2025 (7) TMI 423 - AT - Income Tax

Addition u/s 56(2)(vii)(b) on lease hold land - Addition being assessee s share of the difference between purchase consideration and the valuation as per DVO - validity of DVO s valuation - assessee argued addition provisions of section 56(2)(vii)(b) cannot be applied on a lease land the provisions of section 56(2)(vii)(b) came into force from 01.04.2014 and that the assessee has entered into the agreement of sale by making an advance payment of Rs. 10, 00, 000/- in September 2013 and the DVO s valuation is not correct since the sale instances used by the DVO for valuation are not comparable and that the DVO has not given any discount for the encumbrance of the property HELD THAT - We will only consider the issue of DVO s valuation not being correct. Assessee along with two other persons purchased a land containing 2 plots which is under lease for 50/75 years for a consideration of Rs. 1, 00, 00, 000/-. Since the stamp duty was much higher the AO issued a show cause notice as to why the provisions of section 56(2)(vii)(b) should not be applied. The assessee objected to the stamp duty value considered by the AO stating that the owner has made a distress sale and that the assessee has not obtained the possession of the land due to the fact that the lessee who has built a school on the impugned land has filed case in the Hon ble High Court against handing over the possession. The contentions of the assessee with regard to the valuation report is two fold. One the sale instances considered are not the correct comparables and the second that the DVO has not given proper discount towards the property being encumbered. In support of the first contention theAR submitted additional evidences containing the sale deed of the instances considered by the AO. Since the additional evidences now produced goes to the root of the issue of sale instances considered by the DVO not being correct for a proper adjudication of the issue and for substantial cause the additional evidence is admitted and taken on record. The reasons as submitted by the AR for the sale instances considered are not correct comparables are that a) The land size in the sale instances is much smaller than the size of the impugned land that the size of the land impacts the rate per sqm. b) Two of the sale instances are sale of TDR and not land c) One of the sale instances is a free hold land and not lease hold as in assessee s case d) In one of the sale instances the encumbrance is of different nature From the preliminary review of the additional evidences we notice that there is merit in the contentions of the ld AR regarding the facts pertaining to the lands. For the purpose of valuation it is necessary to consider the nature of restrictions to the rights of the seller i.e. land being under lease with a structure on it and the access restrictions of the purchaser such as assessee not being in possession of the land are critical factors. Further the discounting to be applied for the encumbrances also needs to have a valid basis and that the same cannot be done as estimation. As already stated from the perusal of the above extracted valuation report we are unable to appreciate the basis on which the DVO has arrived at the value of Rs. 4998 per sqm. though it has been mentioned that adjustments towards time lag location shape size litigation etc. has been made. Having said so we also are not inclined to hold that the purchase price paid by the assessee as correct value of the land for the reason that there is no valid basis except the fact that the seller has made a distress sale inspite of the stamp duty value being high. To that limited extent we agree with the contention of the ld DR that the valuation submitted by the assessee cannot override the statutory DVO s report. In view of these discussions we are of the view that the valuation of the property needs to be revisited by the DVO given that the additional evidences are now submitted by the assessee. Accordingly we remit the issue back to the AO with a direction to obtain a revised detailed valuation report from the DVO taking into consideration the additional evidences now submitted by the assessee. During the course of hearing the ld AR did not present any argument with regard to the grounds contending the applicability of section 56(2)(vii)(b) to lease hold land and that property being acquired prior to insertion of section 56(2)(vii)(b) in the Act. Hence these grounds are not adjudicated and left open. Appeal of the assessee is allowed for statistical purposes.

Summary

The core legal questions considered in this appeal pertain primarily to the applicability and correctness of addition under section 56(2)(vii)(b) of the Income Tax Act, 1961, in relation to the valuation of immovable property acquired by the assessee. The issues include:

1. Whether the provisions of section 56(2)(vii)(b) apply to leasehold land, as opposed to freehold land.

2. Whether the valuation of the property adopted by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]-based on the Departmental Valuation Officer's (DVO) report-is correct and justified, especially considering the nature and character of the land, including encumbrances and possession issues.

