The Hon’ble Hyderabad Income-tax Appellate Tribunal (ITAT), in the case of Lalitha Karan held that the AO is duty bound to refer the matter to the DVO as per the provisions of section 50C(2) of the Income-tax Act, 1961, when on the facts and circumstances of the case, the assessee claims that the value adopted by the stamp duty authorities does not represent the fair market value, due to certain mitigating circumstances.
Asst. CIT, Circle 5(1), Hyderabad vs. Lalitha Karan [ITA No. 1130/Hyd/2015] (AY 2011-12)
The question before the Hyderabad ITAT was: Where the sale of property in question is subjected to certain encumbrances, is it justified to reject the transaction value which is very low as compared to the stamp duty valuation without referring the matter to the valuation officer?
Facts of the case:
- Lalitha Karan, the assessee had derived long term capital gains amounting to INR 14,23,805 on the sale of property in which the assessee had 50% share. The property of the assessee was occupied by the tenants for over 60 years and litigation over the property was pending under the Maharashtra Rent Control Act.
- In spite of advertisement in the newspapers, nobody came forward to purchase the property because of litigation. Thus, the property was sold at a lower rate than the market value, with a clause in the sale deed that the purchaser would deal with the tenants and vacate the property. The sale deed also contained a clause that the property was sold under “as is where is” condition.
- During the scrutiny assessment, the assessee made a specific request to the Assessing Officer (‘AO’) that the matter be referred to the Departmental Valuation Officer (‘DVO’) but the request was turned down by the AO. The AO stated that in law he is bound to adopt the value of the stamp valuation authority u/s 50C of the Act, for the purpose of computation of capital gains.
Further, he has no discretion whatsoever in this matter and hence, the circumstances of sale of property explained by the assessee had no relevance to the adoption of valuation while applying the said section. Thus, the AO passed the assessment order by adopting the stamp value of the property and rejecting the transaction value as adopted by the assessee.
- Aggrieved by the said order, the assessee appealed before the Commissioner of Income-tax (Appeals) (‘CIT(A)’). The CIT(A) observed that the AO is bound to refer the valuation of the property to the DVO, if the assessee claims that the value adopted by the registration authorities does not represent correct market value. He further observed that the AO had brushed aside the assessee’s valid and relevant objections. Thus, the CIT(A) concluded that the addition made by the AO was without following the due process of law and, hence, the same cannot be sustained and accordingly deleted the addition.
- Aggrieved by the order of the CIT(A), the revenue appealed to the ITAT by stating that the CIT(A) ought to have remanded the issue to the file of the AO with a direction to refer the valuation of property to the DVO and not simply delete the additions made by the AO.
Key Observations and decision of the ITAT, Hyderabad:
- The Hon’ble ITAT stated that the powers of CIT(A) are subject to section 250 of the Act whereby the CIT(A) has no power to set aside any issue even in a genuine case and, hence, the only option left to the CIT(A) is either to allow the appeal of the assessee after obtaining the remand report or to dismiss the appeal of the assessee.
- Further, the ITAT observed that the AO failed to address the fact that the property was not free from encumbrance and that the AO had not taken fair market value (‘FMV’) of the property into consideration, though a statutory duty is imposed upon the AO to obtain the value by referring the matter to DVO. In other words, the AO chose to brush aside the submissions of the assessee, by not referring the matter to the DVO.
- It was noted that there are catena of decisions on this point and, on other hand, referring to the speech of the Finance Minister as well as circular issued by the CBDT bringing the intention of the legislature whereby it was held that the AO is duty bound to refer the matter to the DVO when the reasons were thoroughly mentioned by the assessee for the FMV that it could fetch in the facts and circumstances of the case.
- The ITAT observed that the property was purchased on “as is where is” condition with a specific clause that any further litigation will be dealt with by the purchaser and under those circumstances, generally, market value cannot be adopted. In these circumstances, the Courts have time and again held that reference u/s 50C(2) of the Act is mandatory and that the AO having failed to follow such provisions, should not be given one more chance to refer the matter to the DVO.
- Further, relying on the principles laid down by the Hon’ble Supreme Court in the case of Manish Maheshwari vs. ACIT and another, and Indore Construction P. Ltd. vs. CIT,  289 ITR 341 (SC), the ITAT concluded that when the AO has not followed the procedure prescribed u/s 50C(2), such an addition deserves to be deleted.
The use of the word ‘may’ under Section 50C(2) of the Act was always a subject matter of litigation because in many cases, the AO did not refer the case to the DVO despite strong objections from the assessee on stamp valuation.
This judgement lays down that the AO is duty bound to refer the matter to the DVO when on the facts and circumstances of the case, the assessee claims that the value adopted by the stamp duty authorities does not represent the fair market value, due to certain mitigating circumstances.