ITAT Mumbai Rejected Section 50C Due to Flawed Valuation of Tenanted Property

Mukesh Vaikunthlal Mehta Vs ITO (ITAT Mumbai)

Erroneous DVO Valuation and Tenanted Property: ITAT Holds Section 50C Inapplicable in Mukesh Vaikunthlal Mehta’s Case

In Mukesh Vaikunthlal Mehta vs ITO, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) examined the applicability of Section 50C of the Income-tax Act, 1961 to the sale of a heavily tenanted property and the reliability of the District Valuation Officer’s (DVO) valuation. The assessee, along with his two brothers, jointly sold a property at Vile Parle (East), Mumbai, consisting of land and three buildings with 26 units, most of which were occupied by tenants and other owners. The declared sale consideration of ₹2.5 crore was significantly lower than the stamp duty value of ₹7.03 crore, prompting the Assessing Officer to invoke Section 50C and substitute the stamp duty value, resulting in a substantial long-term capital gains addition. During appellate proceedings, the CIT(A) partly reduced the addition by adopting the DVO’s valuation of ₹5.02 crore, but still sustained an addition of ₹84.27 lakh. On further appeal, the ITAT closely analysed the DVO’s methodology and factual assumptions. The Tribunal noted that while the DVO excluded the area occupied by tenants, he failed to fully account for the area occupied by other flat owners (developer flats), leading to an inflated assessment of the property’s development potential. After correcting this error and recomputing the fair market value by properly excluding all occupied areas, the Tribunal determined the property’s value at approximately ₹2.42 crore, which was lower than the actual consideration received. Consequently, the ITAT held that Section 50C was not attracted and deleted the entire addition. Having granted relief on the core issue, the Tribunal treated the remaining grounds relating to deductions and exemptions as academic. The ruling underscores that Section 50C cannot be mechanically applied and that valuation of tenanted or encumbered properties must realistically reflect legal and factual constraints on development potential.

Facts of the Case

1. The Assessee sold an immovable property situated in Mumbai for a declared consideration of ₹2.50 Crores.

2. During assessment proceedings, the Assessing Officer (AO) invoked Section 50C of the Income-tax Act, 1961.

3. The AO adopted the stamp duty valuation of ₹7.03 Crores as the deemed full value of consideration.

4. Based on this, the AO made an addition of ₹1,51,00,000 towards Long Term Capital Gains (LTCG).

5. The Assessee objected to the stamp duty valuation and requested a reference to the District Valuation Officer (DVO) under Section 50C(2).

DVO Valuation & First Appeal

1. The DVO valued the property at ₹5,02,51,500.

2. The Assessee contended that the DVO’s valuation was erroneous as it failed to consider the full built-up area, particularly:

• Flats occupied by original developer/owner-occupants
• Certain portions not under tenancy

3. The CIT(A) accepted the DVO value and granted partial relief, restricting the addition to ₹84,27,058.

Contentions Before the ITAT

1. The Assessee argued that:

• The DVO considered only tenanted units while ignoring residential flats occupied by owner-occupants.
• This resulted in overvaluation of the property.

2. It was submitted that if the correct area was considered, the fair market value would fall below the actual sale consideration, rendering Section 50C inapplicable.

Tribunal’s Findings

1. The ITAT examined the valuation report and found that:

• The DVO omitted the residential area occupied by original developer flats.
• Only tenanted portions were factored into the valuation.

2. The Tribunal corrected the total residential area to 1,585.76 sq. meters.

3. On rectification, the revised fair market value was computed at ₹2,42,09,333.

Final Decision

1. Since the corrected FMV was lower than the actual sale consideration of ₹2.50 Crores, the provisions of Section 50C were held to be not applicable.

2. Consequently, the entire addition made on account of LTCG was deleted.

3. The appeal was partly allowed in favour of the Assessee.

Key Legal Principle Evolved

• Section 50C cannot be applied mechanically.
• If, after proper valuation under Section 50C(2), the FMV is less than the declared consideration, the actual sale consideration must prevail.
• Incomplete or erroneous DVO reports can be corrected by the Tribunal.

