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Income Tax Appellate Tribunal, DELHI BENCH ‘SMC’ NEW DELHI
Before: SHRI B.P. JAIN
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘SMC’ NEW DELHI BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER
ITA No.1841/Del/2017 Assessment Year 2008-09 Mahesh Chand Jain Vs. ITO, C/o, Jagdish Chand & Co., Ward-53(5) H-20, LGF, Green Park New Delhi (Main), New Delhi]
PAN-AALPJ7704P (Appellant) (Respondent)
Appellant by : Sh. Satyan Sethi, Sh. Arta Trana Panda, Advs Respondent by : Sh. T. Vasanthan, Sr. DR सुनवाई क� तार�ख/Date of Hearing : 03/10/2017 घोषणा क� तार�ख /Date of Pronouncement: 05/10/2017 ORDER PER B.P. JAIN, A.M. This appeal of the assessee arises from the order of learned CIT(A)-18, New Delhi, vide order dated 15.2.2017 for the Assessment Year 2008-09. The assessee has raised the following grounds of appeal as under:- That on the facts and circumstances of the case and in law, the Commissioner of Income 1. tax, (Appeals)-18, New Delhi ['the CIT(A)'] has erred in holding that for the purposes of computing capital gains under section 45 read with section 50C of the Income tax Act, 1961 ("the Act") of 65-B, Roop Nagar Industrial Estate, Loni (UP) sale consideration of Rs. 10,25,000/- be substituted by the estimated value of Rs.20,00,000/-. 2. That on the facts and circumstances of the case and in law, the CIT(A) erred in holding that sale consideration of Rs.10,25,000/- (wrongly stated as Rs.10,35,500/-) was low and therefore, it is not practicable to value the property as per Rule 3 of Schedule III to the Wealth Tax Act. 3. That on the facts and circumstances of the case and in law, the CIT(A) erred in relying
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upon Amrit Banaspati Co. Ltd. v. CWT (2014) 365 ITR 515 (SC), without confronting the same to the Appellant. It was not appreciated that Amrit Banaspati Co. Ltd (supra) was rendered in different context and was not at all applicable to the present case. 3.1 That on the facts and circumstances of the case and in law, the CIT(A) did not appreciate that reference to the valuation officer was not made under rule 20 of Schedule III to the Wealth Tax Act, 1957. 4. That on the facts and circumstances of the case and in law,the CIT(A) without confronting the Appellant erred in holding that rule 8(b) of Schedule III was attracted in the present case. CIT(A) did not appreciate that even the departmental valuation officer did not hold that rule 8(b) of Schedule III was applicable. 5. That on the facts and circumstances of the case and in law, the CIT(A) exceeded his jurisdiction in estimating the value of 65-B, Roop Nagar Industrial Estate, Loni (UP) at Rs.20,00,000/-for the purposes of section 50C of the Act, a deeming provision. 2. It was argued by the learned counsel for the assessee before the learned CIT(A) and as well as before me that during the AY the appellant has sold a property at Industrial Estate at Loni along with factory building to M/s Sidharth Metal for Rs.10,25,00a/-. In place of loss of Rs.25,683/- returned by the appellant, the AO has made an assessment of long term capital gain of Rs. 17,73,417/- "against which the present appeal was filed.This is re done assessment pursuant to order of ITAT. In the first round the AO intended to adopt the circle rate of the land & factory at Rs.38.56 lakh as the full value of consideration (FVC), invoking section 50C. The appellant during assessment had submitted that reference could be made to the valuation officer, as adoption of the circle rate would be unfair, stating in the following lines: That the property was rented out to a known person Mr. Vinit Kumar Jain. Proprietor M/s Sidharth Metal at a rent of Rs.5,000/- (by rent agreement dated 27.02.2002) but he defaulted making any rental payment after initial payment of Rs.42,000/-. Since the appellant could not resort to legal recourse for evicting him, which would have been protracted and costly to pursue, it was ultimately decided to sell the property to the said Mr. Jain. This by its very nature was thus a distressed sale. However, it was also stated that though the factory was sold for Rs.10.25 lakh, the stamp duty was paid on the circle rate of Rs.38.56 lakh. Accordingly, the property was referred to the Valuation Cell and
