Indexation benefit from period asset was first held by previous owner ITAT

By | November 2, 2016
(Last Updated On: November 2, 2016)

IN THE ITAT VISAKHAPATNAM BENCH

Income-tax Officer, Ward-1(2), Guntur

v.

Padarti Venkata Rama Chandra Rao

V. DURGA RAO, JUDICIAL MEMBER
AND G. MANJUNATHA, ACCOUNTANT MEMBER

IT APPEAL NO. 216 (VIZAG.) OF 2012
[ASSESSMENT YEAR 2009-10]

SEPTEMBER  16, 2016

M.N. Murthy Naik, DR for the Appellant. G.V.N. Hari, AR for the Respondent.

ORDER

G. Manjunatha, Accountant Member – This appeal filed by the revenue is directed against the order of the CIT (A), Guntur dated 3.4.2010 and it pertains to the assessment year 2009-10.

2. The brief facts of the case are that the assessee is an individual deriving income from house property and capital gains filed his return of income for the assessment year 2009-10 on 17.7.2009 admitting total income of Rs. 4,81,480/-. The return was processed u/s. 143(1) of the Income Tax Act, 1961 (hereinafter called as ‘the Act’) on 1.12.2010. Subsequently, the case has been selected for scrutiny under CASS and accordingly, notice u/s. 142(1) of the Act and 143(2) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished relevant information. During the course of assessment proceedings, the A.O. noticed that the assessee has sold an immovable property and computed long term capital gain. To ascertain the correctness of computation of long term capital gain, the A.O. issued a show cause notice and asked to furnish details of properties and mode of computation of long term capital gain. In response to show cause notice, the assessee has filed letter and submitted that he had sold immovable property consisting of land admeasuring 489 sq.yd. along with building consisting of 4 floors measuring 12620 sq.ft. for a consideration of Rs. 1,50,00,000/-. The assessee further submitted that he had acquired the property by way of partition deed dated 28.5.2007 from his father, in turn his father has acquired the property prior to 1.4.1981. Since, he had acquired right over the property by way of one of the mode referred to in section 49(1) of the Act, he had adopted fair market value of the property as on 1.4.2001 and computed cost of acquisition by applying indexation from 1.4.1981 to ascertain the cost of acquisition of property. The assessee further submitted that he has obtained certificate from the registered valuer, to ascertain fair market value of the property as on 1.4.1981 and based on such certificate adopted the value and computed long term capital gain by applying indexation as per the provisions of section 49(1) of the Act and computed long term capital gain of Rs. 4,81,480/-.

3. The A.O., during the course of assessment proceedings, to ascertain the value of both site and construction as on 1.4.1981, addressed letter to the sub registrar, Guntur calling for information u/s. 133(6) of the Act and the S.R.O. has furnished fair market value of both land and structure as on 1.4.1981. The A.O., on perusal of the sale deed dated 30.4.2008, noticed that though sale consideration received as a result of transfer of Rs. 1.5 crores, the stamp duty authority have fixed fair market value of the property as on the date of transfer at Rs. 1,95,35,000/-, therefore, issued a show cause notice and asked to explain why the stamp duty value fixed by the sub registrar for the purpose of determination of stamp duty shall not be adopted as full value of consideration received as a result of transfer for the purpose of computation of long term capital gains. In response to show cause notice, the assessee has filed his letter dated 15.12.2011 and stated that he had invested part of sale consideration for purchase of property and claimed exemption u/s. 54 of the Act, however, failed to give any explanation with regard to application of deemed consideration under the provisions of section 50C of Act.

4. The A.O. after considering the explanation of the assessee computed long term capital gain by adopting deemed consideration of Rs. 1,95,35,000/- for the purpose of determination of capital gains. While doing so, the A.O. observed that the assessee has acquired right over the property by way of one of the mode specified u/s. 49(1) of the Act, accordingly the benefit of indexation shall be allowed from the date the assessee owned the asset. In the present case on hand, the assessee has got right over the property by way of partition deed dated 28.5.2007 and accordingly benefit of indexation is available from the assessment year 2008-09. As regards fair market value of the property, the A.O. observed that though assessee has obtained a certificate from the registered valuer, value adopted by the assessee towards cost of acquisition of the property as on 1.4.1981 is without any basis. The A.O. further held that the SRO has furnished a certificate, wherein fair market value of the property as on 1.4.1981 towards site is fixed at Rs. 150 p.sq.yd. and towards structure with RCC roof was fixed at Rs. 34.10 p.sq.yd. Since the value adopted by the assessee is not supported by any valid evidences, rejected cost of acquisition adopted by the assessee and adopted SRO value and determined cost of acquisition by applying indexation benefit from the assessment year 2008-09 and re-computed long term capital gain of Rs. 1,89,42,855/-.

5. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT (A). Before the CIT (A), the assessee reiterated the submissions made before the A.O. The assessee further submitted that the A.O. was erred in adopting fair market value of the property based on the SRO certificate which is a circle rate fixed for the purpose of determining stamp duty payable on transfer of property. The assessee further submitted that the assessing officer ought to have adopted fair market value given by the approved valuer which was duly filed during the course of assessment. It is also further submitted that the approved valuer’s report contains detailed abstract of construction after a thorough inspection of the said building/construction, therefore, there is no reason for the A.O. to disbelieve the certificate issued by the registered valuer to adopt the SRO value. As regards the indexation benefit, the assessee submitted that he had acquired right over the property by way of one of the modes specified in section 49(1) of the Act and accordingly applied indexation benefit from the year in which the asset was held by the previous owner. The assessee further submitted that he had acquired property by way of partition deed on 28.5.2007 and the said property has been acquired by his father prior to 1.4.1981. As per the provisions of the Act, when the assessee got right over the property by way of any mode specified u/s. 49(1) of the Act, when the asset was acquired by the assessee or previous owner before 1.4.1981, then the assessee at his option can adopt cost to the previous owner or fair market value of the property as on 1.4.1981 whichever is higher. In the present case on hand, since the property was acquired before 1981, he had adopted fair market value of the property as on 1.4.1981, based on the valuation certificate issued by the registered valuer. Therefore, the A.O. was not correct in adopting circle rate fixed by the stamp duty authorities for the purpose of determination of stamp duty to compute cost of acquisition of the property.

6. The CIT (A) after considering the explanations of the assessee held that there is some force in the contention of the assessee with regard to the incorporation of cost inflation index with respect to the said property as on 1.4.1981 as base year instead of adopting assessment year 2008-09 as base year erroneously by the A.O., since the expression held by the assessee is not defined u/s. 48 of the Act. The expression has to be considered as defined under explanation 1(i)(b) of section 2 of the Act. The object of giving relief to an assessee by allowing indexation is with a view to offset the effect of inflation. The CIT (A) further held that as per the circular no. 636 dated 31.8.1992 issued by the CBDT, the fair method of allowing relief by way of indexation is to link it to the period of holding of the asset. The said circular further provided that the cost of acquisition and the cost of improvement has to be inflated to arrive at the indexed cost of acquisition and indexed cost of improvement and then deduct the same from the sale consideration to arrive at long term capital gain. If indexation is linked to the period of holding asset and in the case of assessee covered u/s. 49(1) of the Act, the period of holding of the asset has to be determined by including the period for which, the said asset was held by the previous owner, then obviously in arriving at the indexation, the first year in which the said asset was held by the previous owner would be the first year for which said asset was held by the assessee. With these observations, directed the A.O. to adopt indexation from the year in which the asset was held by the previous owner or from 1.4.1981, whichever is beneficial to the assessee. As regards cost of acquisition of the property, the CIT (A) held that the assessee has adopted cost of acquisition of the property as on 1.4.1981, based on the valuation report issued by the approved valuer. The assessee has substantiated fair market value of the property as on 1.4.1981 with valuer’s report, whereas the A.O. has adopted SRO value fixed by the stamp duty authorities for the purpose of determination of stamp duty without any basis, with these observations, directed the A.O. to substitute the fair market value of the property as on 1.4.1981, as per the approved valuer’s report as against the SRO value adopted by the A.O. Aggrieved by the CIT (A) order, the revenue is in appeal before us.

7. The Ld. D.R. submitted that the Ld. CIT (A) erred in directing the A.O. to adopt value of the property as on 1.4.1981 as per the report of the registered valuer as the fair market value for determining cost of acquisition in the place of value computed by the A.O. as per the guidance value rates obtained from the SRO. The Ld. D.R. further submitted that the CIT (A) erred in placing reliance on the decision of the ITAT, Mumbai in the case of Pratap M. Indulkar in ITA No. 1142/Mum/2010 which dealt with the legality of reference to valuation officer u/s. 55A of the Act, which is not relevant to the facts of the assessee’s case. The D.R. further submitted that as regards the indexed cost of acquisition, the CIT (A) erred in directing the A.O. to adopt indexation benefit from the first year in which the asset was held by the previous owner which is contrary to the specific provisions of explanation (iii) to section 48 of the Act, where it has provided that the indexation should be made from the first year in which the asset was held by the assessee. The D.R. further submitted that the CIT (A) ought not to have relied on the explanation 1(i)(b) to section 2(42A) for construction of the expression first year in which the asset was held by the assessee, as the said explanation is solely meant for reckoning the period for which the asset is held by the assessee, for the purpose of determining whether the asset is short term capital asset or long term capital asset.

