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Issues: (i) Whether the fair market value (FMV) of the land as on 01.04.1981 fixed at Rs.5 per sq. meter by the assessing authorities/first appellate authority for computation of long-term capital gain is sustainable; (ii) Whether the deduction under section 54B of the Income-tax Act, 1961 claimed at Rs.3,05,16,220/- (including land levelling and fencing expenses) is allowable in full or is restricted to Rs.80,62,820/- as held by the first appellate authority, and specifically whether land levelling and fencing expenses of Rs.27,54,400/- form part of cost of acquisition for section 54B.
Issue (i): Whether the FMV of the land as on 01.04.1981 fixed at Rs.5 per sq. meter is to be disturbed.
Analysis: The assessing officer referred the matter to the Departmental Valuation Officer whose expert valuation was accepted in part by the first appellate authority. Valuation as on a historical date is essentially a matter of estimation. Where the determination is grounded on expert valuation and reasonably appreciated by the appellate authority, interference is permissible only if perversity or demonstrable error is shown. The appellate authority considered the DVO report and other material and adopted Rs.5 per sq. meter.
Conclusion: The adoption of FMV at Rs.5 per sq. meter is upheld. This conclusion is against the assessee.
Issue (ii): Whether deduction under section 54B should be allowed to the extent of Rs.3,05,16,220/- claimed (including land levelling and fencing) or restricted to Rs.80,62,820/- being registered purchase price plus incidental expenses, and whether land levelling and fencing expenses of Rs.27,54,400/- qualify as part of cost of acquisition.
Analysis: The first appellate authority held in principle that the asset transferred was agricultural land and that the assessee was eligible for deduction under section 54B, but restricted the allowable deduction to the amount recorded in registered sale deeds plus stamp duty, registration and legal charges. The findings of the assessing officer and the first appellate authority on the quantum were contemporaneous and reasoned, interpreting the statutory expression "purchase" in section 54B and relying on registered documents. However, the record shows the levelling and fencing expenses were incurred to make the agricultural lands fit for cultivation, were explained on oath, and were not disbelieved by the authorities. Authorities have recognised that such expenses, when intrinsically connected to acquisition, form part of the cost for section 54B purposes.
Conclusion: The restriction of deduction under section 54B to Rs.80,62,820/- is affirmed except that land levelling and fencing expenses of Rs.27,54,400/- are held to form part of the cost of acquisition and are allowable. This conclusion is partly in favour of the assessee.
Final Conclusion: The appeal is partly allowed by upholding the FMV determination for computation of long-term capital gain and by sustaining the restriction on deduction under section 54B except that land levelling and fencing expenses aggregated to Rs.27,54,400/- are to be included in the cost of acquisition for section 54B purposes, producing a net partial relief for the assessee.
Ratio Decidendi: Where historical valuation is supported by an expert DVO report and reasonably appreciated on the facts, appellate interference is not warranted; and expenses incurred for levelling and fencing that are integral to making agricultural land fit for cultivation constitute part of cost of acquisition eligible for deduction under section 54B of the Income-tax Act, 1961.
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