ITO WD 3(2), KALYAN vs. JYOTI CONSTRUCTION CO., KALYAN

2 CO No.225/15 2. The revenue in its appeal is aggrieved for deletion of addition by the CIT(A) while computing long term capital gain whereas the assessee has filed cross objection in respect of part addition sustained by the CIT(A).

Rival contentions have been heard and record perused. Facts in brief are that the assessee is a firm engaged in the business of Builders & Developers. During the year under consideration, the assessee sold a property at CTS. No. 2883, 2884 & 2885 at Survey No. 144A, Hissa No. 4, 5 & 6 admeasuring 4188 sq. mts. During the course of assessment proceedings, the assessee worked out Long Term Capital Gains (LTCGs) on the sale of this property and filed a computation of the same before the A.O. showing the LTC Loss of Rs.1,38,585/-. The property was sold for an amount of Rs.45,00,000/- on 29.07.2008. The value of the property for the purpose of stamp duty was fixed at Rs.2,09,40,000/-. The assessee worked out the cost of acquisition of the property as on 1.4.1981 at Rs.825/- per sq.mt. on the basis of a valuation report prepared by a Government Approved Valuer. The long term capital loss worked out by the assessee was as under :- Sale consideration of the property Rs. 2,09,40,000/- Less: Fair market value of the property as on 1.4.1981 as determined by the approved valuer Rs. 36,12,750/- Indexed cost of acquisition = 36,12,750 X 582 = Rs.2,10,78,585/- 100 Long Term Capital Loss Rs.1,38,585/- The A.O. did not accept the FMV of the property as on 1.04.1981 as determined by the approved valuer at Rs. 825/- per sq.mt. and observed 3 CO No.225/15 that the value determined by the approved valuer was on a higher side. the A.O. asked the assessee to explain why the valuation adopted by the approved valuer should not be rejected and the valuation of the property should be adopted at Rs. 6/- per sq.mt. as on 1.4.1981, as done by the Joint District Registrar, Thane. The A.O. did not accept the appellant's explanation and referred the valuation of the property to the Departmental Valuation Officer, Thane on 23.12.2011 for ascertaining the valuation of the property as on 1.4.1981. The A.O. did not accept the valuation report of the approved valuer on the ground that though the land under consideration was reserved for recreation space, primary school, community centre as well as housing for dishoused, in the valuation report, the valuer had reported the land to be open and freehold without any encumbrance. Further, the registered valuer had not reported any comparable sale instances of the nearby land as on 1.4.1981. With regard to the sale instances quoted by the assessee, the AO observed that the sale instances quoted by the assessee were for commercial-cum- residential properties and therefore the rates were not comparable with the assessee's case. On the basis of the Purchase Agreement of the land by the assessee in the year 1970 and 1972, the purchase cost of the land was adopted at Rs.60,000/- and 20% escalation was provided from the year 1972 to 1981 and the value of the land was arrived at Rs.115/- per sq.mt.

After making these observations, the AO worked out the long term capital gain from the sale of the property as under :-

The A.O. also referred the property for valuation to DVO u/s. 55A of the IT.Act. The DVO submitted his report after completion of the assessment i.e. vide his report dated 31.05.2012 determining the value of the property at Rs.4,65,000/- as on 01.04.1981 i.e. Rs. 106/- per sq.mt. The appellant has objected to this reference to the DVO on the ground that the A.O. could have referred the property to DVO only if the appellant had claimed the value of the property at a lesser amount than its FMV whereas in the appellant's case, the value shown by him was higher than the FMV. Therefore, according to the appellant a reference u/s. 55A(a) of the LT. Act could not have been made to the D.VO. In this regard, it is seen that as per clause (c) of section 55A, the A.O. can refer a property for valuation to the DVO, where he is of the opinion that it was necessary to do so, having regard to the nature of the asset and the relevant circumstances. As the value determined by the approved valuer in his report was not based on any comparable sale instances in the 5 CO No.225/15 year 1981, the A.O. had no way of knowing the correct value of the land as on 0l.04.198l. Therefore, the A.O. was justified in referring the property for valuation to the DVO. Various case laws relied upon by the appellant are in respect of clause (a) & (b) of section 55A of the IT. Act and are not applicable to the facts of the case under consideration as it has been held that the reference by the A.O. to the DVO has been made on clause (c) of section 55A of the IT Act.

