Manjunatha Narayanaswamy Manchanayakanahalli Vs Deputy/ACIT (ITAT Bangalore)
Construction Cost Cannot Be Disallowed Entirely While Computing Capital Gains – Matter Remanded to AO to Examine Valuation Report
The assessee sold a property consisting of land with a constructed residential building and claimed deduction of construction cost while computing capital gains. The AO rejected the claim on the ground that the assessee had not produced documentary evidence such as bills or vouchers to substantiate the construction expenses. The CIT(A) also confirmed the disallowance of the construction cost in entirety.
Before the Tribunal, the assessee submitted that the property was originally purchased as a vacant plot and later a building was constructed and sold as a residential property. Since the construction was undertaken many years earlier and was self-managed, the assessee did not possess bills or invoices, and therefore relied on a valuation report from a registered valuer to estimate the cost of construction.
The Tribunal observed from the sale and purchase deeds that the assessee had indeed purchased vacant land and subsequently sold a property consisting of ground and first floor building. Therefore, it was evident that some construction expenditure must have been incurred. In such circumstances, the cost of construction cannot be rejected entirely merely due to absence of primary records.
Accordingly, ITAT held that the valuation report should be examined and the cost of construction determined on a reasonable basis. The matter was therefore remanded to the AO to reconsider the issue afresh, with liberty to examine the valuation report and, if necessary, refer the matter to the Departmental Valuation Officer. The appeal was allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 03/06/2024 in respect of the A.Y. 2021-22 and raised the following grounds:
“1. Disallowance of Construction Cost while computing Capital Gains
1.1. The learned CIT(A) and the learned AO have erred in law and on facts in disregarding the construction cost in its entirety while computing capital gains, despite having accepted the sale consideration as offered, which intrinsically factors in the existence of a fully constructed residential property. The Appellant asserts that the cost of the building cannot be wholly disregarded where the existence of the building is undisputed and where independent Valuation Reports are duly available on record.
1.2. The learned CIT(A) has failed to appreciate that, in the case of self-constructed properties, especially where construction was undertaken several years prior, contemporaneous primary records such as bills, invoices or vouchers may not be available or practically retrievable. In such circumstances, the Valuation Report issued by a Registered Valuer constitutes relevant, admissible, and germane evidence for determining the cost of construction and is legally sufficient to support the claim.
1.3. The learned CIT(A) has erred in passing the impugned order without properly appreciating and evaluating the evidence placed on record, specifically the independent Valuation Report submitted under Rule 46A, and has disregarded the same without assigning cogent or legally sustainable reasons, thereby violating the settled principles of natural justice and fair adjudication.
1.4. Without prejudice to the above grounds and in the alternative, it is respectfully prayed that in the event the construction cost as per the independent Valuation Report is not accepted in entirety, the construction cost ought to be allowed on a reasonable and fair estimation basis, keeping in view the undisputed existence of the constructed building and the totality of facts and circumstances.
The appellant craves leave to add, amend, alter, omit or substitute any of the grounds of appeal at any stage before the appeal is finally heard or adjudicated upon.”
2. The brief facts of the case are that the assessee is an individual and filed his return of income on 22/03/2022. Subsequently, the case was selected for scrutiny and notices u/s. 143(2) and 142(1) were issued. The AO sought for the details about the claim of the exempt income as well as sought for the sources for the cash deposits made into their bank account. The AO also sought for the details about the capital gains declared in the return of income. The assessee had not furnished any details in respect of the claim of exempt income as well as the sources for the cash deposits. Insofar as the capital gain computation, the assessee submitted some documents and claimed the cost of improvement but the assessee had not furnished any documentary evidences in support of the said claim and cost of improvement. Therefore, the AO had confirmed the additions. As against the said order, the assessee filed an appeal before the Ld.CIT(A).
