Discrediting assessee’s valuation report without substantial reasons and without calling for DVO report is unjustified

Swadeshi Polytex Limited Vs DCIT (ITAT Delhi)

ITAT Delhi held that failure to call for DVO report and discrediting the valuation report of the assessee without substantial reasons is unsustainable and bad in law.

Facts- Assessee company is into the real estate development by converting the leasehold land as Stock in trade and selling the plots of smaller sizes after proper development and approval from UPSIDC. AO noticed that assessee had sold a total of 16976.5 sq. Mtr. of land. As per the MOU, the assessee is entitled to receive Rs. 8,200/- per sq. Mtr. for land sold. AO considered that the Market rate of the property is Rs. 10,000/- Sq. Mtr. as per the valuation report submitted by the assessee company.

AO was not satisfied with the fair market value of Rs. 10,000/- taken by the assessee in the year of conversion of fixed asset to stock-in-trade i.e. F.Y. 2010-11 while the fair market value as on 01.04.1981 has been presumed by the assessee at Rs.100 per sq. Mtrs. which AO considered was arbitrary.

Assessee has taken the land on lease for a total land consideration of Rs. 20,02,904/- as per the lease deed. The total area of the land on lease is 3,32,909.69 Sq. mts. Therefore, per Sq. mts. Cost of plot of land 1970-71 arrived at Rs. 6.01/- only.

Assessee claimed that AO was not entitled to discredit the fair market value taken by the assessee without referring the matter to the Departmental Valuation Officer as per section 55(2) of the Act.

Conclusion- Held that when the onus is on a party to prove a fact by a valuation report then the valuation report cannot be considered to be a self-serving document of that party without being disputed on facts. Thus, at one hand having failed to take the opportunity and mandate under law to call for a DVO report and on the other hand having discredited the valuation report of the assessee without substantial reasons makes the order of Ld. Tax Authorities Below erroneous and not sustainable under law.

FULL TEXT OF THE ORDER OF ITAT DELHI

The Assessee has come in appeal against the appellate order dated 18.05.2018 of Commissioner of Income Tax (Appeals)- 31, New Delhi, in appeal no. 252/17-18 for Assessment Year 2013-14 whereby the appeal of the assessee against assessment order u/s 143(3) of the Income Tax Act, 1961 dated 30.03.2016 passed by ITO,Ward -22(4), New Delhi (hereinafter referred as the Ld. AO).

2. The facts in brief are that assessee company is into the real estate development by converting the leasehold land as Stock in trade and to sell the plots of smaller sizes after proper development and approval from UPS IDC. The return of income declaring nil income was filed and the case of assessee was taken up for scrutiny under CASS. Ld. AO noticed that assessee had sold a total of 16976.5 Sq. Mtr. of land at Kavinagar through Pranjal Vyapar Pvt. Ltd. As per the MOU dated 12^thDecember 2011, the assessee is entitled to receive Rs. 8,200/- per Sq. Mtr. for land sold. Ld. AO considered that the Market rate of the property is Rs. 10,000/- Sq. Mtr. as per the valuation report submitted by the assessee company. The assessee has calculated the long term capital gains as follows :-

3. AO was not satisfied with the fair market value of Rs. 10,000/- taken by the assessee in the year of conversion of fixed asset to stock-in-trade i.e. F.Y. 2010-11 while the fair market value as on 01.04.1981 has been presumed by assessee at Rs.100 per Sq.Mtrs. which Ld. AO considered was arbitrary. Ld. AO considered that when assessee has taken this land on lease in the F.Y. 1970-7 1 for a total land consideration of Rs. 20,02,904/- as per the lease deed dated 16.10.1970 and 04.02.1971. The total area of the land on lease is 3,32,909.69 Sq. mts. Therefore, per Sq. mts. Cost of plot of land 1970-71 was arrived at Rs. 6.01/- only. Ld. AO thus, concluded that assessee has arbitrarily considered that fair market value at Rs. 100 which is 1663 % of the actual cost of acquisition. Ld. AO observed that therefore, the fair market value of the property as on 01.04.1981 determined by registered valuer should be considered for computation of Cost of Acquisition. As the assessee company has not produced the valuation report of the property as on 01.04.198 1. The Ld. AO determined the FMV using Compounded Annual Growth Rate Method (CAGR) which Ld. AO considered more rational and reasonable method for calculating fair market value. Thereafter Ld. AO proceeded to make the computation method

