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TMI Blog2025 (3) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... 142(1) were issued alongwith questionnaire, and after taking into consideration the submission filed by the assessee and carrying out the necessary verification/ examination, the assessment proceedings were completed under section 143(3) r.w.s 143(3A) &143(3B) of the Act, wherein the assessed income was determined at Rs. 88,44,429/- after making the disallowance under section 40A(3) of the Act amounting to Rs. 12,09,560/-. 4. Subsequently, the assessment records were called for and examined by the Ld. PCIT, Panchkula and a show cause under section 263 dt. 12/12/2023 was issued by the Ld. PCIT and the contents thereof read as under: "Perusal of assessment record reveals that you had sold a residential property, 139, Masjid Moth, Uday Park, New Delhi, measuring 180 sq.m. for Rs. 5,01,00,000/- during previous year 2017-18 and had declared Long Term Capital Gain of Rs. 49,19,440/- on the same in the ITR. Computation of LTCG as per ITR is as under: Full value of consideration received 5,01,00,000/- Less: Cost of acquisition with indexation 4,51,80,560/- Long Term Capital Gains 49,19,440/- The indexed cost of acquisition was taken by taking the base year as 2001. You furni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The computation of LTCG was required to be as under: Full value of consideration received 5,01,00,000/- Less: Cost of acquisition with indexation Rs. 57,75,300/-X 272/100 1,57,08,816/- Long Term Capital Gains 3,43,91,184/- Hence, Long Term Capital Gain was under assessed by Rs. 2,94,71,744/-on the basis of material on record. Therefore, the assessment order for AY 2018-19 passed on 08.04.2021 in your case u/s 143(3) of the Income Tax Act, 1961, is proposed to be held as erroneous and prejudicial to the interest of Revenue in terms of Section 263 of I.T. Act, 1961. Accordingly, in view of provisions contained in section 263 of the I.T. Act, 1961, I propose to hold the said assessment order for AY 2018-19 to be erroneous, insofar as it is prejudicial to the interests of revenue in terms of Section 263 of the Income Act, especially as per clause (a) and (b) of Explanation 2 to Sec 263 of the Act, and take suitable remedial action u/s 263 of the Income-tax Act, 1961." 5. In response to the show cause, the assessee filed his submissions before the Ld. PCIT. In its submissions the assessee has submitted as under: "1. The Assessing officer has made extensive enquiry i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as our residential is constructed on independent freehold plot & t located in Posh Colony near to ring road and Income tax approved valuer has made valuation on the basis of registered sale deed Doc no 464 Vol 1356 regd on 21/01/998 in which sale of 25% share in land measuring 183 Square Meter and only first floor has been sold for Rs 35 Lakhs before 1-4-2001 and valuer has correctly valued at Rs 1.66 crore & there is no reason to disbelief the valuation done by Income tax Registered valuer. 4. In view of above the calculation of capital at Rs 343,91,184 is not based on correct appreciation of fact and calculating is misleading 5. We also submit that the collector rate is always fixed as minimum rate in order to collect stamp duty and FMV cannot be compared with collector rate. 6. The FMV of construction of house depends upon the quality of construction and collector rate can not applied blankly on all type of construction and your honour shall appreciate the fact that DDA/Housing board provide flats at minimum possible price with low level of construction which cannot be compared with residential house on independent plot in posh area. 7. We also submit that your honour h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take the cost of acquisition as the fair market value (FMV) of the property as on 01.04.2001. The assessee supported the FMV of Rs 1,66,10,500 by filing a Valuation Report of the property sold from a private approved valuer Sh. ParveshGhai. A reference to the said Valuation Report shows that the FMV of Rs 1,66,10,500 was assessed by the valuer on the basis of a sale instance of another nearby property, i.e, sale deed of property C26, Gulmohar Bagh, New Delhi, dated21.01.1998. However, reference to the Valuation Report shows that the FMVhad been inflated with a view to reduce tax liability on the LTCG. The sale instance/sale deed has not been correctly applied by the valuer for the following reasons and was meant to suppress income from LTCG by inflating the cost of acquisition: Property Sold by Assessee House No. 139, Masjit Moth, Uday Park, New Delhi Description of property sold as per Valuation report Plot No. 139, 180 sq.m., having Ground, First and Second floor. The G.Fl is having one drawing / dining room, three bed rooms, one kitchen, attached toilets, one store and one stairs. On 1st floor and second floor, it is same as on ground floor. Amount Date of sale Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the directions to the assessing officer to pass a fresh assessment order after making the requisite inquiries and verifications and giving due opportunity of hearing to the assessee." 7. Against the said findings and directions of the Ld. PCIT, the assessee is in appeal before us. 8. During the course of hearing, the Ld. AR submitted that the assessee has sold a residential house at Delhi. The assessee has taken FMV as on 1-4-2001 as cost of acquisition for the purpose of calculation of capital gain as the property has been acquired before 1-4-2001.The case has been selected under scrutiny U/s 143(2) and the AO has issued various notices U/s 142(1) from 7/2/2020 to 24/03/2021& made extensive enquiries. The AO has made complete enquiry and made addition U/s 40A(3) of Income Tax Act and same has been challenged before NFAC New Delhi. 