3. Whether the valuation date applied by the AO (date of registration in August 2014) is appropriate, considering the advance payment was made in September 2013.

4. Whether the assessee was provided proper and effective opportunity of hearing before the CIT(A) passed the impugned order.

5. Whether the delay in filing the appeal before the Appellate Tribunal should be condoned, given the circumstances of non-receipt of notices and orders.

Issue-wise Detailed Analysis:

1. Applicability of Section 56(2)(vii)(b) to Leasehold Land:

The assessee contended that section 56(2)(vii)(b) cannot be invoked for leasehold land, as the land was not owned outright but held on lease. However, the Tribunal noted that the assessee did not pursue this ground actively during the hearing, and accordingly, this issue was left open without adjudication. The CIT(A) had earlier dismissed the contention without detailed reasoning, and the Tribunal followed suit, focusing on valuation issues instead.

2. Correctness of Valuation Adopted Under Section 56(2)(vii)(b):

Legal Framework and Precedents: Section 56(2)(vii)(b) applies to cases where an individual receives immovable property for a consideration less than its fair market value (FMV), with the difference being taxable as income. The Act mandates use of stamp duty value as a benchmark, but where the assessee disputes it, the AO may refer the matter to the Departmental Valuation Officer (DVO) under section 142A for a fair valuation. The Supreme Court and various High Courts have upheld the validity of using DVO reports as authoritative, provided the process is fair and the valuation is not perverse.

Court's Interpretation and Reasoning: The AO initially noted a large discrepancy between the purchase price (Rs. 1 crore) and the stamp duty value (Rs. 6.87 crore). Upon the assessee's objection, the AO referred the matter to the DVO, who valued the property at Rs. 2.52 crore, significantly lower than the stamp duty value but substantially higher than the purchase price. The AO then made an addition under section 56(2)(vii)(b) of Rs. 50.96 lakh, representing the assessee's one-third share of the difference between the DVO valuation and the purchase price.

The CIT(A) upheld the AO's action, holding that the DVO was well aware of the nature and character of the land, including its leasehold status and encumbrances, and that the valuation could not be questioned. The CIT(A) found that the AO had exercised due diligence and fairness by referring the matter to the DVO and adopting a valuation significantly lower than the stamp duty value.

Key Evidence and Findings: The assessee challenged the DVO's valuation on two main grounds: (a) the sale instances used by the DVO for comparison were not truly comparable, as they involved smaller plots, TDR sales, or freehold land, and (b) the DVO did not adequately discount the value to reflect the encumbrances, including the lessee's possession and ongoing litigation.

The assessee submitted additional evidence, including sale deeds of comparable properties, a court injunction preventing possession transfer, and medical records indicating a distress sale by the original owner. The Tribunal admitted these additional evidences for proper adjudication.

The Revenue countered with detailed submissions emphasizing that the DVO's valuation was a considered, expert assessment that accounted for encumbrances and leasehold nature, as evidenced by the substantial downward revision from the stamp duty value. The Revenue argued that the assessee's advocate's valuation was not a certified valuation and could not override the statutory DVO's report. The Revenue further submitted that the difference between the DVO value and purchase price indicated an abnormally low purchase price, justifying the addition under section 56(2)(vii)(b).

Application of Law to Facts: The Tribunal observed that the DVO's report lacked clarity on the methodology for arriving at the rate per square meter (Rs. 4998), and the comparability of sale instances was questionable. The Tribunal noted relevant Supreme Court principles that larger land parcels generally attract lower per unit rates and that discounts for encumbrances must have a valid basis rather than being arbitrary estimations.

Further, the Tribunal referred to coordinate bench decisions highlighting that where a property is under possession of a third party and access is restricted, the sale consideration reflecting a distress sale may be accepted as the true market value instead of an estimated valuation with arbitrary discounts.

