Friday 15 February 2013

Whether computation of capital gains based on a delayed rectification deed of a property, resulting in lower consideration as compared to original deed, cannot be faulted with - YES: ITAT

THE issue before the Bench is - Whether computation of capital gains based on a delayed rectification deed of a property, resulting in lower consideration as compared to the original deed, cannot be faulted with. And the verdict goes in favour of the assessee.
Facts of the case

The
assessee, an individual, had filed the return of income u/s 139(1) of the Act. During the A.Y. under consideration the assessee had entered into an agreement to sell a land for consideration. Subsequently, when the land was physically measured the area was actually less than that mentioned in the original sale deed. Thus, the assessee entered into revisionary sale deed and accordingly the sale consideration was reduced. While computing income from sale of
land the assessee took the revised sale consideration as base and computed capital gains. In the course of assessment the AO enquired about reduced sale consideration, and in the absence of any satisfying reply from the assessee the AO made additions u/s 50C of the Act equivalent to difference in value as per original sale deed and revisionary sale deed. The AO had also taken cognizance of valuation report whereby the valuation officer (DVO) had confirmed the area of land as 15311 sq. ft. However, the valuation of land by DVO was vague and hence not adopted by the AO.
In appeal, the assessee argued that the valuation officer had made an error in admeasuring the land as 15311sq. feet (as mentioned in original sale deed), since as per the physical valuation the land owned by assessee was only 13500 sq.ft. (as mentioned in revisionary deed). The assessee stated that the DVO had failed to take actual measurement of land, and valued the land on basis of sale deeds of land located in high value areas. The AO contended that the revisionary deed was not legal and the same was not accepted since the same was rectified after three years from original sale deed. The assessee pleaded that since the assessee was in old age and unaware about the tax laws the error was rectified late. However, the CIT(A) did not entertain the plea.

While computing the capital gains on sale of the land by assessee, the cost of acquisition adopted by the assessee was based upon valuation report from registered valuer as on 1-4-1981. The same was indexed and reduced from the sale consideration fro computing capital gains. In course of assessment the AO adopted reduced cost of acquisition as per Stamp Duty Valuation. In appeal, the assessee argued that the land was located in one of prime areas and the value adopted by AO was not practical. The assessee stated that the guidance value as per Stamp Duty purpose could not be adopted and further reliance was placed on the High court decision in case of Mohan-singh whereby it was settled position in law that when there were several sale instances, it was advisable to select the one where the highest value had been declared. The AO rejected the valuation report submitted by the assessee stating that the valuer had neither quoted any instances of sale/purchase in the area nor recorded any information collected. Thus, the valuation was merely fanciful statement which could not be accepted as evidence. Further, the AO stated that the difference in valuation carried out by assessee and guidance value as per Stamp duty was 1200%. The CIT(A) accepted the indexed cost of acquisition computed by the AO.

In course of assessment the AO observed that the assessee had claimed Rs.2.36 crores as paid to five parties with whom the sale agreement was entered in year 1993. The AO noticed that the assessee had not honored the said payment since no confirmation statements were produced for examination and thus, the claim of assessee was disallowed. In appeal, the assessee argued that the said payments were made by assessee owing to breach of contract vide account payee cheques. The assessee further stated that the confirmation of receipt of money was available however, the AO had not accepted the same when submitted by the assessee. However, the CIT(A) accepted the confirmation receipts submitted by the assessee from three parties and disallowed the balance payment.

The assessee had also claimed expenses relating to amount paid to third party for closing the litigation and surrender of claim on the said land. The AO disallowed the same on basis of non-submission of confirmation receipt. In appeal, the assessee argued that the above referred payment was made vide account payee cheques and the agreement was entered with the third party in this regards. The assessee pleaded that the evidences in this regards were not accepted by the AO. In appeal the part of payment was allowed by CIT(A) and accepted by the AO.

Further the assessee had included municipal taxes in the indexed cost of acquisition. In course of assessment the AO disallowed the same. In appeal the CIT(A) confirmed the addition in this regards.

In appeals, having heard the parties, the Tribunal held that:


++ the Assessing Officer confirmed that the area transferred is 13,500 sq ft instead of 15,311 sq.ft. The only reason for not accepting the area transferred at 13,500 sq ft by the CIT(A) is that the rectification deed was belatedly executed. In our opinion, the assessee explained the reasons for executing the Rectification Deed belatedly and we are in agreement with the Remand Report submitted by the Assessing Officer that the area transferred is only 13500 sqy. Being so when we consider the area at 13,500 sqy as per Rectification Deed which is duly registered with the Sub-Registrar and in the circumstances the value mentioned by the assessee for transferring of 13500 sqy is not less as compared to the value adopted by the State authorities for stamp duty valuation. Being so, the addition cannot be sustained on this count. Accordingly, this addition is deleted. This is so, because the Rectification Deed is in writing duly executed by both the parties and then it would reckon back to the date of sale deed and it is to be considered as correct as per Evidence Act s. 114 unless it is proved contrary by the Department. Accordingly, we allow this ground;

++ In our opinion, the value is to be considered at Rs. 300 per sqy which is based on the Registered Valuer report which is very reasonable as compared to the value of the property as on the date of sale at Rs. 11,000 per sqy. Considering the Registered Valuer report and by applying the reverse indexation method, in our opinion, the value is to be considered at Rs. 300 per sqy as on 1.4.1981 is very reasonable and we agree with the assessee. This ground is allowed;

++ the Assessing Officer has no grievance for allowability of Rs. 1.72 crores and the only objection is with regard to Rs. 64 lakhs out of Rs. 2.36 crores. Accordingly this payment is genuine to the extent incurred by the assessee in relation to the transfer of property. Accordingly, this ground is partly allowed;

++ regarding the payment of Rs. 28 lakhs paid to Mr. B. Rajendra Prasad, the Assessing Officer accepted the payment of Rs. 15 lakhs as genuinely incurred for the purpose of transfer of property. However, he has not accepted payment of Rs. 13 lakhs. In our opinion, when the Assessing Officer himself accepted the payment of Rs. 15 lakhs as genuine, there is no reason to disallow the same and the same is accepted and allowed. This ground is partly allowed;

++ Municipal taxes paid by the assessee on yearly basis cannot be considered as a cost of acquisition or cost of improvement allowed while determining the capital gain. On the other hand, if it is incurred as a betterment/development charges which is a onetime payment, that is to be considered as part of cost of acquisition of the capital asset and the same has to be considered while computing the capital gain. This issue is remitted back to the file of the Assessing Officer to decide the same accordingly.

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