“3.4 In this case, the beginning value is to be taken as Rs 6.01 i.e. the rate of the property on the date of lease in the FY 1970-71. End value is to be taken as Rs 10,000/-, the rate at which the deemed sales consideration is taken for the computation of Long term Capital Gains for the property converted in to stock-in-trade in the FY 2010-11. Using the above formula, the Compounded Annual Growth Rate for the period of 40 years is determined as 20.3%. This rate of growth reflects the average rate of growth per annum. LIsing this rate, the Fair Market Value of the property as on 01.04.1 981 is arrived at Rs 38/- . Therefore FMV of Rs 38/- per Sq.mts is considered for the Computation of Long term capital gains as under:

Therefore, an addition of Rs 74,83,582/- is being made to Long term capital gains on account of recomputation of the same by determining the Fair market value of the property as on 01.04.1981 at Rs 38/-. Penalty proceedings u/s 271 (l) (c) of the I.T. Act, 1961 are initiated separately for furnishing inaccurate particulars of income leading to concealment of income.”

4. In appeal before Ld. CIT(A) additional evidences were filed by the assessee for which remand report was called but no remand report was submitted by the Ld. AO. Ld. CIT(A) observed that to support the valuation of Rs. 100 per sq. mts. As on 01.04.1981. The assessee submitted valuer’s report nil showing date of inspection as 29.04.2010, the same was admitted in additional evidence though no report of Ld. AO was received in spite of opportunity. Ld. CIT(A) was not satisfied with the valuer report and considered it to be cursory and self serving document and accordingly observed in para 4.12 as follows :

“4.12 Item no. 40, of the valuation report is as follows –

40. If sale instances are not available or not relied upon the basis of arriving at land rate. The land rates have assumed on the basis of market rates prevailing As on 01.04.1981 which have been varified from several reputed Real Estate Agents.

I find that the report of the assesse ‘s Valuer is very cursory and is a serving document. No real instances or details of inquiries supported by robust evidence are brought forth by the Valuer (and the appellant). The report of the Valuer does not even carry the signature of the lessee. The area is shown as industrial and middle class. The Valuer has arrived at fantastic valuation, as if he was capable of reading in the past. The valuer’s action is absolutely without any basis and is a convenient figment of his imagination. On the contrary, the AO has been more than fair when she has determined the value as on 01.04.1981at Rs. 38 per square meter.”

5. CIT(A) thus sustained the addition with following observations in para 4.14 reproduced as under :-

“4.14. The above analysis shows that the appellant has prima facie shown a super fast and stupendous growth in the value of land from 1971 till 1981. However, this growth is not backed by any evidence or Robust Data. The appellant, apparently, has adopted this stratagem to increase the cost of acquisition of land. When the cost of acquisition of land is pushed up, the long term capital gains get pushed down, and in this process correct capital gains are not reported to Revenue. Thus, by restoring to the aforesaid manipulation, the appellant has tried to suppress the long term capital gains. The AO has determined the cost of acquisition as on 01.04.1981 as Rs. 38 per square meter. The AO’s action is based on cogent analysis and is upheld.

The appellant fails with regard to ground no. 1”

6. The assessee is in appeal raising following grounds :-

“1. That the Learned CIT(A) has erred on facts & in law by dismissing the ground of Appeal no. 1, confirming the addition of Rs. 7483582/- to long term capital gain. The Assessing officer rejected the fair value as on 01 -04-1981, of Rs.100/- per Square Mtr. as adopted by Assessee based on approved Valuer report for computation of Capital Gain.

2. That the Learned CIT(A) has erred on facts & in law by dismissing the ground of Appeal no. 1, confirming the addition of Rs.7483582/- to long term capital gain. The Learned CIT(A) erred in confirming the addition made by Assessing officer based on suspicion, assumption and surmises by calculating herself the fair 01/04/1981 at Rs.38/- per sq. mts. instead of referring the matter to the department valuer as of the Act.

3. That the Learned CIT(A) has erred on facts & in law by dismissing the ground of Appeal no. 1, confirming the addition of Rs. 7483582/- to long term capital gain, made by Assessing officer without any corroberative evidence against the fair value as at 01 -04-1981 adopted by Assessee. The AO travelled beyond the power as given under LAW for ascertaining the fair Value as at 01-04-1981.

