2025 (8) TMI 26 - AT - Income Tax

ITAT Rules Higher Land and Construction Values for Long-Term Capital Gain Calculation Under Income Tax Law

Shri Rajinder Singh Bedi Versus The DCIT, (Int. Taxation), Chandigarh.

ITAT Chandigarh allowed the assessee's appeal against the AO's valuation in a long-term capital gain case involving sale of immovable property. The AO's ... Long Term Capital Gain - sale of immovable house property - - Valuation Report made by the DVO vis-à-vis Registered Valuer - determination of cost of acquisition - assessee is a Non-Resident Indian HELD THAT:- Considering all the rates vis-à-vis the rate of auction at Rs. 17,000/-, the assessee has adopted Rs. 15,000/-. Thus, the Registered Valuer of the assessee has took a fair value of the land relevant at particular time i.e. 01.04.2001. The AO has erred in adopting the rate at Rs. 3,621/- of the land. We set aside the findings of the AO on this aspect and direct him to compute the Long Term Capital Gain by adopting cost of land at Rs. 15,000/-per sq.yd. Cost of acquisition is to be determined by applying rate of Rs. 15,000/- per sq.yd. Thereafter, the indexation is to be granted to the assessee from 01.04.2001 till the date of sale. Covered area for the purpose of calculating cost of improvement/cost of construction - Registered Valuer took covered area at 3302, DVO took at 2981 whereas in the draft assessment order, AO took it as 3302, however, in the final assessment, AO has taken it at 2000 sq.ft. It is not ascertainable as to how he has narrowed down it to 2000. We find that assessee has placed on record Site Plan sanctioned at the time of construction of the house. He has elaborately worked out as to how the covered area was 3302 sq.ft. Thus, we direct the AO to adopt the covered area at 3302.51 sq.ft. which was adopted by him in the draft assessment order also. There is no justification at the end of the DVO as to how he has reduced the area by 420 sq.ft. Rate of cost of construction adopted by the assessee as well as by the DVO - assessee has adopted the rate according to the Valuer's Report. The Id. DVO has adopted a lower rate on the ground that the vendee of the assessee Shri Jagdeep Chawla has totally demolished the house and constructed a new one, therefore, it was not possible to ascertain exact nature of construction. It is pertinent to note that cost of construction was to be ascertained as on 01.04.2001 and not on the date of the sale, because an old house was existing. The Registered Valuer has adopted the rate on the basis of rates prevalent in the area. There is no specific defect pointed out in the rates adopted by the valuer. Accordingly, we direct the AO to adopt the cost of construction at Rs. 821/- per sq.ft. We set aside both the orders of Revenue Authorities and direct the AO to compute the Long Term Capital Gain assessable in the hands of the assessee as under : a) The cost of land as on 01.04.2021 is to be adopted at Rs. 15,000/- per sq.yd. Benefit of indexation is to be granted from that day. b) The land area is to be taken at 528.125 sq.yd. which otherwise is not in dispute. c) The constructed area of the property is to be taken at 3302 sq.ft. and cost of construction be applied at Rs. 821/- per sq.ft. on this area for working out the cost of construction. After debiting above costs, Long Term Capital Gain be computed in the hands of the assessee. Appeal of the assessee is allowed. ISSUES: Determination of the correct Long Term Capital Gain (LTCG) on sale of immovable house property by a Non-Resident Indian (NRI).Appropriate valuation of the cost of acquisition of land as on 01.04.2001 for capital gains computation, specifically the applicability and quantification of Fair Market Value (FMV) under Section 55(2)(b) of the Income Tax Act.Validity of the rates adopted by the Assessing Officer (AO), the Departmental Valuation Officer (DVO), and the Registered Valuer for land and construction costs.Determination of the covered area of the property for computing cost of construction/improvement.Allowability of expenditure claimed as wholly and exclusively incurred in connection with the transfer under Section 48(1)(i).Interpretation and applicability of the Finance Act, 2020 amendment regarding FMV and stamp duty value for acquisition cost computation. RULINGS / HOLDINGS: The correct cost of acquisition for the land as on 01.04.2001 shall be the Fair Market Value at Rs. 15,000 per sq. yard as determined by the Registered Valuer, not the circle rate of Rs. 3,621 adopted by the AO, which was based on an erroneous application of the Finance Act, 2020 amendment effective from 01.04.2021.The AO's adoption of circle rate as FMV for 01.04.2001 is an error, as the amendment applies prospectively and cannot be applied retrospectively for valuation as on 01.04.2001.The covered area for computation of cost of construction shall be taken as 3,302.51 sq. ft. as per the Registered Valuer's report and site plan, rejecting the AO's final assessment reduction to 2,000 sq. ft. without justification.The cost of construction shall be adopted at Rs. 821 per sq. ft. as per the Registered Valuer's report, overruling the lower rate adopted by the DVO and AO, since the cost is to be ascertained as on 01.04.2001 when the old house existed.Expenditure claimed as Rs. 19,40,000/- and cost of improvement claimed by the assessee are disallowed due to lack of documentary evidence, consistent with the AO's findings upheld by the Dispute Resolution Panel (DRP).The AO is directed to compute Long Term Capital Gain by deducting indexed cost of acquisition (land cost at Rs. 15,000 per sq. yd. indexed from 01.04.2001), cost of construction (3,302.51 sq. ft. at Rs. 821 per sq. ft.), and allowable expenses from the full value of consideration. RATIONALE: The Court applied Sections 48 and 55 of the Income Tax Act, 1961, which govern computation of capital gains, including the deduction of expenditure, cost of acquisition, and cost of improvement.Section 55(2)(b) allows the assessee the option to adopt the FMV of the asset as on 01.04.2001 as cost of acquisition if the asset was acquired before that date, subject to the proviso that FMV shall not exceed stamp duty value.The Court emphasized the statutory requirement that FMV represents a hypothetical price in an open market between a willing buyer and seller on the relevant date, and rejected valuation based on circle rates effective from 2021 as inapplicable retrospectively.The Court relied on the Registered Valuer's report and comparable sale instances in the vicinity to establish a reasonable FMV of Rs. 15,000 per sq. yd., rejecting the DVO's and AO's lower valuations as unsupported or based on irrelevant or manipulated sales data.The Court rejected the AO's arbitrary reduction of covered area without any supporting evidence, relying instead on the sanctioned site plan and valuer's measurement.The disallowance of claimed expenditure was upheld due to the assessee's failure to produce requisite documentary evidence, consistent with principles of proof in assessment proceedings.The Court noted the amendment by Finance Act, 2020 to the definition of FMV and stamp duty value is prospective from 01.04.2021 and cannot be applied to valuation as on 01.04.2001, thereby preventing retrospective application of circle rates effective post-amendment.The directions of the Dispute Resolution Panel under Section 144C were considered and incorporated, ensuring procedural fairness and adherence to statutory mandates.