9. The ld. AR further submitted that the Assessing officer has made enquiry in respect of FMV of residential house as on 1-4-2001 vide notice under section 142(1) dated 07/02/2020 and asked for details of sale of property and capital gain &assessee has submitted complete details along with calculation of capital gain. It was submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poor people. The conversion rate of land of DDA land cannot be applied in instant case as the subject residential house is constructed on independent freehold plot & located in Posh Colony near to ring road. 13. It was submitted that Income tax approved valuer has made valuation on the basis of registered sale deed Doc no 464 Vol 1356 regd on 21/01/998 in which sale of 25% share in land measuring 183 Square Meter and only first floor has been sold for Rs 35 Lakhs before 1-4-2001 and valuer has valued at Rs 1.66 crore & there is no reason to disbelief the valuation done by Income tax Registered valuer. 14. Ld. AR also submitted that the collector rate is always fixed as minimum rate in order to collect stamp duty and FMV cannot be compared with collector rate. Ld. AR submitted that the FMV of construction of house depends upon the quality of construction and collector rate cannot applied blankly on all type of construction and your honour shall appreciate the fact that DDA/ Housing board provide flats at minimum possible price with low level of construction which cannot be compared with residential house on independent plot in posh area. 15. The Ld. AR further submitted that PCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs and has stated that the valuer manipulated calculation of FMV to reduce LTCG liability. Further she has referred to Schedule of residential land rate issued by the Land and Development Office Delhi vide letter dt. 02/05/2017 and basis the same has held that the FMV of the property as on 01/04/2001 working out to Rs. 57,75,300/-. Besides that, she has mentioned that while executing Gift deed dt. 08/10/2009, the FMV of the property was determined at Rs. 1,08,00,000/- for calculating stamp duty of the gift deed and which should be taken as the FMV for the purpose of determining the Index Cost of Acquisition. However, if we look the final finding of the Ld. PCIT, she has apparently accepted the assessee's contention regarding non-applicability of land rates as per LDO Delhi and has restricted her findings in relation to the valuation report as well as the FMV of the property sold at the time of registration of the gift deed. Therefore, we restrict our examination to these two issues and respective contentions in order to examine where the order so passed by the AO has been rightly held to be erroneous in so far as prejudicial to the interest of the Revenue or not. 18. Firstly, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of acquisition basis FMV as on the first day of April 2001, we are of the considered view that the order so passed by the AO cannot be held to be erroneous as the same is in consonance with the stated provisions in Sub Section 55(1)(b) of the Act which apparently has skipped the attention of the Ld. PCIT. 21. Further, we refer to the provision of Explanation (iii) to Section 48 which talks about the Index cost of acquisition which has been defined to mean an amount which bears to the cost of acquisition the same proportion of cost of inflation index for the year in which the asset is transferred bears to the cost of inflation index for the first year in which the asset was held by the assessee or for the year beginning the first day of April 2001 whichever is later. 22. In the instant case, where the assessee's father acquired the property prior to the 01/04/1981 and thereafter the property has been gifted to the assessee which has been sold in the year under consideration while computing capital gain the term "first year in which the asset was held by the assessee" as so interpreted by the Courts to means the year in which asset was first held by the previous owner and not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration received by the assessee, inter alia the deemed cost of acquisition. [Para 11] Where the gains are long term capital gains (other than long term capital gains arising to a non-resident from the transfer of shares or debentures of an Indian Company), then, as per the second proviso to section 48 of the Act, the capital gains have to be computed by deducting from the full value of consideration the 'indexed cost of acquisition' and the 'indexed cost of any improvement' instead of deducting the 'cost of acquisition' and 'cost of improvement'. [Para 12] In the instant case, the capital asset in question was originally acquired by the previous owner (daughter) on 29-1-1993 and the same was acquired by the assessee under a gift deed dated 2-1-2003 without incurring any cost. The assessee sold the said capital asset on 30-6-2003. Since the assessee held the capital asset for less than thirty six months (2-1-2003 to 30-6-2003) in the ordinary course, as per section 2(42A), the assessee would have held the asset as a short-term capital asset and, accordingly, liable for short-term capital gains tax. However, in view of Explanation 1(i)(b) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation 1(i)(b ) to section 2(42A), the assessee is deemed to have held the capital asset from 29-1-1993. By reason of the deemed holding of the asset from 29-1-1993, the assessee is deemed to have held the asset as a long term capital asset. If the long term capital gains liability has to be computed under section 48 by treating that the assessee held the capital asset from 29-1-1993, then, naturally in determining the