2025 (6) TMI 559 - AT - Income Tax

Revenue loses appeals on LTCG addition under section 55(2)(a)(ii) and unexplained deposits under section 69A

Income-Tax Officer, Ward-3 (3) (12), Ahmedabad Versus Late Shri Cawas Darasha Karaka, Legal Heir M/s. Cawas Karaka Trust

ITAT Ahmedabad dismissed revenue's appeal in two matters. Regarding LTCG addition under section 55(2)(a)(ii), the tribunal upheld CIT(A)'s deletion of ... Addition on account of LTCG u/s 55(2)(a)(ii) - assessee had transferred only tenancy right which was acquired without any costs - CIT(A) deleted the addition made by the AO holding that the claim of the assessee was as per the provisions of the Act - HELD THAT:- Since the provisions of Act do not support the action of the Assessing Officer to refer the matter to the DVO, the appeal of the Revenue is liable to be dismissed. We decline to interfere with the order of the CIT(A) in this regard and this ground of appeal raised by the Revenue is dismissed. Addition u/s 69A - funds deposited in the savings bank account held by the assessee treated as unexplained money - CIT(A) deleted the addition - HELD THAT:- CIT(A) has correctly deleted the impugned addition, as the source of the deposits has been adequately explained. Accordingly, we see no reason to interfere with the order of the Ld. CIT(A) - Decided against revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the addition of Rs. 4,40,00,000/- made by the Assessing Officer as Long Term Capital Gain (LTCG) on transfer of leasehold rights should stand, particularly in light of the provisions of section 55(2)(a)(ii) of the Income-tax Act, 1961, and whether the cost of acquisition should be considered Nil or as claimed by the assessee based on payment made by the forefathers.(b) Whether the addition of Rs. 61,32,000/- made under section 69A of the Act on account of unexplained deposits in the assessee's savings bank account is justified, considering the documentary evidence furnished by the assessee explaining the source of such deposits.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Deletion of addition on account of LTCG under section 55(2)(a)(ii)Relevant legal framework and precedents:Section 55(2)(a)(ii) of the Income-tax Act deals with the cost of acquisition of certain capital assets acquired before 1st April 1981, providing that if the cost of acquisition is not ascertainable, the fair market value (FMV) as of 1.4.1981 shall be deemed to be the cost of acquisition. Section 49(1)(iii)(a) states that where capital assets become property of the assessee by succession or inheritance, the cost of acquisition shall be the cost at which the previous owner acquired the property.Various judicial precedents were cited, including decisions from ITAT Mumbai and Delhi High Court, emphasizing the principles for valuation of leasehold rights and the scope of reference to the Valuation Officer under section 55A.Court's interpretation and reasoning:The Assessing Officer (AO) treated the cost of acquisition of leasehold rights as Nil because the leasehold rights were acquired without any documented consideration by the assessee's father. The AO relied on the absence of any mention of payment in the lease deeds and rejected the affidavit submitted after 72 years claiming payment of Rs. 3,000/- by the assessee's father for waiver of certain rights.The AO further referred the matter to the Valuation Officer (DVO) under section 55A to determine the FMV as on 1.4.1981. The DVO's valuation was significantly lower than the valuation submitted by the assessee's registered valuer. The AO held that the cost of acquisition should be the FMV determined by the DVO, and consequently, the entire sale consideration was treated as LTCG.The Commissioner of Income-tax (Appeals) (CIT(A)) deleted the addition, accepting the valuation report submitted by the assessee and the claim that Rs. 3,000/- was paid by the assessee's father, relying on the affidavit and holding that leasehold rights in perpetuity are akin to ownership rights.The Revenue challenged this deletion before the Tribunal.Key evidence and findings:The assessee relied on registered deeds dated 29.07.1944, particularly Deed No. 4644, which purportedly recorded the payment of Rs. 3,000/- by the assessee's father to the landlord for waiver of the right to seek permission for sub-leasing. The assessee also submitted an affidavit supporting this claim.The AO found no corroborative evidence in the deeds and rejected the affidavit as self-serving and lacking legal validity given the passage of 72 years. The AO also noted that the DVO's valuation was more reliable than the registered valuer's report submitted by the assessee.Application of law to facts:The Tribunal examined whether the cost of acquisition should be considered Nil or the FMV as on 1.4.1981, and whether the affidavit could