AO is bound to consider assessee’s objections before adopting FMV as per ”Guidance Value” or as per DVO Report [Section 50C]

AO is bound to consider assessee’s objections before adopting FMV as per ‘Guidance Value’ or as per DVO Report [Section 50C]

1. Introduction

Section 50C of the Income-tax Act, 1961 is a special provision which comes into picture whenever a capital asset being land or building is transferred/ sold. It is a deeming provision which provides for substitution of actual sale consideration for value adopted/ assessed/ assessable as per Stamp Valuation Authority (‘SVA’) if, the former is less than the latter. There are few safeguards provided in the statute against the mechanical adoption of value as per SVA. One of the safeguard is provided under section 50C(2), wherein the assessee can opt for getting the valuation of property done from Departmental Valuation Officer (”DVO”). The procedure is that, pursuant to objections raised by the assessee, the Assessing Officer (”AO”’) refers matter to DVO for valuation of capital asset being sold. The DVO after giving opportunity of being heard to assessee, provides his Valuation Report. In this regard, law has been fairly settled that, DVO’s report is binding on AO. The assessee if aggrieved against the DVO’s report, can raise its objections before Appellate Authorities. Recently, the Hon’ble Madras High Court in the case of Jagannathan Sailaja Chitta v. Income-tax Officer, International Taxation 2(2), Chennai* [2019] dated 15/02/2019 [104 taxmann.com 131 (Madras)], has held that, the assessee can raise its objections even before Assessing Authority who is armed with powers of a Civil Court u/s 131 and is duty bound to consider the assessee’s objections in an objective manner. This article analyses the recent Madras HC decision (supra) and other judicial precedents.

2. Analysis of relevant provisions [Section 50C]

2.1 Section 50C makes a special provision for determining the full value of consideration in cases of transfer of immovable property [Section 50C(1)]:

Where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed or assessable by SVA for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration received or accruing as a result of such transfer and capital gains shall be computed on the basis of such consideration under section 48 of the Act.

2.2 Valuation can be referred to the Valuation Officer [Section 50C(2)]:

If the following conditions are satisfied, the AO may refer the valuation of the relevant asset to DVO in accordance with section 55A of the Income-tax Act:

(i) Where the assessee claims before the AO that, the value adopted or assessed or assessable by the stamp valuation authority exceeds the fair market value ”FMV” of the property as on the date of transfer; and

(ii) The value so adopted or assessed or assessable by stamp valuation authority has not been disputed, in any appeal or revision or reference before any authority or Court.

2.3 Consequences where the value is determined by the DVO [Section 50C(3)]:

If the FMV determined by the DVO is less than the value adopted (assessed or assessable) for stamp duty purposes, the AO may take such FMV to be the full value of consideration. However, as per section 50C(3), if the FMV determined by the DVO is more than the value adopted or assessed or assessable for stamp duty purposes, the AO shall not adopt such FMV and will take the full value of consideration to be the value adopted or assessed or assessable for stamp duty purposes.

2.4 Remedy if valuation by DVO is disputed by assessee:

i. The assessee, can file an appeal, against the Assessment Order which has been finalised after considering valuation as per DVO Report. The assessee can raise its objections against the valuation as per DVO report before Appellate Authorities.

3. View taken by Hon’ble Courts

The Hon’ble Courts have consistently held that, DVO Report obtained u/s 50C(2) is generally binding on Assessing Officer who has to adopt the valuation as per section 50C(3) and finalize assessment accordingly. However, DVO report is not binding on Appellate Authorities who can consider assessee’s objections against DVO report, while hearing an appeal against such assessment order. In this regard, following decisions are worth referring:

3.1 CIT v. Dr. Indra Swaroop Bhatnagar [2012] (30 taxmann.com 293) dated 19/09/2011 (Allahabad HC), wherein it has been held as under:

• Generally, when the AO has obtained the DVO Report then, the same is binding on AO;
• Therefore, the order passed by the Tribunal holding that valuation done by the DVO was to be adopted was upheld.

3.2 Lovy Ranka v. DCIT (106 taxmann.com 193) dated 01/04/2019 (Ahmedabad ITAT), wherein it has been held as under:

• Tribunal referred to provisions of section 50C(2) and relevant provisions of Wealth Tax Act, 1957 referred therein;
• Tribunal held that, correctness of Valuation Report can be challenged before CIT(A) & ITAT. DVO needs to be given opportunity of being heard by CIT(A) & ITAT;
• Tribunal remanded matter to the files of CIT(A) for adjudication on merits, after giving opportunity of being heard to assessee & DVO and then pass a speaking order.