indexed cost of acquisition under section 48, the assessee must be treated to have held the asset from 29-1-1993 and, accordingly, the cost inflation index for 1992-93 would be applicable in determining the indexed cost of acquisition. [Para 17] If the argument of the revenue that the deeming fiction contained in Explanation 1(i)(b ) to section 2(42A) cannot be applied in computing the capital gains under section 48 is accepted, then, the assessee would not be liable for long term capital gains tax, because, it is only by applying the deemed fiction contained in Explanation 1(i)(b ) to section 2(42A) and section 49(1)(ii) the assessee is deemed to have held the asset from 29-1-1993 and deemed to have incurred the cost of acquisition and, accordingly, made liable fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. Section 2 expressly provides that unless the context otherwise requires, the provisions of the Act have to be construed as provided under section 2. In section 48, the expression 'asset held by the assessee' is not defined and, therefore, in the absence of any intention to the contrary the expression 'asset held by the assessee' in clause (iii) of the Explanation to section 48 has to be construed in consonance with the meaning given in section 2(42A). If the meaning given in section 2(42A) is not adopted in construing the words used in section 48, then the gains arising on transfer of a capital asset acquired under a gift or will be outside the purview of the capital gains tax which is not intended by the legislature. Therefore, the argument of the revenue which runs counter to the legislative intent cannot be accepted. [Para 20] Apart from the above, section 55(1)(b )(2)(ii) provides that where the capital asset became the property of the assessee by any of the modes specified under section 49(1) not only the cost of improvement incurred by the assessee but also the cost of improvement incurred by the previous owner shall be deducted from the total c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the year in which the assessee became the owner of the asset. [Para 24]" 23. Further, our reference was drawn to the decision of Hon'ble Punjab & Haryana High Court in case of Rajiv Mehra Vs. CIT (supra) wherein it has been held as under: * Section 47(iii) specifically lays down that any transfer of a capital asset under a gift or will or an irrevocable trust would not be covered by the provisions of section 45(1) and taking into consideration the transfer of capital asset cannot be computed in terms of section 45. Thus, the present transfer of property has to be examined in terms of section 47 which specifically takes into consideration section 47(I) as any distribution of capital assets on the total or partial partition of a Hindu undivided family. In the instant case, there is a settlement arrived at between the members of the Hindu undivided family (HUF). Accordingly, the cost with reference to the acquisition of property would have to be assessed as per section 49(1)(i). [Para 16] * From the perusal of the aforesaid, it is apparent that a capital asset can be treated to be transferred where there is a consideration involved and would also include sale, exchange or rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be satisfied before a tax is levied on a capital gain. A family arrangement, in the interest of settlement, may involve movement of property or payment of money from one person to another. Several judgments have held that there is no 'transfer' involved in a family arrangement. Therefore, there is no question of capital gains tax index under a family arrangement. [Para 35] * Thus, even though the documents relating to will may not have been accepted by the Tribunal, still the calculation has to be done treating the indexation as on 1-4-1981 and merely because the family settlement was arrived in the year 2003 would not make any difference, and the order passed by the Commissioner (Appeals), is therefore, found to be correct although the Commissioner (Appeals) has applied section 49(1)(ii). [Para 36] * Therefore, agreeing with the submission of the appellant-assessee that even if the existence of the will may be ignored so far as the appellant-assessee is concerned he has become the holder of the property on the basis of a family settlement and the cost of acquisition shall be with reference to 1-4-1981 alone. The calculation, therefore, has to be done accordingly and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has arrived at the reasonable view that the value so determined is not at variance with the FMV of the property so sold by the assessee and where such an opinion has been formed by the AO after due application of mind, the order so passed by the Ld. AO cannot be held to be erroneous and prejudicial to the interest of the Revenue. 26. We find force in the contention so advanced by the Ld AR as what is relevant for determining the fair market value is the comparative sale instance not just in terms of land area, built up structure, proximity of location but also the ownership rights and inherent risks associated with such ownership and therefore, where the assessee has sold a property having 100% ownership rights, the comparative sale instance where the seller holds 25% undivided share has to be suitably grossed up rather than discounted as currently done by the Valuer and where the adjusted value is considered, there is no prejudice which is caused to be Revenue as the same is on a higher side as compared to what has been considered by the assessee. 27. In light of the aforesaid discussion and in the entirety of facts and circumstances of the case, we are of the considered view t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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