Facts of the Case

The assessee, an individual, sold his share in an immovable property and declared the resultant long-term capital gain. During scrutiny assessment under Section 143(3), the Assessing Officer computed capital gains arising from the sale of the assessee’s share in the property and brought the same to tax. The Commissioner (Appeals) partly modified the assessment, including observations regarding the appropriate assessment year for taxation of the gains. The assessee thereafter preferred an appeal before the Income Tax Appellate Tribunal.

Issues Involved

  1. Whether long-term capital gain from sale of the property share was correctly computed and taxed.
  2. Whether conversion charges paid for converting leasehold property into freehold constituted allowable cost of improvement.
  3. Whether the valuation adopted by the Assessing Officer was justified.
  4. Determination of the correct assessment year for taxing the capital gains.

Petitioner’s (Assessee’s) Arguments

  • The assessee contended that the capital gain had not been computed in accordance with law.
  • It was argued that expenditure incurred for conversion of leasehold land into freehold enhanced the value of the asset and should be allowed as part of the cost of improvement.
  • The assessee also challenged the valuation adopted by the Assessing Officer and the timing of taxation.

Respondent’s (Revenue’s) Arguments

  • The Revenue supported the assessment order and the findings of the Commissioner (Appeals) to the extent favorable to the Department.
  • It was argued that the valuation adopted by the Assessing Officer, including reliance on prevailing circle rates, was reasonable in the absence of reliable comparable sale instances.
  • The Department contended that the computation of capital gains had been correctly carried out in accordance with statutory provisions.

Court Order / Findings (ITAT)

  • Capital gains must be computed in accordance with the statutory mechanism provided under the Act.
  • Expenditure incurred for converting leasehold property into freehold is intrinsically linked to improvement of title and enhances the value of the asset, and therefore qualifies as cost of improvement.
  • Adoption of circle rate by the Assessing Officer may be justified where the valuer’s report lacks reliable supporting data.

Important Clarification

The Tribunal clarified that expenses which improve ownership rights or marketability of property—such as conversion from leasehold to freehold—can form part of the cost of improvement for capital gains computation, subject to verification of facts.

Link to download the order –

https://itat.gov.in/public/files/upload/1625813959-143%20Sujit%20Majumdar%20pdf.pdf

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