3.3 Anil Murlidhar Deshmukh v. ITO (101 taxmann.com 93) dated 13/12/2018 (Pune ITAT), wherein it has been held as under:

• Report of the DVO is binding on the AO in terms of sub-section (3) of section 50C of the Act, unless, the assessee shows some glaring mistakes in such valuation;
• The Tribunal itself considered objections raised by the assessee but did not find merit in the same thereby, rejected the assessess’s appeal.

3.4 Sri Pattabhiram v. ITO (45 taxmann.com 141) dated 13/12/2013 (Visakhapatnam ITAT), wherein it has been held as under:

• It is well settled principle of law that, once a reference is made to the DVO, the valuation report submitted by the DVO is binding on the AO;
• In any case, the assessee challenged the adoption of value determined by the DVO on legal grounds. The assessee did not contest correctness of the valuation made nor brought any contrary material to prove that the mode and method of FMV value determined by the DVO was more than the actual FMV;
• The Tribunal upheld valuation as per DVO report.

3.5 Suresh C. Mehta v. ITO (35 taxmann.com 230) dated 17/05/2013 (Mumbai ITAT), wherein it has been held as under:

• Tribunal referred to provisions of section 50C(2) and relevant provisions of Wealth Tax Act, 1957 referred therein;
• Tribunal observed that, a combined reading of these sections provides that insofar as the AO was concerned, he was bound by the valuation adopted by the DVO. Whereas the CIT(A) & Tribunal can entertain objections relating to such valuation and DVO Report was not binding upon them.
• Tribunal remitted back the matter to CIT(A) for fresh adjudication after considering assessee’s objections.

4. Recently, the Hon’ble Madras High Court in the case of Jagannathan Sailaja Chitta v. Income-tax Officer, International Taxation 2(2), Chennai* [2019] dated 15/02/2019 [104 taxmann.com 131 (Madras)], has held that, assessee can raise objections against DVO report before Assessing Authority and Appellate Authority.

4.1 Facts and background

4.1.1   The assessee had sold an immovable property for sale consideration of Rs.17.09 crores. The value adopted by the SVA was Rs. 19.70 crores as per section 50C of the Act. Thus, the difference between the aforesaid valuations of Rs.2.61 crores was added to the total income as capital gains and tax was levied on the same. The assessee had raised objections against the higher valuation as per SVA and had sought for fresh valuation from DVO. The AO had referred the matter for valuation to DVO but since the assessment was getting time-barred the assessment was completed by the AO adopting the valuation as per SVA and the difference of Rs.2.61 crores was subjected to tax.

4.1.2  Before CIT(A), for the first time the AO produced the DVO’s report which was obtained subsequent to assessment proceedings. The DVO’s report had valued the property at Rs.27.36 crores which was higher than the valuation as per SVA (ie Rs.19.70 crores). The assessee had raised objections against the higher valuation of property which were also taken before DVO. The crux of objections was that, the subject property & nearby area were underdeveloped which were compared with the values of plots sold after the land was developed. That the land being underdeveloped the guideline rate prescribed by the government for the developed saleable land cannot be a yard-stick for valuing the underdeveloped large parcel of land.

4.1.3 The assessee had insisted before CIT(A) that, sale consideration as per sale deed was the FMV of the property and therefore valuation as per DVO or the ”Guidance Value” cannot be adopted as per section 50C. The CIT(A) observed that, it had given careful consideration to assessee’s objections raised before DVO. That DVO had given careful consideration to assessee’s objections and accordingly arrived at the value of the property at 27.36 crores. Further relying on provisions of section 50C(2) r.w.s 50C(3), the CIT(A) confirmed the action of AO.

4.1.4   The Tribunal also dismissed the appeal of the assessee in this regard and upheld the ‘Guidance Value’ as determined by the SVA as FMV and thus upheld the addition of Rs.2.61 crores.

4.2 Substantial Questions of Law before Hon’ble HC

1.Whether ITAT was justified in adopting FMV u/s 50C without considering objections of the assessee, based on the report of DVO as well as against presumptive valuation as per section 50C?

2.Whether Appellate Authorities themselves could decide the objections of the assessee or should have remitted the matter back to Assessing Authority?

4.3 Held by Hon’ble High Court

4.3.1  The Hon’ble Court was in agreement with the judgement of Hon’ble Delhi High Court in the case of CIT v. Khoobsurat Resorts (P.) Ltd. (supra), wherein it was held that, the provisions of Section 50C of the Act only enable the Revenue to adopt the Guidance Value declared by the SVA for payment of stamp duty, as the FMV under Section 48 of the Act. But, that Guidance Value cannot, ipso facto, be taken as the valuation for the purpose of computing Capital Gains Tax liability in the hands of the assessee/seller.

