Bangalore ITAT Allows Indexed Construction Cost for Capital Gains Despite Sale Deed Describing Property as Vacant Plot

Case Background

Case: Narayana Chandra Reddy Vs DCIT (ITAT Bangalore)
Assessment Year: 2018-19
Appeal Against: Order of NFAC, Delhi dated 26/06/2025

Overview of the Dispute

In a significant ruling favouring the assessee, the Income Tax Appellate Tribunal, Bangalore has held that indexed cost of construction of a factory building cannot be denied merely because the registered sale deed describes the transferred property as a vacant plot. The Tribunal emphasised that overwhelming corroborative documentary evidence on record must prevail over a single transaction document that was deliberately drafted to minimise stamp duty obligations.

The case arose from the sale of an industrial property located at Plot No. 7A, Bommasandra Industrial Area, Bangalore. The assessee, an individual, had filed his return of income on 28/08/2018 for Assessment Year 2018-19. The case was selected for limited scrutiny through CASS, specifically to examine capital gains or loss and investment in immovable property.

Facts of the Case

The assessee sold his industrial property situated at Plot No. 7A, Bommasandra for a total consideration of Rs. 6,75,00,000/-. While computing the resulting capital gains, the assessee claimed indexed cost of construction amounting to Rs. 3,48,71,795/-, based on original construction expenditure of Rs. 1,50,00,000/- incurred during Financial Year 2005-06.

The sale was executed through a registered sale deed dated 26/10/2017, by which the assessee transferred 25,000.331 sq. ft. of industrial property to the purchaser, M/s. GEA Westfalia Separator India Pvt. Ltd.

Critical Issue: The registered sale deed described the property as a vacant plot, with no reference whatsoever to any building structure or factory shed standing on the land at the time of transfer.

Notices under Section 143(2) and Section 142(1) of the Income Tax Act, 1961 were issued during the course of assessment proceedings. The assessee responded comprehensively to each notice, submitting detailed explanations along with extensive supporting documentation.

Assessing Officer's Position

The Assessing Officer (AO) rejected the assessee's claim for indexed cost of construction on a singular basis — that the registered sale deed made no mention of any building on the plot. The AO issued multiple notices, including a show cause notice dated 28/12/2020 and another on 03/02/2021, requiring the assessee to substantiate the construction claim.

Despite receiving voluminous documentary evidence in response to each notice, the AO chose to rely exclusively on the sale deed and proceeded to disallow the entire indexed cost of construction. The disallowed amount was added back to the assessee's income, significantly inflating the assessed capital gains.

Evidence Produced by the Assessee

The assessee placed the following documentary evidence on record before the AO and subsequently before the appellate authorities: