Land Levelling Costs Allowed for Section 54B Deduction; Revenue’s Lower FMV Estimate for 1981 Upheld

ORDER

SIDDHARTHA NAUTIYAL, Judicial Member. – This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), Gandhinagar (in short “Ld. CIT(A)”), Ahmedabad vide order dated 08.03.2019 passed for A.Y. 2012-13.

2. The assessee has raised the following grounds of appeal:

3. The brief facts of the case are that the assessee, Shri Pravinsinh Bhawansinh Vaghela, filed his return of income for Assessment Year 2012-13 declaring a total income of Rs. 9,44,168/-. During the year, the assessee, along with six other co-owners, sold land situated at Survey No. 394 of TP Scheme No. 7, Village Sargasan, for a total consideration of Rs. 11,25,62,000/-, out of which the assessee’s share was Rs. 4,11,75,000/-. The Assessing Officer completed the assessment under section 143(3) of the Income-tax Act (“the Act”) on 25.03.2015 by determining the total income at Rs. 4,44,12,740/-. While framing the assessment, the Assessing Officer treated the land sold as non-agricultural land, adopted the fair market value of the land as on 01.04.1981 at Rs. 5 per sq. meter as against Rs. 80 per sq. meter claimed by the assessee, and accordingly recomputed the indexed cost of acquisition. The Assessing Officer also disallowed the deduction claimed by the assessee under section 54B of the Act amounting to Rs. 3,05,16,220/-on the ground that the land sold was non-agricultural and that the assessee had not proved use of the land for agricultural purposes for the preceding two years. Further, deduction claimed under section 54F of the Act of Rs. 26,74,471/- was disallowed for want of supporting documents. In addition, an amount of Rs. 36,00,000/- stated to be gifts received from the assessee’s son and daughter was treated as unexplained cash credit under section 68 of the Act. As a result, long-term capital gain was recomputed at Rs. 4,07,29,002/- and various additions were made to the returned income.

4. Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals). The first issue considered by the CIT(Appeals) related to the cost of acquisition as on 01.04.1981. During appellate proceedings, a remand report was called for and the matter was referred to the Departmental Valuation Officer, who valued the land at Rs. 3 per sq. meter as on 01.04.1981. However, the CIT(Appeals) held that the rate of Rs. 5 per sq. meter adopted by the Assessing Officer was fair and reasonable and, accordingly, confirmed the Assessing Officer’s action in adopting the cost of acquisition at that rate. Thus, the ground relating to enhancement of cost of acquisition was dismissed. The second ground of appeal pertained to the denial of deduction under section 54B of the Act. The CIT(Appeals) examined in detail whether the original land sold by the assessee was agricultural in nature and whether it was used for agricultural purposes during the two years preceding the date of transfer. After considering Form No. 12, 7/12 extracts, agricultural income declared by the assessee, and other documentary evidence, the CIT(Appeals) held that the land was indeed agricultural land and was used for agricultural purposes prior to its conversion into non-agricultural land shortly before sale. However, on the issue of quantum of investment eligible for deduction under section 54B of the Act, the CIT(Appeals) held that only the cost reflected in the registered sale deeds, along with stamp duty, registration charges and related legal expenses, could be considered as “purchase” for the purposes of section 54B of the Act. Accordingly, while rejecting the assessee’s claim of Rs. 3,05,16,220/-, the CIT(Appeals) directed the Assessing Officer to allow deduction under section 54B of the Act to the extent of Rs. 80,62,820/- being the registered purchase price plus incidental acquisition expenses. Thus, this ground was partly allowed. The subsequent ground related to deduction under section 54F of the Act. During appellate proceedings, the assessee furnished the registered sale deed and payment details for purchase of a residential flat. After verification, the CIT(Appeals) held that the assessee was eligible for deduction under section 54F of the Act and recomputed the allowable deduction at Rs. 33,88,000/- as against Rs. 26,74,471/- allowed by the Assessing Officer. This ground of appeal was allowed. The final ground of appeal concerned the addition of Rs. 36,00,000/- treated as unexplained gifts. On examination of bank statements, cash book, and flow of funds, the CIT(Appeals) found that the amount represented the assessee’s own money routed through the bank accounts of his son and daughter and subsequently withdrawn in cash for making payments towards purchase of agricultural land. Since the source of funds was the sale consideration already subjected to capital gains tax, the CIT(Appeals) held that the addition under section 68 of the Act was not justified and directed deletion of the addition of Rs. 36,00,000/-. This ground was allowed.

5. In the result, the appeal was partly allowed, with relief granted in respect of deductions under sections 54B and 54F and deletion of the addition on account of alleged gifts, while the Assessing Officer’s action regarding adoption of cost of acquisition as on 01.04.1981 was confirmed.