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the AVO estimated the cost as Rs.28,24,100/- as per'the valuation report placed on record. In the process, the contention of the appellant that the rent capitalization method is to be adopted for the purpose was dismissed. The objection as to age of the building or that it is a commercial deal was rejected since it was considered that the AVO has taken these factors to consideration and because the sale was to a relative. On the same ground the contention of it being a distressed sale was also turned down. The AO has adopted the value taken by AVO at Rs.28.24 lakh as the FVC and computed the capital gain. In the appeal proceedings, the action of the AO was upheld. The ITAT in further appeal held that:- In the first appeal, the CIT(A)- XXVI vide order dated 18.10.2011 upheld the addition of capital gains of Rs. 17,73,417/- However, in the second appeal, ITAT vide order dated 27.03.2015 set-aside the assessment, observing thus: "During the hearing before us, Ld. Counsel of the assessee has filed a paper book containing the various decision of the Hon’ble High Court, especially the jurisdiction High Court in the case of CIT v. New Delhi Construction Co. (1980) 123 ITR 68 (Del) and stated that the present case may be decided in accordance with the decision of the Hon’ble jurisdiction High Court in the case of CIT v. New Delhi Construction Co. (supra), as the facts and circumstance of the present case are similar to that case. We have perused the judgment of the Hon’ble jurisdictional High Court in the case of CIT vs. New Delhi Construction Co. tSuora) and therefore, we are of the view that in the interest of justice, the yresent issue in dispute are required through examination at the level of the AO, hence, we quash the order of the Ld. CIT IAI and remit back the issue in dispute, to the file of the AO. with the direction to decide the present issue in dispute, in accordance with the aforesaid direction of the Hon’ble Jurisdictional High Court delivered in the case of CIT vs. New Delhi Construction Co. (19801 123 ITR 68 (Del.). after giving adequate opportunity of being heard to the assessee.” 3. In short, the Tribunal directed that the present case may be decided in accordance with the decision of Hon’ble Delhi HC in CIT vs. New India Construction Co. (supra) after affording an opportunity to the appellant in this regard. 4. In the second round of assessment, the AO observed that the property in question is not governed by Rent Control Act and also the judgment of New India Construction Co. is not applicable to the facts of the case. On these points, the observations were as under:
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The reply of the assessee regarding pursuing legal remedies was considered but not found tenable. Further, on going through the Uttar Pradesh Urban Building (Regulation of Letting, rent and Eviction) Act, 1972 as provided by the assessee, it is found that as per the Act does not apply to all the properties situated in Uttar Pradesh as a whole. There is some applicability conditions laid down in the Act which reads: Applicability- it may be mentioned UP Urban Buildings (Regulation of Letting Rent and Eviction) Act. 1972 is not applicable to building for a period of 40 years from the date of their construction. As the property was purchase in the year 2000 and 'construction was carried out in the year 2001, the construction was there was not more 7-8 years old and hence the property does not come under purview of the Act. Further perusal of the Act revealed that there are certain classes of properties which have been exempted from the operation of Act as follows: Exemptions from operation of Act.- (1) Nothing in this Act shall apply to {the following, namely}: [(a). Any building of which the Gov. of a local authority or a public sector corporation [ or a Cantonment Board} is the landlord; or]... Any building used or intended to be used as a factory within the meaning of the (b) Factories Act, 1948 (Act No. LXII of 1948) where the plant of such factory is leased out along with the building; or Any building used or intended to be used for any other industrial purpose (that is (c) to say, the purpose of manufacture, preservation or processing of any goods) or as a cinema of theatre, where the and apparatus installed for such propose in the building is leased out along with the building. ....(d) Any building, whose monthly rent exceed two thousand rupees;. It is, thus amply clear the Uttar Pradesh Urban Building (Regulation of Letting, Rent and Eviction) Act, 1972 as referred by the assessee did not apply to the property sold by the assessee i. e. plot no. 65-B, Roop Nagar Industrial Estate, Loni (UP) which was an industrial plot and whose monthly rent was Rs. 5,000/-per month as per the rent agreement. 13. Besides the above applicability and exemption of property in the Act did, facts or circumstances of the case of assessee are totally different from the case as relied upon wherein the tenant and transferee were two different parties and eviction proceedings were also pending as per the rent control law and there was no certainly that the proceedings would essentially result in the transferee obtaining vacant possession. Thus, there was a risk involved for the transferee and therefore the transaction for the tenanted property took place at a low price wherein the rent capitalization method was adopted. 5. In that view of the matter he took the FVC at the same value as in the original assessment i.e Rs.28,24,100/-. 6. During the present appellate proceedings, the appellant has submitted that the AO