In light of the additional evidence and these legal principles, the Tribunal found merit in the assessee's contentions and concluded that the valuation required reconsideration. The matter was remitted to the AO with directions to obtain a revised detailed valuation report from the DVO, taking into account the additional evidence and allowing the assessee to provide further relevant information.

Treatment of Competing Arguments: The Tribunal balanced the Revenue's reliance on the statutory DVO valuation process with the assessee's factual evidence of encumbrances and distress sale circumstances. It recognized the statutory authority of the DVO but emphasized the need for a valuation based on sound methodology and relevant comparables, especially when additional evidence challenges the initial valuation.

Conclusions: The Tribunal did not accept the initial DVO valuation as final and ordered a fresh valuation to ensure a fair and accurate determination of FMV for tax purposes.

3. Date of Valuation:

The assessee argued that the valuation should be based on the date of initial payment (September 2013) rather than the registration date (August 2014), as section 56(2)(vii)(b) came into force from 1 April 2014. This ground was not actively pursued during the hearing, and the Tribunal did not adjudicate it, leaving it open.

4. Opportunity of Hearing Before CIT(A):

The assessee contended that no proper and effective hearing was provided before the CIT(A) passed the order. The Tribunal did not specifically address this ground in its reasoning, focusing instead on the valuation and delay issues. The CIT(A) record indicated that the assessee had filed replies and submissions, suggesting some opportunity was provided.

5. Condonation of Delay in Filing Appeal:

The appeal before the Tribunal was filed with a delay of 411 days. The assessee submitted that the delay was due to non-receipt of notices and the CIT(A) order, which was passed without issuing a hearing notice. The assessee's representative had appeared in manual proceedings and responded to notices before the appeal was migrated to the National Faceless Appeal Centre (NFAC). The delay was discovered only when the tax consultant accessed the ITBA portal.

The Revenue opposed condonation, arguing that the assessee was aware of the proceedings and had responded to notices.

The Tribunal relied on Supreme Court principles from the case of Collector, Land Acquisition v. Mst. Katiji, emphasizing that delay should not be presumed deliberate or due to negligence without evidence. The Tribunal found the assessee's explanation credible, noting the absence of contrary evidence from the Revenue. The Tribunal held that the delay was not intentional or culpable and condoned the delay accordingly.

Significant Holdings:

"The DVO after examining all the factors involved in the valuation of the land, has assessed the market value of the land at Rs. 2.52 crore. From the perusal of DVO report itself is evident that he was well aware of the nature and the character of land in question. Therefore the valuation of the land by the DVO can't be questioned in my considered opinion." (CIT(A))

"There is merit in the contentions of the ld AR regarding the facts pertaining to the lands. Further in our view the following observations of the Hon'ble Supreme Court while considering an appeal under Land Acquisition ... are relevant ... Large areas do not attract the same price as is offered for the small plots of lands. Therefore some amount of deduction is also normally permissible on account of largeness in area." (Tribunal)

"The valuation of the property needs to be revisited by the DVO given that the additional evidences are now submitted by the assessee. Accordingly we remit the issue back to the AO with a direction to obtain a revised detailed valuation report from the DVO taking into consideration the additional evidences now submitted by the assessee." (Tribunal)

"There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides ... The judiciary is respected ... because it is capable of removing injustice and is expected to do so." (Tribunal, relying on Supreme Court)

The Tribunal established the core principle that valuation for tax purposes under section 56(2)(vii)(b) must be based on a fair and accurate assessment considering all relevant factors, including leasehold status, encumbrances, possession, and comparable sales. Arbitrary or unexplained discounts are impermissible. The statutory DVO valuation is authoritative but not beyond challenge if valid evidence undermines its basis. The Tribunal also emphasized fairness in procedural matters, condoning delay where the assessee was not at fault.

On the issue of valuation, the Tribunal did not uphold the addition outright but remitted the matter for fresh valuation, thereby allowing the assessee an opportunity to substantiate its claims and ensuring that the tax demand is based on a correct FMV.