Jayanti Vasishta Vs ITO (ITAT Bangalore)
In a recent decision, the Income Tax Appellate Tribunal (ITAT) Bangalore bench ruled in favor of the appellant, Ms. Jayanti Vasishta, allowing indexed cost of construction for a penthouse regularized on the date of sale. The case, titled Jayanti Vasishta Vs ITO, pertained to the assessment year 2014-15 and presented significant legal arguments regarding the computation of capital gains.
The appeal stemmed from a scrutiny assessment conducted by the Income Tax Officer (ITO), which was subsequently reopened under section 148 of the Income Tax Act. The appellant, Ms. Jayanti Vasishta, had declared income from the sale of a penthouse but disputed certain additions made by the assessing officer during the assessment proceedings.
One of the primary contentions raised by the appellant was regarding the indexed cost of acquisition and construction. The appellant argued that the property in question, acquired through gift in the financial year 2002-03, should be eligible for indexation benefits from April 1, 1981, as it was originally obtained before that date and subsequently converted to residential use in 1988-89.
The assessing officer disallowed the indexed cost of acquisition and construction, contending that the property did not qualify as a capital asset before its conversion. Furthermore, the officer raised concerns about the legality of the construction, claiming it was not part of the sanctioned plan and therefore ineligible for capital gains treatment.
However, the appellant provided compelling evidence, including a confirmation from the developer, M/s. BSR Developers, acknowledging payment for the construction of the penthouse. Additionally, the appellant demonstrated that the property had been regularized with the local municipal authorities and all necessary documents were in order.
In its ruling, the ITAT Bangalore bench upheld the appellant’s arguments, emphasizing that the property had acquired the status of a capital asset upon its conversion to residential use. Therefore, the indexed cost of acquisition and construction should be allowed from April 1, 1981, as claimed by the appellant. The tribunal also highlighted the regularization of the property on the date of sale, further solidifying its status as a capital asset eligible for capital gains treatment.
The decision of the ITAT Bangalore bench in the case of Jayanti Vasishta Vs ITO sets an important precedent regarding the computation of capital gains in cases involving properties regularized after their sale. It underscores the principle of equity and fairness in taxation, ensuring that taxpayers are not unduly burdened with higher tax liabilities due to technicalities.
Moreover, the ruling reaffirms the importance of documentary evidence and legal compliance in establishing the eligibility of properties for capital gains treatment. By providing clarity on the treatment of indexed cost of construction, the ITAT decision offers valuable guidance to taxpayers and tax authorities alike.
In conclusion, the ITAT’s decision in Jayanti Vasishta Vs ITO serves as a significant milestone in the interpretation of tax laws related to capital gains. It upholds the rights of taxpayers while promoting adherence to legal standards, ultimately contributing to a more transparent and equitable tax regime.
FULL TEXT OF THE ORDER OF ITAT BANGA-LORE
This appeal by the assessee is against the DIN & Order No. ITBA/NFAC/S/250/2023-243/1054506398(1) dated 21.07.2023 of the CIT(Appeals)-1, National Faceless Appeal Centre, Delhi for the AY 2014-15 on the following grounds:-
“1. That in any case and in view of the matter, the action of the Learned Officer in framing the impugned Assessment Order is bad in law and is opposed to the facts and circumstances of the case and thus liable to be set aside.
2. That the Learned CIT(A) erred in passing an Order u/s 250 of the Act without providing opportunity of personal hearing despite specific request by the Appellant and the same is against the principals of natural justice.
3. That the Learned CIT(A) ought to have provided an-other opportunity as the Appellant had submitted only partial response to the Notice in order to place further documents on records.
4. That the Learned Assessing Officer erred in re-opening the proceedings on mere change of opinion based on audit objection and material already available on records.
5. That the Learned CIT(A) grossly erred in contending that the rulings relied upon by the Appellant cannot be followed merely because they are not passed by the jurisdictional authorities.
6. That the Learned CIT(A) ought not have alleged that the Appellant colluded with the builder to construct illegal portion and that the gains are through deceit and illegality.
7. That the Revenue Authorities mis-construed the provisions of Section 48 of the Act which clearly provided that the cost to be considered is the cost at which the previous owner had incurred to purchase the asset and the indexation benefit to be consid-ered is from the date of purchase of such asset.
8. That the Learned Revenue Authorities ought to have appreciated that indexed cost of acquisition as defined in Section 48 of the Act is referring to the “Asset” and not Capital Asset. Accordingly, the Appellant is eligible to consider indexation benefit even before the conversion of asset into Capital Asset.
9. That the Learned CIT(A) was not the competent au-thority to comment on the legality of the construction and the CIT(A) grossly erred in alleging that the penthouse was not arising out of residential land as the development potential was fully exhausted
10. That the Learned CIT(A) disregarded the conten-tion of the Appellant wherein it was contended that the cost of construction of penthouse was paid by foregoing one apartment of Appellant’s share.
11. That the Appellant denies the liability to pay inter-est u/s 234A, 234B and 234C of the Act as the same has been levied erroneously and is required to be deleted,
12. The Appellant craves leave to add, alter, modify, amend substitute or delete all or any of the above Grounds of Appeal.
For these and other grounds that may be argued at the time of the personal hearing, the Appellant prays that the Order be set aside and relief be granted by deleting the additions made by the Revenue Authorities.”
