Taxpayer Entitled To Indexed Cost Of Improvement Even Under Section 50C Capital Gains Computation, Holds ITAT

The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has granted relief to taxpayer Dilip Kumar Gupta by holding that an assessee can claim the indexed cost of improvement while computing capital gains under Section 50C of the Income Tax Act.

The assessee, Dilip Kumar Gupta, along with his two brothers, had sold an immovable property worth Rs 39 lakhs, located at B.K. Guda, W-B:7-1, Plot:99, bearing House No. 7-1-307/14/G/6/5 and admeasuring 180 square yards, during the year under consideration, i.e., Assessment Year 2012-13, and had declared LTCG (Long Term Capital Gains) of Rs 13 lakhs (1/3rd share of the assessee) as generated from the sale of the property. However, the stamp duty valuation (SRO value) of the property was Rs 75.90 lakh, so the assessee’s share worked out at Rs 25.30 lakh.

Consequently, the tax authorities reopened the assessment under Section 147, alleging that the long-term capital gains (LTCG) had been underreported and a reopening notice dated March 27, 2019, was issued under section 148 of the act.

In response to the notice, the assessee filed a revised return and claimed a deduction for the indexed cost of improvement amounting to Rs 11.39 lakh, representing expenses incurred on the construction of a building on the property. However, the claim was rejected, holding that such a deduction is not permissible when Section 50C is applied.

The AO held that “a firm conviction that the deduction of the indexed cost of improvement Rs.11,39,746/- claimed by the assessee was not allowable as per section 50C of the Act, thus, disallowed the same and made an addition of the said amount to the income returned by the assessee in response to the notice issued under section 148 of the Act”. When approached, the Commissioner of Income Tax (Appeals) [CIT(A)] sustained the impugned addition.

Thereafter, the aggrieved assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT) Hyderabad, arguing that once the assessment was reopened for recomputation of capital gains, he was entitled to claim all legitimate deductions related to that transaction, including the indexed cost of improvement.

The Tribunal endorsed the assessee’s argument and noted that Section 50C only substitutes the sale consideration with the stamp duty value and does not prohibit deduction of the indexed cost of improvement. The ITAT further noted that the AO had rejected the claim solely on a legal misunderstanding and had not verified the actual amount claimed.

Accordingly, the tribunal “set aside the matter to the file of the AO only for the limited purpose of verifying the veracity of the quantum of deduction of the indexed cost of improvement as had been so claimed by the assessee”. The appeal is allowed for statistical purposes.