Practical Tax Planning Insight

• Always challenge stamp duty valuation where:
  • Property is tenanted
  • Occupancy restrictions exist
  • Valuation ignores actual usable area
• DVO valuation is not final and can be scrutinized on facts and calculations
• (ITA No. 4669/MUM/2025 ; Pronounced on 01.01.2026)

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. The present appeal preferred by the Assessee is directed against the order, dated 31/05/2025, passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)’] whereby the Ld. CIT(A) had dismissed the appeal against the Assessment Order, dated 30/12/2016, passed under Section 143(3) read with Section 147 of the Income Tax Act, 1961 for the Assessment Year 2011-2012.

2. The Assessee has raised following grounds of appeal :

“1. On the facts and the circumstances of the case, and in law, the honorable CIT(A) has erred and is not justified in confirming the addition of Rs. 84,27,058/- made by the learned AO under the head of Long Term Capital Gain by applying the section 50C without appreciating the facts of the case. The appellant hereby prays that the additions of Rs. 84,27,058/- made by applying provisions of section 50C of the Income-tax Act, 1961 (‘Act’) may please be deleted.

2. On the facts and the circumstances of the case, and in law, the honorable CIT(A) has erred and is not justified in confirming the addition of Rs.84,27,058/- made by the learned AO under the head of Long Term Capital Gain by placing reliance on DVO’s report and judicial precedents since the said same suffer from various fundamental infirmities: Hence, the appellant prays that such addition may be deleted.

3. Without prejudice to the grounds numbers 1 and 2 above, the honorable CIT(A) failed to appreciate that the full value of consideration accruing as a result of transfer of the property should be the aggregate consideration paid by the buyer, i.e.: (i) monetary consideration paid to the appellant and joint owners;

(ii) area consideration paid to the appellant and joint owners;

(iii) monetary consideration paid to tenants/ owners/occupants enjoying the property and (iv) area consideration paid to tenants/ owners /occupants enjoying the property. Such full value of consideration should be compared with the stamp duty value arrived by the DVO to determine applicability of section 50C of the Act. Further, the amount paid to the tenants/ other owners and occupants should be allowed as a deduction in the hands of the appellant in the computation of capital gains. Since the aggregate consideration paid by the buyer for the entire property far exceeds the stamp duty value, there is no question of applying provisions of section 50C of the Act. Hence, the appellant prays that such addition may be deleted.

4. On the facts and the circumstances of the case, and in law, the honorable CIT(A) has erred and is not justified in confirming the addition of Rs.84,27,058/- made by the learned AO without considering the stamp duty and registration charges payment of Rs.43,51,000/- for Deed of Conveyance and Rs.24,40,000/- paid to Amit Mehta for giving consent to the conveyance deed for release to his share from property. The appellant hereby prays that such amount paid of Rs.43,51,000/- and Rs. 24,40,000/-may be allowed as a deduction in the computation of capital gains working.

5) On the facts and the circumstances of the case, and in law, the honorable CIT(A) has erred and is not allowing deduction of value of flat acquired by the appellant under section 54 of the Act. The appellant hereby prays that the such deduction under section 54 of the Act may be granted to the appellant in the computation of capital gains income.

3. The relevant facts in brief are that the Assessee, an individual, filed return of income for the Assessment Year 2011-2012 declaring a total income of INR.59,459/- which was processed under section 143(1) of the Act. However, the assessment was reopened as notice under Section 148 was issued to the Assessee on 10/11/2015.

4. During the assessment proceedings under Section 14(3) read with Section 147 of the Act, the Assessing Officer noted that the Assessee had reported capital gains income on account of sale of share in the capital asset being land admeasuring 1001.70 sq. mtrs at Vile Parle(E), Mumbai along with buildings A, B, and C constructed thereon having 26 units/flats occupied Landowners, flat/unit owners and tenants. [hereinafter referred to as the ‘Property’]. The area occupied by the owners and tenants was as under:

4.1. The Property was held jointly held by the Assessee along with his two brothers, and therefore, vide Deed of Conveyance registered on 11/03/2011 the Assessee along with his two brothers transferred the Property to Zee Infrastructure Private Limited [hereinafter referred to as the ‘Purchaser’] for a consideration of INR.2.5 Crores.