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has not followed the appropriate procedure in ascertaining the value of property and has unjustified chosen not to follow the direction of the ITAT for the wrong reasons. The ITAT had directed for adopting the Rent Capitalization method which also has been approved by the Hon’ble Delhi HC. It is wrong on the part of AO to presume that the Rent Capitalization method could also be applied only where small portion of property is in self occupation of the land lord. In New India Construction Co. case, the premises were fully tenanted and no portion was in possession with the landlord. In the instant case, there is no evidence to contradict the fact that the tenancy in favour of Mr. Vineet Jain was not real. The other reason for which the rent capitalization method was not followed by the AO is that the rent receipt was nominal @ Rs.5,000/- in a month from such a property. The AR has contended that this could not be the only reason to not follow the rent capitalization method as held in Gorge Okes Ltd. vs. CWT 267 ITR 677 (Mad). The other reason adopted by the AO that the vendee was a close relative of the appellant. To this the AR contends that the mere relationship without anything more is no ground to say that rent is r at a commercial rent for the same is understated because of relationship . Reliance was made on the case of Delhi High Court in Siddho Mai and Sons. Vs. ITO 122 ITR 839(Del.) (ii) The AR had also challenged the very valuation of the AVO on the following grounds:
a) The value of structure (factory) at Rs.11,23,600/- is not proper as no reduction towards depreciation for a 5 year old building has been given bv the AVO.
b) The adoption of circle rate to the impugned property is also not correct since the sweeping application of circle rate to all cases ignoring the locational factors and commercial use etc. may not be appropriate in all cases as held by ITAT Delhi in Ravikant vs. ITO 110 TTJ 297.
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In this regard, the AR has also specifically answered to make a query as to how the case of New India Construction Co. fits in to the facts of the case of the appellant, so to be an appropriate precedent to be followed, as directed by the Hon’bie ITAT and which has not been followed by the AO for the reasons stated in the assessment order. The same is reproduced here under:
Comparative analysis of facts of CIT vs. New India Construction Co. (1980) 123 ITR 68 with the facts of the case of the Appellant. S. No Facts of New India Construction Co " Facts of the case of the Appellant History & particulars of property 1. First floor of property C-42, Connaught Circus, 65-B, Roop Nagar Industrial Estate, Loni New Delhi having covered area of 7200 sq.ft. admeasuring 566.84 sq.mtr (page 68) was (668.90 sq. mtrs) was sold for Rs.2,20,000/ - to purchased by the Appellant on 10.1.2001 for New India Construction Co. on 22.12.1974. Rs. 1,66,665/- (page 8-10). Property (first floor) was in the occupation of three Cantilever structure (Kadi Patti) was erected in tenants and eviction proceedings against them the year 2001 -03 (page 12), at the cost of were pending. Rs.6,60,800/-. New India Construction Co. paid Rs. 1,05,000/- to tenants. Rs. 75,000/- was spent on converting the Cost of construction as per valuer’s report is use of property into commercial. A sum of Rs. 11,23,604/- (page 71). Rs.2,75,000/- was incurred on renovation etc. Property was let out to M/s Siddharth Metal, Having incurred Rs.4,55,000/- on eviction, renovation etc., the property was sold for proprietor Mr. Vineet Kumar Jain on a Rs.9,16,980/-. monthly rent of Rs.5,000/- for five years (page 13-16). On 22.8.2007, property was sold to Mr. Vineet Kumar Jam for Rs. 10,25,000/ - (page 32-60). On this aspect, facts of the case of the Appellant and of New India Construction Co. 1supral stand on same footina. Rent 2. Property was let out to three tenants on a monthly Property was let out to M/s Siddharth Metal, rent of Rs.328/-. Prop. Mr. Vineet Kumar Jain on a monthly rent of Rs.5,000/-. Rent was a nominal rent (123 ITR 68 @ 71). Rent of Rs.5,000/- per month was not a nominal rent. On investment ofRs. 8,26,665/ - 11,66,665 + 6,60,0001 the return of 7.25%
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was not a depreciated return. On this as Dect. facts of the case of the Appellant stand on a better footing.