4. The Appellant craves leave to add/alter any/all grounds of appeal before or at the time of Hearing of the Appeal.”

7. Heard and perused the record.

8. On behalf of the assessee it was submitted that the first thing is that AO was not entitled to discredit the fair market value taken by the assessee without referring the matter to the Departmental Valuation Officer as per the section 55(2) of the Act. It was further submitted that Ld. AO failed to take into consideration the fact that while making necessary compliances for approval to convert the lease land into the salable plots a large area of the total land was left out and only a saleable area of 222665 sq. mts. was available from total land 332909.69 sq. mts. It was submitted that Ld. AO and the Ld. CIT(A) have both ignored that there were various costs on development of the land to make it saleable. Specially, referring to letter dated 12.01.2011 available at page no. 74 to 75 of the paper book, it was submitted that while giving permission to sell the land in the form of plots UPSIDC had directed that a minimum of Rs. 50 per sq. mts. will be paid by the assessee as sub-division fees. Ld. AR heavily relied the valuation report made available at page no. 37 to 40 to submit that the valuer has made a calculation at the rate of 100 per sq. mts. for the total land 332909.69 sq. mts. while in fact only one third land was available. It was submitted by the Ld. AR that the land was converted into 384 plots and 33.15 % of the total land of the company had to be surrendered to UPSIDC for roads etc and was not saleable. The assessee was under obligation to pay 12.5% of the UPSIDC estimates of cost towards administration and supervision charges to the UPSIDC as mentioned in the permission letter at point no. 2 of the paper book at page no. 74. It was submitted that further expenditure were made for drains, parks, public utilities etc. It was also submitted that after development these roads, electricity lines etc. were to become property of UPS IDC. It was also submitted that in fact while the land had to be converted into saleable plots by demolishing various factory, building and other structures of the earlier existing business of manufacturing of polyester yarn spread on the entire land of 80 acres which also burdened assessee of the cost. It was submitted that the proposed addition on the basis of CAGR was not brought to the knowledge of assessee by any show cause notice. Ld. AR thus submitted that the cost of development was Rs. 500 per sq. mts. Thereupon 12.5% and 5% charges were paid to UPSIDC and even if these costs are discounted back to the year 1981 the cost cannot be less than 100 sq. mts.

8.1 Lastly it was submitted that the assessment u/s 147 for A.Y. 20 14-15 was reopen on 30.5.2022 and has been finalized on 17.04.2023 by accepting deemed cost of acquisition on 01.04.1981 at Rs.100 per sq.mts.

8.2 Ld. DR however supported the findings of Ld. Tax Authorities below.

9. Giving thoughtful consideration to the matter on record it comes up that the assessment order does not show if any notice was given to the assessee of the fact that the fair market value adopted by assessee is rejected and further that having applied the wisdom of compound annual growth method assessee was asked to show cause for the addition.

9.1 In this context, it is pertinent to observe that the Act specifically provides that if the Assessing Officer is not satisfied with the fair market value of the capital asset then reference can be made to DVO for the valuation. That is the only way with the Ld. AO to shift the onus on the assessee to justify any other valuation adopted by the assessee. Tribunal Mumbai Bench in Macrotech Developers Ltd. Vs. DCIT-7(3), ITA No. 2266 & 2239/Mum./2022 for A.Y. 2017-18 and 2018-19 has deleted addition made u/s 43CA on the ground that revenue failed to follow the mandate of Section 43 CA(2) r.w.s. 50C(2) by not referring valuation of property sold to Valuation Officer.

10. Further, Ld. CIT(A) has failed to take into consideration the fact that once a valuation report was sent to the Ld. AO calling remand report and he had preferred not to respond to same, then a presumption should be in favour of the assessee rather than discrediting the report to be self serving. The Bench is of considered opinion that when the onus is on a party to prove a fact by a valuation report then the valuation report cannot be considered to be a self serving document of that party without being disputed on facts. Ld. CIT(A) has mentioned that report is cursory without pointing out any shortcomings. The opinion of an expert cannot be brushed aside in a whimsical manner. Specially when law mandates the evidence of an expert to be admissible for proving specific question of fact as in the present case, the fair market value of the property. Thus, at one hand having failed to take opportunity and mandate under law to call for a DVO report and on the other hand having discredited the valuation report of the assessee without substantial reasons makes the order of Ld. Tax Authorites Below erroneous and not sustainable under law.

11. The factual submissions made on behalf of the assessee with regard to the fact that actual saleable land was two third itself makes the fair market value of property arrived at Rs. 38 by Ld. AO to be not sustainable. Further the substantial expenses also indicate that the market value of the land had to be taken on a more reasonable basis. The acceptance of market in the subsequent years also benefits the assessee as the same shows that in the presnt AY the Ld. Tax Authorities, while passing the impugned orders, did not appreciate the facts in correct perspective. Therefore, grounds raised are sustained, the appeal of assessee is allowed. Impugned addition on account of FMV taken by Ld. AO is set aside.

Order pronounced in the open court on 13th June, 2023.