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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI JOGINDER SINGH & SHRI RAMIT KOCHAR
आदेश / O R D E R
PER RAMIT KOCHAR, ACCOUNTANT MEMBER :
These two appeals being cross appeals, filed by the assessee company and the Revenue are directed against the order dated 26-05-2009 passed by the Commissioner of Income Tax(Appeals) -VI, Mumbai (Hereinafter called “the CIT(A)”), for the assessment year 2005-06.
2. Ground No. 1 to 1.5 of the assessee company appeal relates to the sustenance of disallowance of expenses of Rs. 42,02,922/- made by the assessing officer (Hereinafter called “the AO”) u/s 14A of the Income Tax Act, 1961(Hereinafter called “the Act”) read with Rule 8D of Income Tax Rules, 1962 instead of disallowance of Rs.4,65,332/- made suo-moto by the assessee company.
3. The assessee company case was selected for scrutiny by the Revenue for framing assessment u/s 143(3) read with Section 143(2) of the Act. The assessee company made investments in stocks and shares and mutual funds. As per the AO , Dividend income and long term capital gain from these investments is exempt from income tax . The assessee company earned Dividend of Rs.2,32,66,616/- from the investments which was claimed exempt from Income Tax . As per the AO the direct and indirect expense incurred and attributable to such investments are to be disallowed. The assessee company was asked by the AO to quantify such disallowance in accordance with CBDT circular . The assessee company submitted that the CBDT circular is not applicable to the assessment year under consideration . The assessee company submitted computation of expenses attributable to investment activities as per CBDT circular. The amount of expenses quantified by the assessee company amounting to Rs.42,02,922/- were ITA 4441/M/2009 & 4461/M/2009 3 disallowed u/s 14A of the Act by the AO. On appeal before the CIT(A) against the orders of assessment dated 22.08.2008 passed by the AO u/s 143(3) of the Act read with Section 142(2A) of the Act , the assessee company was asked by the CIT(A) that why the disallowance u/s 14A be not upheld considering that the sub-section (2) and (3) to Section 14A of the Act read with Rule 8D are retrospective . The assessee company submitted that the Subsection (2) and (3) to Section 14A of the Act are not retrospective by relying on following decisions :
a. Wimco Seedlings Limited v. DCIT 107 ITD 267(Del.)(TM) b. TCI Finance Limited v. ACIT (2008-TIOL-213-ITAT-Hyd.) c) Impulse (India) Private Limited v. ACIT (2008) 22 SOT 368(Del.)
The CIT(A) following decision in Daga Capital Management Private Limited reported in 117 ITD 169(Del.)(SB) held that provisions of sub section (2) and (3) of Section14A of the Act read with Rule 8D of Income Tax Rules, 1962 are retrospective.
On merits, the assessee company submitted that the as per Section 14A(2) of the Act resort can be made by AO to Rule 8D only if the AO is not satisfied having regards to the accounts of the assessee company about the correctness of the claim of the assessee company. The assessee company submitted that no investment has been made out of borrowed funds. The assessee company submitted that The Tribunal in the assessee’s own case for assessment year 2001-02 and 2002-03 has upheld the contentions of the assessee company that investment were not made of the borrowed funds. It was also submitted that for assessment year 2004-05, the assessee suo-moto disallowed administrative expenses @2% of dividend income which was ITA 4441/M/2009 & 4461/M/2009 4 increased by the AO in the assessment order to 5% of dividend income while the CIT(A) reduced the disallowance to 2% of dividend income which was accepted by Revenue and no appeal has been filed before the Tribunal. The assessee company submitted that for the assessment year 2005-06, it has received dividend of Rs.2,32,66,616/- from the investment made in Mutual Funds units and the said dividend income is claimed exempt . The assessee company has suo moto disallowed 2% of dividend income and disallowance comes to Rs.4,65,332/- which was made in return of income filed with Revenue u/s 14A of the Act for administrative expenses. The assessee company submitted that the actual administrative expenses being even lower than this amount for which calculation were submitted which are reproduced by the CIT(A) in page 29-31 of the CIT(A) order and which as the assessee company comes to Rs.77,955/- towards administrative expenses while for interest the assessee company submitted that it has incurred interest expenditure of Rs.9.05 lacs on the cash credit facilities which facilities are utilized for meeting working capital requirements and hence no allocation of such interest expenses towards disallowance u/s 14A of the Act can be made. The CIT(A) rejected the contentions of the assessee company and held that both borrowed and own funds are utilized by the assessee company for making investments which is made out of common pool of funds and the AO is justified in making disallowance under Rule 8D(1) of Income Tax Rules,1962 read with Section 14A of the Act as rule 8D(1) of Income Tax Rules, 1962 is retrospective as per decision in the case of Daga Capital Management (supra).
