Bangalore ITAT Allows Indexed Cost of Factory Building Despite Sale Deed Mentioning Only ‘Vacant Land’ – Stamp Duty Mischief Cannot Inflate Income Tax

Narayana Chandra Reddy Vs DCIT (ITAT Bangalore)

Bangalore ITAT Allows Indexed Cost of Factory Building Despite Sale Deed Mentioning Only ‘Vacant Land’ – Stamp Duty Mischief Cannot Inflate Income Tax

The Bangalore ITAT granted major relief to the assessee by allowing indexed cost of construction while computing capital gains, despite the sale deed mentioning only a “vacant plot” and not the factory building standing on it. The assessee had sold industrial property at Bommasandra and claimed indexed cost of factory construction incurred in FY 2005-06. The AO and CIT(A) denied the claim solely because the registered sale deed did not mention any building structure.

The Tribunal noted that the assessee had produced extensive documentary evidence proving existence of the factory shed, including sanctioned building plan from KIADB, loan documents, contractor confirmations, purchase invoices for construction materials, rental income disclosures in earlier years, BESCOM records, building tax receipts and TDS deducted by tenant company GEA Westfalia Separator India Pvt. Ltd. on lease rentals. The ITAT observed that when rental income from the very same premises had been consistently accepted by the department in earlier years, the Revenue could not suddenly contend that no building existed.

The Tribunal accepted the assessee’s explanation that the building was deliberately not mentioned in the sale deed to avoid higher stamp duty liability. In a sharp observation, the ITAT remarked that such conduct may amount to “mischief” under the Karnataka Stamp Act by both buyer and seller, for which appropriate authorities may take action, but such stamp duty irregularity cannot become a basis to levy higher income tax by denying genuine indexed cost of construction.

The ITAT further criticized the AO for not conducting any meaningful enquiry despite availability of substantial evidence. The Tribunal observed that the AO could have summoned the contractor, tenant, suppliers or BESCOM authorities if he doubted the genuineness of construction, but no such exercise was undertaken. Merely relying on the sale deed alone, while ignoring overwhelming corroborative evidence, was held unsustainable.

Accordingly, the Bangalore ITAT held that the assessee had successfully established existence and transfer of the factory shed along with the land and directed allowance of indexed cost of construction while computing long-term capital gains.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 26/06/2025 in respect of the A.Y. 2018-19.

2. The brief facts of the case are that the assessee is an individual and filed his return of income 28/08/2018. His case has been selected for limited scrutiny under CASS to examine the capital gains / loss and investment in immovable property. Notice u/s. 143(2) was issued and the assessee has also filed the details sought for by the AO. The AO based on the details furnished by the assessee, had alleged that the assessee had computed the indexed cost of construction at Rs. 3,48,71,795/- while arriving the capital gain in respect of the property sold at plot no. 7A, Bommasandra for a sum of Rs. 6,75,00,000/-. In the computation, the assessee had claimed the construction was made in the year 2005-06 and incurred an expenditure of Rs. 1,50,00,000/-. The AO based on the sale deed furnished by the assessee, had not accepted the indexed cost of construction since the sale deed mentioned about only a vacant plot without any construction over it. Thereafter, notice u/s. 142(1) was issued requiring the assessee to furnish the basis of such construction claim. The assessee filed his reply along with the evidences for the construction of the factory premises. Again, the AO had issued a show cause notice on 28/12/2020. The assessee furnished a written reply and again explained the evidences for the construction of the premises. Another notice was issued on 03/02/2021 and the assessee had submitted the evidences in the form of bills / vouchers for the purchase of raw materials. The assessee had also submitted that the factory premises constructed in the plot was later on let out to M/s. GEA Westfalia Separator India Pvt. Ltd. and the lessee also deducted the TDS while making the lease rent to the assessee and therefore the construction was established by the assessee. The assessee also explained the fact why the building was not mentioned in the sale deed and relied on the supporting documents to show that there was a construction and in the constructed area, the above said company took the facility for rent. The assessee had also furnished the loan sanction letters and also the copy of the assets and liability statement and the sanctioned plan of the said property and also the electricity and tax paid receipts stood in the name of the tenant. The assessee had also furnished the ledger account of AVS ready mix concrete products Pvt. Ltd. and the confirmation letter given by the contractor who had constructed the building in the said premises and also the invoice copies issued by the raw materials suppliers and prayed to accept the said details and accept the computation made by the assessee. The AO not accepted the documents furnished in support of the claim that there is a construction but relied on the sale deed and observed that there is no mention about the building and therefore disallowed the indexed cost of construction and added the same to the income of the assessee.

