Allowable cost of construction when only 1st floor sold as per sale deed to reduce stamp duty

Allowable Cost of construction when only first floor of house was sold as per registry to reduce the stamp duty. ITAT restored the case for fresh determination

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the addition made by the Assessing Officer (AO) restricting the claim of indexed cost of construction to only ground floor on the basis of sale deed.  

ABCAUS Case Law Citation
ABCAUS 3509 (2021) (06) ITAT

Important case law relied referred:
Bawa Shiv Charan Singh vs. CIT 149 ITR 29
Madras Fertilizers Ltd. vs. CIT 209 ITR 44

The assessee was an individual. The return of income of the assessee was selected for limited scrutiny for the reason of long-term capital loss claimed on sale of property.

During the course of income tax assessment proceedings, the AO noted that the assessee had claimed capital loss claiming indexed cost of acquisition of the property based on a valuation report of the construction cost of ground, first and second floor. However as per the sale deed only ground floor of the property was sold.   

Therefore, a show casue notice (SCN) was issued asking the assessee to explain as to why the construction cost should not be restricted to ground floor only.   

The assessee submitted that he had sold the complete property from ground floor to second floor and requested to consider the total construction cost of the property mentioned in the valuation report.

However, the AO was not satisfied with the explanation given by the assessee and again asked him to substantiate the proof of existence of first floor and second floor especially when the sale deed clearly showed the built up freehold property on ground floor along with map of the property.

Accordingly, AO rejected the claim of the assessee and determined the long-term capital gains by inter alia allowing the proportionate cost of construction.

CIT(A) confirmed the addition.

Before the Tribunal, the assessee submitted that in view of the municipal tax receipt for three storied building evidencing the existence of all the floors, the addition sustained by the CIT(A) should be deleted.

It was further submitted by the counsel of the assessee that the buyer might have forced the assessee to mention in the sale deed only ground floor to reduce the stamp duty.

The ITAT opined if the contention that the buyer had forced assessee to reduce the stamp duty is accepted, then, it is also quite possible that the assessee might have received more money for the first and the second floor from the buyer who had shown lesser amount of sale consideration to avoid future tax liability.

However, the ITAT also took congnizance of the municipal receipt mentioning the existence of first and second floor.  

The Tribunal noted that the AO had not called the buyer  to find out the truth nor the assessee had produced the  buyer for his examination. 

Accordingly, the ITAT restored the issue to the file of the AO with a direction to grant one final opportunity to the assessee to substantiate his case by producing the buyer and the registered valuer for their examination by the AO and to arrive at the true character of the property. 

Thus the appeal was allowe din favour of the assessee.

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