4.Aggrieved by the orders of the CIT(A), the assessee company is in appeal before the Tribunal.
5. Before us, the assessee company submitted that the issue relating to the applicability of Rule 8D of Income Tax Rules, 1962 has been decided by ITA 4441/M/2009 & 4461/M/2009 5 the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. DCIT (2010) 328 ITR 81 (Bom.) wherein it was held by Hon’ble Bombay High Court that Rule 8D of Income Tax Rules, 1962 is applicable only prospectively i.e. from assessment year 2008-09. As held by the Hon’ble jurisdictional High Court, the disallowance u/s 14A of the Act for the years prior to assessment year 2008-09 has to be made on reasonable basis and that too if the AO is not satisfied with the correctness of the working of expenditure relatable to exempt income given by the assessee company as provided u/s 14A(2) of the Act. In the case under consideration, the relevant assessment year is 2005-06 and rule 8D of Income Tax Rules, 1962 is not applicable while the AO has made disallowance of expenses of Rs.42,02,922/- invoking Rule 8D of Income Tax Rules, 1962 read with Section 14A of the Act.
6. The ld. D.R., on the other hand, supported the orders of authorities below.
7. We have heard the arguments of both the sides and also perused the relevant material available on record. We find that the Hon’ble jurisdictional High Court in the case of Godrej and Boyce Mfg. Co. Ltd. (supra) held that Rule 8D of Income Tax Rules, 1962 is applicable only prospectively i.e. from assessment year 2008-09, hence, disallowance u/s 14A of the Act for the years prior to assessment year 2008-09 has to be made on reasonable basis once the AO having regards to the accounts of the assessee is not satisfied with the correctness of the claim of the assesssee company. We, therefore, restore this issue to the file of the A.O. with a direction to re-compute the disallowance to be made u/s 14A of the Act of reasonable amount as per directions of Hon’ble Bombay High Court in Godrej and Boyce Manufacturing Company Limited(supra). As pointed out by the assessee company, the assessee company has already made disallowance of its own of an amount of Rs. 4,65,332/- being disallowance @2% of dividend income of ITA 4441/M/2009 & 4461/M/2009 6 Rs.2,32,66,616/- received by the assessee company which basis of disallowance has been accepted by the Revenue in the preceding assessment years. The A.O. is accordingly directed to consider this aspect also while computing the reasonable disallowance to be made u/s 14A of the Act. Ground No. 1 to 1.5 is accordingly treated as partly allowed.
Ground No. 2 relates to non adjudication of ground no 12 to 14 raised before the CIT(A) in the memo of appeal filed before the CIT(A), by the CIT(A) in the appellate order dated 26.05.2009 . It is stated before us by the Ld. Counsel of the assessee company that the above ground has become infructous as the CIT(A) has already passed orders dated 30.03.2010 u/s 154 of the Act by the CIT(A) amending the appellate order dated 26.05.2009. The assessee company submitted that its grievance is duly redressed by the afore-stated orders dated 30.03.2010 passed u/s 154 of the Act by the CIT(A) and this ground may be dismissed as infructous. The Ld. DR relied upon the orders of the authorities below. We have considered the rival contentions and perused the material on record and we hold that the ground no 2 has become infructous as per statement of the Ld. Counsel of the assessee company as the CIT(A) has already granted relief to the assessee company vide orders dated 30.03.2010 u/s 154 of the Act by the CIT(A) amending the appellate order dated 26.05.2009 and hence this ground is dismissed as infructous. We order accordingly.
