The Income Tax Appellate Tribunal, Bangalore, has clarified that the actual cost of acquisition of a property, substantiated by verifiable payment records, prevails over the lower value recorded in a sale deed for the purpose of computing long-term capital gains. This decision reinforces the principle that tax liability must reflect economic reality, not artificial understatement for stamp duty avoidance.
Background & Facts
The Dispute
The assessee, a director of a private limited company, purchased a residential plot in Bangalore from Telecom Employees' Co-operative Housing Society Ltd. The transaction involved a discrepancy between the actual payment made and the value declared in the sale deed. The assessee paid Rs. 11,53,125 for the plot but, to reduce stamp duty, the sale deed recorded a lower guideline value of Rs. 4,61,250. The Income Tax Department relied on this lower figure to compute capital gains, leading to a higher tax liability.
Key Facts
- The assessee purchased Site No. 287 at Woods Enclave 1, Bangalore, on 08/05/2004, 15/09/2005, and 16/09/2005
- Total payment made to the Housing Society: Rs. 11,53,125, evidenced by three receipts
- Registration and stamp duty charges added: Rs. 39,800
- Total actual cost of acquisition: Rs. 11,92,923
- Sale deed recorded consideration: Rs. 4,61,250 (government guideline value)
- The Housing Society issued a certificate dated 17/01/2017 confirming receipt of Rs. 11,53,125
- The assessee filed return of income on 13/12/2014 for A.Y. 2014-15
- AO initially accepted cost of acquisition as Rs. 5,00,794 based on sale deed
- Indexed cost of acquisition computed by AO: Rs. 9,46,168
- AO disallowed 70% of development expenses, allowing only 30% as improvement cost
- Indexed cost of improvement: Rs. 13,29,619
- Computed long-term capital gain by AO: Rs. 24,24,213
Procedural History
- 13/12/2014: Assessee filed income tax return for A.Y. 2014-15
- Date unspecified: Scrutiny assessment under Section 143(3) completed by AO
- 07/02/2018: CIT(A) dismissed assessee’s appeal
- 13/09/2019: ITAT Bangalore, in ITA No. 1093/Bang/2018, set aside the issue to AO for fresh decision, directing examination of difference between sale deed value and actual payment
- Post-13/09/2019: AO issued notice under Section 142(1) seeking evidence of actual payment
- Date unspecified: Assessee submitted Housing Society certificate and three payment receipts
- Date unspecified: AO rejected evidence and maintained original cost of acquisition
- Date unspecified: CIT(A) dismissed second appeal due to non-appearance of assessee
- 12/03/2026: Hearing before ITAT Bangalore
- 09/06/2026: Judgment pronounced
Relief Sought
The assessee sought:
- Recognition of actual cost of acquisition at Rs. 11,92,923
- Indexed cost of acquisition at Rs. 23,23,849
- Full allowance of development expenses (100%) as cost of improvement
- Recomputation of long-term capital gain accordingly
- Setting aside of AO and CIT(A) orders
The Legal Issue
The central question was whether the cost of acquisition for computing long-term capital gains under Section 48 of the Income Tax Act, 1961, must be determined by the value recorded in the sale deed, or whether actual payment supported by documentary evidence can override it.
Arguments Presented
For the Appellant
The assessee’s representative argued that the sale deed value of Rs. 4,61,250 was artificially low to evade stamp duty, and did not reflect the true economic transaction. He submitted three payment receipts from the Housing Society dated 08/05/2004, 15/09/2005, and 16/09/2005, totaling Rs. 11,53,125, along with a certificate dated 17/01/2017 confirming receipt. He relied on the Tribunal’s earlier order dated 13/09/2019, which had directed the AO to examine this discrepancy and had affirmed that the revenue cannot reduce cost of acquisition when actual payment is proven. He emphasized that the Act requires the actual cost incurred, not the declared value for stamp duty purposes.
For the Respondent
The Department contended that the sale deed is the primary document for determining cost of acquisition and that the assessee failed to provide sufficient evidence before the CIT(A). It argued that the non-appearance before the CIT(A) rendered the assessee’s submissions inadmissible at the appellate stage. It further maintained that the AO’s reliance on the sale deed was legally sound and that the Tribunal should not entertain fresh evidence at this stage.
The Court's Analysis
The Tribunal rejected the Department’s technical objection regarding non-appearance before the CIT(A), noting that the issue was not about procedural default but about substantive justice. It observed that the earlier remand order had specifically directed the AO to examine the difference between the sale deed value and the actual payment, implying that the Tribunal had already accepted the plausibility of the claim.
"No doubt, this is not correct but insofar as the proceedings under the Income Tax Act are concerned, we need not bother about the said act done by the assessee."
The Tribunal emphasized that the Income Tax Act is concerned with the actual cost incurred by the assessee, not with the legality of stamp duty avoidance under state law. It held that the three receipts and the Housing Society’s certificate constituted credible, contemporaneous documentary evidence of payment. The Tribunal further noted that the AO had not disputed the authenticity of these documents but had merely refused to accept them without justification.
Regarding the cost of improvement, the Tribunal observed that the earlier remand order had focused exclusively on the cost of acquisition and had not addressed the 30% disallowance of development expenses. Therefore, the AO had no authority to introduce a new addition on improvement costs during the remand proceedings. The Tribunal held that the AO’s disallowance of 70% of improvement expenses was arbitrary and without basis.
The Tribunal concluded that since the evidence was on record, undisputed, and sufficient to establish actual cost, there was no need to remand the matter again to the AO. To do so would cause unnecessary delay and defeat the purpose of appellate adjudication.
The Verdict
The appeal was allowed. The Tribunal directed that the cost of acquisition be accepted at Rs. 11,92,923, with indexed cost of acquisition computed at Rs. 23,23,849. The cost of improvement was allowed at 100% of the actual expenses, not restricted to 30%. The long-term capital gain was to be recomputed accordingly. The orders of the AO and CIT(A) were set aside. No further remand was ordered. The decision was effective immediately.
What This Means For Similar Cases
Actual Payment Evidence Overrides Sale Deed Values
- Practitioners must now prioritize collecting and submitting original payment receipts, bank statements, and third-party acknowledgments (e.g., from housing societies or builders) to substantiate actual cost of acquisition
- Sale deed values below market or actual payment are no longer conclusive for capital gains computation
- The burden shifts to the Department to prove fraud or fabrication, not to the assessee to justify higher payments
Remand Orders Do Not Open All Issues for Reassessment
- When a matter is remanded for a specific issue (e.g., cost of acquisition), the AO cannot introduce new additions on unrelated matters (e.g., improvement expenses) without fresh notice and opportunity
- Practitioners should challenge any new additions during remand proceedings as beyond the scope of remand
- Tribunals will not permit procedural manipulation by revenue authorities to reopen settled issues
Appellate Tribunals May Adjudicate on Undisputed Evidence
- If credible evidence is available on record and not disputed, appellate tribunals are empowered to decide the issue directly rather than remanding
- This avoids endless cycles of remand and reduces litigation burden
- Practitioners should ensure all relevant documents are filed at the first appellate stage to enable direct adjudication
