Indexation base year for LTCG on inherited property: 01-04-1981 CII 100 upheld, not 1989-90 agreement CII 172.

For computation of LTCG on transfer of inherited immovable property, the dominant issue was the correct base year and Cost Inflation Index (CII) for indexing the FMV as on 01-04-1981. The tribunal held that, since the property was admittedly inherited in 1981, indexation must start from 01-04-1981 with CII 100, and there was no legal basis to adopt CII 172 with reference to an aborted agreement of FY 1989-90; accordingly, the AO was directed to recompute LTCG using stamp duty valuation as consideration, FMV at ?17.50 per sq. mtr as on 01-04-1981, proportionate share, and allow relief for eligible investment in jointly purchased new property.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether, for computing long-term capital gain, the "full value of consideration" should be taken as the stamp duty value reduced by the amount paid to confirming parties, where such payment was made out of the transaction proceeds.

(ii) What fair market value (FMV) as on 01.04.1981 should be adopted for the inherited land for purposes of computing indexed cost, where the Assessing Officer and the assessee relied on different per-square-meter rates.

(iii) Whether indexation should be applied with reference to the cost inflation index as on 01.04.1981 (CII 100) rather than a later year linked to an aborted agreement, when the property was admittedly inherited in 1981.

(iv) Whether the assessee is entitled to relief for investment in a new residential flat (jointly purchased), and how such relief should be given while recomputing long-term capital gain.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Treatment of payment to confirming parties while determining consideration for capital gains

Interpretation and reasoning: The Court noted that although the stamp duty valuation was higher than the stated sale consideration, a substantial amount was paid to confirming parties who had earlier entered into an agreement to purchase the land. The Court held that, if stamp duty valuation is adopted for computation, the payment made to confirming parties cannot be ignored because it affects the amount attributable to the actual sellers/co-owners from the transaction.

Conclusion: The Court directed that, for computation of long-term capital gain, the consideration should be taken at Rs. 1,79,00,000/- (i.e., stamp duty value of Rs. 2,79,00,000/- reduced by Rs. 1,00,00,000/- paid to confirming parties), and the assessee's proportionate share should be applied to such figure.

Issue (ii): Adoption of FMV as on 01.04.1981 for inherited land

Interpretation and reasoning: The Court found that the Assessing Officer adopted a lower per-square-meter rate than the assessee's valuation report, and considered that adopting a "middle path" would better serve real adjudication and substantial justice. It therefore chose a compromise FMV rate between the two competing rates to resolve the factual valuation dispute without prolonging litigation.

Conclusion: The Court directed the Assessing Officer to adopt FMV as on 01.04.1981 at Rs. 17.50 per sq. mtr. for purposes of computing the cost of acquisition and indexation, and then recompute the assessee's long-term capital gain on a proportionate basis.

Issue (iii): Base year for indexation where property was inherited in 1981 and a later agreement was aborted

Legal framework (as discussed): The Court examined the competing use of cost inflation index figures and the rationale for selecting the relevant base year for indexation in the facts of an inherited property.

Interpretation and reasoning: The Court accepted that the property was inherited in 1981 and found no logic in applying the cost inflation index of a later year merely because of an agreement executed in that later period, particularly when that agreement was described as aborted. The Court therefore preferred indexation from 01.04.1981.

Conclusion: The Court directed that indexation be computed by adopting CII 100 as on 01.04.1981 (and not CII 172 of FY 1989-90) while recomputing the long-term capital gain.

Issue (iv): Relief for investment in a new residential flat (joint purchase)

Interpretation and reasoning: The Court treated the claim of investment in a new flat as plausible on the record, noting that the assessee had intimated such investment and that the purchase was joint with a brother, with the assessee's share quantified. The Court held that relief should be granted in recomputation, but linked it to verification of the alternative claim regarding the new flat investment.

Conclusion: The Court directed the Assessing Officer, while recomputing long-term capital gain, to give relief in respect of Rs. 11,15,320/- invested in the jointly purchased new property, subject to verification as required in implementing the direction.

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