Ground No. 3 relates to the upholding of disallowance of Rs. 78,700/- incurred by the assessee company treating the same as capital expenditure as against revenue expenditure claimed by the assessee company
The A.O. observed that the assessee company has claimed revenue expenditure to the tune of Rs. 11,57,159/- in the return of income filed with the Revenue whereas the same are capital expenditure in nature. The details ITA 4441/M/2009 & 4461/M/2009 7 of such expenditure claimed by the assessee company have been given by the A.O. in his assessment order dated 22.08.2008 u/s 143(3) read with Section 142(2A) of the Act on page 17 to 18. The A.O. disallowed the said expenditure by treating the same as capital expenditure after allowing depreciation which came to Rs. 3,57,948/-. On appeal before the CIT(A) against the additions made by the AO in the assessment order dated 22.08.2008, the assessee company explained that the major addition made by the A.O. are on account of purchase/ up-gradation of the computer software and relied upon decision of Madras High Court in CIT v. Southern Roadways Limited 220 CTR 298(Mad. HC) . The CIT(A) held as far purchase of packed off the shelf software i.e. Adobe , Office 2003 and Office 2004 and upgradation of software (i.e. oracle 8i software ) and RAM, the issue stand covered in favour of the assessee company by Hon’ble Delhi High Court in the case of GE Capital Services Limited 164 Taxmann 46(Del.) and with respect to expenditure incurred on the upgradation of software , the issue is decided in favour of the assessee company by decision of Hon’ble Delhi High Court in the case of K & Co. reported in 181 CTR 378(Del.) and Delhi Special Bench in the case of Amway India Enterprises reported in 111 ITD 112(Del.) ( SB).While the CIT(A) held that Rs. 78,700/- are capital expenditure being spent on batteries and replacement of monitors and not allowable as Revenue expenditure as claimed by the assessee company in the return of income filed with the Revenue.
11.Aggrieved by the decision of the CIT(A) with regard to holding of Rs.78,700/- being spent on monitors and batteries as capital expenditure, the assessee company is in appeal before us.
The assessee company submitted that the CIT(A) was not correct in treating the amount of Rs. 78,700/-as capital expenditure.
ITA 4441/M/2009 & 4461/M/2009 8
The ld. D.R., on the other hand, supported the order of the CIT(A).
We have heard the rival parties and perused the material on record. The assessee company has not been able to bring on record any further evidence/documents or explanation before us to substantiate its contentions that these expenditure w.r.t. purchase of monitors and batteries aggregating to Rs.78,700/-are revenue in nature to controvert the findings of the CIT(A). In our opinion, these expenditure of Rs.78,700/- are capital expenditure incurred by the assessee company and has rightly been disallowed by the A.O and sustained by the CIT(A). There is no infirmity in the order of the CIT(A) and the findings of the CIT(A) does not require any interference from our side. This ground of appeal is accordingly dismissed.
15. Ground No. 4 relates to ad-hoc disallowance of Rs. 23,22,920/- i.e. 5% out of provision for expenses of Rs.4,64,58,410/- . As a practice, the assessee company creates ad-hoc provisions for expenses at the year end which are reversed on the first day of next financial year. The assessee company was asked to explain the details of the provisions of expenses of Rs.4,64,58,410/- created on 31/03/2005 and actual expenditure incurred by the assessee company against the afore-stated provisions. The assessee company has not deducted TDS on these provisions as in the opinion of the assessee company TDS is not applicable to provisions because payees are not identified and amount are not ascertained with certainty. The assessee company relied upon CBDT notification no SO/69/E dated 25/01/1996 and submitted that the provisions is to be made for all known liabilities and losses. The AO held that the practice of the assessee to create the provisions on the last date of financial year and reverse the same on next day , and then debit the actual expenses in the subsequent year distorts the correct income assessable for the financial year and this practice is defective and is not in accordance with the mercantile system of accounting. Since the assessee company was not ITA 4441/M/2009 & 4461/M/2009 9 able to furnish the complete information , the AO disallowed 5% of the provision for the expenses of Rs.4,64,58,410/ debited in the books of accounts on 31st March 2005 i.e. Rs.23,22,920/- while framing the assessment order dated 22.08.2008 u/s 143(3) of the Act read with Section 142(2A) of the Act . Aggrieved by the assessment order passed by the AO, the assessee company filed first appeal before the CIT(A) and submitted that the assessee company being a Company and as per Companies Act , the accounts are to be maintained as per mercantile system of accounting and hence the provisions are made for the expenses incurred by the assessee company in the financial year for which invoices are not received before the date of signing of annual accounts and this practice is consistently followed by the assessee company and no disallowance is made in the earlier years. Since the assessee company failed to substantiate the basis on which these estimated provisions were made and the addition was confirmed by the CIT(A).
Aggrieved the assessee company is in appeal before us and the assessee company reiterated its submissions as advanced before the authorities below while the ld DR relied upon the orders of the authorities below.
