Section 55A- Full value of consideration cannot be construed as fair market value

IN THE ITAT AHMEDABAD BENCH ‘C’

Assistant Commissioner of Income-tax

v.

Prakash Ratanlal Sheth

IT APPEAL NO. 951 (AHD.) OF 2012

[ASSESSMENT YEAR 2008-09]

JULY 31, 2012

ORDER

T.R. Meena, Accountant Member – This is an appeal at the behest of the Revenue which has emanated from the order of CIT(A)-V, Baroda, order dated 15.02.2012 for assessment year 2008-09. The effective grounds of Revenue appeal are as under:-

“(i)  The learned CIT(A) erred in law in not considering the applicability of the provisions of section 55A of the IT Act, which empowers the AO to ascertain the fair market value of a capital asset for the purpose of determining capital gains by referring the valuation of the same to Valuation Officer.

(ii)  The learned CIT(A) erred on facts and in law in not considering the facts that assessee had constructed additional floor at different times and had given the wrong computation of Long Term Capital Gain by adopting incorrect indexation.”

2. The factual matrix of the case is that the assessee has shown long term capital loss on property A-1-23, Ishwarshanti Society, Karelibaug sold on 28.02.2008 at a price of Rs. 14,00,000/-. The cost of acquisition is Rs. 10,49,237/- as on 1991 which after Indexation comes to Rs. 29,05,174/-. As the appellant claimed loss under the head capital gain, therefore, ld. A.O. has referred the property u/s 55A of the IT Act for fair market value of the property on date of sale to the District Valuation Officer who estimated the fair market value of the property Rs.24,04,400/- against the consideration of Rs. 14,00,000/- shown in the sale agreement. It is also found from the Valuation Report that the appellant had constructed ground floor in 1991 and first floor & second floor in 1994 to 95-96 respectively. The appellant, however, claiming the benefits of indexation from F.Y. 1991-92. The A.O. had given reasonable opportunity to the assessee before computing a capital gain on the basis of DVO Report. The appellant admitted before the A.O. vide his letter dated 22.12.2010 that property was acquired on 16.10.1991 and admitted that some construction on ground floor, first floor and second floor was done by him. The ld. Counsel for the appellant as well as ld. A.O. relied upon various case laws. Finally, the A.O. computed the capital gain as under:-

“13. Revised calculation of indexation for determining the cost of acquisition:

As the assessee has shown Long Term Capital Loss on the property A-1-23, Ishwarshanti Society, Karelibaug at Rs. (-) 15,05,174/-. As per the revised calculation the Long term Capital gains is Rs. 1,42,200/-. Hence the difference of Rs. 1,42,200 + 15,05,174/- i.e. Rs. 16,47,374/- is added back to assessee’s income from Long Term Capital Gain on the said property.”

3. Being aggrieved by the order of the A.O., the appellant carries the matter before the CIT(A) who has deleted the addition after considering the Hon’ble Delhi High Court decision in case of CIT v. Smt. Nilofer I. Singh [2009] 309 ITR 233/176 Taxman 252 and has held as under:-

“5.2 I have considered the facts of the case as well as the observation of the AO and the arguments advanced by the AR. The AO has not brought any material on record to show that actual consideration received by the appellant is more than the consideration shown by the Appellant. Except for the situations mentioned in Section-50C, there is no provision in the Act which allows adoption of fair market value of property as full value of consideration received for the purpose of computing capital gains. Since the Appellant has not objected to the valuation made by the stamp valuation authority there is no occasion for the A.O. to make reference to the valuation officer under provisions of Section-50C (2) of the IT Act. Even when the reference is made to the valuation officer and he determines a value higher than the value adopted by the stamp valuation authority, the AO is required to adopt the value determined by stamp duty authority as per provisions of Section 50C (3) of the IT Act. Thus, the AO has clearly erred in adopting the fair market value of property as full value of the consideration received for the purpose of computing capital gains. Action of the AO is therefore, quashed and he is directed to adopt the amount of Rs. 14,00,000/- as full of consideration accruing to the appellant on transfer of property.”

4. Now the Revenue is before us. The ld. D.R. vehemently argued that the A.O. has power to refer the case for determining the fair market value as on date of sale u/s 55A of the IT Act. Further the incorrect indexation had been calculated in computing the capital gain. The A.O. can refer the case under sub-section (b) of Section 55A in any other case to the DVO. The CIT(A) was not right in deleting the addition of the A.O.

5. From the appellant side, a written reply was filed by the assessee. The assessee’s submission is reproduced as under:-

“(i)  It is firstly submitted that some of the considerations that led to the addition are apparently irrational and irrelevant for computing income under Income-tax Act. These observations are to the effect that generally it is not possible to incur loss on sale of property and transactions in cash are rampant in transactions of property. In such an event, understatement of income being rampant, all Income-tax returns filed in the country will need to be disbelieved.

