Case Law Details
Dilip Kumar Gupta Vs DCIT (ITAT Hyderabad)
The Income Tax Appellate Tribunal (ITAT), Hyderabad, allowed the assessee’s appeal for statistical purposes, holding that there is no restriction under Section 50C of the Income Tax Act on claiming the indexed cost of improvement while computing long-term capital gains (LTCG) based on the deemed sale consideration. However, it remanded the matter to the Assessing Officer (AO) for the limited purpose of verifying the quantum of the indexed cost of improvement claimed by the assessee.
The assessee had sold an immovable property during Assessment Year 2012-13. Based on the difference between the actual sale consideration and the stamp duty value, the AO reopened the assessment under Section 147 and invoked Section 50C by substituting the sale consideration with the higher value adopted by the Sub-Registrar. In the return filed in response to the notice under Section 148, the assessee computed capital gains after adopting the deemed sale consideration and claimed deduction for the indexed cost of acquisition as well as the indexed cost of improvement representing expenditure incurred on construction of the building.
The AO disallowed the indexed cost of improvement of ₹11,39,746 on the ground that such deduction was not permissible under Section 50C. The Commissioner of Income Tax (Appeals) affirmed the disallowance. Before the Tribunal, the assessee also sought condonation of a delay of 63 days in filing the appeal, explaining that the delay occurred due to illness, supported by a medical certificate. The Tribunal condoned the delay, observing that it resulted from ill-health rather than negligence and referred to the Supreme Court’s decision advocating a liberal approach in condoning delays.
On merits, the Tribunal held that once the assessment was reopened under Section 147 on the issue of computation of LTCG, the assessee was entitled, in the return filed pursuant to the notice under Section 148, to claim deductions relating to that issue, including the indexed cost of improvement. Relying on the Supreme Court’s decision in Commissioner of Income Tax v. Sun Engineering Works (P.) Ltd., the Tribunal observed that reopening sets aside the earlier under-assessment relating to the reopened issue, enabling the assessee to make a legitimate claim connected with that issue.
The Tribunal further held that Section 50C merely substitutes the sale consideration with the deemed value for computing capital gains and does not prohibit deduction of the indexed cost of improvement. It found the AO’s view that Section 50C barred such deduction to be legally unsustainable. However, since the AO had rejected the claim solely on that legal premise and had not examined the correctness of the amount claimed, the Tribunal restored the matter to the AO only for verification of the quantum of the indexed cost of improvement. Subject to such verification, the assessee’s claim was held to be allowable. Accordingly, the appeal was allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (for short, “CIT(A)”), dated 16/07/2025, which in turn arises from the order passed by the Assessing Officer (for short, “AO”) under section 143(3) r.w.s 147 of the Income Tax Act, 1961 (for short, “the Act”), dated 02/11/2019. The assessee has assailed the impugned order of the CIT(A) on the following grounds of appeal:
“1. The learned CIT(A) erred in both law and on facts of the case.
2. The learned CIT(A) failed to provide proper opportunity for hearing and for filing further evidence.
3. The CIT(A) erred in law and on facts in confirming the substitution of actual sale consideration by the SRO value u/s 50C of the Act, without any evidence that the consideration received by the assessee was understated or the transaction was not genuine.
4. The learned CIT (A) ought to have referred the matter to the Departmental Valuation Officer (DVO) as mandated under Section 50C(2) when the assessee objected to the adoption of SRO value
5. The learned CIT(A) erred in upholding the Assessing Officer addition and ought to have allowed the benefit of Indexed cost of improvement claimed by the appellant.
6. The CIT(A) erred in upholding the disallowance of the claim for cost of improvement solely on the ground of insufficient supporting bills and vouchers.
7. Any other ground that may be urged at the time of hearing.”
2. Succinctly stated, the assessee, who is a director with M/s. Patwari Bakers Private Limited filed his return of income for AY 2012-13 on 29/06/2013, declaring an income of Rs. 17,18,860/-.
