ITAT Deletes LTCG Addition as DVO cannot Reduce FMV Backed by Registered Valuer Report

Rameshchandra Maganlal Gandhi Vs ITO (ITAT Surat)

Summary: The ITAT Surat allowed the assessee’s appeal concerning computation of long-term capital gains (LTCG) arising from the sale of land during AY 2009-10. The assessee had adopted the fair market value (FMV) of the property as on 01.04.1981 based on a registered valuer’s report, while the Assessing Officer referred the matter to the Departmental Valuation Officer (DVO) and adopted a substantially lower value, resulting in an addition towards LTCG. The Tribunal noted that the assessment year involved was prior to AY 2013-14 and held that, under the unamended provisions of Section 55A, the DVO had no authority to reduce the FMV adopted by the assessee when such valuation was supported by a registered valuer’s report. Relying on the jurisdictional Gujarat High Court decision in Gauranginiben Shodhan, the Tribunal held that the reference to the DVO was not permissible in the facts of the case. Consequently, the addition made by the Assessing Officer was deleted and the appeal was allowed.

Core Issue: Whether, for AY 2009-10 (i.e., prior to the amendment of section 55A with effect from 01.07.2012), the Assessing Officer could refer a property to the Departmental Valuation Officer (DVO) for the purpose of reducing the fair market value (FMV) as on 01.04.1981 adopted by the assessee on the basis of a registered valuer’s report and thereby recompute long-term capital gains.

Facts: The assessee sold a plot of land during AY 2009-10 for a sale consideration of ₹35,00,000 and claimed deduction under section 54EC of ₹21,10,000. The property had been acquired before 01.04.1981 and, for computing capital gains, the assessee adopted the FMV as on 01.04.1981 at ₹2,43,000, based on a report of a Government Registered Valuer valuing the land at ₹350 per sq. meter. The AO considered the valuation to be excessive and made a reference to the DVO under section 55A. The DVO determined the FMV as on 01.04.1981 at only ₹36,835, whereas sale instances obtained from the Sub-Registrar indicated a rate of about ₹97 per sq. meter. Based on such lower valuation, the AO drastically reduced the indexed cost of acquisition and recomputed LTCG at ₹16,81,114.

Valuation Dispute:

The dispute therefore centered around whether such downward substitution of FMV through DVO reference was legally permissible for AY 2009-10.

AO/CIT(A) Findings: The AO held that the FMV adopted by the assessee was excessive and referred the matter to the DVO. Based on the DVO’s report and sale instances obtained from the Sub-Registrar, he reduced the FMV and recomputed LTCG. The CIT(A) did not grant complete relief and directed verification of the DVO report and consequential recomputation of capital gains.

Assessee’s Arguments: The assessee contended that prior to the amendment made to section 55A by the Finance Act, 2012 with effect from 01.07.2012, the AO had no power to make a reference to the DVO where the assessee had adopted FMV on the basis of a registered valuer’s report and the AO considered such value to be excessive. The amendment enabling such references was prospective and applicable only from AY 2013-14 onwards. Therefore, for AY 2009-10, the DVO’s report was wholly irrelevant and could not be used to reduce the FMV adopted by the assessee.

ITAT Findings: The Tribunal accepted the assessee’s contention and held that the assessment year involved was AY 2009-10, much prior to the amendment of section 55A. Therefore, the pre-amendment law governed the issue. Under the pre-amended provisions, where an assessee had adopted FMV on the basis of a registered valuer’s report, the AO could not invoke section 55A merely to reduce such value. The Tribunal noted that the Gujarat High Court in Gauranginiben S. Shodhan had categorically held that where the value declared by the assessee is supported by a registered valuer’s report, a reference to the DVO for reducing the value is impermissible and any valuation so obtained has no relevance for determining capital gains.