8. On the other hand, the Ld. A.R. for the assessee strongly supported the order of the CIT (A). The A.R. further submitted that the A.O. was erred in adopting market value of the property as fair market value of the property as on 1.4.1981, as the fair market value of the property is much more than the SRO value fixed by the stamp duty authority for the purpose of determination of stamp duty. The A.R. further submitted that the legislature has expressly drawn a distinction between two phrases “full value of the consideration” and “fair market value” in the context of computation of cost of acquisition of the property and determination of full value of consideration, as a result of transfer of capital asset”. The A.O. was erred in considering full value of consideration as a result of transfer to substitute the fair market value of the property for determining cost of acquisition of the property. In support of his argument relied upon the decision of Hon’ble High Court of Karnataka in case of N. Govindaraju v. ITO [2015] 377 ITR 243  As regards the indexed cost of acquisition, the A.R. submitted that the A.O. was erred in applying indexation benefit from the date in which the asset was held by the assessee. As per the provisions of section 49(1) of the Act, when the assessee becomes the owner of the property by way of inheritance or succession, the assessee is eligible for indexation benefit from the date when asset was first acquired by the previous owner. In the present case, the assessee got right over property by way of partition deed in the year 2007-08, which was acquired by his father before 1.4.1981, therefore, the assessee has rightly computed indexation benefit from 1.4.1981. To support his argument relied upon the decision of Hon’ble High Court of Mumbai in the case of CIT v. Manjula J. Shah [2013] 355 ITR 474

9. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The first issue that came up for our consideration is cost of acquisition of the property. The assessee has adopted cost of acquisition of the property as on 1.4.1981 based on the certificate of registered valuer. The A.O. has determined cost of acquisition of the property based on the SRO value of the property fixed by the State Government for the purpose of determination of stamp duty. The A.O. was of the opinion that cost of acquisition adopted by the assessee based on the registered valuer certificate is not in accordance with the provisions of section 48 & 49 of the Act. According to the A.O., when asset is acquired by the assessee by way of one of the mode specified u/s. 49(1) of the Act, the assessee can either adopt cost to the previous owner or fair market value of the property as on 1.4.1981. According to the A.O., the fair market value of the property as on 1.4.1981 is as per the SRO value.

10. It is the contention of the assessee that he has adopted fair market value of the property based on the certificate of the registered valuer. The assessee further contended that the A.O. was not correct in applying SRO value as fair market value of the property, as the SRO value fixed by the State Government is not correct market value of the property. The A.O. was erred in equating with full value of consideration as a result of transfer to the fair market value of the property for the purpose of computation of cost of acquisition. We find force in the argument of the assessee for the reason that the A.O. was erred in adopting SRO value to substitute fair market value of the property for the purpose of computation of cost of acquisition of the property. Section 48 of the Act deals with the mode of computation of income chargeable under the head “capital gains” and in that context full value of consideration would mean the consideration or price received as a result of the transfer of a capital asset. It is different from fair market value of the property, which phrase is used in section 45(2) of the Act relating to capital gains and section 55(3)(b) in relation to cost of acquisition.

11. The legislature has expressly drawn a distinction between the two phrases ‘full value of consideration’ and ‘fair market value’. The former would be the price received on transfer of capital asset and the later would be the price of a capital asset would ordinarily petch on sale in open market on the relevant date. In the present case on hand, the assessee has adopted fair market value of the property as on 1.4.1981 as cost of acquisition which is based on a certificate issued by the registered valuer. The A.O. without assigning any reasons disbelieved registered valuer’s report and adopted SRO value of the property for the purpose of determination of computation of cost of acquisition, when Act specifically provides powers to the A.O. under the provisions of section 55(2) of the Act, to refer the valuation of the property to the valuation officer, when he is of the opinion that the fair market value of the property adopted by the assessee is higher than the fair market value of the property. The A.O., without exercising the option of referring the matter to the valuation officer, simply adopted SRO value which is fixed in a different context to determine the cost of acquisition of the property. Therefore, we are of the opinion that the A.O. was erred in adopting SRO value to substitute the fair market value adopted by the assessee, which is based on a registered valuer certificate.