3. As against the said order, the assessee filed an appeal before the Ld.CIT(A) and the Ld.CIT(A) also relied on the sale deed and concluded that there was no construction existed on the land at the date of sale and therefore the disallowance of the indexed cost of construction is in order.

4. As against the said order, the present appeal has been filed by the assessee before this Tribunal.

5. At the time of hearing, the Ld.AR submitted that except the non-mentioning of the building in the sale deed, all other documents produced by the assessee would indicate that there was a construction of the building in the said premises and therefore the assessee is entitled for the indexed cost of construction. The Ld.AR further submitted that the lower authorities had not considered the statutory documents while deciding the issue and in fact they have not given any finding about the said documents and therefore their orders are not in accordance with law. The Ld.AR also filed a paper book enclosing all the notices issued by the AO and the replies filed by the assessee along with the various documents to show that there was a construction and the constructed premises were let out and sold during the assessment year and therefore the claim of the indexed cost of construction is in order.

6. The Ld.DR relied on the orders of the lower authorities and submitted that the sale deed does not mention about the transfer of the building and therefore the lower authorities had rightly disallowed the indexed cost of construction as claimed by the assessee.

7. We have heard the arguments of both sides and perused the materials available on record.

8. The main dispute involved in this appeal is about the disallowance of the indexed cost of construction of the building by the AO while computing the capital gains in respect of the property situated at 7A, Bommasandra.

9. Before the AO, the assessee had explained the fact that the building has not been mentioned in the sale deed to avoid the payment of the stamp duty. Further, the sale deed has been registered by the Sub Registrar without physically verifying the property. We have also gone through the paper book filed by the assessee in which the notices u/s. 143(2) as well as u/s. 142(1) were furnished. We have also perused the replies filed by the assessee along with the supporting documents.

10. In page 27 of the paper book, the assessee had furnished the copy of the reply filed to the notices issued u/s. 143(2) of the Act in which the assessee had mentioned about the construction cost of Rs. 1,50,00,000/-made during the year 2005-06. Based on that, the capital gains were also computed by the assessee. The assessee had also furnished the copy of the sale deed dated 26/10/2017 executed by the assessee with the purchaser M/s. GEA Westfalia Separator India Pvt. Ltd. By way of this sale deed, the assessee had sold 25,000.331 sq.ft. to the purchaser.

11. Again on 04/11/2020, the assessee filed the copies of the LIC loan document, Punjab National Bank loan document to show that the assessee had got loan from the said entities against the property owned by the assessee. In page 65, the AO again issued a notice u/s. 142(1) and sought for the various details about the capital gain losses and investment in immovable property. The assessee also filed their reply on 11/12/2020 and also enclosed the statement of income earned by the assessee. In the said statement of income, the assessee had mentioned the property at 7A, Bommasandra and arrived the net income chargeable from the said property under the head income from house property. The assessee had also in the Schedule 9 as well as Schedule 12 of the return of income had mentioned about the long term capital gain arrived in respect of the plot 7A, Bommasandra. Similarly, the details about the TDS deducted by the tenant M/s. GEA Westfalia Separator India Pvt. Ltd., was also available in page 85 of the paper book. In the said reply, we find that the assessee had enclosed the sanction plan given by the Karnataka Industrial Areas Development Board to construct a factory premises on 18/03/2009 and on such approval, the assessee had also constructed the factory premises and let out to M/s. GEA Westfalia Separator India Pvt. Ltd. The assessee had also furnished the details about the rental income received by the assessee for the A.Ys. 2015-16, 2016-17 and 2017-18 from the said property. The assessee had also furnished the BESCOM invoice copy raised in the name of the M/s. GEA Westfalia Separator India Pvt. Ltd. who is occupying the premises at 7A, Bommasandra. The assessee had also furnished the building tax paid receipts to show that there was a building. In support of their contention that there was a building, the assessee had also furnished the construction details and also the confirmation letter issued by the contractor to show that there was a construction and based on that only, the indexed cost of construction has been arrived. The assessee had also furnished the copy of the ledger account of the said suppliers in which the address at 7A, Bommasandra Industrial Area, Bangalore was mentioned. The assessee had also furnished the copy of the return of income for 2010­11, 2011-12 in which the assessee had received rental income from the said company.