3. Thereafter, the AO based on information that the assessee a/w his two brothers, has sold an immovable property situated at B.K. Guda, W-B:7-1, Plot:99, bearing House No.7-1-307/14/G/6/5 admeasuring 180 Sq yds for a consideration of Rs.39 lakhs during the subject year and had though disclosed in his return of income the “Long term capital gains” (LTCG) of Rs.13 lakhs (1/3rd share of the assessee), but the segment value of the said property as per the SRO was Rs.75,90,000/-as per which his share worked out at Rs.25,30,000/- (1/3rd share of Rs.75,90,000/-), thus holding a conviction that the income of the assessee chargeable to tax on the aforesaid sale transaction had escaped assessment, initiated proceedings under section 147 of the Act. Notice under section 148 of the act, dated 27/03/2019, was issued and served upon the assessee.
4. In response, the assessee filed his return of income for AY 201213 on 24/09/2019 declaring an income of Rs.19,50,990/-, wherein he had admitted “capital gains” of Rs.9,84,649/- after deducting, viz., (i) indexed cost of acquisition: Rs.4,05,605/-; and (ii) indexed cost of improvement: Rs.11,39,746/- on his share of capital gains.
5. During the course of the assessment proceedings, the AO observed that, as per section 50C of the Act, no deduction of indexed cost of improvement was allowable. Accordingly, the AO called upon the assessee to explain as to why his claim for deduction of indexed cost of improvement of Rs.11,39,746/- may not be added as per Section 50C of the Act. In reply, the assessee claimed that he had sold the subject property during the year under consideration for Rs. 13 lakhs, i.e., below the SRO value of Rs. 25,30,000/- due to adverse vastu and a disadvantageous location. Elaborating further, it was stated by him that he had purchased the land on 14/05/2004 for a consideration of Rs.2 lakhs and thereafter constructed a building on the same ad measuring 1,000 Sq ft., which property was thereafter sold on 02/06/2011 for a consideration of Rs.13 lakhs. He submitted that he had initially considered only the land value when computing the capital gains on the sale of the subject property and had not considered the cost of building. It was further stated that in the return of income filed in response to the notice issued under section 148 of the Act, the cost of building of Rs.8 lakhs (covered area 1,000 sq ft) was considered, and the consequential capital gains was computed after considering the SRO value of Rs.25,30,000/-. Accordingly, it was submitted that, as in the return of income filed in response to notice under section 148 of the Act, the cost of improvement, i.e., expenses incurred on the construction of the building, was considered; therefore, the capital gains arising on the transfer of the sale transaction had rightly been disclosed.
6. However, the AO did not find favour with the aforesaid explanation of the assessee. The AO held a firm conviction that the deduction of the indexed cost of improvement Rs.11,39,746/- claimed by the assessee was not allowable as per section 50C of the Act, thus, disallowed the same and made an addition of the said amount to the income returned by the assessee in response to the notice issued under section 148 of the Act.
7. Aggrieved, the assessee carried the matter in appeal before the CIT(A), but without success.
8. The assessee, aggrieved with the order of the CIT(A) has carried the matter in appeal before us.
9. Shri VVS Ankith, Advocate, Learned Authorised Representative (for short, “Ld. AR”) for the assessee, at the threshold of hearing of the appeal, submitted that the same involves a delay of 63 days. Elaborating on the reasons leading to the delay, the Ld. AR submitted that the same had crept in as the assessee during the relevant period was suffering from paraplegia with mild neurological symptoms. Elaborating further, it was stated that due to the aforesaid debilitating condition, he was medically advised to undergo strict bed rest to prevent further worsening of his neurological morbidity. The assessee, to fortify the aforesaid factual position, had also placed on record a certificate of Agasya Hospitals, Hyderabad. The Ld. AR, to buttress his aforesaid contention, had taken us through the affidavit dated 11/06/2026, along with a copy of the Medical Certificate and a petition filed by the assessee seeking condonation of the aforementioned delay.
10. Per contra, Shri Vamshi Krishna, Learned Senior Departmental Representative (for short, “Ld. Sr-DR”) did not raise any objection to the seeking of the condonation of the delay involved in the appeal filed by the assessee.