However, it is seen that the report of the DVO also cannot be relied upon because of various objections raised by the appellant as reproduced above. The DVO in his report, while stating the method of valuation, .has observed that the rates applied by him were derived from the State Government Ready Reckoner rates as on 1989 after taking into consideration various factors like physical location of the land. However, no working has been attached by the DVO with the report to show how he had arrived at the FMV and what was the basis of the reverse working of the valuation from 1989 to 1981. With regard to the sale instances quoted by the appellant, the only reason why the DVO has not taken these instances into consideration is that the sale instances were in respect of constructed properties i.e. the properties comprised of both land and building and in the absence of details of built up area, the DVO was not in a position to find out the value of the land. (Moreover, while arriving at valuation of the property, the DVO, in his report at point No.6.1. mentioned that he had given due consideration for various factors influencing the value of the property regarding its physical, legal, social and economical aspects, as shown in Annexure-A. However, on a perusal of Annexure A it is seen that no such factors are listed to throw light as to what had influenced the DVO's mind while arriving at the valuation of the property. At point No. 9.1. the DVO has simply stated that he was determining the FMV of the property as on 0l.04.1981 at Rs. 4,65,000/- by applying the rate of Rs. 106/- per sq.mt. However, no basis has been pointed out by the DVO for adopting the rate of Rs.106/- per sq.mt. For all these reasons, the report of the DVO also cannot be relied upon.

Thus, the reports of both the DVO as well as approved valuer of the appellant, cannot be relied upon for the reasons discussed above. The only basis therefore left was the comparison of the comparable instances of sale. The instances listed by the AO in the assessment order are in respect of land situated at a distance of more than 5 kms., as has been pointed out by the appellant from a copy of the map placed at Annexure-13 page no. 111 of the paper book, whereas the sale instances pointed out by the appellant are within ½ km. of the land sold by the appellant. Even, the DVO in his report has not made any adverse observation with regard to these instances pointed out by the appellant. The only reason, the DVO had not taken into account these sale instances, was that these instances were in respect of constructed buildings and in the 6 CO No.225/15 absence of the details of built up area, the DVO was not in a position to find the value of the land. It is a known fact that the value of any property is primarily and to a large extent on account of value of land, whereas the cost of construction remains almost the same irrespective of where the land is situated. In the appellant's case, the land was situated very near to Railway Station being at a walkable distance from Kalyan Railway station, situated in a busy commercial-cum-residential locality as stated by the appellant and as has also been confirmed by the DVO in his report at point no.3.3 „Specifications‟. The three sale instances pointed out by the appellant in his submissions are as under - CS No. Survey Total FMV as Actual sale Distance No. Area in on01.04.1981 rate in case from Sq.Mtrs. per sq.mt.in of sale appellant‟s case of instances property appellant relied upon 2883 to 144 Rs.825/- - - 2885 3269/& 9 253C 80.44 -- Rs.497/- ½ km. 2895 140/3 231 -- Rs.1330/- ½ km. 3329 260 916.66 -- Rs.1278/- ½ km.

The weighted average value of per sq.mt. of the constructed property from the above mentioned sale instances works out at Rs. 1237.3 per sq.mt. Even, if 40% of this value is held to be in respect of building / construction (though as already observed above the value of a property mainly and to a large extent is on account of the value of the land, still the average value of land as per these instances will be Rs. 742.38 per sq.mt. As these instances are located very near to the appellant's land i.e. within ½ km, the average rate of land as worked out from these sale instances is applied to the appellant's land and it is therefore held that the Fair Market Value of the land as on 01.04.1981 was Rs. 740 per sq.mt. Based on this valuation, the Long term capital gains resulting to the appellant from the sale of property is worked out as under - Sale consideration Rs. 2,09,40,000/- Value of property as on 01.04.1981 740 X 4390 Rs. 32,48,600/- Applying Indexation 32,48,600/- X 582 = Rs.1,89,06,852/- 100 Long term capital gain Rs. 20,33,148/- Therefore, the addition on account of LTCGs is restricted to Rs. 20,33,148/-. The AO is directed accordingly.”