Residential or commercial 3. Property was factory (commercial). Property was residential but the buyer got its use converted to commercial. At oaae 73. it was held that such conversions are generally granted on payment of nominal amounts Future potentiality of the property 4. Since the property in Connaught Circus, future There is only limited future potentiality of the potentiality of the property was high. property for the same is not situated in any commercial hub. It is on the outskirt of the city. At oaae 74. takina into account that property is situated in Connaught Circus, it was observed that property prices command high value. On this asDect also, facts of the case of the ADoellant stand on a better footing.
Cost of land and building method 5. At oaae 75. it was held that value of the orooertu Since property was tenanted, cost and building method was not appropriate. on the basis of cost and building method would have been relevant, if it was self occupied by the On this aspect, facts of the case of the transferor Appellant and of New India Construction Co. tsuorai stand on same footing.
Rent Control Act 6. Rent Control Act was applicable. Rent Control Act is not applicable. This aspect is leaal. Punjab Si Haryana Hiah Court has held in CbT v. Shri Radheu Mohan- 153ITR 399 that rent capitalization method is applicable to buildinas to which Rent Control Act are not applicable.
Appropriate method 7. At oaae 76. takina into consideration entirety of On this aspect, facts of the case of the facts, referred to above that method of Appellant and of New India Construction Co. (supra) stand on same footina. capitalization of the rental value by multiplying a number of years yield was proper method. .....
The learned CIT(A) vide para 4.2.18 observed as under:
4.2.18 From a careful observation of ratios laid down in the above cases, the factor pertinent to the case in hand may be summarized as follows: The method which is generally resorted to in determining the value of the land (i) and building specially those used for business purposes is the method of capitalization of the return actually received or which might reasonably be received from the land and building. However, it is also recognised that this method could not be laid down as a general rule applicable to all
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situations and circumstances.(see CIT vs New India Construction Co.) The AO need not always go for valuation as per Rule 3, if the case falls under (ii) exception under Rule 8. As was explained by the Apex court, what is practical is largely contextual. In case. AO is of the opinion that it is not practicable to apply the provisions of Rule 3. and the said asset is referred to Valuation Officer under Section 16A for assessment, the value of such asset shall be estimated to be the price which, in the opinion of the Valuation Officer, would fetch if sold in the open market on the date of valuation, (see Amrit Banaspati Co. Ltd. vs CWT [2014)49 taxmann.com 269 (SC). Applying the above principles to the facts in hand, I find that apart from the practical difficulty faced in this case in valuing the impugned property7, which is clearly discernible, one more condition providing an exception to application of Rule 3 is at Rule 8(b) i.e. where the difference between the unbuilt area and the specified area exceeds twenty per c,ent, of the aggregate area. In this case, it has been stated by the AR during the hearing on 3/2/17 that the extent of constructed area as given by the DVO is correct. That is the total area of the land is 566.84 sq m and actual area of construction is 335 sq m. (He, however challenged the method of valuation adopted by the DVO which we would discuss later in this order.). Thus found, the difference between the unbuilt area and the specified area here exceeds twenty per cent, of the aggregate area. Therefore Rule 3 would not apply stricto sensu in this case, unlike the case in Rajendra Lai & Sons (HUF)2009] 181 TAXMAN 129 (DELHI )(MAG.). Further, I notice that the tenant in our case is not only a relative of the appellant (iii) but he has defaulted in paying the requisite rent for long five years and has discontinued further payment after initial payment of Rs.42,000/-. In fact it is he who has ultimately purchased this property. Thus, it will not be preposterous to presume that the unpaid rent would have gone into consideration while fixing the saleable value of the property and there could be an arrangement. It is also further noticeable that at the end of 5th year from the date of original agreement the rent would have been enhanced to Rs.6,000/- in a month and logically that should have been taken even while computing the value of the property as per rent capitalization method. 4.2.19 Therefore, even as per rent capitalization method the following would be the value of the property: (a) Rent @ Rs. 6,000/- p.m. x 12x12.5(factor)=Rs.9,00,000/- (b) Added to this, the balance rent payable for five years: Rs. 5,000 x 12 x 5= Rs.3,00,000/- less paid Rs. 42,000/- = Rs. 2,58,000/-, (c) Total: (a+b)= Rs.11,58,000/-. 4.2.20 Thus, it is quite apparent that even going by this simple calculation, the value imputed to be the sale consideration at Rs. 10,38,500/- is low by any standard. Even as per the prescribed rule for valuation of a commercial
