The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) disallowed the indexed cost of construction, as the property sale was regularized in government records and is deemed a capital asset under Section 2(14) of the Income Tax Act, 1961.
The brief facts of the case are that the assessee filed a return of income under Section 139 declaring income of Rs.33,23,480. The case was selected for scrutiny and assessment was completed under Section 143(3) accepting the returned income.
The AO noted that property received by way of gift was not a capital asset within the meaning of Section 2(14) of the Act and section 48 is applicable only to capital asset. Therefore indexed cost of acquisition has to be allowed from the previous year in which the land was converted to residential purpose
The counsel for the assessee Mrs. Kavitha P vehemently argued on the reopening of the assessment based on audit objection and submitted that the AO has already taken into account the material available during the course of assessment proceedings and merely not mentioning the details or reasons in the assessment order is not a criterion for reopening the case. She submitted that the audit objection cannot be considered as a tangible material for reopening the assessment.
She further submitted that the property was obtained by the assessee by way of gift and the said land was obtained before 01.04.1981 and therefore cost of acquisition of the land should be considered as on 01.04.1981. The property got converted from agricultural to residential purpose in the year 1988-89 and assessee received the said property by way of gift in FY 2002-03. The assessee is eligible to get the cost of benefit of indexation from 01.04.1981.
However, the AO has granted cost of acquisition with indexation only from the year 1988-89 since the property got the character of capital asset which is not correct. Further the AO has not granted the cost of construction benefit in respect of Penta house which was constructed beyond the sanctioned plan.
Mr V. Parithivel, representing the revenue relied on the order of the lower authorities. He submitted that the assessee was eligible for cost of acquisition when the property got converted from agriculture to non- agriculture purpose in 1988-89 and not from 01.04.1981 and in the in-between period the assessee was out of purview of definition of capital asset as defined in Section 2(14). Therefore, the AO rightly disallowed Rs.3, 20,632.
ITAT noted that on the date of sale, it was a capital asset and the assessee completed all the formalities and regularised it with BBMP and produced all the documents. Therefore, it cannot be said that the property is illegal on the date of sale. Accordingly, the assessee is eligible for indexed cost of construction as claimed in the computation of income.
On the date of sale the property was regularised in the municipal/Govt. records and is covered under the definition of capital asset as defined in Section 2(14) of the Act which is evident from the documents submitted by the AR of the assessee.
The two member bench of the tribunal comprising Madhumitha Roy ( Judicial member ) and Laxmi Prasad Sahu ( Accountant member ) deleted the disallowance of indexed cost of construction of Rs.35, 49,590. 20.
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