2. The brief facts of the case are that the assessee filed return of income u/s. 139 declaring income of Rs.33,23,480. The case was selected for scrutiny and assessment was completed u/s. 143(3) accepting the returned income. Later on, the case was reopened by issue of no-tice u/s. 148 dated 11.12.2017. Assessee was provided copy of reasons recorded on 03.07.2018 (which is placed at pages 33-34 of PB). In response, the assessee filed the return on 12.09.2018 declar-ing the same income of Rs.33,23,480 as in the original return, computing the long term capital gains as under:-
3. The AO observed that the assessee was gifted the residential land (con-verted from agricultural to residential purpose during 198889) in total measuring 2 acres 16 guntas bearing No.59 & 71/7, situated at Sarakki Village, Uttarahali Hobli, Bengaluru South Taluk during 2002-03. In 2003-04, the assessee entered into Joint Development Agreement (JDA) dated 27.12.2003 and one apartment built in that land has been sold during FY 2013-14 for a sale consideration of Rs.71,55,000. Capital gain of Rs.27,59,071 has been offered to tax after deducting the indexed cost of acquisition and indexed cost of construction and no proof of construction was submitted by the as-sessee.
4. 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. From the JDA, it was noted that the said apartment P2 Block I bearing municipal No. New 52/20 (old no.) located at 7th Main Road, Shakambi Nagar, Bengaluru, BBMP PID No.57-274-52/202 is not in the schedule of Apartments and thus it is outside the purview of JDA and the sanctioned plan. The confirmation received from the developer, M/s. BSR Developers is re-produced as under:-
“The Joint venture between BSR Developers and Shri Vashishta Jayanti bearing registered document number BNC(U)-KNGR/32167/2003-04 for the project Jayanti Gardens Block 1 was completed in the year 2006. The Penthouse portion, P2 block 1 bearing Municipal No. 52/20 (old No.) located at 7th Main road Shakambi Nagar, Bengaluru, BBMP PID No.57-274-52/202. The said apartment was additional built and is outside the sanction plan. There-fore the land owner was require to pay basic cost of construction for the unit measuring 2505 sft super built area, at the rate of Rs.750 per sq.ft. The land owner has paid the same to M/s. BSR Developers and we acknowledge the receipt of this amount.”
5. The AO issued show cause notice on 04.12.2018 in this regard. The as-sessee replied objecting to the imitating of reassessment proceedings and relying on B. N. Vyas v Com-missioner of Income Tax held in Hon’ble High Court of Gujrat [1986] 25 Taxman 133 (Gujrat) submitted that cost has to be considered is the cost incurred by the previous owner and indexation benefit has to be from inception irrespective of whether the asset was capital asset or not. The AO rejected the sub-missions of the assessee and observed that the assessee has not invested any amount from sale consid-eration on sale of flat and it was not an authorized construction. The AO disallowed the cost of acquisi-tion and made addition of Rs.3,20,662. Further, the AO disallowed cost of construction amounting to Rs.35,49,590 claimed by the assessee for 2505 sq.ft. @ 750/sq.ft. Accordingly, the assessed income was Rs.69,73,065.
6. On appeal, the CIT(Appeals) after considering the written submissions of the assessee dismissed the appeal of the assessee. Aggrieved, the assessee is in appeal before the In-come Tax Appellate Tribunal.
7. The ld. AR vehemently argued on the reopening of the assessment based on audit objection and submitted that the AO has already taken into account the material availa-ble 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.
8. 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 grant-ed 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. M/s. BSR Developers has categorically accepted that the property was measuring 2505 sq.ft. and cost of construction is Rs.750/ sq.ft. which amount has been paid by the owner. Therefore, it cannot be said that the assessee has not paid the said amount to the Developer. She further submitted that the necessary facts have been dis-closed and the said property was regularized in the municipal records and subsequently in the sale deed before the selling to the capital asset. Hence it satisfies all the conditions of becoming a capital asset and the AO has also assessed it under the head capital gain. Therefore, the assessee is eligible to claim cost of construction with indexation benefit. She relied on Vodafone West Ltd. vs ACIT 354 ITR 572 (Gujrat) and CIT v. M. Ramaiah Reddy [1986] 158 ITR 611 (Kar) and other judgments which are placed on the paper book filed by the AR of the assessee.
9. The ld. Dr relied on the order of the lower authorities. He submitted that the assessee is 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.
10. He further submitted that the house sold by the assessee was illegal construction and it was not part of the Joint Development Agreement (JDA) and the sanctioned plan. He pointed out that at page 7 of the CIT(A)’s order, the assessee has categorically stated that the builder at the request of the appellant had agreed to construct the Penthouse in addition to the agreed number of apartments as per the terms of the JDA. Thus, the appellant’s defense that one of the flats in JDA was sacrificed and instead Penthouse was constructed is factually incorrect. He further submitted that as per sanctioned plan, 18 flats were to be constructed (6 for Owner and 12 for Developer). Accordingly the capital asset stands exhausted. The 19th flat was illegal creation in collusion with the devel-oper and is not emanating from the gifted land, but crystallised from thin air through deceit and illegali-ty, posting potential danger to the lives of future inhabitants and cannot be a capital asset eligible for deduction u/s. 48. He also relied on the decision in the case of ITO v. Bhagwan T. Fatnani [2015] 58 com 227 (Mumbai). The submissions made by the ld. DR is placed on recorded. He therefore requested the order of the CIT(Appeals) has to be upheld.
11. In the rejoinder, the ld. AR submitted written submissions dated 10.01.2024 as under:-
