VENKATESH BOMMA,HYDERABAD vs. ITO., (INT TAXN)-1, HYDERABAD

1. The Assessing Officer has erred in arriving long term capital gains by not considering the cost of construction as per work order to complete the Semi-Finished Residential Flat is erroneous as it is contrary to the facts of the case.

Facts of the case, in brief, are that the assessee did not file his return of income for the A.Y 2014-15. The assessment has been subsequently reopened u/s 147 of the Income Tax Act, 1961 for the reasons recorded as per which income chargeable to tax had been escaped assessment on account of under assessment of capital gain derived from transfer of property. Notice u/s 148 of the Act dated 27.3.2021 was issued and served on the assessee. There is no response from the assessee to the said notice. Subsequently, notices and show-cause notices were issued and served on the assessee from time to time, but the assessee neither appeared nor filed any details. Therefore, the Assessing Officer passed the draft assessment order u/s 144(1) r.w.s. 147 of the I.T. Act, dated 22.8.2022 and determined the total income at Rs.32,09,200 towards computation of Long-Term Capital Gain derived from transfer of property by taking into account full value of consideration as per provisions of section 50C of the Act without allowing deduction towards the cost of acquisition of the property in absence of necessary details.

Against the draft assessment order, the assessee has filed objection before the DRP-1 Bengaluru. Before the DRP, the assessee has furnished certain additional evidences including copy of the sale deed dated 4.12.2023 for transfer of property, copy of sale deed for purchase of property dated 30.03.2007, details of cost of improvement including additional construction put up in the property and copy of loan sanction letter from the ICICI Bank. The additional evidences filed by the assessee were forwarded to the Assessing Officer for his comment and report. The Assessing Officer vide his remand report dated 7.8.2023 has verified the documents submitted by the assessee and accepted the indexed cost of acquisition of Rs.26,80,123/- based on the purchase consideration of Rs.14,50,000/- paid as per deed dated 30.03.2007. However, so far as the indexed cost of improvement of Rs.35,28,035/- is concerned which is based on a document captioned as “work order regarding agreement of Rs.19,50,000/-“ between the vendor and assessee for certain house construction work, the Assessing Officer observed that the evidences put up by the assessee prima facie does not appears to be genuine.

The DRP after taking relevant evidences filed by the assessee and also taking into account the remand report of the Assessing Officer directed the Assessing Officer to recompute the capital gain by adopting the full value of consideration in terms of provisions of section 50C of the Act and also allow indexed cost of acquisition as claimed by the assessee towards consideration paid for purchase of property. However, rejected the indexed cost of improvement as claimed by the assessee amounting to Rs.35,28,035/- on the ground that the assessee could not substantiate its claim with necessary evidences. Thereafter, the Assessing Officer passed the final assessment order and determined the total income at Rs.5,29,077/- towards Long-Term Capital Gain derived from transfer of property and modified the assessment.

Aggrieved by the final assessment order, the assessee is in appeal before the Tribunal.

The learned Counsel for the assessee Shri P. Rajeshwara Rao, CA submitted that the learned Assessing Officer/DRP erred in not allowing indexed cost of improvement even though the assessee has filed necessary evidences including agreement with the vendor for additional construction work and also copy of bank loan sanction letter to prove that the assessee has availed housing loan of Rs.30.00 lakhs for purchase of property. The learned Counsel for the assessee further submitted that the assessee has purchased unfinished flat for a consideration of Rs.14,50,000/-. Further, the assessee had entered into an agreement for further construction with the vendor for an amount of Rs.19,50,000/-. The assessee has availed housing loan of Rs.30.00 lakhs on the basis of agreement with the vendor and the Bank has sanctioned Rs.30.00 lakhs loan on the basis of purchase price of the flat plus additional construction. The Assessing Officer without appreciating the relevant facts has only allowed the cost of acquisition of the property ignoring the amounts spent by the assessee for further construction. Therefore, he submitted that the Assessing Officer may be directed to allow indexed cost of improvement on the basis of work order and agreement entered into with the vendor.

We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee claimed indexed cost of improvement of Rs.35,28,035/- based on a document captioned as “work order mentioning agreement of Rs.19,50,000/- between the vendor and the assessee for certain house construction work”. The Assessing Officer rejected the claim of the assessee only on the ground that the assessee could not justify the payment of consideration to the vendor with necessary bank statement. We find the assessee has purchased the property in the year 2007 for a consideration of Rs.14,50,000/-. The assessee has availed housing loan of Rs.30.00 lakhs from ICICI Bank Ltd. The Bank has sanctioned Rs.30.00 lakh housing loan on the basis of agreement to sell as well as work order entered into with the vendor for construction of building. If we go by the appraisal of the Bank while sanctioning sum of Rs.30.00 lakhs loan for purchase of property, it is very clear that the Bank has considered the consideration paid for purchase of property and additional amount paid by the assessee for further construction of the property. Otherwise, no Banker in this country would grant a housing loan of Rs.30.00 lakhs for purchase of a property valued at Rs.14,50,000/-. Therefore, we are of the considered opinion that the argument of the learned Assessing Officer that the work order and agreement entered into by the assessee with the vendor is not genuine is totally incorrect and baseless. At the same time, the assessee is also unable to file further evidences to substantiate his case that he has paid a sum of Rs.19,50,000/- to the vendor for additional construction work in the property. Except the work order, the assessee could not furnish relevant bank statement to prove payment to the builder. Unless the assessee file necessary evidences to substantiate its claim, it is difficult for the Assessing Officer to accept the claim of the assessee only on the basis of the work order. Therefore, we are of the considered opinion that the matter needs to go back to the file of the Assessing Officer for further verification. Thus, we set aside the order of the Assessing Officer and restore the issue back to the file of the Assessing Officer with a direction to reexamine the claim of indexed cost of improvement on the basis of work order and agreement entered into with the vendor for putting up further construction in the property. The Assessing Officer is directed to call for necessary record from the Bank, if so necessary to ascertain the true nature of the work order entered into by the assessee with the vendor. In case the Assessing Officer finds that the assessee has paid additional amount of Rs.19,50,000/- for further construction, then the Assessing Officer is directed to allow deduction towards indexed cost of improvement while computing the Long-Term Capital Gain derived from transfer of property.