It was argued by ld. AR that issue with regard to making reference to the valuation officer is covered by the decision of jurisdictional High Court in the case of Puja prints, 360 ITR 697, wherein the Hon’ble High Court held that reference u/s.55A(a) could be made to the DVO only when the value adopted by the assessee was less than the fair market value. As per the Hon’ble High Court when value of property adopted by the assessee was much more than fair market value even as determined by the DVO, invocation of Section 55A(a) was not justified. The court further held that CBDT Circular dated 25-11-1972 has no application as the understanding of the statutory provisions by the revenue as found in the circular issued by the CBDT is not binding upon the assessee and it is open to an assessee to contend to the contrary. Reliance was also placed on the decision of coordinate bench in the case of Mukesh Bhawarlal Sharma, ITA No.1470/Mum/2012, dated 19-2-2014, wherein it was held that reference to the DVO can be made only when the value adopted by the assessee is less than the fair market value. Since the fair market value was more than as compared to the value adopted by the assessee, it was held that reference to made to the DVO was not sustainable. Reliance was also placed by ld. AR on the decision of Hon’ble Gujarat High Court in the case of Hiaben Jayantilal Shah, 310 8 CO No.225/15 ITR 31. Reliance was also placed on the decision of ITAT Delhi Bench in the case of Urmila Bawa, 11 SOT 661.

On the other hand, ld AR relied on the order of AO and contended that CIT(A) had reduced the addition without any cogent reason.

We have considered rival contentions, carefully gone through the orders of the authorities below and found from the record that assessee is a builder and developer. The land sold during the year was accepted by the AO as investment and not as stock-in-trade. Accordingly, assessee was directed to file computation of long term capital gain on the sale of property. The assessee worked out long germ capital gain by adopting cost of acquisition of property as on 1-4-1981 at Rs.825/- per sq.mtr. on the valuation of report prepared by the Government approved valuer. However, the AO did not agree with the valuation so offered by the assessee and the AO made a reference to the valuation officer. Finally the AO computed capital gain by adopting Rs.6/- per sq.ft. as on 1-4-1981 as done by the Joint District Registrar, Thane. The AO observed that the registered valuer had not reported any comparable sale instances of the nearby land as on 1-4-1981. By the impugned order the CIT(A) reworked out the long term capital gain by observing that the land was situated very near to the railway station even at a walkable distance. The CIT(A) observed that valuation made by the department valuation officer cannot be relied upon because of the various objection raised by the assessee were not considered by him. It was observed by the CIT(A) that DVO has not given any working while applying the rates from State Government 9 CO No.225/15 Ready Reckoner. It was also observed that DVO has not given any working to show how he had arrived at fair market value and what was the basis of the reverse working of the valuation from 1989 to 1981. The CIT(A) further found that the DVO has not taken sale instances pointed out by the assessee and registered valuer in his report. It was observed that the value of any property is primarily and to a large extent on account of value of land, whereas the cost of construction remains almost the same irrespective of where the land is situated. After taking into account all the facts and circumstances of the case as well as sale instances quoted and the allocation of land, the CIT(A) arrived at valuation of Rs.740/- per sq.mtr., after applying indexation the long term capital gain was worked out at Rs.20,33,148/-.

The issue with regard to making a reference to the DVO for ascertaining value of property as on 1-4-1984 is covered by the decision of Hon’ble Bombay High Court in the case of Puja Prints, 224 Taxman 22, wherein the Hon’ble High Court held that reference can be made to the DVO only if value declared by the assessee is in the opinion of AO is less than its fair market value. In the instant case before us, apparently the value disclosed by the assessee as on 1-4-1981 is much more than the fair market value, therefore, reference to the valuation officer was not correct. The ITAT Mumbai Bench in the case of Mukesh Bhawarlal Sharma, ITA No.1470/Mum/2012, order dated 19-2-2014, after following the decision of Hon’ble jurisdictional High Court in the case of Puja Prints(supra) held that reference to the DVO can be made only when