RESHMA ALEEM,BENGALURU vs. INCOME TAX OFFICER, WARD-1(1)(1), BANGALORE

PER WASEEM AHMED, ACCOUNTANT MEMBER: The present appeal filed by the assessee is directed against the order under section 250 of the Income Tax Act, 1961 (hereafter the Act) passed by the learned Commissioner of Income Tax (Appeals) under the National Faceless Appeal Centre, Delhi (hereafter the Ld. CIT(A)) for A.Y. 2016-17 bearing DIN & Order No.: ITBA/NFAC/S/250/2025-26/1081586992(1).

3.1 During the assessment proceedings, the assessee submitted that she received ancestral land along with 4 other siblings in 5 equal proportions on 24th February 2010. Thereafter, she and her siblings entered into a JDA on 8th February 2012 with the developer and transferred the land under the JDA in lieu of a 45% share in the built-up area, together with a proportionate share in the undivided area. The construction was completed in 2013, and she received her share in the built-up area (Flat), which was sold during the year. As per the assessee, the fair market value/guideline value/stamp duty value of the flat received in lieu of transfer of land under the JDA became her cost of acquisition. Accordingly, she claimed the guideline value of the flat received at Rs. 40,82,400/- as cost of acquisition while after indexing at Rs. 43,09,643/- computing capital gains on transfer of impugned flat during the year.

3.2 However, the AO rejected the assessee’s submission. The AO held that, under sections 48, 49, and 50 of the Act, cost of improvement means any capital expenditure incurred by the assessee in making any addition or alteration to the capital asset. In the present case, the assessee has not incurred any expenditure. As such, it was the developer who constructed the flat on the land owned by the assessee and her family members. Accordingly, the AO disallowed the assessee’s claim of indexed cost of improvement of Rs. 43,09,643/- and added it to the assessee's total income.

4.1 The assessee further submitted that one of the flats so received under the JDA was subsequently sold on 29.08.2016. While computing the capital gain on sale of the said flat, the cost attributable to the construction of the flat necessarily formed part of its cost of acquisition/cost of improvement. The AO was therefore not justified in accepting the cost attributable to the land while completely rejecting the cost attributable to construction of the flat. The flat which was sold came into existence only as a consequence of the JDA and the corresponding surrender of rights in the land.

4.2 The assessee contended that even though the transfer under the JDA was not offered to tax in the relevant earlier year, the same could not result in denial of the legitimate cost of the flat while computing capital gain on its subsequent sale. There is no provision under sections 48 and 49 of the Act which permits denial of the cost merely because capital gain arising from an earlier transaction was not offered to tax in the relevant year. The taxability of the earlier transaction and determination of the cost of the asset subsequently sold are separate matters.

4.3 It was further submitted that capital gain is chargeable only on the real gain arising from transfer of a capital asset. The sale consideration cannot be treated as capital gain without allowing the legitimate cost incurred for acquiring or bringing the asset into existence. Once the AO accepted that the assessee had sold a constructed flat, the corresponding cost of construction could not be treated as non-existent.

4.5 In support of her claim, the assessee relied upon the decision of the Hon'ble Delhi High Court in CIT v. Vasavi Pratap Chand [2018] 99 taxmann.com 403 (Delhi) / [2017] 398 ITR 316 (Delhi), wherein the principle that the cost of acquisition of the flats received under a development arrangement would include the corresponding cost of construction was accepted. It was therefore contended that the fair market value/cost of construction attributable to the flat received under the JDA should be allowed while computing the capital gain on its subsequent sale. However, the learned CIT(A) dismissed the assessee's appeal and confirmed the disallowances made by the AO by observing as under:

6.1.1 Now before me in the appellate proceedings, the appellant has filed written submission. The appellant has filed the sale deed of the property and filed detailed note on Section 2(47) and also Section 45 of the Income Tax Act. From the submission of the appellant, it is evident that no details, evidences have been filed before me on the cost of improvement claimed by the appellant and the deduction claimed worth Rs. 4082400/-. Not a single sentence has been written by the appellant on the addition made by the AO on this issue. Hence the addition of the AO is confirmed and appeal of the appellant is dismissed 5. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us and filed a paper book running from pages 1 to 30 which comprises a copy of the sale deed and a copy of the guidance value fixed by the Government of Karnataka. The Ld. AR for the assessee before us reiterated the submissions made before the lower authorities. The Ld. AR drew our attention particularly to pages 20 and 21 of the paper book, wherein a translated copy of the guidance note/rates fixed by the Government of Karnataka has been placed. It was submitted that the said document specifically provides the rate applicable to the super built-up area at Rs. 4,050 per sq. ft. The assessee's share in the constructed property was 1,008 sq. ft. Therefore, by applying the prescribed rate of Rs. 4,050 per sq. ft., the cost works out to Rs. 40,82,400/-, which is exactly the amount claimed by the assessee as cost of improvement.

