Ravi Kant vs Income Tax Officer on 13 July, 2007

Income Tax Appellate Tribunal - Delhi

Ravi Kant vs Income Tax Officer on 13 July, 2007
Equivalent citations: (2007) 110 TTJ Delhi 297
Bench: D Tyagi, P Kumar
ORDER Pramod Kumar, A.M.

1. This is an appeal filed by the assessee and is directed against the order dt. 4th Aug., 2006 passed
by the CIT (A) in the matter of assessment under Section 143(3) of the IT Act, 1961, for the asst. yr.
2003-04.

2. The grievance of the assessee is two fold-first, that the CIT (A) erred in law on facts in adopting
the sale consideration of property at Rs. 15,50,000, being value taken by the stamp valuation
authority, as against the actual sale consideration of Rs. 6,50,000, by applying provisions of Section
50C of the Act; and, second, that without prejudice to the aforesaid grievance, the CIT (A) ought to
have adopted the sale consideration of property at Rs. 11,42,000 as per the valuation done by the
Departmental Valuation Officer (DVO).

3. The factual matrix in which these grievances arise is like this. In the relevant previous year, the
assessee had sold a house property for a consideration of Rs. 6,50,000. It was in respect of this
transaction that the assessee, in his IT return, had disclosed capital gain, and the capital gains so
disclosed by the assessee were computed by taking into account Rs 6,50,000 as sales consideration,
even though admittedly the valuation of the house property, for stamp duty purposes, was Rs.
15,50,000. In the course of scrutiny assessment proceedings, the AO invoked Section 50C(1) to
adopt the value, as per valuation for stamp duty purposes, as the sales consideration. The assessee's
objection was stamp duty valuation was highly excessive as the circle rates were fixed by the stamp
duty authorities by apparently taking into account the rates of commercial properties in the area,
whereas the area where the property was located was a mix of commercial and residential properties
and the property in question was a residential property. It was also submitted that he had no
objection to cross-examination of the buyer, and buyer and seller of two comparable cases quoted by
the assessee. None of these submissions impressed the AO. However, at assessee's instance, the
matter was referred to the DVO who valued the property at Rs. 11,42,100. In the computation of
capital gains, even this valuation was not adopted. No reasons for assigned for the same.
Accordingly, the capital gains were recomputed by adopting Rs. 15,50,000 as sales consideration.
Aggrieved, assessee carried the matter in appeal before the CIT (A) but without any success. The CIT
(A) observed that "the circle rates of any area are fixed on the basis of empirical criteria, which are
taken into account by the state authorities" which, "includes rates of several registries in adjacent
area, commercial consideration, market value etc". The CIT (A) further observed that even though
the assessee has stated that some of the sale deed registrations in the area have been made at similar
or even lower rates, but all this is not relevant in view of specific provisions of Section 50C of the Act
which requires the stamp duty valuation to be adopted for the purpose of computing capital gains.
The addition made by the AO was thus confirmed. The assessee is not satisfied by the order of the
CIT (A) and is in further appeal before us.

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 Ravi Kant vs Income Tax Officer on 13 July, 2007

4. We have heard the rival contentions, perused the material on record and duly considered factual
matrix of the case as also the applicable legal position.

5. Let us look at the scheme of the Act first. Section 50C of the IT Act, which was introduced by the
Finance Act 2002 w.e.f. 1st April, 2003, contains for special provisions for valuation of
consideration in certain cases. Section 50C(1) provides that where consideration received or
accruing as a result of transfer by an assessee of a capital asset, consisting of land or building or
both, is less than the value adopted or assessed by any authority of a State Government (referred to
as stamp valuation authority) for the purpose of payment of stamp duty for such transfer, the value
so adopted or assessed shall, for the purposes of Section 48, be deemed to be the full value of
consideration received or accruing as a result of such transfer. In other words, when the stated sales
consideration of a land or house property is less than stamp duty valuation for the said property, it is
the stamp duty valuation which shall prevail for the purposes of computation of capital gains under
Section 48.