(ii)  It is secondly submitted that the Assessing Officer was not entitled to make a reference to valuer. The valuer was not justified in valuing the property in the manner he did. The valuation by stamp duty authorities was in accordance with norms determined by the Government. That there was no loss on sale of property as erroneously understood by the Assessing Officer. That the property was in bad physical condition and did not have a good location. That both the Assessing Officer and the valuer ought to have given adequate opportunity to challenge the valuation. However, we are not addressing detailed arguments in this regard as we believe it is unnecessary in view of later submissions. However, in case later submissions are not accepted, we request Your Honour to grant opportunity to address arguments in this regard.

(iii)  It is submitted that the addition is not warranted in view of the fundamental provision of section 48 that the computation of income is to be done by reducing the cost from sale consideration received.

There is no provision any where permitting adoption of a different figure in lieu of consideration actually received. Market value can be substituted for consideration actually received only in situations contemplated in sections 50C or 45(4) etc.

Assessing Officer has failed to appreciate this fundamental provision.

While section 55A permits reference to valuer to determine fair market value, the permission is only ‘for the purposes of this chapter’ meaning that whenever chapter contemplates determination of fair market value as in case of section 50C or 45(4) etc.. It does not permit reference even when market value is not the prescribed basis for computing income.

This is in accordance with the decision of Hon’ble Delhi High Court in case of Commissioner Of Income-Tax v. Smt. Nilofer I. Singh reported at 2009-(309)-ITR-0233-DEL. This decision relates to Assessment Year 1998-99 which is long after insertion of section 55A and deletion of section 52. Hence the Assessing Officer’s reasons for ignoring the other decision on that ground do not survive.

We would add that at one point of time, section 52 contemplated adoption of market value in place of actual consideration. Even when that provision was there, Supreme Court in case of K.P. Verghese market value cannot be adopted unless there is evidence of receipt of extra consideration. Now with deletion of section 52, the decision in case of K.P. Verghese much more applicable rather than not being applicable.

(iv) The decisions relied on by the Assessing Officer are relating to estimation of cost for ascertaining investment from undisclosed sources for the purpose of section 68 where market value would be relevant. They cannot be applied for determining actual consideration received for the purpose of section 48.

Hence it is submitted that the decision of the Hon. CIT(A) be upheld and appeal of the department required to be dismissed.”

6. We have perused the orders of the authorities below and written reply of the assessee and gone through the case law. The appellant had shown sale value as a result of transfer at Rs. 14,00,000/- whereas stamp authority has taken this value at Rs. 13,83,600/- it means that assessee had shown more sale consideration in sale deed. Thus, this case cannot be referred u/s 50C (2) of the IT Act to the DVO. The capital gain can be calculated under chapter – IV of computation of income from capital gain. Section 48 empowered to AO to calculate the capital gain. For calculation of capital gain full value of the transaction received or accruing as a result of the transfer of the capital assets following amount is to be deducted (i) expenditure incurred wholly and exclusive in connection with such transfer (ii) the cost of acquisition of the assets and the cost of any improvement there on. Further, indexation on cost of acquisition and cost of improvement is to be allowed. The various High Courts have held that full value of consideration u/s 48 cannot be construed fair market value as per Section 55A of the IT Act. The Hon’ble Delhi High Court has held the similar view in case of Smt. Nilofer I. Singh (supra) after considering Hon’ble Supreme Court decision in case of CIT v. George Hinderson & Co. Ltd. [1967] 66 ITR 622. The full value consideration is mean, the full value of consideration received by the transferee in exchange of the capital assets transferred by him. The Hon’ble Supreme Court also observed that in the case of full value consideration is the full sale price is actually paid. It was further of the view that the expression “full value means the whole price without any deduction, whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for. Nor did it has any necessary reference to the market value of the capital assets which is the subject matter of the transfer”. Following the Hon’ble Delhi High Court ratio in above case, we have considered view that the ld. A.O. was not justified in substituting the fair market value in place of full value of consideration. Thus, we confirm the order of the CIT(A).

7. The second ground of Revenue appeal is against not considering the additional construction made by the appellant in different year by the CIT(A). The A.O. noticed that the assessee had constructed ground floor, first floor and second floor in different years. The appellant had admitted the fact during the course of assessment proceeding. Ld. A.O. computed the capital gain on the basis of indexation on construction in different years at the time of assessment which was not challenged by the appellant before the CIT(A). The ld. CIT(A) also had not given any findings in his appeal order on cost of improvement and indexation there on. Thus, this ground of Revenue appeal is dismissed.

8. In the result, on both grounds, the Revenue’s appeal is dismissed.