4.2. For the purpose of determination of stamp duty value of INR.7.03 Crores was adopted by the Stamp Duty Authorities. Since the agreed consideration was less than the stamp duty value, the Assessing Officer adopted the stamp duty value as full value of consideration invoking the provisions contained in Section 50C of the Act and re-computed capital gains income in the hands of the Assessee at INR.1,51,09,891/-(as against INR.9,891/- computed by the Assessee) in the following manner:

4.3. While computing the capital gains income as above, the Assessing Officer did not take into consideration stamp duty of INR. 43,51,000/-paid to stamp authority on deed of conveyance and the amount of INR.24,40,000/- paid to the son of their sister – Smt. Umaben Vaikunthlal Mehta [i.e. Mr. Amit Mehta].

4.4. As the report of the District Valuation Officer (DVO) was not received at the time of framing the Assessment, the Assessing Officer had recorded in the Assessment Order that the Assessment Order shall be rectified on receiving report from the DVO.

4.5. Thus, vide Assessment Order, dated 30/12/2016, additional capital gains income of INR.1,51,00,000/- was brought to tax in the hands of the Assessee.

5. Being aggrieved, the Assessee preferred appeal before the Learned CIT(A) against the Assessment Order. Vide Order, dated 31/05/2025, the Learned CIT(A) granted partial relief to the Assessee after taking into consideration the Valuation Report of the DVO, dated 24/01/2017 as the Learned CIT(A) adopted value of INR.5,02,51,500/- as full value of consideration for Section 50C of the Act.

5.1. Accordingly, the capital gains income was computed at INR.84,27,058/- by the Assessing Officer vide Order dated 10/09/2018 passed under Section 155(15) of the Act in the following manner:

5.2. On the issue of stamp duty of INR.43,51,000/- paid to the stamp authority on Deed of Conveyance (dated 12/12/2010 registered on 11/03/2011) and the amount of INR.24,40,000/- paid to the son of their sister – Smt. Umaben Vaikunthlal Mehta [i.e. Mr. Amit Mehta], the Learned CIT(A) agreed with the Assessing Officer and did not grant any relief to the Assessee.

6. Not being satisfied with the partial relief granted by the Learned CIT(A) vide Order dated 31/05/2025, the Assessee has preferred the present appeal before this Tribunal on the grounds reproduced in paragraph 2 above.

7. During the course of hearing detailed arguments were advanced by both the sides by placing on material forming part of the Paper-Book filed by the Assessee. Both the sides have reiterated the stand taken by/before the authorities below. We have considered the rival submissions/contentions and have perused the material on record.

8. We note that it is admitted position that vide Deed of Conveyance, dated 12/12/2010 [registered on 11/03/2011], the Assessee along with his two brothers had transferred the Property and/or rights therein to the Purchaser. Therefore, the Assessee was under obligation to offer to tax as his income for the relevant previous year 1/3^rdof capital gains arising from the aforesaid transaction.

Ground No. 1, 2 & 3

9. The first issue that arises for consideration in the present appeal pertains to the application of the provisions contained in Section 50C of the Act and the consequent determination of the Fair Market Value/Full Value of Consideration of the Property for the purpose of computing capital gains.

9.1. During the course of the assessment proceedings, the Assessee had disputed the stamp duty value of INR.7,03,00,500/- proposed to be adopted by the Assessing Officer for the purpose of computing capital gains, and therefore, a reference was made to the DVO. Since the report of the DVO was not received by the time Assessment Order was passed, the Assessing Officer adopted the stamp duty value of INR.7,03,00,500/- for determining the amount of capital gains. The reference made to the DVO was answered by the DVO by way of Valuation Report, dated 24/01/2017 [placed at pages 110 to 120 of the paper-book] during the pendency of appeal preferred by the Assessee against the Assessment Order. The Learned CIT(A) considered the the said valuation report from DVO and has adopted the DVO valuation of INR.5,02,51,500/- for determining the capital gains income. By way of Ground No. 1, 2 & 3 raised in the present appeal the Assessee has disputed the value determined by the DVO and the applicability of provisions contained in Section 50C of the Act.

9.2. During the course of hearing before this Tribunal, the Learned Authorised Representative for the Assessee had, inter alia, contended that value of INR.5,02,51,500/- determined by the DVO comprises (a) flat occupied by Assessee (along with his 2 brothers) (b) flats occupied by 5 owners [hereinafter referred to as ‘Developer Flats’] and (c) flats occupied by the other 20 tenants [hereinafter referred to as ‘Tenanted Flats’]. The 5 owners and 20 tenants had received separate consideration for for Developer Flats and Tenanted Flats, respectively, from the Purchaser (i.e., Zee Infrastructure Pvt. Ltd). The valuation report submitted by DVO has valued the Property at INR.5,02,51,500/- which is the value of the entire property consisting of land and building of A, B, and C having 26 flats/units.