12. Now it is pertinent to discuss here the case law relied upon by the assessee. The assessee has relied upon the decision of Hon’ble Karnataka High Court in the case of N. Govindaraju (supra), wherein the Hon’ble High Court under similar circumstances held as under:

“Section 48 of the Act deals with the ‘Mode of Computation’ of income chargeable under ‘Capital gains’ and in that context ‘full value of the consideration’ would mean the consideration or price received as a result of the transfer of a capital asset. It is different from ‘fair market value’ of the property, which phrase is used in section 45(2) [relating to capital gains] and section 55(2)(b) [relating to cost of acquisition]. (para 44)

The legislature has expressly drawn a distinction between the two phrases: ‘full value of the consideration’ and ‘fair market value The former would be the price received on transfer of a capital asset and the latter would be the price that a capital asset would ordinarily fetch on sale in open market on the relevant date. (para 47)

Assessee had provided the reasons for determining Rs. 225/- per sq. ft. as the fair market value of the property by producing the relevant material, including valuation report of a registered valuer, which all have been ignored while arriving at the price of Rs 84/- per sq. ft. The Assessing Officer assessed the value of the property as on 1.4.1981 on the basis of sale deeds of some nearby properties registered for such price in the year 1981 and thus, arrived at that figure. In our opinion, the same cannot be the proper mode of arriving at the ‘fair market value’ of the property in question as on 1.4.1981, for the purpose of determining ‘Capital gains’ under the Act. (para 48)

Tribunal was not justified in arriving at the fair market value of the property in question as on 1.4.1981 without taking into consideration the material on record, including the valuation report filed by the assessee. The matter thus requires to be remanded to the Assessing Officer for determination of the fair market value of the property in question in accordance with law and in the light of the observations made hereinabove. (para 51)”

13. The CIT (A) after considering the relevant details has rightly directed the A.O. to substitute value adopted by the assessee as fair market value of the property as on 1.4.1981 to compute cost of acquisition. We do not find any reasons to interfere with the CIT (A) order. Hence, we inclined to upheld CIT (A) order and reject ground raised by the revenue.

14. The next issue that came up for our consideration is benefit of indexation. The facts relating to the issue are that the assessee has sold a property which he had acquired by way of partition deed in the year 2007-08. The assessee claims that he got right over the property by way of partition deed, which was acquired by his father prior to 1.4.1981. The assessee further submitted that as per the provisions of section 49(1) of the Act, when he got right over the asset by way of any modes specified u/s. 49(1) of the Act, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it as increased by the cost of any improvement of the asset incurred or born by the previous owner or the assessee as the case may be. Since, he got right over property by way of inheritance or succession, as per the provisions of the Act, he has adopted fair market value of the property as on 1.4.1981 and applied indexation benefit from the date the asset was first held by the previous owner and computed long term capital gain. The A.O. was of the opinion that when assessee is owner of the property by way of any one of the mode specified u/s. 49(1) of the Act, then the indexation benefit should be allowed from the date the asset first held by the assessee. The A.O. further was of the opinion that the assessee has got right over property by way of inheritance/succession through a partition deed dated 28.5.2007 which pertains to the assessment year 2008-09 and accordingly, the assessee is eligible to claim benefit of indexation from the assessment year 2008-09 onwards.

15. We do not find any merits in the findings of the A.O., for the reason that when the asset was acquired under any circumstances given by section 49(1) of the Act, for the purpose of reckoning the period of holding, the period of holding of asset by the previous owner is considered to compute the period of holding whether it is long term or short term. In a similar way, when the assessee got right over property by any of the modes specified u/s. 49(1) of the Act, obviously the assessee is eligible for the benefit of indexation from the period the asset was first held by the previous owner, but not the period from which the asset was held by the assessee. This view was upheld by the Hon’ble Bombay High Court, in the case of Manjula J. Shah (supra), wherein the Hon’ble High Court held that indexed cost of acquisition has to be computed with reference to year in which previous owner first held asset and not year in which the assessee became owner of asset. A similar view is given by the Hon’ble High Court of Delhi, in the case of Arun Shungloo Trust v. CIT [2012] 205 Taxman 456  and also the Hon’ble High Court of Gujarat, in the case of CIT v. Gautam Manubhai Amin [2013] 218 Taxman 319

16. In the present case on hand, the assessee got right over property by way of inheritance through a partition deed which was acquired by his father prior to 1.4.1981. When the assessee got right over property by any of the mode specified u/s. 49(1) of the Act, then for the purpose of computation of indexed cost of acquisition, the period of holding of previous owner has to be considered. The CIT (A) after considering the relevant details rightly held that the assessee is eligible for indexation benefit from the period the asset was first held by the previous owner or 1.4.1981 whichever is later as per the provisions of section 49(1) of the Act. We do not see any reasons to interfere with the order of CIT (A). Hence, we inclined to uphold the CIT (A) order and reject ground raised by the revenue.

17. In the result, the appeal filed by the revenue is dismissed.

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