6. This provision is, however, subject to an important exception scheme of which is set out in
Sub-sections (2) and (3) of Section 50G. Section 50C(2) provides that where assessee claims before
the AO that the value adopted by the stamp valuation authority, under Section 50C(1), exceeds fair
market value of the property as on the date of transfer, and unless such valuation is subject-matter
of litigation before any authority or Court, the AO may refer the matter of determination of fair
market value of the property in question to the DVO and the same shall be taken into account for
computation of capital gains. Section 50C(3), however, provides that when fair market valuation so
determined by the DVO is higher than the valuation or assessment as per the stamp valuation
authority, the computation of capital gains is to be done with reference to the valuation or
assessment as per the stamp valuation authority. In other words, valuation of property by the DVO
cannot act to the detriment to the assessee; the assessee cannot be put to any disadvantage in case
the matter is referred to the DVO.

7. The scheme of Section 50C can be summarised as follows. The normal rule thus is that where
stamp duty valuation is higher than the stated consideration on transfer, the same is to be adopted
for the purposes of computing capital gains. The exception is that in case the assessee can
demonstrate that the fair market valuation is less than the stamp duty valuation, the fair market
value is to be adopted. The safeguard is that assessee's challenge to the stamp duty valuation before
the tax authorities cannot put the assessee to any disadvantage. In effect thus, when stamp duty
valuation of a property is higher than stated value of sale consideration, only the onus to prove the
fair market value has shifted to the assessee. As long as assessee can reasonably discharge this onus,
even under the scheme of Section 50C, the consideration stated by the assessee cannot be disturbed.

8. In the case before us, it is an undisputed position that even as per the DVO, the fair market value
of the property is Rs. 11,42,100. In these circumstances, the full value of consideration, for the
purposes of Section 48, cannot be taken at a figure higher than Rs. 11,42,100. The scheme of Section
50C(2) clearly mandates so. The action of the authorities below in ignoring the DVO's report cannot
be justified at all. We are, therefore, of the considered view that in no case, the full value of
consideration on transfer of the property, for the purposes of computing the capital gains under

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 Ravi Kant vs Income Tax Officer on 13 July, 2007

Section 48, can be taken at a figure higher than Rs. 11,42,100.

9. On a perusal of valuation report, however, we find that even the valuation by the DVO has placed
too much of emphasis on the assessment or valuation by the stamp valuation authority. This is
neither desirable nor permissible. The reason is this. The valuation by the stamp valuation authority
is based on the circle rates. These circle rates adopt uniform rate of land for an entire locality, which
inherently disregards peculiar features of a particular property. Even in a particular area, on account
of location factors and possibilities of commercial use, there can be wide variations in the prices of
land. However, circle rates disregard all these factors and adopt a uniform rate for all properties in
that particular area. If the circle rate fixed by the stamp valuation authorities was to be adopted in
all situations, there was no need of reference to the DVO under Section 50C(2). The sweeping
generalizations inherent in the circle rates cannot hold good in all situations. It is, therefore, not
uncommon that while fixing the circle rates, authorities do err on the side of excessive caution by
adopting higher rates of the land in a particular area as the circle rate. In such circumstances, the
DVO's blind reliance on circle rates is unjustified. The DVO has simply adopted the average circle
rate of residential and commercial area, on the ground that interior area of the locality, where the
assessee's property is situated, is mixed developed area i.e. shops and offices on the ground floor
and residence on the upper floors. When DVO's valuation required to compare the same with the
valuation by the stamp valuation authority, it is futile to base such a report on the circle report itself.
Such an approach will render exercise under Section 50C(2) a meaningless ritual and an empty
formality. In our considered view, in such a case, the DVO's report should be based on consideration
stated in the registration documents for comparable transactions, as also factors such as inputs from
other sources about the market rates. For the reasons set out above, and with these observations, we
remit the matter to the file of the AO. The DVO will value the property de novo, in the light of our
above observations, and in case the valuation so arrived at by the DVO is less than Rs. 11,42,100, the
AO shall adopt the fresh valuation so done by the DVO for the purpose of computing capital gains
under Section 48 of the Act. We direct so.

10. For the reasons set out above, and with the observations as above, we remit the matter to the file
of the AO for recomputation of taxable capital gains. The AO shall decide the matter afresh in
accordance with the law, by way of a speaking order and after giving due and fair opportunity of
hearing to the assessee. The AO shall also require the DVO to submit fresh valuation report in terms
of our observations as above.

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