residential properties, including a house purchased in the name of the assessee's mother, in the facts of inherited property.

Issue (i): Whether, for computing long-term capital gains on sale of ancestral agricultural land, the assessee could adopt a higher historical value as on 01.04.1981 based on the rate determined by the Supreme Court for nearby land acquired compulsorily.

Analysis: The land had no direct contemporaneous valuation on record for 01.04.1981. The valuation adopted by the assessee was supported by a Supreme Court determination of value for land in the same vicinity, though that case arose from compulsory acquisition. The Court held that the solatium component could not be carried into the present valuation, but the underlying rate for the comparable land could be used as a reasonable guide. In the absence of better data, the Court accepted a revised historical value of Rs. 150 per sq. yd. as on 01.04.1981 and directed recomputation of indexed cost of acquisition.

Conclusion: The issue is answered in favour of the assessee, subject to recomputation of indexed cost on the basis of Rs. 150 per sq. yd. as on 01.04.1981.

Issue (ii): Whether the assessee was entitled to deduction under section 54F on investments made in residential properties, including a house purchased in the name of the assessee's mother, in the facts of inherited property.

Analysis: The property originally belonged to the assessee's father and, on the facts found, devolved on the assessee and the mother by inheritance. The Court accepted the explanation that the assessee had sold the property as a single recorded owner but had in substance applied the sale proceeds for acquisition and construction of residential properties, including one registered in the mother's name. The Court treated the arrangement as an indirect partition of inherited property and found no material to dislodge the claim that the investments were made from the sale consideration. The Court also held that the inherited share attributable to the mother's interest was not a basis to deny the relief in the peculiar facts of the case.

Conclusion: The issue is decided in favour of the assessee and the deduction under section 54F is allowed in substance.

Final Conclusion: The quantum addition was reduced and the related penalty could not survive once the substantive relief was granted.

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