We have considered the rival contention and perused the material on record. The assessee company has made provisions of expenses during the year of Rs.4,64,58,410/- which are reversed by the assessee company on the first day of the next year. The assessee company has not submitted details and an adhoc disallowance of 5% of Rs.4,64,58,410/- is made by the AO and confirmed by the CIT(A). No details about the basis of claiming such expenses are also submitted. In our opinion , the interest of justice will be best served if the matter is restored to the file of AO and the assessee company be directed to produce necessary evidences to substantiate its contentions. The assessee company counsel has stated before us that similar addition in the made in the subsequent year i.e. assessment year 2006-07 which has led to double ITA 4441/M/2009 & 4461/M/2009 10 addition. The AO shall consider the claim of the assessee company for both the years i.e. assessment year 2005-06 and 2006-07 with respect to the assessment records and books of accounts maintained by the assessee company to ensure that no prejudice is caused to the assessee company due to double addition of the same amount leading to double taxation and at the same time the AO shall also protect the interest of revenue after verifying the claim of Rs.4,64,58,410/- towards provision for expenses debited to the Profit and Loss Account during the assessment year 2005-06 and claimed as revenue expenditure vis-à-vis the actual expenditure incurred by the assessee company against this provision for expenses of Rs.4,64,58,410/-. The assessee company shall be given opportunity of hearing in accordance with the principles of natural justice and the assessee company shall be allowed to produce relevant evidence in its defense to justify and substantiate its claim of provision for expenses of Rs.4,64,58,410/- debited to the Profit and Loss Account and claimed as revenue expenditure in the return of income filed with Revenue. This ground of the assessee is accordingly allowed for statistical purposes.
In the result, the appeal filed by the assessee company is partly allowed for statistical purposes.
Revenue Appeal -ITA No 4461/Mum/2009
The Revenue is aggrieved by the orders of the CIT(A) dated 26th May 2009 and has raised following grounds of appeal in the memo of appeal filed :
“1. “On the facts and in circumstances of the case, the Ld. CIT(A) failed to appreciate that the property was covered under table 17/121 of ready reckoner with valuation of land at Rs.26,28,36,812/- and the balance ITA 4441/M/2009 & 4461/M/2009 11 consideration of Rs.35,46,02,813/- and rest amount for building of Rs.25,60,375/- towards other accessories.”
2. “On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing the Assessing Officer to accept the valuation of land and building shown by the assessee in valuation report of the Registered Valuer disregarding Fair Market Value of land as on 01.04.1981 at Rs.1,38,15,664/- as per Ready Reckoner.”
3. “On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appreciate the formula of land cost plus method which was rightly used in para 9 of the assessment order.”
4. “The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing officer be restored.” ”
The assessee company sold its office building and land on which office building was constructed located at Prabhadevi, Mumbai for a gross composite aggregate consideration of Rs.62 crores whereby no bifurcations are mentioned separately in the sale agreement of said property dated 15th March 2005 w.r.t. the land , building and accessories namely lifts, AC’s installations etc. . The assessee company bifurcated the gross composite aggregate consideration of Rs.62 crores for computing Long Term and Short Term Capital Gain as under:
a) Land Rs.43.56 Crores b) Building Rs.18.18 Crores c) Accessories such as Lift, AC’s etc installed in the Building Rs. 0.26 Crores ITA 4441/M/2009 & 4461/M/2009 12
--------------------- Rs. 62.00 Crores ---------------------- The bifurcation of the gross composite aggregate consideration of Rs.62 crores received by the assessee company between land and building separately has been done by the assessee company on the basis of the valuation report dated 11/11/2004 issued by a government approved registered valuer , Dr. Roshan H. Namavati valuing the said property on 08th November 2004 using land residual technique method. The said registered valuer valued the land and building at total value of Rs.56,86,38,040/- whereby land value was considered at Rs.30,94,85,276/- while building value was considered at Rs.13,09,91,820/- and the builders profit at Rs.12,81,58,944/- using land residual technique method.
It was observed by the AO that in preparing the valuation report the afore- stated government appoved registered valuer has mentioned various factors in the report including the rate for 2004 as per stamp duty ready reckoner for Mumbai. It was observed by the AO that the ready reckoner rate adopted is for G ward subzone 17/121 on page 77 of ready reckoner which is Rs.71,000/- per square meter of commercial building for the year 2004. The government approved registered valuer also considered two other properties at their selling rate of Rs.7481 per sq. ft. and Rs.4329/- per square feet which were transferred/sold on May 2000 and December 2001 respectively in his valuation report dated 11th November 2004 whereas the property under consideration has been transferred on 15th March 2005. The AO also observed that details of locations of two properties used as reference by the registered valuer have not been mentioned so it cannot be said that both the references are from the same sub-zone of Mumbai and have the same valuations at least as per stamp duty ready reckoner so that they can be considered as comparable and used as references.
