Indexed Cost of Improvement Allowable when Deemed Sale Consideration Adopted u/s 50C: ITAT [Read Order]

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) ruled that the indexed cost of improvement allowable when deemed sale consideration adopted under Section 50C of the Income Tax Act, 1961.

The assessee, Dilip Kumar Gupta, a director in M/s Patwari Bakers Private Limited, filed his return of income for AY 2012-13 declaring income of Rs. 17,18,860. Based on information that he along with his brothers had sold an immovable property for Rs. 39 lakhs, while the Stamp Valuation Authority (SRO) valued the property at Rs. 75.90 lakhs, the Assessing Officer (AO) initiated reassessment proceedings under Section 147 of the Income Tax Act on the belief that income had escaped assessment.

In response to notice under Section 148 of the Income Tax Act , the assessee filed a revised return declaring higher capital gains after considering indexed cost of acquisition and cost of improvement relating to construction on the property. During assessment, the AO held that deduction of indexed cost of improvement of Rs. 11,39,746 was not allowable in view of Section 50C of the Income Tax Act and accordingly disallowed the same, making an addition to the returned income.

The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the action of the AO, confirming the disallowance of the indexed cost of improvement and sustaining the addition.

The Authorised Representative (AR) submitted that the CIT(A) had erred in law and facts of the case while upholding the addition and confirming the view taken by the AO. Elaborating on his contentions, the AR submitted that there was no justification for the AO to have declined the assessee’s claim for deduction of the indexed cost of improvement of the subject property as was raised in the return of income filed in response to the notice issued under Section 148 of the Income Tax Act.

The Departmental Representative relied upon the orders of the authorities below and supported their decision while rejecting the claim of the assessee.

The Bench of Ravish Sood, Judicial Member and Madhusudan Sawdia, Accountant Member noted that “At this stage, we deem it apposite to observe that there is no restriction provided in section 50C of the Act that prevents an assessee from claiming a deduction of the indexed cost of improvement while computing the income under the head “capital gains” after adopting the deemed sale consideration as per the mandate of section 50C of the Income Tax Act.”

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