AO cannot refer to DVO u/s 55 when valuation made by the registered valuer was on higher side

Brief of the case:

Revenue challenged the order passed by ITAT majorly on three grounds. Firstly, on ground of adopting value of property as per the value provided by registered valuer instead of value adopted by AO on the basis of report of DVO. Secondly, in applying cost inflation index with effect from 01.04.1981 instead of 1999-2000 in which assessee inherited property. Thirdly, on helding rental income as income from other sources instead of income from property. After examining the facts and circumstances considered by ITAT Hon’ble HC dismissed the appeal.

Facts of the case:

• The assessee is an individual and filed return for the asst. yr. 2004-05 declaring total income of Rs. 10,85,730. The assessment was made under Section 143(3) determining the total income taxable in the hands of the assessee at Rs. 82,67,260.
• Assessee has inherited a residential house property at 47, Golf Links, New Delhi, on the demise of her mother. It was originally acquired by the father of the assessee in 1958. After his demise, the assessee’s mother became its owner. After the demise of the mother, the assessee inherited the same along with other heirs and the share of the assessee is undisputedly 1/4th in the said property.
• As the said property was owned by the predecessor in title to the assessee prior to 1st April, 1981, the assessee has option to substitute the ‘fair market value’ of the said property as on 1st April, 1981 to be the “cost of acquisition”.
• Accordingly, the assessee has obtained a valuation report from a Registered Valuer. As per that valuation report, the fair market value of the property was determined at Rs. 73,60,975. The 1/4th share of the assessee’s share came to Rs. 18,40,244 and was considered as cost of acquisition under Section 55 of the IT Act, while arriving at the capital gain to be taxable in the hands of the assessee.
• During the course of the assessment proceedings, the assessee has filed the report issued by the Registered Valuer and the AO has referred the matter of valuation to the DVO under Section 55A of the Act.
• The DVO has estimated the market value of the property at Rs. 46,62,280 and thereby arrived at the 1/4th share of the assessee at Rs. 11,65,570. Taking this into account, the AO has determined the capital gain taxable in the hands of the

Contention of the revenue:

• AO could have made a reference provided he was of the opinion that the valuation made by the registered valuer was less than the fair market value of the property.
• The computation of capital gains has to be made in accordance with section 48 and in particular explanation (iii).
• Under Expln. (iii) to Section 48 the cost inflation index applicable to the year in which the asset first held by the assessee is to be considered.

Contention of the assessee:

• Assessee objected to the reference made to the Valuation Officer under Section 55A(b)(ii) of the Act. According to assessee, its case was covered by Clause (a) of Section 55A and, therefore, Clause (b) was not applicable.
• The assessee had relied on the market value determined by the Registered Valuer and the same being higher and not lower, the AO did not have authority to refer the valuation of the capital asset to the Valuation Officer under Section 55A(b)(ii).
• The appellant having inherited the property on passing away of her mother and the said property having been owned by the ‘previous owner’ prior to 1st April, 1981, the authorities below should have determined the indexed cost of acquisition with reference to cost inflation index applicable for financial year 1981-82.
• ‘Cost of acquisition’ to the assessee was to be determined under Section 49(i)(ii) r/w Section 55(2)(b)(ii) of the Act. Indexed cost of acquisition should have also been determined with reference to such cost, by adopting the cost inflation index applicable to the year of acquisition in the hands of ‘previous owner’.
• The appellant being owner of the residential building at New Delhi, by dint of incurring 1/3rd of the cost of construction, the authorities below should have held the appellant as the ‘owner’ of the house property and should have assessed rental income under the head ‘House property’.
• When the DVO himself admitted that Golf Links property was better located but allowed mere 25 per cent increase without giving any reasons, the CIT(A) should have followed the valuation report of the Registered Valuer which had statutory recognition under Section 55A of the Act.

Held by CIT (A):

• CIT (A) adopted the fair market value of the appellant’s 1/4th share in the property at New Delhi at amount determined on the basis of report of DVO against estimated by the Registered Valuer.
• AO’s has rightly determined the indexed cost of acquisition with reference to cost inflation index applicable for the financial year 1999-2000 as against cost inflation index applicable for financial year 1981-82.

Held by ITAT:

• If we accept the report of the Registered Valuer, the value of the property results in increase of 18 times of the value estimated in 1981, which favourably compares with general rate of inflation and increase in the values of property in particular. On the other hand, if we adopt the value estimated by the DVO then the increase in value is 30 times over 1981 prices which appears too high and excessive.
• The Registered Valuer gave cogent reasons and considered numerous facts affecting the value of the subject property and therefore, we do not find any infirmity in the valuation report of the Registered Valuer.
• As per the schematic interpretation the cost of inflation index should be made applied with reference to the year in which the capital asset was first acquired by the previous owner.
• 1/3rd cost of construction of the Panchsheel property was incurred by the assessee and in all past assessments the Revenue considered the assessee to be the 1/3rd owner thereof. In the wealth-tax assessment 1/3rd share of property was charged to wealth-tax treating her to be the owner. Hence rental income should be assessed as income from property not as income from other sources and assessee is liable to deduction u/s 24.

Held by the Court:

• When the valuation made by the registered valuer was on the higher side, there was no occasion for the assessing officer to refer the matter to the valuation officer under section 55A. therefore, the valuation at a sum of Rs.18,40,244/- as at 1st April, 1981 was correctly accepted by the learned Tribunal.
• In C.I.T Vs. Manjula J. Shah reported in (2013) 355 ITR 474 (Bom) held that “Since the assessee, in the present case, is held liable for long-term capital gains tax by treating the period for which the capital asset in question was held by the previous owner as the period for which the said asset was held by the assessee, the indexed cost of acquisition has also to be determined on the very same basis.”

So cost of acquisition should be determined with reference to the year 1981.

• The above position of law is also supported by C.I.T- I Vs. Rajesh Vitthalbhai Patel reported in (2013) 37 Taxmann.Com 439.
• One inference which can be drawn is that the land belonging to the husband has been thrown into the common stock of joint property between the husband and the wife. Both of them thus became the joint owners by operation of the doctrine of blending. They admittedly have borne the cost of construction in the ratio of 1/3rd and 2/3rd. Therefore, the income arising out of the property is in fact an income arising out of house property which has to be taxed under Section 22 rather than as an income arising out of other sources under Section 56.