The Income Tax Appellate Tribunal, Delhi Bench, has held that the Assessing Officer cannot arbitrarily reject a registered valuer's report determining the fair market value of property as on 01.04.2001 for calculating indexed cost of acquisition under Section 48 of the Income Tax Act. The Tribunal emphasized that the AO's method, lacking cogent evidence, was legally unsound and restored the assessee's claim of exemption under Section 54 for long-term capital gains.
Background & Facts
The Dispute
The appellant, Smt. Sushma Kapur, an individual taxpayer, sold a residential property at Safdarjung Enclave, New Delhi, during Assessment Year 2020-21. The property was jointly owned with her sister-in-law, Smt. Nutan Kapoor, and had been inherited from her late husband. The assessee declared an indexed cost of acquisition of Rs. 1,73,40,000 and claimed exemption under Section 54 of the Income Tax Act for Rs. 2,97,56,000 on the capital gains arising from the sale.
Key Facts
- The assessee filed her return of income for AY 2020-21 declaring total income of Rs. 9,92,990
- The case was selected for scrutiny under CASS due to:
- Large investments in immovable property reported through Form 26QB
- Substantial claims of exemptions under Sections 54 and 54F
- The assessee sold a shop at Munirka, New Delhi, for Rs. 44,00,000, inherited from her late husband, and claimed exemption under Section 54F by investing in a new residential property purchased on 27.11.2019 for Rs. 3.30 crore
- The AO allowed the Section 54F exemption as conditions were satisfied
- The dispute arose regarding the capital gains from the sale of the Safdarjung Enclave property:
- Assessee's declared indexed cost of acquisition: Rs. 1,73,40,000
- AO's computed indexed cost of acquisition: Rs. 67,44,197
- AO's addition to total income: Rs. 84,99,803
The Underlying Transaction
- The Safdarjung Enclave property was originally acquired in 1963 for Rs. 22,910 as per DDA allotment letter
- The assessee furnished a valuation report dated 18.10.2019 by a registered valuer, determining:
- Cost of land as on 01.04.2001: Rs. 60,00,000 (assessee's 50% share)
- Cost of construction: Rs. 21,02,000
- Total valuation: Rs. 1,21,31,000 (rounded)
- The registered valuer adopted a rate of Rs. 39,645 per sq. meter as on 01.04.2001
- The AO adopted a rate of Rs. 12,699 per sq. meter without providing cogent reasoning
Procedural History
- 23.09.2022: Assessment order passed by NFAC, Delhi under Section 143(3) r.w.s 144B, adding Rs. 84,99,803 to total income
- 29.09.2025: CIT(A)-NFAC upheld the addition
- ITA No. 7294/Del/2025: Appeal filed before ITAT Delhi
- 08.04.2026: Hearing conducted; order pronounced on the same date
Relief Sought
The assessee sought:
- Deletion of the addition of Rs. 84,99,803 made by the AO
- Restoration of the exemption claimed under Section 54
- Recognition of the indexed cost of acquisition as declared by the assessee based on the registered valuer's report
The Legal Issue
The central question before the Tribunal was whether the Assessing Officer's method of calculating the indexed cost of acquisition under Section 48 of the Income Tax Act, by rejecting the registered valuer's report and adopting an arbitrary valuation, was legally sustainable.
Arguments Presented
For the Appellant
- The AO's method of calculating the indexed cost of acquisition was arbitrary, legally unsound, and unsupported by the Income Tax Act
- The assessee relied on a valuation report dated 18.10.2019 by a registered valuer, which determined the fair market value of the property as on 01.04.2001
- The AO's approach of using DDA 1981 rates, indexing to 2001, and further indexing to the current year lacked logical basis and cogent evidence
- The co-owner, Smt. Nutan Kapoor, had declared identical values for the same property, which were accepted by the tax authorities in her case
- The AO failed to provide any valid reason for rejecting the registered valuer's report
For the Respondent
- The AO contended that the assessee's declared indexed cost of acquisition was inflated and not supported by documentary evidence
- The AO relied on the original acquisition cost in 1963 (Rs. 22,910) and the DDA allotment letter to compute the fair market value as on 01.04.2001
- The AO's method of calculation was based on the provisions of the Income Tax Act and was legally sound
The Court's Analysis
The Tribunal examined the validity of the AO's method for determining the indexed cost of acquisition under Section 48 of the Income Tax Act. The key observations were:
"We are of the considered view that the valuation of land as on 01.04.2001 adopted by the AO is not supported by any cogent and corroborative evidence. The AO has not given any cogent reason as to how the valuation of land adopted by the Registered valuer, is not acceptable. We therefore consider the approach of the AO of adopting the indexation method for finding the FMV of the land as on 01.04.2001, as arbitrary and not legally sound."
The Tribunal noted that the assessee had furnished a valuation report by a registered valuer, which determined the cost of land and construction as on 01.04.2001. While the AO accepted the cost of construction, it disputed the cost of land without providing any valid justification. The Tribunal emphasized that the AO's valuation method lacked evidentiary support and was arbitrary.
Further, the Tribunal observed that the co-owner of the property, Smt. Nutan Kapoor, had declared identical values for the same property, which were accepted by the tax authorities in her case. This consistency strengthened the assessee's position, as there was no reason to deviate from the valuation adopted by the assessee when the co-owner's identical declaration had been accepted.
The Tribunal concluded that the AO's disallowance of the capital gains deduction under Sections 54 and 54F was unsustainable and reversed the addition.
The Verdict
The Tribunal allowed the appeal of the assessee. The key directions were:
- The addition of Rs. 84,99,803 made by the AO was deleted
- The exemption claimed under Section 54 was restored
- The indexed cost of acquisition as declared by the assessee, based on the registered valuer's report, was accepted
What This Means For Similar Cases
Registered Valuer's Report Must Be Given Due Weight
The judgment reinforces that when an assessee furnishes a valuation report by a registered valuer to determine the fair market value of a property for calculating indexed cost of acquisition:
- The AO cannot arbitrarily reject the report without providing cogent reasons or evidence
- The AO must engage with the valuer's methodology and point out specific flaws, if any
- Mere reliance on outdated rates or arbitrary calculations will not suffice to discredit the assessee's declared value
Consistency in Valuation Across Co-Owners
- If co-owners of a property declare identical values, and the tax authorities accept the declaration for one co-owner, they cannot arbitrarily reject the same for another co-owner
- Tax authorities must maintain consistency in their approach to avoid allegations of arbitrariness
AO's Burden to Justify Rejection
- The AO bears the burden of justifying any deviation from the assessee's declared value
- The AO must provide corroborative evidence or cogent reasoning to support its valuation method
- Arbitrary or unsupported calculations will not withstand judicial scrutiny under Section 48 of the Income Tax Act