11. We have given thoughtful consideration and are of the view that, as the delay involved in the present appeal had crept in because of the ill-health of the assessee and not on account of any lackadaisical approach on his part, the same, in all fairness and in the interest of justice, merits to be condoned. Our aforesaid view that a liberal approach should be adopted for condoning the delay involved in the appeal is supported by the recent decision of the Hon’ble Supreme Court in the case of Vidya Shankar Jaiswal vs. The Income Tax Officer, Ward-2, Ambikapur in Special Leave Petition (Civil) Nos. 26310-26311/2024, dated 31st January, 2025. The Hon’ble Apex Court, while setting aside the order of the Hon’ble High Court of Chhattisgarh, which had approved the declining of the condonation of the delay of 166 days by the Income-Tax Appellate Tribunal, Raipur Bench, had observed that a justice-oriented and liberal approach should be adopted while considering the application filed by an appellant seeking condonation of the delay involved in filing the appeal.
12. On merits, the Ld. AR reiterated the submissions and the contentions made before the AO and the CIT(A). The Ld. 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 contention, the Ld. AR submitted that there was 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 Act. The Ld. AR submitted that both the lower authorities had grossly erred in not appreciating the issue involved in the present case in the backdrop of the settled position of law.
13. Per contra, the Ld. Sr-DR relied upon the orders of the authorities below and supported their decision while rejecting the claim of the assessee.
14. We have given thoughtful consideration and are unable to persuade ourselves to concur with the view taken by the AO, which, thereafter, has been approved by the CIT(A). Before proceeding further, we deem it apposite to observe that as the case of the assessee was reopened under section 147 of the Act on the ground that he had wrongly computed the “Long term capital gain” (LTCG) on transfer of the subject property by not adopting the “deemed sale consideration” as contemplated under section 50C of the Act, therefore, the assessee in his return of income filed on 24/09/2019 remained well within his right to claim deduction of the indexed cost of improvement of Rs.11,39,746/-, i.e., the investment made by him towards construction of the property, which, though was not claimed by him in his original return of income filed on 29/06/2013. We say so, for the reason that pursuant to the notice issued by the AO under section 148 of the Act, dated 27/03/2019, the previous under-assessment of the income of the assessee qua the “Long term capital gain” (LTCG) arising on the transfer of the aforementioned property was set aside, as a result whereof the assessee in his return of income filed in response to the aforesaid notice issued under section 148 of the Act, dated 27/03/2019 remained well within his right to raise a claim for deduction of the cost of construction of the property while computing the “Long term capital gain” (LTCG) arising on the subject sale transaction. Our aforesaid view that the assessee, pursuant to notice under section 148 of the Act, remains well within his right to raise a claim of deduction regarding the issue based on which his case has been reopened is supported by the judgment of the Hon’ble Supreme Court in the case of Commissioner of Income Tax v. Sun Engineering Works (P.) Ltd. (1992) 198 ITR 297 (SC). In the said case, the Hon’ble Supreme Court had, inter alia, observed that pursuant to the reopening of the case under section 148 of the Act, what is set aside is, thus, only the previous under assessment and not the original assessment proceedings. In our view, as the case of the assessee before us had been reopened on the ground of suppression of “Long term capital gain” (LTCG) arising on the transfer of the subject property, the assessee remained well within his right to claim deduction of the cost of construction of the subject property, i.e., the indexed cost of improvement while computing the LTCG arising on the transfer of the same in his return of income filed in response to notice issued under section 148 of the Act.
15. At this stage, we deem it apposite to observe that there is no restriction provided in section 50C of the Act that prevents an assesseefrom 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 Act.
16. Be that as it may, we are unable to persuade ourselves to concur with the AO, who had declined the assessee’s claim of deduction of Rs.11,39,746/- on the ground that the same was not permissible as per section 50C of the Act. At the same time, we are also not oblivious of the fact that as the AO had summarily declined the assessee’s claim for deduction of indexed cost of improvement of Rs.11,39,746/- based on his aforementioned observation, therefore, he had no occasion to verify the veracity of the quantum of the said claim of deduction as was raised by the assessee. We thus, while principally approving the claim of the assessee for deduction of indexed cost of improvement while computing the LTCG on the transfer of the subject property under section 50C of the Act, set aside the matter to the file of the AO only for the limited purpose of verifying the veracity of the quantum of deduction of the indexed cost of improvement as had been so claimed by the assessee.
17. In the result, the appeal filed by the assessee is allowed for statistical purposes in terms of our aforesaid observations.
Order pronounced in the open court on 17th June, 2026.
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