2025 (4) TMI 1362 - HC - Income Tax

Tax Exemption Dispute: Valuation Report Challenged, Assessing Officer's Disregard of Construction Costs Questioned Under Section 54

Atul Jain Versus National Faceless Assessment Centre Delhi

The SC examined a tax dispute involving capital gains exemption under Section 54 of the Income Tax Act. The court found the Assessing Officer's complete ... Disallowance of benefit u/s 54 - Assessee could not establish the value of the cost of construction by production of any bills or other documents. It is the Assessee’s case that he had inherited the property from his mother and did not have any bills or documents to substantiate the cost of construction. Accordingly, the Assessee had furnished an independent valuer’s report estimating the value of construction at the material time. Assessee is aggrieved as the said valuation report had been disregarded. HELD THAT:- AO has not undertaken any exercise to estimate the costs of construction and has proceeded to assume them to be NIL. Prima facie, the cost of building cannot be disregarded in entirety. We also note that the Assessee has a remedy of statutory appeal before the CIT(Appeals). We, accordingly, refrain from entertaining the present petition leaving it open for the Assessee to avail his statutory remedy. However, in the peculiar facts and circumstances of the case, we direct that in the event the Assessee prefers an appeal within a period of four weeks from date, the same would be considered by the Appellate Authority on merits 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court in this matter are:Whether the Assessee is entitled to claim the benefit under Section 54 of the Income Tax Act, 1961, in respect of capital gains arising from the sale of a residential property comprising land and a constructed building.Whether the cost of construction, claimed by the Assessee based on an independent valuer's report in the absence of documentary proof such as bills or receipts, can be accepted for the purpose of computing capital gains.Whether the Assessing Officer's disallowance of the construction cost and consequent addition to the Assessee's income was justified.The procedural correctness and scope of judicial intervention in the assessment order passed under Section 143(3) read with Section 144B and the accompanying notice under Section 156 of the Act.2. ISSUE-WISE DETAILED ANALYSISEntitlement to Benefit under Section 54 of the Income Tax Act, 1961The relevant legal framework is Section 54 of the Income Tax Act, which provides exemption from capital gains tax if the capital gains arising from the transfer of a residential property are reinvested in another residential house property. The Assessee claimed the benefit by investing the capital gains amount in a new asset, thereby seeking to reduce the taxable capital gains to nil.The Court noted that there was no dispute regarding the sale consideration of Rs. 12,00,00,000/- or the cost of land purchased in 2001-02 at Rs. 1,11,07,044/-. The Assessee computed the indexed cost of land and construction, claiming deductions aggregating Rs. 7,05,57,700/- (land Rs. 3,67,64,315/- and construction Rs. 3,37,93,385/-), resulting in a capital gain of Rs. 4,94,42,300/-, which was claimed to be fully reinvested under Section 54.The Court observed that the Assessee had submitted detailed written submissions, computation of capital gains, bank statements, sale deeds, and a valuation report, which were taken on record. This indicates compliance with procedural requirements and an attempt to substantiate the claim under Section 54.Admissibility of Construction Cost Based on Valuation Report Without Documentary ProofThe pivotal issue was the Assessee's inability to produce bills or receipts substantiating the cost of construction, as the property was inherited from the mother and no original documents were available. The Assessee relied on an independent valuer's report estimating construction cost at Rs. 2,04,18,964/- as of the relevant period.The Assessing Officer disregarded this valuation report and assumed the construction cost to be nil, leading to disallowance of the claimed deduction under Section 54. The Court noted that the AO did not undertake any alternative exercise to estimate construction costs, instead proceeding on the basis of total disallowance.The Court reasoned that completely disregarding the cost of construction without any estimation or enquiry was prima facie unsustainable. The valuation report, though not supported by bills, was an independent assessment and should not have been rejected outright without further investigation or estimation by the AO.Procedural and Remedial ConsiderationsThe Court recognized that the Assessee had a statutory remedy of appeal before the Commissioner of Income Tax (Appeals) against the impugned assessment order. Exercising judicial restraint, the Court refrained from adjudicating the substantive dispute at this stage and directed the Assessee to file an appeal within four weeks.It was ordered that the appellate authority shall consider the appeal on merits, ensuring that the valuation report and other submissions are duly considered. Meanwhile, recovery of the demand was stayed pending disposal of the appeal. This approach balanced the Assessee's right to challenge the order with the procedural framework under the Act.3. SIGNIFICANT HOLDINGSThe Court held that:'Prima facie, the cost of building cannot be disregarded in entirety.''The Assessing Officer has also not undertaken any exercise to estimate the costs of construction and has proceeded to assume them to be NIL.''In the peculiar facts and circumstances of the case, we direct that in the event the Assessee prefers an appeal within a period of four weeks from date, the same would be considered by the Appellate Authority on merits.'The core principles established include:The cost of construction forming part of the capital asset must be taken into account for computing capital gains, and cannot be summarily disregarded without proper enquiry or estimation.Independent valuation reports, even in the absence of documentary bills, merit consideration and cannot be outrightly rejected without reasoned analysis.Statutory remedies must be exhausted before judicial interference in assessment proceedings, and appellate authorities must consider all relevant evidence on merits.Recovery of demand can be stayed pending appeal disposal to protect the Assessee's interests.Final determinations on each issue were deferred to the statutory appellate process, with the Court ensuring procedural fairness and directing the appellate authority to consider the merits of the claim, especially the valuation report and the cost of construction, before passing any final order.