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building, the prevailing market rate in the locality could be adopted to compute the gross maintainable rent. But as has been stated before, there is no comparable rental value of any nearby property available on record. 4.2.21 In the above premises, it is thus to observe that one has to arrive at a reasonable valuation for the property and the following figures may be kept in mind. The circle rate of the property is Rs. 38.5 lakh the AVO has valued it at Rs. 28.5 lakh and the value as per rent capitalization method comes to Rs. 11.58 lakh. Since none of the methods provide a realistic method in the case in hand which is unique itself, I would therefore, estimate the valuation to be at Rs. 20,00,000/- in the facts of the case. The same is directed to be substituted for the figure adopted by the AO.” 9. I have heard the rival contentions and perused the facts of the case. ITAT by its order dated 27.3.2015 had directed the Assessing Officer to decide the issue in accordance with the judgment in New India Construction Co. (supra). However, the authorities below did not follow the directions of the ITAT. Hence, the orders are vitiated. Reliance is placed on Bhopal Sugar Industries Ltd. vs. ITO (1960) 40 ITR 618 (SC). As regards Ratio of Amrit Banaspati Co. Ltd (supra), was not applicable. In this case [AY 1993-94], Amrit Banaspati had declared value of residential flat at Rs. 1,55,139/-. Amrit Banaspati had entered into agreement to sell the flat in 1995 for Rs. 10,26,00,000/-. The Assessing Officer taking the view that it is not practicable to value the flat as per Rule 3 to 7 of Schedule III made reference to DVO under Rule 20 read with Rule 8(a) of Schedule III. The Valuation Officer valued the flat at Rs.2,60,73,000/-. On these facts, Hon'ble Apex Court upheld the finding of the Assessing Officer that Rule 8(a) was applicable for it was not practicable to value the flat as per Rule 3 to 7. The facts of the present case are nowhere near the facts of the case of Amrit Banaspati. In Amrit Banaspati,
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value of flat was determined at Rs.2,60,73,000/- as against declared value of Rs.1,55,139/- i.e. more than 150 times, whereas, in the present case, the value of 65-B, Roop Nagar determined by the CIT(A) at Rs.20,00,000/- is not even double of the declared value of Rs.10,25,000/-. Further, the Assessing Officer did not make reference to DVO under Rule 20 read with Rule 8(a) of Schedule III. The cause of reference was the provisions of section 50C. Stamp valuation is fixed based on the premise what a willing purchaser would offer for a vacant property. It does not take into consideration attributes such as encumbrances of tenanted property. In such as a case, it cannot be said that it is impracticable to value the property as per Rule 3 to 7 of Schedule III. The reason that Rule 8(b) was attracted because difference between the un-built area and the specified area was more than 20% of the aggregate area is factually incorrect.
Total area of the property 566.84 sq. mtr Built up 335 sq. mtr Un-built area 231.84 sq mtr Specified area (60% of the aggregate area) 340.10 sq. mtr Difference between un-built and specified area 05.10 sq. mtr.
Therefore, Rule 8(b) of Schedule III was not applicable. CIT(A) taking enhanced rent of Rs. 6,000/- per month arrived at the value of 65-B, Roop Nagar at Rs. 11,58,000/-, as per rent capitalization method. Having determined the value as per rent capitalization method, there was no cause to disregard it.
In the circumstances of facts of the case, the AO is directed to fix up the value on the basis of rent capitalization method of Rs. 11,58,000/- and compute the gain accordingly. Thus the appeal of the assessee is partly allowed.
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In the result, appeal of the assessee in ITA No. 1841/Del/2017 is partly allowed.
Order pronounced in the open court on this day 05.10.2017.
Sd/- (B.P. JAIN) ACCOUNTANT MEMBER Dated: 05/10/2017 SH Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(Appeals) 5.DR: ITAT Asstt. Registrar, ITAT, New Delhi
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