6. Before us, the Counsel for the assessee submitted that with respect to Ground No. 1, the Counsel submitted that the learned CIT(A) erred in confirming the addition of Rs. 66,77,877/- by adopting an incorrect and unreasonably low fair market value of the land as on 01.04.1981. The Counsel submitted that the Assessing Officer as well as the CIT(A) mechanically adopted the rate of Rs. 5 per sq. meter without properly appreciating the valuation reports, comparable instances and surrounding development of the area. It was argued that valuation as on 01.04.1981 is a matter of estimation and cannot be determined in a rigid or arbitrary manner, particularly when the land was situated in the fast-developing area near Gandhinagar. It was further contended that once the authorities themselves differed between Rs. 3 per sq. meter and Rs. 5 per sq. meter, the valuation becomes subjective and the benefit of doubt ought to have been given to the assessee. Accordingly, it was prayed that the addition sustained on account of recomputation of long-term capital gain be deleted. With respect to Ground No. 2, the Counsel submitted that the learned CIT(A), though correctly holding that the original asset transferred by the assessee was agricultural land and that the assessee was eligible for deduction under section 54B in principle, gravely erred in restricting the deduction to Rs. 80,62,820/- instead of allowing the full claim of Rs. 3,05,16,220/-. It was submitted that the assessee had purchased two agricultural land parcels at village Sorna, Kapadvanj, and the total cost of acquisition, including stamp duty, registration charges, vakil fees, land levelling and fencing expenses, aggregated to Rs. 3,05,16,220/-, which was duly claimed as deduction under section 54B of the Act. Attention was drawn to the directions of the CIT(A) calling for a remand report and issuance of summons to the sellers, pursuant to which the Assessing Officer, in the remand report, categorically accepted that payments were made through banking channels as well as in cash out of known sources. The only objection of the Assessing Officer was that such evidences were not furnished during the original assessment proceedings, which, according to the Counsel, loses significance once a remand report is called for and evidences are examined. The Counsel further submitted that Statute does not restrict the deduction to the amount stated in the sale deed, especially when the actual cost incurred by the assessee is duly proved by documentary evidence. The Counsel submitted that section 54B of the Act is a beneficial provision aimed at encouraging reinvestment in agricultural land and, therefore, deserves liberal interpretation. Reliance was placed on various judicial precedents to support the proposition that deduction under section 54B of the Act cannot be curtailed merely on technical or procedural grounds when actual investment is not disputed. Lastly, with regard to land levelling and fencing expenses, the Counsel submitted that expenses aggregating to Rs. 27,54,400/- were essentially incurred as part of acquisition of the agricultural lands and not as post-acquisition improvement. It was pointed out that these expenses were specifically explained by the assessee in his statement recorded on oath and were never disputed by the Assessing Officer or the CIT(A). No further queries were raised by the Assessing Officer on this issue, which clearly indicates acceptance of the factum of incurring such expenses. It was argued that the CIT(A) erred in treating these expenses as improvement cost and denying deduction under section 54B of the Act. In view of the above submissions, the Counsel prayed that the addition sustained on account of long-term capital gain be deleted and the deduction under section 54B be allowed in full, including land levelling and fencing expenses, and the appeal of the assessee be allowed accordingly.

7. In response, the Ld. DR placed reliance on the observations made by the Ld. CIT(Appeals) in their respective orders.

8. We have heard the rival contentions and perused the material on record

9. So far as the ground raised by the assessee relating to determination of the fair market value of the land as on 01.04.1981 is concerned, we note that the Assessing Officer had referred the matter to the Departmental Valuation Officer and the DVO determined the value at Rs. 3 per sq. meter. The learned CIT(Appeals), after considering the DVO’s report, adopted a higher value of Rs. 5 per sq. meter as against Rs. 80 per sq. meter claimed by the assessee. It is a settled position of law that valuation is essentially a matter of estimation and where the determination is based on expert opinion of the DVO and has been reasonably appreciated by the appellate authority, no interference is warranted in the absence of perversity. In the present case, we do not find any infirmity in the approach adopted by the learned CIT(Appeals) in confirming the fair market value at Rs. 5 per sq. meter. Accordingly, the ground of appeal raised by the assessee challenging the fair market value of the land as on 01.04.1981 is dismissed.

10. Coming to the issue of deduction under section 54B of the Act, we observe that the learned CIT(Appeals) has categorically held that the original asset transferred by the assessee was agricultural land and that the assessee was eligible for deduction under section 54B of the Act in principle. However, the learned CIT(Appeals) restricted the deduction to Rs. 80,62,820/- by considering only the consideration mentioned in the registered sale deeds along with stamp duty and registration charges, as against the assessee’s claim of Rs. 3,05,16,220/-. The assessee has contended that the entire amount represents the actual cost of acquisition of the new agricultural lands and that the factum of payment of Rs. 3,05,16,220/- stands accepted in the remand report. At the same time, we find that the learned CIT(Appeals) has given a reasoned finding while restricting the deduction by interpreting the expression “purchase” occurring in section 54B of the Act and by placing reliance on the registered documents. In the facts of the present case and in view of the findings concurrently recorded by the Assessing Officer and the learned CIT(Appeals), we do not find merit in the assessee’s contention that the learned CIT(Appeals) gravely erred in restricting the deduction to Rs. 80,62,820/- instead of allowing the full claim of Rs. 3,05,16,220/-. Accordingly, the ground raised by the assessee challenging the restriction of deduction under section 54B to Rs. 80,62,820/-is decided against the assessee. This view is supported by the principle that exemption provisions, though beneficial, must be applied strictly in accordance with the statutory conditions.

11. However, with regard to the specific ground relating to land levelling and fencing expenses amounting to Rs. 27,54,400/-, we concur with the submissions of the learned Counsel for the assessee. It is evident from the record that these expenses were incurred to make the agricultural lands fit for cultivation and were explained by the assessee in his statement recorded on oath. No adverse finding disputing the genuineness or incurrence of these expenses has been recorded either by the Assessing Officer or by the learned CIT(Appeals). Such expenses, being intrinsically connected with acquisition of agricultural land, form part of the cost of acquisition for the purposes of section 54B. The Jaipur Bench of the Tribunal in Mathur Lal v. ITO [2019] 174 ITD 44 (Jaipur – Trib.) has held that expenditure incurred on levelling and fencing of agricultural land is to be considered as part of cost of acquisition eligible for deduction under section 54B of the Act. Respectfully following the said decision, this ground is allowed in favour of the assessee.

12. In the result, appeal of the assessee is partly allowed.