2018 (7) TMI 830 - AT - Income Tax

Addition on account of Long Term Capital Gain on sale of property - non refer the valuation to DVO for determination of the fair market value - AO as well as the DVO rejected the plea of the assessee to value the fair market value of the property on the date of sale - request of the assessee to ascertain the fair market value of the property on the date of sale denied - Held that - We do not countenance such action of the AO/DVO. There is no estoppel against law. Since the AO has referred to the DVO the valuation report on the basis of which the assessee had valued the property as on 01.04.1981 at Rs. 1, 64, 65, 457/- then in all fairness assessee s request for determination by DVO the fair market value of the property on the date of sale should have been considered in the light of the fact that the property in question was in dilapidated condition encroached by trespassers and defaulting tenants and shopkeepers resulted in discounted sale of the property on as is where is basis. Therefore in the interest of natural justice and fair play the AO being a quasi juridical authority should have referred not only the value of the property as on 01.04.1981 but also the fair market value as on the date of sale. As relying on the decision of the Hon ble High Court in Sumit Kr. Agarwal 2014 (6) TMI 13 - CALCUTTA HIGH COURT we set aside the order of the DVO/AO and remand the matter back to the AO with a direction to refer the valuation to DVO for determination of the fair market value as on the date of sale of the property as well as on 01.04.1981 after giving opportunity to the assessee and thereafter to compute LTCG in accordance to law - Appeal of assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Addition of Rs. 98,82,643/- on account of Long Term Capital Gain (LTCG) on sale of property.
2. Valuation of the property as on 01.04.1981 and on the date of sale.
3. Fair market value determination by the Departmental Valuation Officer (DVO).
4. Application of Section 50C of the Income Tax Act.

Detailed Analysis:

Issue 1: Addition of Rs. 98,82,643/- on account of Long Term Capital Gain (LTCG) on sale of property
The assessee, a partner in a firm, sold an ancestral property and reported a 1/4th share of the sale consideration amounting to Rs. 62,50,000/-. The property was in a dilapidated condition, encroached by unauthorized occupants, and sold on an 'as is where is basis'. The assessee offered the value of consideration being 1/4th of the stamp duty value of Rs. 13,00,73,603/- or Rs. 3,25,18,401/- in view of Section 50(c) of the Act. The assessee computed the LTCG as Rs. 2,04,941/- after considering the fair market value as on 01.04.1981. However, the AO calculated the LTCG as Rs. 98,82,643/- based on the DVO's valuation, leading to an addition of Rs. 96,77,702/-.

Issue 2: Valuation of the property as on 01.04.1981 and on the date of sale
The assessee used a valuation report dated 14.02.2013 to determine the fair market value of the property as on 01.04.1981 at Rs. 1,64,65,457/-. The AO referred the valuation to the DVO, who estimated the fair market value as Rs. 1,15,34,144/- for the entire property, reducing the assessee’s share value to Rs. 28,83,536/- (without indexation). The AO and DVO did not consider the assessee's request to value the property on the date of sale, which was against the principles of natural justice and fair play.

Issue 3: Fair market value determination by the Departmental Valuation Officer (DVO)
The DVO's valuation of the property as on 01.04.1981 was significantly lower than the assessee's valuation. The AO computed the LTCG based on the DVO's valuation, resulting in a higher tax liability for the assessee. The tribunal noted that the DVO should have also considered the fair market value on the date of sale, given the property’s poor condition and encroachments.

Issue 4: Application of Section 50C of the Income Tax Act
Section 50C mandates that the value adopted for stamp duty purposes is considered as the full value of consideration for capital gains computation. The tribunal highlighted that the AO should have given the assessee an option to have the property valued by the DVO on the date of sale as well, ensuring fairness and avoiding miscarriage of justice. This aligns with the precedent set by the Hon’ble Calcutta High Court in Sunil Kr. Agarwal Vs. CIT, where it was held that the AO should offer the option of DVO valuation to the assessee to ensure fair treatment.

Conclusion:
The tribunal set aside the orders of the DVO and AO, remanding the matter back to the AO with instructions to refer the valuation to the DVO for determining the fair market value as on the date of sale and as on 01.04.1981. This decision ensures that the LTCG is computed in accordance with the law, providing the assessee with a fair opportunity to present their case. The appeal of the assessee was allowed for statistical purposes.

Pronouncement:
Order pronounced in the open court on 10/07/2018.