be relied upon as evidence of payment. The Tribunal noted that section 55A was amended w.e.f. 1.7.2012, and since the transfer occurred on 1.5.2012, the amended provisions allowing reference to the DVO where the value claimed by the assessee is at variance with FMV were not applicable. Hence, the AO's reference to the DVO was not justified.Further, the Tribunal observed that the affidavit submitted by the assessee was not disproved or controverted by the AO, and the principle established in the Gujarat High Court decision in Glass Line Equipment was that uncontroverted affidavits must be accepted.The Tribunal also considered the nature of leasehold rights for 999 years as equivalent to ownership rights, which is supported by judicial precedents.Treatment of competing arguments:The Revenue argued that the absence of any mention of payment in the lease deeds and the self-serving nature of the affidavit rendered the claim of Rs. 3,000/- payment invalid. It also contended that the cost of acquisition should be Nil and that the valuation by the DVO was more reliable.The assessee countered that the registered deed No. 4644 was evidence of payment and that the AO did not challenge the affidavit or seek to verify the deed from the sub-registrar, thus failing to disprove the claim. The assessee also argued that the leasehold rights in perpetuity are akin to ownership, and the valuation adopted by the assessee was correct.Conclusions:The Tribunal concluded that the AO's action of treating cost of acquisition as Nil was not justified. The reference to the DVO under section 55A was invalid as the transfer occurred prior to the amendment of section 55A. The affidavit's contents remained uncontroverted, and the leasehold rights in perpetuity are to be treated as ownership rights for the purpose of capital gains computation. Therefore, the deletion of the addition of Rs. 4,40,00,000/- by the CIT(A) was upheld.Issue 2: Deletion of addition of Rs. 61,32,000/- under section 69A on unexplained depositsRelevant legal framework and precedents:Section 69A of the Income-tax Act provides for addition to income where any sum is found credited in the books of the assessee for which the assessee fails to offer a satisfactory explanation about the source.Court's interpretation and reasoning:The AO made an addition of Rs. 61,32,400/- treating deposits in the assessee's savings bank account as unexplained. The assessee furnished documentary evidence explaining the source of these deposits, including consideration received from sale of shares and repayment of unsecured loans to M/s Pickers Ltd. The CIT(A) considered these explanations and deleted the addition.Key evidence and findings:The assessee submitted detailed evidence including receipts, balance sheets of M/s Pickers Ltd., and bank statements demonstrating the source of funds credited to the bank account. The amounts were traced to legitimate transactions such as share sales and loan repayments.Application of law to facts:Given the documentary evidence satisfactorily explaining the source of deposits, the addition under section 69A was not warranted.Treatment of competing arguments:The Revenue did not press this ground before the Tribunal, having filed an adjournment application. The Tribunal relied on the findings of the CIT(A) and the evidence on record.Conclusions:The Tribunal upheld the deletion of the addition under section 69A, finding no reason to interfere with the CIT(A)'s order.3. SIGNIFICANT HOLDINGS'Since the provisions of Act do not support the action of the Assessing Officer to refer the matter to the DVO, the appeal of the Revenue is liable to be dismissed. We decline to interfere with the order of the Ld. CIT(A) in this regard and this ground of appeal raised by the Revenue is dismissed.''The affidavit if on record and the contents of the said affidavit have remained uncontroverted. The same was not disproved or found to be false. If that be so Hon'ble Gujarat High Court in the case of Glass Line Equipment 253 ITR 454 has held that when affidavit was not controverted it has to be taken accepted.''Leasehold rights in perpetuity are equivalent to ownership rights and cannot be equated to tenancy rights.''There is nothing in section 55A which debars the Assessing Officer from making reference under clause (b) even when registered valuer's report has been filed. In cases where registered valuer's report has been filed, reference under clause (a) of section 55A can be made if the Assessing Officer finds the valuation lower than the market value. In any other case, clause (b) is applicable.''In view of the documentary evidence explaining the source of deposits, the addition under section 69A is rightly deleted.'The Tribunal finally dismissed the Revenue's appeal on both grounds, upholding the CIT(A)'s deletion of the additions made by the AO.