9.3. The above submissions were opposed by the Learned Departmental Representative. Referring to the valuation report of the DVO, it was submitted by Learned Departmental Representative that the DVO had taken into consideration all the objections raised by the Assessee and has excluded ‘residential built-up area occupied by the existing tenants’ (1486.62 sqm)’. Therefore, the contention of the Assessee that the value determined by the DVO was of the entire property was factually incorrect.

9.4. We note that in the valuation report prepared by the District Valuation Officer (for short ‘the DVO’) the ownership history of the property under consideration has been stated as under:

9.5. After taking into consideration the ownership history, the DVO determined the value of the property as on 01/04/1981 at INR.29,59,500/- and as on 11/03/2011 at INR.5,02,51,500/-. On perusal of methodology adopted by the DVO, we find that while determining value as on 01/04/1981, the DVO has computed Fair Market Value by taking the estimated cost of construction (determined by taking into account the year of construction) as the basis and has reduced the same by the depreciation (keeping in view the age of construction). However, for the purpose of value as on 11/03/2011, the DVO has adopted a completely different approach for determining the Fair Market Value taking the development potential of the Property as the basis. In our view, the DVO should have adopted similar methodology for determining Fair Market Value of the Property as on 01/04/1981 and 11/03/2011.

9.6. Be that as it may, we note that during the course of hearing it was contended on behalf of the Assessee that only 9.67% of the value determined by the DVO should be attributed to the Assessee since the DVO has determined the value of the entire Property. On going through the valuation report we find that the aforesaid submission made on behalf of the Assessee is not entirely correct. As submitted by the Learned Departmental Representative, the DVO has excluded the area aggregating to 1486.62 Sq. Mtrs being the ‘residential built-up area occupied by the existing tenants’. Thus, the DVO has considered the area occupied by the tenants in respect of Tenanted Flats and has excluded the same to determine the development potential and income/gains arising from the same. However, we note that the DVO has failed to factor in the aggregate area of occupied by the owners of the Developer Flats. On going through the list of Landowners/occupants/tenants placed on record at pages 286 & 287 of the Paper-Book, we find that property consisting of the building A, B, C is occupied by (i) landowners [i.e. the Assessee along with his two brothers] having one flat, and (ii) Manoj Mohanlal Goradia (the original developer) having two flats and three flat owned by the parties who have purchaser the flat from Manoj Mohanlal Goradia (the original developer) and (iii) further property is also occupied by 20 tenants. The details of the corresponding flat with carpet area to be allotted to the parties other than the Assessee was also provided by the Assessee to the Learned CIT(A) and has been reproduced at Pages 35 to 38 of the order impugned as part of written submission filed by the Assessee. On examining the same we find that the total residential area to be provided to parties [other than the Assessee] was 1,585.76 Sq. Mtr. (equivalent to 17,069 Sq. Ft.) as opposed to 1,486.62 Sq. Mtr. adopted by the DVO. Accordingly, the ‘Balance FSI without fungible FSI’ gets reduced from 516.78 Sq. Mtr. to 417.64 Sq. Mtr. In case the computation made by the DVO is rectified by taking into the aforesaid value of the Property as on 11/03/2021 comes to INR.2,42,09,333/-.

9.7. Since the Value of INR.2,42,09,333/- determined as above is less that the consideration of INR.2.5 Crores, the provisions contained in Section 50C of the Act would not get attracted. Accordingly, addition of INR.1,51,00,000/- made by Assessing Officer under Section 50C of the Act which was reduced to INR.84,27,058/- by the CIT(A) is deleted. In terms of the aforesaid, Ground No. 1, 2 & 3 raised by the Assessee are allowed.

Ground No. 4 & 5

10. Since we have deleted the addition as above, all the other contentions and grounds raised by the Assessee are dismissed as having been rendered academic at this stage. Accordingly, Ground No. 4 & 5 raised by the Assessee are dismissed.

11. In terms of paragraph 9.7 and 10 above, the present appeal preferred by the Assessee is partly allowed.

Order pronounced on 01.01.2026.