How to determine cost of improvement in case of sale of old or inherited land / building in the absence of any material i.e. evidence or documents

[CA Surender Gupta]

The question arises in the present cases, perhaps a common question specially where the land and building are old one and sold.

In general for old contraction or improvements, assessee does not have any evidence or documents to prove the cost of construction improvement.

In such a situation, for the purpose of computation of Long Term Capital Gain and in compliance of the provisions of Section 48 of the Income Tax Act, 1961, how to determine the cost of improvements?

This issue as brought before the High Court in the matter of Sarojini Ramaswami Versus Assistant Commissioner of Income-Tax [2007 (1) TMI 129 - MADRAS High Court] wherein while confirming the decision of tribunal it was observed that,

“On the question of cost of improvement, a perusal of the order of the Commissioner shows that the relief had been granted to the assessee accepting the claim for improvement cost at ₹ 5,00,000 without any material. Except to state that the Mugappair area was actually a low lying area leading to water logging and that the assessee had put up a construction to the compound wall, the Commissioner granted the claim of the assessee absolutely unsupported by any material on record to support the claim that the assessee had incurred ₹ 5,00,000 towards cost of improvement at ₹ 5,00,000. Rightly, the Tribunal rejected the plea of the assessee and allowed the appeal filed by the Department, that in the absence of any material, cost of improvement be restricted to ₹ 3,00,000 only.”

Further, in the latest decision in the matter of The Assistant Commissioner of Income-tax, Central Circle-2, Thiruvananthapuram Versus Shri G. Raju and Vica-Versa [2016 (9) TMI 1180 - ITAT COCHIN] following the above decision, tribunal while giving partial relief to the assessee, has observed that:-

“It is a fact that the assessee has filed a detailed cash flow shown different sources from which the money has been brought in. The assessee also has explained that during those days bank accounts were not so common and large families use to keep cash with themselves as most of the receipts were from agriculture and other allied sources. The fact that without improvements the assessee would not have received this amount is also pointed out.  ……..  In the circumstances and facts of the case, it is evident that the assessee has made substantial improvements to the land which is supported by year wise cash flow. The Assessing Officer has simply ignored the cash flow stating various other reasons. The Ld. CIT(A) has considered the cash flow and in order to compensate any probable defects and omissions has made an estimated disallowance of 40% which the learned DR during the course of hearing has accepted as correct except for the size of the amount. However, to meet the interest of justice, the disallowance of cost of improvement is directed to be fixed at 45% of the cost claimed, i.e., the assessee is eligible for 55% of the improvement cost claimed. This will take care of defects pointed out by the Assessing Officer and Ld. DR including the opening cash in hand.”

 

Therefore, it can be concluded that in respect of claim on account of cost of improvement, which is old one and in the absence of documentary evidence, the court and the tribunal are allowing the same of the basis of probability theory and on reasonable certainty.

See:- The Assistant Commissioner of Income-tax, Central Circle-2, Thiruvananthapuram Versus Shri G. Raju and Vica-Versa - 2016 (9) TMI 1180 - ITAT COCHIN