The Tribunal observed that the assessee had adopted the FMV as on 01.04.1981 strictly on the basis of a registered valuer’s report. Therefore, the AO lacked jurisdiction under the then existing section 55A to refer the matter to the DVO for the purpose of reducing such FMV. Since the entire addition rested upon the DVO’s report, the addition was held to be unsustainable. Having allowed the principal ground relating to section 55A, the Tribunal declined to adjudicate the alternate ground relating to the tolerance range under section 50C.

Case Laws Relied Upon:

(i) Kiritbai Jayantilal Kundalia (HUF), 73 taxmann.com 122 (Guj.)

(ii) Late Shantaben P. Patel, L/H Govindbhai P. Patel, R/Tax Appeal No. 1204 of 2018 (Guj – HC),

(iii) Puja Prints, 43 taxmann.com 247 (Bom – HC),

(iv) Daulal Mohta (HUF), 360 ITR 680 (Bom – HC),

(v) Shri Mahavevbhai Mohanbhai Naik, ITA No.820/Ahd/2016 (Surat – Trib.),

(vi) Balubhai Mustufabhai Mahida, 149 taxmann.com 378 (Surat – Trib.),

(vii) Shree Jayantibhai Chimanbhai Patel, ITA Nos. 138 & 139/SRT/2017,

(viii) Kukeshbhai Ramubhai Ahir, ITA No. 1652/Ahd/2017 (Surat – Trib.),

(ix) Kirankumar Ramanlal Naik, ITA No.18/Srt/2023 (Surat – Trib.),

(x) Virendra Natwarlal Jariwala, 131 taxmann.com 159 (Surat – Trib.),

(xi) Nanubhai G. Ahir, ITA No. 2289/Ahd/2016 (Surat – Trib.),

(xii) Kaushikaben Nimeshbhai Patel, ITA No.06/Srt/2017 (Surat – Trib.),

(xiii) Jagrutiben V. Patel, Bharvinaben V. Patel, ITA Nos.650 & 651/Ahd/2017 (Surat – Trib.),

Jigneshkumar S. Modi, ITA No.544/Srt/2018 (Surat – Trib.),

Chirag Bharatbhai Amin, ITA No.1694/Ahd/2016 (Surat – Trib.),

Ranchhodbhai C. Patel, ITA Nos. 821 & 822/Ahd/2016 (Ahd – Trib.),

(xvii) Apurva Narendra Patel, Meenaben Narendrabhai Pael, Mitesh Narendrabhai Patel, ITA Nos.143, 142 & 144/Ahd/2019,

(xviii) Dipakkumar Someshwar Pandya, ITA No.1691/Ahd/2018 (Ahd – Trib.)

(xix) Arvindbhai Popatlal Patel, ITA No.374/Ahd/2016 (Ahd – Trib.)

Relevant Paras: Para 8.

Held: For AY 2009-10, being a period prior to the amendment of section 55A, the AO could not refer the property to the DVO for reducing the FMV as on 01.04.1981 adopted by the assessee on the basis of a registered valuer’s report. Consequently, the DVO’s report had no evidentiary relevance, the recomputation of LTCG based on such report was invalid, and the addition was deleted. Since the assessee succeeded on the main issue, the alternate ground relating to tolerance under section 50C was left unadjudicated.

FULL TEXT OF THE ORDER OF ITAT SURAT

The appeal filed by the assessee is against the order passed by the Learned Commissioner of Income Tax (Appeals), Addl/JCIT(A)-2, [in short “CIT(A)”], Lucknow on 09.0102025 for the Assessment Year (AY) 2009-10.

2. The assessee has raised the following grounds of appeal:

“(1) The CIT(A) ought to have accepted the FMV of the appellant as on 01.04.1981 for determining cost of acquisition as DVO report was redundant for reducing the FMV for the purpose of section 55A of the assessments prior to AY 2013-14.

2. With sales consideration within 10% tolerance range of the FMV, sales consideration ought to have been accepted since third proviso to section 50C(1) is retrospective in nature.

