ITAT Jabalpur on Section 54 Exemption, DVO Valuation & Year of Taxability in Surendra Singh Vs ITO

The Jabalpur Bench of the ITAT in Surendra Singh Vs ITO has delivered an important decision touching multiple core issues in capital gains taxation under the Income Tax Act 1961. The ruling examines:

  • When capital gains become taxable where there is an earlier agreement to sell;
  • How to determine cost of acquisition and indexed cost of acquisition when the matter is referred to the District Valuation Officer (DVO) under Section 142A;
  • The correct application of Section 50C and its first proviso, especially its retrospective operation;
  • The extent and manner of availing exemption under Section 54 for investment in a second residential house by way of construction.

The Tribunal ultimately remanded the matter on valuation issues and on the Section 54 construction claim, while confirming the year of taxability and granting the assessee the benefit of the proviso to Section 50C(1).

Background of the Case

For Assessment Year 2015-16, the assessee, an individual, declared income of ₹1,22,89,550 in the return filed on 20/08/2016. He reported nil long-term capital gain on sale of two immovable properties after claiming deduction under Section 54 amounting to ₹2,59,54,878. The claim under Section 54 comprised:

  • Investment in a flat of ₹60,78,000; and
  • Investment claimed toward construction of a second residential house of ₹1,98,76,878.

During scrutiny, the Assessing Officer (AO):

  • Rejected the assessee’s cost of acquisition/indexed cost based on a private valuer’s report;
  • Rejected the assessee’s adoption of stamp duty value (SDV) as full value of consideration; and
  • Sought valuation from the DVO under Section 142A for both the historical cost (as on 01/04/1981) and fair market value (FMV) at the time of sale.

Relying on the DVO’s reports, the AO recomputed the long-term capital gains at ₹14,60,27,824 and allowed Section 54 relief only for the flat purchase (₹60,78,000). The balance long-term capital gain of ₹13,99,49,824 was brought to tax.

On appeal, the Commissioner of Income-tax (Appeals) [CIT(A)]:

  • Substituted the DVO’s sale value with the actual consideration recorded in the registered sale deeds;
  • Adopted a simple average of the assessee’s and the DVO’s valuations for determining cost of acquisition as on 01/04/1981; and
  • Upheld denial of Section 54 exemption to the second house construction, holding the investment to be time-barred.

Both the assessee and the Revenue carried the matter in cross-appeals before the ITAT Jabalpur.

Issues Before the Tribunal

The cross-appeals raised three broad clusters of issues:

  1. Year of chargeability of capital gains

    • Whether the transfer occurred in Financial Year 2010-11 relevant to AY 2011-12 (as claimed by the assessee on the basis of an agreement to sell dated 29/03/2011), or
    • In Financial Year 2014-15 relevant to AY 2015-16 (as adopted by the AO and CIT(A)).

  2. Valuation issues

    • Proper determination of cost/indexed cost of acquisition as on 01/04/1981;
    • Correct sale consideration for computing capital gains, including:
      • Applicability of Section 50C; and
      • Retrospective operation of the **first proviso to Section 50C(1)`.

  3. Scope of exemption under Section 54

    • Eligibility of the assessee’s claim of Section 54 exemption for investment in a second residential house by way of construction on a plot purchased earlier.

Facts Pertaining to the Properties and Valuation

Properties Sold

The assessee had received certain immovable properties by way of a gift deed dated 24/10/1962 from his father. During the relevant period, he sold two properties at Napier Town, Jabalpur:

  1. Property P1

    • House No. 2682 to 2685, land area 52,747 sq. ft. with 4,270.50 sq. ft. built-up
    • Sold through registered sale deed dated 31/03/2015
    • Actual sale consideration: ₹10,00,00,000
    • SDV adopted for registration and for original capital gain computation by the assessee: ₹22,60,81,000.

  2. Property P2

    • House No. 2682 to 2685, land area 28,428 sq. ft. with 1,765 sq. ft. built-up
    • Sold through registered sale deed dated 14/08/2014
    • Actual sale consideration: ₹6,00,00,000
    • SDV adopted: ₹12,08,61,000.

The assessee had initially computed LTCG by:

  • Obtaining a valuation as on 01/04/1981 from a private registered valuer (Mr. R K Motwani), who valued both properties together at ₹3,29,88,925, applying ₹380 per sq. ft. for land and ₹350 per sq. ft. for built-up area (figures as per source; maintain all numerics);
  • Computing indexed cost of acquisition at ₹33,78,06,592 (₹3,29,88,925/100 * 1024); and
  • Adopting the combined SDV of ₹34,69,42,000 as full value of consideration instead of actual sale proceeds of ₹16,00,00,000.

Net long-term capital gain was thus declared at ₹9,13,54,408, which was then claimed as fully exempt under Section 54.

AO’s Action and DVO Reference

Finding the assessee’s valuation as on 01/04/1981 to be excessive and unsupported, the AO:

  1. Obtained information from the Sub‑Registrar, Jabalpur under Section 133(6) regarding assessable values for FY 1981-82.
  2. The Sub-Registrar reported assessable values as at 01/04/1981 at:
    • P1: ₹71,736
    • P2: ₹38,663
      which were vastly lower than the assessee’s valuer’s figures.
  3. Because of this wide divergence, the AO referred the matter to the DVO under Section 142A to ascertain FMV as on 01/04/1981.

The DVO then determined FMV as on 01/04/1981 as follows:

  • P1: ₹33,81,850
  • P2: ₹17,23,050

Total FMV: ₹51,04,900.

Using this, the AO computed indexed cost of acquisition at ₹5,22,74,176 (₹51,04,900/100 * 1024).