Indexed cost of improvement remains deductible despite deemed sale consideration rules, subject to verification of the claimed expenditure.

Indexed cost of improvement remains deductible when computing long-term capital gains even where deemed sale consideration is adopted under section 50C. Section 50C prescribes the sale consideration to be used for computation but does not restrict deduction of otherwise allowable improvement costs. In reassessment concerning underreported capital gains, a taxpayer may claim indexed construction costs in the return filed in response to the reassessment notice. Rejection of such a claim solely because section 50C applies is incorrect; the claimed expenditure must instead be verified and quantified.

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Issues: Whether an assessee, in reassessment initiated for adoption of deemed sale consideration, may claim deduction of indexed cost of improvement while computing long-term capital gains.

Analysis: Reassessment set aside the earlier underassessment relating to long-term capital gains arising from the transfer. The assessee was therefore entitled, in the return filed pursuant to notice for reassessment, to claim the cost of construction as indexed cost of improvement in computing such gains. Section 50C mandates adoption of deemed sale consideration but contains no restriction against deduction of otherwise allowable indexed cost of improvement. The lower authorities had rejected the claim solely on an erroneous understanding of section 50C and had not verified the quantum of the expenditure claimed.

Conclusion: The indexed cost of improvement is allowable in principle notwithstanding adoption of deemed sale consideration under section 50C; the quantification of the claimed deduction is restored for verification.

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