2025 (5) TMI 881 - AT - Income Tax

Denial of exemption u/s 54F - No construction activity has been shown by the assessee - period of 3 years have already elapsed - HELD THAT - Determination of cost of acquisition as on 01.04.1981 based on the valuation report of ld DVO in the case of Manjeet Singh is not correct. AO had indeed noted that the case was referred to DVO u/s 55A of the Act in the case of assessee itself for determination of cost of acquisition as on 01.04.1981. AO is directed to adopt the said valuation report for the purpose of determination of cost of acquisition as on 1.4.1981 for assessee herein. On perusal of the decision of Goetze India 2006 (3) TMI 75 - SUPREME COURT referred by ld DR we find that the appellate authority can always entertain a claim even though the same is not made in the return. Hence we direct the ld AO to examine the claim of exemption u/s 54B and 54F of the Act afresh in accordance with law and uninfluenced by earlier observations made in the order. The assessee is at liberty to furnish fresh evidences if any in support of his contentions. With these directions grounds raised by the assessee on merits are allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the determination of income by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] at Rs. 2,55,61,102/- against the declared income of Rs. 2,20,060/- by the assessee is justified;

(b) Whether the sale consideration of Rs. 2,53,41,042/- adopted for computing long-term capital gain invoking section 54 of the Income-tax Act, 1961 (the Act) is correct;

(c) Whether the investment claimed by the assessee in the property qualifies as a valid reinvestment under section 54B or 54F of the Act, especially considering the claim that the transaction did not materialize due to the builder's incompetency;

(d) Whether the AO and CIT(A) erred in disallowing the exemption claimed by the assessee without sufficient evidence or proper inquiry, and by relying on adverse inferences and speculative assumptions;

(e) Whether the assessment and appellate proceedings were conducted in violation of the principles of natural justice due to lack of proper opportunity to the assessee;

(f) Whether the levy of interest under sections 234B and 234C of the Act is justified on the facts and circumstances of the case;

(g) Whether the cost of acquisition of the land as on 01.04.1981 was correctly determined by adopting valuation from a related but different case instead of the valuation report obtained specifically for the assessee;

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Determination of Income and Adoption of Sale Consideration for Capital Gains

The relevant legal framework includes the provisions of the Income-tax Act relating to capital gains, particularly sections 2(14) defining capital asset, and sections 54B and 54F dealing with exemptions on reinvestment of capital gains.

The assessee contended that the land sold was agricultural land and thus exempt from capital gains tax under section 2(14). The AO observed from the sale deed that the land was situated within municipal corporation limits, which made it a capital asset liable to capital gains tax. The AO also noted the sale consideration of Rs. 3 crores and sought to determine the cost of acquisition for computing capital gains.

The AO referred the matter to the District Valuation Officer (DVO) under section 55A for determination of cost of acquisition as on 01.04.1981. However, the DVO's report for the assessee was not received by the time of assessment. Instead, the AO adopted the DVO valuation from a related case (Manjeet Singh) involving nearby land, valuing it at Rs. 3,32,150/- per acre, rejecting the private valuation report submitted by the assessee (Rs. 16,50,000/- per acre). The AO completed the assessment taxing long-term capital gains based on this valuation.

The CIT(A) upheld the AO's approach and valuation.

The Tribunal found that the AO's adoption of valuation from a different case was incorrect because the AO had indeed obtained a valuation report from the DVO for the assessee's own land under section 55A, which was not considered. The Tribunal directed the AO to adopt the DVO's valuation report specific to the assessee for determining the cost of acquisition.

This reflects the principle that valuation for cost of acquisition must be based on the best available evidence specifically related to the assessee's property rather than analogous cases, ensuring accurate computation of capital gains.

Issue (c) and (d): Claim of Exemption under Sections 54B and 54F and Validity of Investment

The assessee claimed exemption under sections 54B and 54F during the assessment proceedings, which was not claimed in the original return. The AO denied the exemption on the grounds that:

• Exemption under section 54B requires reinvestment in the assessee's own name, whereas the reinvestment was made by the assessee's wife;
• No construction activity was shown on the property purchased under section 54F, and the three-year period for holding the property had elapsed;
• The claim was made belatedly during assessment and not in the return.