7.1 In the present case, the assessee and other landowners transferred 55% of their rights in the land to the developer under the scheme of JDA. In consideration, the landowners became entitled to 45% of the constructed area. Therefore, we are of the opinion that the constructed area received by the assessee cannot be treated as having been acquired without any cost. The assessee parted with valuable rights in the land for obtaining the constructed area. Thus, there was consideration flowing from the assessee for acquiring the constructed property.

7.2 The flat subsequently sold by the assessee came into existence pursuant to the JDA. Therefore, while computing capital gain on its sale, the cost attributable to the constructed portion cannot be ignored merely because the developer directly incurred the construction expenditure. What matters is the consideration the assessee paid to acquire the constructed area. The AO, having accepted the sale of the constructed flat, should not have treated its construction cost as nil merely because the assessee did not directly make payment to the developer.

7.3 We are also conscious of the fact that the assessee has not offered capital gain on transfer of 55% of landholding under the JDA. However, in our considered opinion, the tax treatment on the transfer of land under the JDA in the earlier year is a separate matter. Even if the assessee did not offer capital gain arising from the JDA to tax in the relevant earlier year, that by itself cannot make the cost of the flat nil when the same is subsequently sold. The computation of capital gain on the sale of the flat should be made in accordance with the applicable provisions of the Act. In holding so, we find support and guidance from the decision of the Hon'ble Delhi High Court in CIT v. Vasavi Pratap Chand reported in [2018] 99 taxmann.com 403. The principle emerging from the said decision supports the case of the assessee that, in a development arrangement, the cost attributable to construction of the flats received by the landowner forms part of the cost while computing capital gain on their subsequent transfer. The held portion of the said decision of the Hon’ble Delhi High Court for ready reference is extracted as under:

Held that there was a transfer of possession of 44 per cent of the land by the assessees to the builder and possession of 56 per cent of the built-up area by the builder to the assessees in terms of section 2(47), read with section 53A, of the Transfer of Property Act. The consideration for the transfer of 44 per cent land was the cost of construction of the 56 per cent built-up area. As far as cost of acquisition of land was concerned, it had to be the market value of land as on 1-4-1981.

7.4 Coming to the quantum of cost, before us the assessee has placed on record the guidance value fixed by the Government of Karnataka. The Ld. AR drew our attention to pages 20 and 21 of the paper book. As per the said document, the applicable guidance value for the super built-up area was Rs. 4,050 per sq. ft. The constructed area falling to the share of the assessee was 1,008 sq. ft. Thus, the value works out to Rs. 40,82,400/- (1,008 sq. ft. × Rs. 4,050 per sq. ft.).

7.5 We further note that the Ld. CIT(A) rejected the claim on the ground that no evidence had been furnished regarding the cost of improvement. However, the assessee's claim was not based upon expenditure incurred by making direct payment for construction. The specific case of the assessee was that the constructed area was received as consideration under the JDA and its cost was determined on the basis of the applicable Government guidance value. Therefore, the claim could not have been rejected merely for want of bills or proof of direct construction expenditure. The relevant aspect was the value of the constructed area received by the assessee under the JDA. The same has been supported by the Government guidance value placed on record.

7.6 In view of the above, we are of the view that the assessee is entitled to take Rs. 40,82,400/- as the cost of the constructed portion received under the JDA and sold during the year. Consequently, the corresponding indexed cost claimed at Rs. 43,09,643/- is allowable while computing the capital gain. Accordingly, the AO is directed to allow the same. Therefore, the impugned addition of Rs. 43,09,643 is hereby deleted, and the ground raised by the assessee on this issue is allowed.

Order pronounced in the open court on 7th October, 2026.

Sd/- Sd/- SOUNDARARAJAN K. WASEEM AHMED JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore Dated: 7th October, 2026 Vms Copy to: RESHMA ALEEM, NO. 36, 2ND CROSS, DACOSTA SQUARE 1 COOKE TOWN,, BENGALURU-560084, KARNATAKA

INCOME TAX OFFICER, WARD-1(1)(1), 2 BMTC BUILIDNG, KORAMANGALA,, BANGALORE-560095, KARNATAKA

3 THE PCIT / CIT, 4 THE D.R., ITAT, BANGALORE BENCH 5 GUARD FILE By Order

ASSISTANT REGISTRAR / I.T.A.T., BANGALORE

Digitally signed P G by P G RAJANI Date: RAJANI 2026.10.22 15:55:52 +05'30'