ITA 4441/M/2009 & 4461/M/2009 13 The AO rejected the references adopted by the valuer as being not appropriate and reliable due to following reasons: a) References are 4 to 5 years old. b) Reference properties are very small in size as compared to the property of the assessee. c) There are wide variations in the square feet rates of the two reference properties. d) The two reference properties cannot be compared to each other based on their square feet rates. e) It is not known that both the reference properties are also in the same sub-zone of BMC as the property of the assessee company sold during the assessment year. f) The valuer has not followed the method of valuation as mentioned in stamp duty ready reference reckoner 2004 and has not adopted the cost of construction and depreciation rates given therein. The ready reckoner has mentioned cost of construction at Rs. 6500/- per square meter whereas the valuer has adopted the cost of construction at Rs.16,953/- per square meters. g) The rate of depreciation for a 32 years old building should be taken at 40%.
ITA 4441/M/2009 & 4461/M/2009 14 h) The adjustment for carpet area and build up area does not appear to have been done as mentioned in the ready reckoner by the registered valuer.
The AO observed that the registered valuer has determined the value of land separately and valued the land at the rate of Rs.2666 per sq. feet and to it was added builder profit@20% and determine the final value at rate of Rs 3199 per square feet or Rs.34,436/- per square meters. The assessee company has apportioned the composite aggregate consideration of Rs.62 crores on the basis of value of land and building determined by the registered valuer in the valuation report.
The AO observed that the reference rate of two buildings adopted by the registered valuer are not appropriate and reliable references. Further , the value of land on the date of transfer determined by the valuer does not match with the value of land as given in the stamp duty ready reckoner for the year 2004 for plot of the assessee which in developed land in sub-zone 17/121 of 2004 stamp duty ready reckoner is Rs.24,400/- per square meter. The AO referred to Section 50C of the Act and stated that the full value of consideration for the land transferred can be determined on the basis of valuation of the land as per stamp valuation authority for the purposes of Section 48 of the Act to compute capital gain as per Act and in the instant case, the stamp duty rate of land is Rs 24,400/- per square meter in sub-zone 17/121 which can be adopted .Thus, the AO adopted the 2004 stamp duty ready reckoner rate of the fully developed land as the correct value of the land to determine the full value of consideration received by the assessee company for transfer of the land and hence the value of land computed after considering FSI of 2.35 used on the land computed value of land at Rs.26,28,36,812/- and balance consideration of Rs.35,46,02,813/- was adopted for consideration for building and rest Rs.25,60,375/- was ITA 4441/M/2009 & 4461/M/2009 15 considered for accessories like lift and AC’s .Thus, the AO used the building residual technique method to assign separate values to land and building while the assessee used the land residual technique method to assign separate value to land and building.
The AO further observed that to compute long term capital gains for transfer of land , value of land as on 01/04/1981 is required to be determined . The assessee company submitted valuation report from the same government approved registered valuer Dr. Roshan H. Namavati which determined the value of land at Rs.3,93,37,068/- as on 01/04/1981 for the purposes of capital gain. The AO observed that the registered valuer adopted reference of flat no 8B in building ASAVARI in a nearby locality which falls under sub- zone 17/118 of stamp duty ready reckoner which has lower valuation rate while the plot of the assessee company falls under sub-zone 17/121 as per stamp duty ready reckoner and hence in the opinion of the AO reference is not proper reference to determine the value of property as on 01/04/1981.
The AO also held that the valuer has not adopted the correct depreciation rates for the building as per rates provided in the ready reckoner. It was also held by AO that cost of construction in 1981 as provided in ready reckoner is Rs.80 per square feet whereas the valuer has adopted the cost of construction of Rs.250 per square feet. Thirdly, the AO held that value of office property in sub zone 3A(zone of the assessee company ) as per stamp duty ready reckoner for the year 1981 is Rs.880/- per sq. feet whereas the rate of residential premises in subzone 10 ( zone of ASAVARI ) is Rs.480 per square feet and the two properties are not comparable. The valuer has adopted at rate of Rs.550/- per square feet for ASAVARI property and multiplied by 1.5 and applied to the office property of the assessee as reference rate which is highly improper as per the AO.