3. On the facts and circumstances of the case and as per law, the CIT(A) was not justified in determining the LTCG.

4. The above grounds are without prejudicial to one another.

5. The appellant craves leave to add, alter or vary any of the grounds of appeal.”

3. As per AIR information, it was found that the assessee had sold an immovable property during the AY 2009-10 for consideration of Rs.35,00,000/- in his savings bank account, invested a sum of Rs.21,00,000/- in bonds/debentures from his undisclosed sources of income and the assessee has not offered the same for taxation for AY 2009-10. Statutory notices were issued and the assessee, through its Authorized Representative (AR), attended the proceedings and filed the details along with written submissions. The Assessing Officer (for short, ‘the AO’) observed that the assessee sold a plot of land for consideration of Rs.35,00,000/- and Stamp Duty thereon of Rs.2,04,500/- paid as per stamp valuation authority. This plot was acquired by the assessee before 01.04.1981 and therefore the cost of acquisition of said land was taken at Rs.2,43,000/- as on 01.04.1981 by adopting the value of Rs.350/- per square meter as per estimation by Government Registered Valuers. Accordingly, the assessee computed the long-term capital gain (LTCG) in his return of income. The AO observed that the valuation adopted by assessee as on 01.04.1981 is in higher side. Therefore, a reference was made to DVO on 28.10.2016 for determination of fair market value (FMV) as on 01.04.1981. Information was called from the office of Sub-registrar, District – Navsari u/s 133(6) for sale instances of similar property. The AO observed that the selling cost of the said instance was Rs.48,600/- for an area 503 square meters. Therefore, rate to the nearby instance comes to Rs.48,600/503 = 96.62/square meter, approximate Rs.97 per square meter. On verification of the valuation report received by the office of Sub-registrar, it has come to notice that the value of stamp duty comes to Rs.41,73,469/- as on sale date. The assessee had computed net LTCG taking value of the sold property at Rs.35,00,000/-. During the assessment, the assessee requested for valuation of property to the DVO as on date of sale vide his letter dated 06.06.2008 for determination of FMV as per provisions of section 50C(2) of the Act. Reference was made to DVO for determination of FMV value on 10.11.2016. Since, the valuation report was not received by the AO and the assessment proceedings were getting barred by limitation, the AO on the basis of data available and subject to DVO report pending, determining the value at Rs.97 per square meter on the basis of sale instances furnished by the Sub-registrar, Gandevi. Thus, the LTCG worked out as under:

Thus, the AO made addition of Rs.16,81,114/- towards LTCG.

4. Being aggrieved by the order of AO, the assessee filed appeal before the CIT(A). The CIT(A) has partly allowed the appeal for statistical purposes.