4.3.2  The assessee’s objections against higher valuation by DVO as well as in terms of Section 50C of the Act was neither dealt/ considered with by Assessing authority nor by Appellate Authorities in the present case. That the presumption under Section 50C(1) of the Act, even though rebuttable in law, was never allowed to be rebutted by the assessee at all.

4.3.3  The Departmental authorities failed to meet the objections of the assessee, which were raised before CIT(A) for the first time at the appeal stage, but were never overruled by a speaking order and the Guidance Value (i.e as per SVA) as per Section 50C(1) of the Act was taken as a Gospel Truth against the disclosed and declared value of the sale by the assessee. This was not permitted in law.

4.3.4 In Income Tax Act, the concept of levy of tax on ”real income” exists. Therefore, Capital Gains Tax can also be levied on ‘real’ capital gains and not on the presumptive capital gains. The need to determine a FMV upon a fact finding exercise is a sine qua non. But, such fact finding exercise by the Departmental authorities, be that Assessing Authority or even the Appellate Authority, was not really undertaken in the present case.

4.3.5  It is undoubted that both the Appellate Authority and the Assessing Authority, in law, had powers of a Civil Court also vide Section 131 of the Act and, therefore, the Valuation Report of DVO as well as the presumption under Section 50C of the Act about the FMV has to be treated as an evidence or a legal presumption, which is open to be rebutted by the assessee in accordance with law.

4.3.6 The assessee cannot be denied an opportunity to raise his objections even against the presumptive FMV under Section 50C(1) of the Act or Report of DVO under Section 50C(2) of the Act and the Assessing Authority or the Appellate Authorities, whose powers are co-extensive with those of the Assessing Authority, cannot refuse to meet those objections point by point.

4.3.7  The Fair Assessment Procedure under the scheme of assessment in the Income Tax Act has it at the root the principles of natural justice and the same has not been denied by presumptive provisions, such as Section 50C of the Act and several other provisions in the scheme of the Act.

4.3.8 CIT(A), where, for the first time, the Report of DVO came up, could either deal with the objections of assessee himself or remit the matter back to the Assessing Authority for dealing with the said objections in an appropriate and detailed manner.

4.3.9 The Hon’ble Court allowed the Appeal and set aside the orders passed by the learned CIT(A) and also the learned Tribunal and remitted the matter back to the Assessing Authority to decide both the questions about the valuation of the property to be taken while dealing with the objections of the Assessee against the Report of DVO as well as the presumptive value under Section 50C of the Act and then compute FMV.

4.3.10 The Court observed that, the Assessing Authority has the powers of a Civil Court conferred upon him by virtue of Section 131 of the Act by way of enforcing the attendance of any person, including any officer of a banking company or examining him on oath, production of documents, discovery and inspection, as the case may be. Therefore, while dealing with Departmental Valuation Officer’s Report or in allowing the assessee to controvert the presumptive value under Section 50C of the Act, the Assessing Authority can very well exercise the said powers conferred upon him.

5. Decision rendered post Hon’ble Madras decision in case of Jagannathan Sailaja Chitta (supra)

Smt Vimla Devi Samariya v. ITO (ITA No.348/Jp/2018) dated 11/07/2019 (Jaipur ITAT)

• Decision of Madras HC case of Jagannath (supra) was referred;
• Tribunal held that, the report of the DVO is binding on the AO, however, the same is not binding and can be challenged before the Appellate Authorities.
• Tribunal set aside the matter to the file of the AO who shall call for a fresh report from the DVO taking into consideration the assessee’s objections vis-à-vis Tribunal’s direction and after providing reasonable opportunity to the assessee.

6. Conclusion

 6.1 The decision of Hon’ble Madras HC is a welcome decision. It is a common experience during assessment proceedings that, if the assessee has some grievance or objections against DVO’s Report, the AO does not consider the same on the ground that, DVO’s Report is binding on AO. The assessee has to file an appeal & take his objections before Appellate Authorities. The Appellate Authorities, if they find merit in assessee’s objections, generally remits the matter to the files of lower authorities [either AO or CIT(A)] for fresh consideration. Thus, the matter gets prolonged unnecessarily and gives rise to litigation.

6.2 On the other hand, as per Hon’ble Madras HC decision (supra), if the assessee’s objections against the DVO report are considered by AO and are disposed of by way of a speaking order, then the assessee’s grievance will be addressed during assessment proceedings itself and further litigation on this issue may reduce. Also, the objections of assessee requires detailed fact-finding exercise which AO is well suited to carry out objectively by using wide powers as that of a Civil Court u/s 131 of the Act.