ITA 4441/M/2009 & 4461/M/2009 16 The AO also referred to the ready reckoner published by Architect Publishing Corporation of India(APCI) for market value of property as on 01/04/1981 whereby it has held that the rates adopted by the Collector of Stamps , Mumbai appeared to be fairly reasonable and which can be adopted with suitable modifications for valuing the property in Mumbai as on 01/04/1981 for capital gain tax purposes. The rate of Rs.280 per square feet for the value of the land as on 01/04/1981 was adopted by the AO as per date available in the compilation of APCI and 1981 ready reckoner rate for zone 3A which contained the same description of location of property as per zone 17/121 of 2004 ready reckoner by which the total value of land transferred as on 01/04/1981 is Rs.1,38,15,664/-.
The assessee company submitted before the AO that the value of vacant land in the 1981 ready reckoner is not applicable to its case rather the value of the property along with land is applicable as the land was not vacant land as on 01/04/1981. The assessee company submitted that value of property as mentioned in the ready reckoner is Rs 1000/- psf whereas the valuer has adopted the rate of Rs 735/- psf. The AO observed that rate as per 1981 ready reckoner is Rs.880 psf for office premises and not Rs.1000 psf as mentioned by the assessee company and the rate of Rs.1000 psf is for shops and commercial area while in this instant case it is the sale of office and not a shop.
Thus, the AO due to following reasons held that the valuation report as submitted by the assessee is not acceptable: a) Reference to ASAVARI building is not applicable in this case. b) The assessee has not followed the method of valuation mentioned in the stamp duty ready reckoner for 01/04/1981.
ITA 4441/M/2009 & 4461/M/2009 17 c) The stamp duty ready reckoner provides the rate of developed land as on 01/04/1981 duly factored for FSI. d) The valuation method adopted by the valuer has considered the land area equal to constructed area. e) The rate mentioned by the asssessee in its 19/08/2008 letter is not correct.
The AO held that the stamp duty ready reckoner rates as on 01/04/1981 for the plot of the assessee company should be used for determination of the correct value of land as on 01/04/1981 and hence the AO determined the value of land as on 01/04/1981 at Rs.1,38,15,664/- as detailed above for the purposes of computation of long term capital gain.
Thus, the AO computed the long term capital gain on transfer of land and short term capital gain on transfer of building and accessories as under:
Item Type of Considerati Value as on Indexed Cost Cost of Capital Capital on allocated 1/04/1981/ = 480/100 transfer in Gains Gain (In Rs.) WDV (In Rs.) proportion (In Rs.) (in Rs.) to allocated considerati on (In Rs.) Land Long 262836812 13815664 66315187 4560623 191961003 Term Building Short 354602813 30604666 6152903 317845244 Term Lifts and Short 2560375 44426 2515949 AC’s Term ITA 4441/M/2009 & 4461/M/2009 18 consider ed in deprecia tion chart Total 62000000 10757952
Aggrieved by the orders of the AO, the assessee company filed first appeal with the CIT(A) . The assessee company submitted before the CIT(A) that the assessee company sold its Prabhadevi office on 15th March 2005 which consisted free hold land together with the office building at Prabhadevi for combined consolidated aggregate consideration of Rs.62 crores. The property was valued by a government approved registered valuer Dr Roshan H. Namavati as on 08th November 2004 vide report dated 11th November 2004 with an objective to bifurcate the sale consideration between the land and building to compute capital gains as per the Act. The Registered Valuer has valued the property as on 08th November 2004 as under:
Land Component Rs.30,94,85,276/- Building Rs.13,09,91,820/- Builder’s Profit Rs.12,81,58,944/- ------------------------- Total Rs.56,86,38,040/- -------------------------- The assessee company submitted that the basis for valuation by the registered valuer is the sale of two office properties in the vicinity (one admeasuring 1916 sq feet sold in May 2000 @ Rs7481 per square feet (psf) and another admeasuring 462 sq. feet in December 2001 @ Rs.4329 psf both located at Prabhadevi,Mumbai ) and the ready reckoner rate for office for the year 2004 for G Ward sub-zone 17/121 which was Rs.71000/- per square ITA 4441/M/2009 & 4461/M/2009 19 meter i.e. Rs 6596 psf. The value so arrived at by averaging the three rates was Rs 5520 psf after allowing quantity allowance of 10%. The apportionment of the fair market value was done by the said registered valuer as under :