The CIT(A) upheld these findings.

The Tribunal relied on the Supreme Court decision in Goetze India, which held that an appellate authority can entertain claims not made in the return of income. Therefore, the Tribunal directed the AO to re-examine the claim of exemption under sections 54B and 54F afresh, uninfluenced by earlier observations, allowing the assessee to furnish fresh evidence in support.

This underscores the principle that procedural lapses in claiming exemptions in the original return do not preclude examination of such claims on merits if raised during assessment or appeal, subject to compliance with legal requirements.

Regarding the validity of the investment claimed, the Tribunal did not conclusively decide on the merits but remitted the matter for fresh consideration, indicating that the AO must verify the genuineness of the reinvestment and compliance with statutory conditions.

Issue (e): Violation of Principles of Natural Justice

The assessee alleged that neither the AO nor the CIT(A) granted sufficient opportunity of hearing, rendering the orders vitiated for violation of natural justice.

The Tribunal did not explicitly find a violation but implicitly addressed this by directing fresh adjudication on the exemption claims and cost of acquisition, allowing the assessee to present fresh evidence, thereby ensuring a fair opportunity to be heard.

Issue (f): Levy of Interest under Sections 234B and 234C

The AO levied interest under sections 234B and 234C for default in payment of advance tax and deferment of tax liability.

The Tribunal noted the settled legal position that interest under section 234C is chargeable only on the returned income and not on the assessed income, and that interest under section 234B is consequential upon the former.

However, the Tribunal did not specifically quash or uphold the interest but allowed the appeal for statistical purposes with directions for fresh consideration, implying that the interest liability should be recomputed consistent with the revised income determination.

Issue (g): Determination of Cost of Acquisition

The AO's adoption of valuation from a different case rather than the DVO report obtained for the assessee was challenged.

The Tribunal held that the AO erred in not considering the DVO's own valuation report for the assessee's land and directed the AO to adopt that report for determining the cost of acquisition as on 01.04.1981.

This decision aligns with the statutory mandate under section 55A that the cost of acquisition for capital gains purposes should be determined based on valuation by the DVO where the cost is unascertainable, and that the valuation must be specific to the property in question.

3. SIGNIFICANT HOLDINGS

"We hold that the determination of cost of acquisition as on 01.04.1981 based on the valuation report of ld DVO in the case of Manjeet Singh is not correct. The ld AO had indeed noted that the case was referred to ld DVO u/s 55A of the Act in the case of assessee itself for determination of cost of acquisition as on 01.04.1981. The ld AO is directed to adopt the said valuation report for the purpose of determination of cost of acquisition as on 1.4.1981 for assessee herein."

"On perusal of the decision of Hon'ble Supreme Court in the case of Goetze India referred by ld DR, we find that the appellate authority can always entertain a claim even though the same is not made in the return. Hence, we direct the ld AO to examine the claim of exemption u/s 54B and 54F of the Act afresh in accordance with law and uninfluenced by earlier observations made in the order."

"With regard to chargeability of interest u/s 234C of the Act, the law is very well settled that the same could be charged only on the returned income and not on the assessed income. Levy of interest u/s 234B of the Act is consequential in nature."

The core principles established include:

• The cost of acquisition for capital gains must be determined based on the DVO's valuation specific to the assessee's property under section 55A, not by analogy to other cases;
• An appellate authority is empowered to entertain claims for exemption not made in the original return, subject to legal conditions;
• Exemptions under sections 54B and 54F require compliance with statutory conditions including ownership and use of reinvested property;
• Interest under section 234C is chargeable on returned income, and interest under section 234B is consequential;
• Assessment and appellate authorities must provide fair opportunity and consider evidence properly before confirming additions or disallowances.

Final determinations included remanding the matter to the AO for fresh determination of cost of acquisition based on the DVO report, fresh examination of exemption claims under sections 54B and 54F with opportunity to the assessee to produce evidence, and reconsideration of interest liability consistent with revised income determination. The appeal was allowed for statistical purposes with these directions.