Profit sharing with nagar palika

My father purchased a plot in 1987 and built a house for self use in 1991. The cost of the plot in 87 was 36000 and the total cost of construction including the cost of plot was 3 Lacs. There was a clause in the agreement that whenever there will be resale of this plot, nagar palika will be entitled for an amount equal to 50% of profit. Recently my father is selling this house for 34Lacs. Nagar palika is saying that our profit is (34Lacs(current selling cost) - 36000(original cost)) so they are entitled to half of that profit. My query is shouldn't the profit be calculated using current circle rates or using indexation like it is done for long term capital gain tax. Please advise.