Base Rate Rs.5520/- Less Builder Profit@20% Rs.1104/- Cost of Construction Rs.1750/- Rs.2854/- ------------ Value of Land Rs.2666/- psft Based on the above, the said registered valuer worked out the Fair Market value with depreciation in his valuation report dated 11.11.2004 valuing the property as on 08th November 2004 as under:
1. Land Component 116086 sqft area X Rs 2666 Rs.30,94,85,276/- 2. Construction: a)Building=116086X1750 Rs.20,31,50,500/- b)Accessories-depreciated cost Rs. 9,75,000/- ----------------------- Rs.20,41,26,000/- Less: Depreciation on main building = 116086X 630 Rs. 7,31,34,180/- ------------------------ Rs.13,09,91,820/- 3. Builders Profit @20% Rs.12,81,58,944/- ------------------------ Total Rs.56,86,38,040/- -------------------------- ITA 4441/M/2009 & 4461/M/2009 20 The sale consideration being Rs 62 crore, the assessee company submitted that the excess of Rs.5,13,63,960/- received as sale consideration by the assessee company over fair market value and the Builder profit of Rs.12,81,58,944/- was proportionately apportioned by the assessee company to land and building in the ratio of value of land and building determined by the registered valuer and the value arrived is as under:
Land Rs. 43,56,21,000/- Building Rs.18,18,18,625/- Lifts Rs. 16,86,314/- AC Installation Rs. 8,74,061/- ----------------------- Total Rs.62,00,00,000/- ------------------------ The assessee company submitted that for purpose of computation of capital gains chargeable to tax u/s 45 of the Act , the assessee company also got the said property valued as on 1st April 1981 from the same government approved registered valuer Dr. Roshan H Namavati vide valuation report dated 11th November 2004 as under:
Land Component Rs.3,93,37,068/- Building Rs.2,62,75,430/- Builder’s Profit Rs.1,70,64,642/- ------------------------- Total Rs.8,62,77,140/- -------------------------- The assessee company submitted that the basis for valuation by the registered valuer is the sale of two properties in the vicinity (one sold in ITA 4441/M/2009 & 4461/M/2009 21 December 1982 @ Rs1250 psf (after adjusting for cut back for time difference the rate adopted was Rs 922 psf ) and another in 1981 @ Rs.550 psf and multiplied with 1.5 times to arrive at rate for commercial premises which comes to Rs.825 psf both located at Veer Savarkar Marg, Mahim and the ready reckoner rate for commercial premises for the year 1981 which was Rs.720/- per square feet . The value so arrived at by averaging the three rates was Rs 735/- psf after allowing quantity allowance of 10%. The apportionment of the fair market value was done by the registered valuer as under :
Base Rate Rs.735/- psf Less Builder Profit@20% Rs.147/- Cost of Construction Rs.250/- Rs.397/- psf ------------ Value of Land Rs.338/- psft Based on the above, the registered valuer worked out the Fair Market value with depreciation as under:
1. Land Component 116086 sqft area X Rs 338 Rs.3,93,37,068/- 2. Construction: a)Building=116086X250 Rs.2,90,21,500/- b)Accessories-depreciated cost Rs. 1,56,080/- ----------------------- Rs.2,91,77,580/- Less: Depreciation on main building = 116086X 25 Rs. 29,02,150/- ------------------------ Rs.2,62,75,430/- ITA 4441/M/2009 & 4461/M/2009 22
3. Builders Profit @20% Rs.1,70,64,642/- ------------------------ Total Rs.8,26,77,140/- ------------------------- The assessee company allocated the builder profit proportionately to the value of the land which then work out the value of land as on 01/04/1981 at Rs.4,95,67,929/-.
The AO rejected both the valuation report given by the registered valuer for the reasons cited in the assessment orders which are detailed in the preceding para’s and are not repeated for the sake of brevity. The assessee company submitted before the CIT(A) that the report of the registered valuer is rejected without making statutory reference to the departmental valuation officer(DVO) and instead the valuations are estimated by the AO himself who is not a technical expert and the bifurcation of the land and building were disturbed by the AO. The assessee company submitted that Section 55A of the Act stipulate that it is mandatory on the part of the AO to refer to DVO for valuation of the property if the AO does not agree with the report of registered valuer submitted by the taxpayer . The assessee company submitted that in such a situation if no reference is made to DVO , then the valuation report by registered valuer submitted by the assessee be accepted. The assesssee company relied upon the decision of Hon’ble Himachal Pradesh High Court in Raghunath Singh Thakur reported in 304 ITR 268(HP). The assessee company submitted that the registered valuer Dr. Roshan H. Namavati being one of the most renowned registered valuer in Mumbai had been commended by Hon’ble Supreme Court in the case of Sumangalam Coop. Housing Society Limited 2007Jt(1) SC 211.
