ITAT Bangalore Allows Indexed Construction Cost Despite Omission in Sale Deed

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) held that the indexed cost of construction cannot be denied merely because the sale deed described the transferred property as a vacant plot when multiple independent documents established the existence of a factory building on the land.

The assessee, an individual taxpayer, had sold property situated at Plot No. 7A, Bommasandra Industrial Area, for Rs 6.75 crore and, while computing long-term capital gains, claimed an indexed cost of construction amounting to Rs 3.48 crore. The assessee explained that factory premises had been constructed on the land during FY 2005-06 at a cost of Rs 1.50 crore, and the same had subsequently been let out to M/s GEA Westfalia Separator India Pvt. Ltd.

During assessment proceedings, the Assessing Officer disallowed the indexed cost of construction primarily on the ground that the registered sale deed described the property only as a vacant plot and contained no reference to any building or factory shed. The AO therefore concluded that no construction existed on the property at the time of sale.

The assessee, however, furnished several documents in support of the construction claim, including sanctioned building plans issued by the Karnataka Industrial Areas Development Board (KIADB), loan sanction letters from LIC and Punjab National Bank, contractor confirmation certificates, supplier ledger accounts, invoices for construction materials, BESCOM electricity bills, property tax receipts, and income tax returns showing rental income from the factory premises in earlier years. The assessee also produced evidence showing that the tenant company had deducted TDS on rent payments for Assessment Years 2015-16 to 2017-18. The Commissioner (Appeals) nevertheless upheld the disallowance by relying mainly upon the contents of the sale deed.

On further appeal, the Tribunal observed that the assessee had consistently declared rental income from the factory premises in earlier years, and the same had been accepted by the department. The Bench noted that the tenant had deducted TDS on rent payments, which itself demonstrated the existence of a constructed property. It further observed that the assessee had produced extensive documentary evidence supporting the construction of the factory shed.

The Tribunal held that apart from the sale deed, the department had no contrary material to establish the non-existence of the building. It also criticised the Assessing Officer for failing to conduct a proper inquiry despite the availability of relevant evidence. The Bench noted that the AO neither summoned the contractor who issued the construction certificate nor examined the tenant company, suppliers, or BESCOM authorities to verify the assessee’s claim.

The Tribunal accepted the assessee’s explanation that the building was not mentioned in the sale deed to avoid higher stamp duty liability, observing that such an omission under the Karnataka Stamp Act could not justify the denial of a legitimate deduction under the Income Tax Act when independent evidence established the existence of the building.

Thus, the Tribunal held that the assessee had sold the property along with the factory shed and was entitled to claim the indexed cost of construction while computing long-term capital gains. The disallowance made by the Assessing Officer was therefore deleted.

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