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Facts
The assessee sold a residential property and claimed Long Term Capital Gains (LTCG) and deduction under section 54. The Assessing Officer (AO) doubted the cost of construction, estimating it lower than claimed, and consequently enhanced the LTCG. The assessee challenged this before the CIT(A), who upheld the AO's order.
Held
The Tribunal noted that the AO's estimation of construction cost using reverse indexation was not in accordance with the law. Considering the unavailability of the original construction for verification and the lack of scientific basis for the AO's estimation, the Tribunal used the valuation report of an approved valuer as a guiding factor. The AO was directed to consider the cost of construction at Rs. 3,86,000, distributed equally between FY 1982-83 and 1983-84.
Key Issues
The main issue was the estimation of the cost of construction for calculating LTCG and the validity of the AO's method of reverse indexation for this estimation.
Sections Cited
Section 54, Section 48
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JAIPUR BENCHES,”B” JAIPUR
Before: DR. S. SEETHALAKSHMI, JM & SHRI RATHOD KAMLESH JAYANTBHAI, vk;dj vihy la-@ITA No. 604/JP/2023
sustained the order of the ld. AO (in para 5.1.3 at page 5 of his order) by holding as under :-
“I have considered the submission of the appellant and the documents filed during the appeal proceedings. The submissions made in appeal were made before the AO also. As discussed in para 2 of the assessment order, the construction of the property was 32 years old. Further, it is an undisputed fact that the property in question was a constructed property, hence cost of improvement needs to be allowed to the assessee. Since the property is very old, the appellant is not expected to have kept the bills/vouchers pertaining to construction of the property. However, the appellant should have made due diligence to calculate the cost of improvement through a registered valuer. The appellant failed to provide any basis for taking the cost of improvement at Rs. 321/- per sq Ft. as in 1982 and 1983. The AO on the other hand has applied reverse indexation method for calculating the cost of improvement which is based on logic. In the absence of actual valuation of cost of improvement, I find the reverse indexation method to be the most practical method for computing the cost of improvement. Accordingly, the disallowance made by the AO of Rs.37,59,795/- is confirmed. The ground of appeal raised is hence dismissed.”
9.1 The action of the ld. AO determining estimated cost of construction at present and considering the same as indexed cost of construction on reverse indexation is not in accordance with law when the assessee has objected and has placed his cost of construction stating that the same is done in two year whereas the ld. AO has estimated the cost in one year only and that too on reverse working considering the cost at the time of for land was accepted but only the dispute made related to the cost of construction. Since, it is also not disputed fact that if the matter is remanded back to estimate the cost of construction the present building is not there as stated by the ld. AR of the assessee. Thus, to give the justice and to consider the principles of natural justice we considered the cost of construction estimated by the approved valuer as guiding factor to render justice to the assessee. The assessee claimed that construction of the house had been done during PY 1982-83 and 1983-84 whereas the ld. AO has nowhere denied this fact but for working out estimated cost during 1982-83 by adopting reverse indexation method he has shown his satisfaction about the estimated cost as had been incurred during PY 1982-83. He has also stated that the ld. AO could not appreciate that then constructed house of the assessee was having 2005 Sq. feet RCC construction and 167.50 Patti Posh construction whereas the ld. AO worked out estimated cost of construction for 2005 sq. ft RCC construction only. Since there is no scientifical basis for arriving the cost of construction by the ld. AO and as he is also not an expert person in the civil construction field and hence his working is merely a work of his estimation without any proof not only that the way he has estimated the cost of apply the indexation of the subsequent indexation and not the reverse.
Since, the buyer of the property of the assessee had demolished the residential house of the assessee and the construction is no more in existence and hence at none of the stages i.e. before AO or CIT (A) she could substantiate his cost and also not made any request to refer the matter to Departmental valuation cell. Due to these circumstances the assessee appointed a registered valuer (approved by CCIT, Jaipur) to whom she had submitted parameters of the construction and based thereon the valuer has estimated cost of construction of the house during the years 1982-83 and 1983-84 by applying local PWD rates as prevailing during these years. Such report has been submitted by the assessee with a request for admission of this document as an additional document so as to seek the justice and to be used as guiding tool the same is used for the first time before us as a reasonable and scientific way of estimation of cost of construction. In terms of the sub rule 4 to rule 18 of the ITAT Rules, 1963 we consider this evidence as a guiding support so as to give the justice to the assessee. As per this valuation report the estimation made by the registered valuer is Rs. 3.86 Lacs and in the report the valuer stated that in absence of any requisite details it can safely be presumed that such viz. FY 1982-83 and 1983-84. The bench noted that the estimation done by the ld. AO at Rs. 24,06,000 during PY 2015-16 is not in accordance with the provisions of section 48. As per the provisions of section 48 read with its explanation estimation of actual cost as had been incurred during the relevant year has first to be estimated and thereafter only indexation has to be applied whereas the ld. AO straightway jumped to estimating current cost of construction and justified the same by reverse indexation is not correct. The AO is silent on the issue as to why not he disturbed the rate of land. It is not correct to accept only a part of the matter as correct and not to accept other part of the matter without any justification. We also note that the assessee had claimed cost of construction as had been incurred during two previous years viz. 1982-83 and 1983-84 which fact seems to had been completely ignored by the ld. AO. At one place in the order he doubts about the construction period whereas in subsequent para he agrees to the period 1982-83 by comparing the presently estimated cost by reverse indexation. We also note that the ld. AO has used his estimations only about the cost of construction. If he had any doubts he could have referred the matter to Valuation Cell of the department, which he did not do and proceeded as per his own estimations. Under these circumstances we direct the ld. AO to consider the cost of construction at Rs. 3,86,000 to be distributed equally in the year 1982-83 & 1983-84 as against the claim of the assessee at Rs. 6,44,300/- which will serve end to justice to both the revenue as well as to the assessee. Based on this observation the appeal of the assessee is partly allowed.
In the result, the appeal of the assessee is partly allowed.