5. The Ld. AR further submitted that the FMV as on 01.04.1981 under dispute as under:

The Ld. AR further submitted that prior to the AY 2013-14, the DVO had no power to reduce the FMV u/s 55A of the Act. The Amendment u/s 55A to reduce the cost (as on 01.04.1981) became effective only from 01.07.2012 and would not apply to any past assessment years. As per the direct decision of Hon’ble Gujarat High Court in case of CIT vs. Gauranginiben S. Shodhan Indl., (2014) 367 ITR 238 (Guj.), the DVO has no power to reduce the valuation adopted by the assessee as on 01.04.1981 is based on the register valuer’s report. The Ld. AR has relied upon the following decisions: (i) Kiritbai Jayantilal Kundalia (HUF), 73 taxmann.com 122 (Guj.), (ii) Late Shantaben P. Patel, L/H Govindbhai P. Patel, R/Tax Appeal No. 1204 of 2018 (Guj – HC), (iii) Puja Prints, 43 taxmann.com 247 (Bom – HC), (iv) Daulal Mohta (HUF), 360 ITR 680 (Bom – HC), (v) Shri Mahavevbhai Mohanbhai Naik, ITA No.820/Ahd/2016 (Surat – Trib.), (vi) Balubhai Mustufabhai Mahida, 149 taxmann.com 378 (Surat – Trib.), (vii) Shree Jayantibhai Chimanbhai Patel, ITA Nos. 138 & 139/SRT/2017, (viii) Kukeshbhai Ramubhai Ahir, ITA No. 1652/Ahd/2017 (Surat – Trib.), (ix) Kirankumar Ramanlal Naik, ITA No.18/Srt/2023 (Surat – Trib.), (x) Virendra Natwarlal Jariwala, 131 taxmann.com 159 (Surat – Trib.), (xi) Nanubhai G. Ahir, ITA No. 2289/Ahd/2016 (Surat – Trib.), (xii) Kaushikaben Nimeshbhai Patel, ITA No.06/Srt/2017 (Surat – Trib.), (xiii) Jagrutiben V. Patel, Bharvinaben V. Patel, ITA Nos.650 & 651/Ahd/2017 (Surat – Trib.),Jigneshkumar S. Modi, ITA No.544/Srt/2018 (Surat – Trib.), Chirag Bharatbhai Amin, ITA No.1694/Ahd/2016 (Surat – Trib.), Ranchhodbhai C. Patel, ITA Nos. 821 & 822/Ahd/2016 (Ahd – Trib.), (xvii) Apurva Narendra Patel, Meenaben Narendrabhai Pael, Mitesh Narendrabhai Patel, ITA Nos.143, 142 & 144/Ahd/2019, (xviii) Dipakkumar Someshwar Pandya, ITA No.1691/Ahd/2018 (Ahd – Trib.) and (xix) Arvindbhai Popatlal Patel, ITA No.374/Ahd/2016 (Ahd – Trib.).

6. As regards Ground No.2, the Ld. AR submitted that since the variation between sales consideration recorded by the assessee and the DVO’s report is less than 15%, which is as follows:

As per the decision of Hon’ble Supreme Court in case of C. B. Gautam vs. UOI & Others, 199 ITR 530 (SC), deeming provisions of section 50C would not come into play and that the value recorded by the assessee must be accepted. In alternative, the average of sales estimate between registered valuer and DVO may be taken at Rs.35,42,750 = (Rs.31,27,500 + Rs.39,58,000)/2. The Ld. AR also has given the working of resultant capital gain under two alternatives. The Ld. AR further submitted that cost as per the register valuer’s report prior to AY 2014-15 has to be accepted as amendment to section 55A is prospective in nature.

7. The Ld. DR for the revenue submitted that the AO has rightly made addition as the difference is more than 13.08% in respect of cost estimated of the land as per the assessee as well as DVO. The Ld. DR further submitted that the CIT(A) has categorically directed the AO to verify the DVO’s report and based on it recomputed the LTCG on sale of property by carry out necessary rectification of the assessment. The Ld. DR relied upon the order of the CIT(A).

8. We have heard both the parties and perused all the relevant materials available on record. From the perusal of record, it can be seen that the present AY 2009-10 is prior to AY 2013-14, as per the reference to the DVO u/s 55A when there is a less than FMV at dispute, Section 55A of the Act prior to amendment will be applicable. The contention of the Ld. AR that the DVO has no power to reduce the FMV adopted by the assessee as on 01.04.1981 if based on register valuer’s report appears to be correct. In fact, the Hon’ble jurisdictional High Court in case of Gauranginiben Shodhan (supra) has categorically mentioned that ascertainment of fair market value with aid of DVO’s report would have no relevance for purpose of determining full value of consideration received or accruing as a result of transfer of capital asset for purposes of section 48 of the Act. Since the assessee has relied on registered valuer’s report, the AO could not refer to the same under Clause (b) of section 55A of the Act. Thus, the addition made by the AO is not justified. Since the Ground No.1 has been decided in favour of the assessee, Ground No.2, which is an alternate ground does not require adjudication. Thus, the appeal of the assessee is allowed.

9. In the result, the appeal of the assessee allowed.

Order pronounced in the open court on 29-05-2026