12. From the above said documents furnished by the assessee, it is clear that there was a building constructed and also let out to M/s. GEA Westfalia Separator India Pvt. Ltd. and received rental income which was also shown to the department while filing the return of income for various years. The only mistake pointed out by the authorities below are that the sale deed does not mention about the constructed area and therefore the authorities had doubted about the existence of the building while the sale deed was executed.

13. It is the case of the assessee that the building i.e. factory shed was constructed in the year 2005-06 after getting proper approval from the Karnataka Industrial Areas Development Board and also after obtaining loans from the various organizations. In support of the said contentions, the assessee had also relied on the rental income received by him from the tenant M/s. GEA Westfalia Separator India Pvt. Ltd. on which the tenant had also deducted the TDS while making the payment. When there is no building, there is no necessity to pay any rent to the assessee and there is no necessity to deduct the TDS on it. Further, the various records produced by the assessee before the AO as well as before us establishes the fact that the construction was there for which the assessee had procured various materials. It is also a fact that the contractor who had constructed the factory shed had given a certificate to that effect. We have also perused the ledger account of the various suppliers in which the premises address has been mentioned as 7A, Bommasandra. We have also considered the reasons given by the assessee for not mentioning the building in sale deed. To avoid the payment of higher stamp duty, the said fact was not mentioned in the said sale deed. The non-inspection by the Sub-Registrar would help the assessee and therefore the purchaser had avoided payment of higher stamp duty. These are all the mischiefs committed by both the assessee as well as the purchaser under the Karnataka Stamp Act, for which the said authority should initiate appropriate proceedings. In the present case, we are concerned about the payment of the income tax on the capital gains and therefore the mischiefs done under the different Act could not be a valid reason for imposing the income tax on the assessee.

14. When there are number of documents furnished by the assessee in support of their claim that there was a building which was also transferred by way of the sale deed dated 26/10/2017, to disprove the said claim, the authorities should have some other evidences. In the present case, there are no such evidences except the sale deed. Moreover, the assessee had filed a certificate issued by the contractor who had certified that they had constructed the building in the property owned by the assessee but the AO had not initiated any steps to summon the said contractor and examine him on oath to find out the genuineness of the said certificate. No such exercise was done by the AO. Further, the assessee had furnished the supplier’s name and address who had supplied the materials for the construction of the said building but the AO had not taken any steps to summon them and examine them in support of his case that no such construction was carried out by the assessee. Further, the assessee had reported the rental income from the said company M/s. GEA Westfalia Separator India Pvt. Ltd. in the A.Ys. 2015-16, 2016-17 and 2017-18 which was also accepted by the very same AO and therefore it is established that the assessee was owning a building in the said premises and received rental income from the said building. Further, the tenant also deducted the TDS and remitted to the department. All the above said facts were accepted by the department and only for the A.Y. 2018-19, the AO had disallowed the indexed cost of construction on the basis of the single document. Infact the AO could have summoned the tenant to elucidate the truth. When the assessee had alleged that there was a construction and produces some documents the AO could have done some exercise by summoning and examining the Contractor, Tenant and BESCOM and on that basis the AO could have concluded the proceedings. No such exercise was done by the AO.

15. The assessee had responded to the various notices issued by the AO and also furnished the various details and also the documents but no such effort was made by the AO to disprove the details as well as the documents. In such circumstances, we are of the view that the assessee had established his case by producing the various documents to show that there was a factory shed available in the premises at 7A, Bommasandra Industrial Area and therefore the indexed cost of construction claimed by him is in order. We arrived such a conclusion since the department has no other evidence to show that there was no construction. Even the department has not examined the tenant to disprove the contention that there is no building in the premises.

16. In such circumstances, we have no other way except to accept the plea of the assessee that the assessee had sold the property along with the factory shed and therefore he is entitled for the deduction of the indexed cost of construction while computing the longterm capital gains.

17. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 26^th May, 2026.