ITA 4441/M/2009 & 4461/M/2009 23 The assessee company submitted before the CIT(A) that the assessee company has adopted land residual technique method for the purpose of valuing the property while the AO has adopted the building residual technique method. The assessee company submitted that the bulk of the payments are for land and small component was meant for building, the method adopted by the assessee company being land residual technique be accepted which gives correct value of land while the method adopted by the AO gives absurd results.The assessee company submitted that as per valuation method of building residual technique adopted by the AO, the value of building comes to Rs.35,46,02,813/- with the built up area of 116086.52 sft i.e. Rs 3050 psft while ready reckoner rate of RCC Cost of building is Rs.6500 per square meters which comes to Rs. 603.86 psf which is absurd. The assessee company referred to book of author Kahn – Cases – Schirmmel 1963 Ed. P 149 whereby it is written that the building residual technique can be adopted when :
“ The building residual technique is a means of determining building values under the following conditions:
1. 1. The value of the land can readily be estimated by sales or by use of the hypothetical – building land residual technique.
2. The building is an improper improvement.
3. The building is in late or middle life, with obvious deficiencies due to deterioration or obsolescence.”
The assessee company submitted that its case does not fall within above parameters as laid down by the author as above to be covered under building residual technique method as adopted by the AO .
The assessee company also submitted before the CIT(A) that the reliance placed by the AO on the book titled “Indian Valuers Directory and Reference ITA 4441/M/2009 & 4461/M/2009 24 book incorporating market value of property in Mumbai as on 01st April 1981” by Mr Santosh Kumar & Mr. Sunit Gupta is misconceived as the AO has not appreciated the same :
“ Above rates are adopted for valuing the property for collecting the stamp duty amount by the state government. Hence in our opinion the same values could be reasonably relied upon with suitable modifications for valuing the property in Mumbai as on 01/04/1981 for capital gain tax purpose.
In order to work out capital gain tax, on sale of property acquired before 01/04/1981 , assessee has an option to take the purchase value of that immovable property or value as on 01/04/1981. This value is accepted as acquisition cost and indexing is allowed on this value for working out capital gain tax.
If the assessee opts for the purchase value, there is no problem, but in case he prefers the valuation as on 01/04/1981 , which is normally the case, then he has to get a report from the Government Registered Valuer. On the basis of Government Registered Valuer’s report he works out the tax amount and pays the capital gains tax. Registered valuers can adopt above values subject to valuation factors mentioned in this book along with their judgment and observations to arrive at just and fair value for capital gain purpose.
The rate quoted will differ from structure to structure depending upon the services available,location and amenities provided. Hence from the judgment valuers should accordingly modify the rates while preparing valuation report. The rates should not be considered final and binding which may vary depending on various factors. However these rates give fairly correct idea about the rate prevailing in 1981 for property assuming full payment is made in white. As such these rates are adopted by the Collector of stamps , Mumbai ITA 4441/M/2009 & 4461/M/2009 25 and sub-registrar of Assurance, Mumbai for valuation purpose for all documents executed during the year 1981 for determining the stamp duty. Accordingly, Income Tax Department should have no objection if the valuation report is prepared on the basis of rates and guidelines illustrated in this chapter.”(emphasis supplied)
Thus, the assessee company submitted that :
(a) That the ld author submitted that fair market value of the property to be computed as on 01/04/1981 based on the Government registered valuer report as on 01/04/1981 which has been done by the assessee company.
(b) The assessee company submitted that the ld author has observed that the rates given in the valuation book could be reasonably relied with suitable modification as per judgment of registered valuer.
(c) That the rates given in the valuation book should not be considered as final and binding.
(d) That the valuer has considered two sales instances for computing FMV of the property as rates in the valuation book are not final and binding and these comparables are not doubted by the AO.
(e) That the ld author has stated that the income tax department should have no objection if the valuation report is prepared based on rates given in the valuation book and that the valuation report is prepared on the basis of the rates given in the valuation book.
The assessee company also submitted that the AO erred in adopting the rate of Rs.280 psf of ‘vacant land’ for computing the FMV as on 01/04/1981 from ITA 4441/M/2009 & 4461/M/2009 26 ready reckoner rates published by Government for zone 3-A which is not applicable to the property transferred by the assessee company as the property transferred is land and building both and not vacant plot of land. The assessee company also submitted before the authorities below that NOC from the office of the Additional Collector & CA, ULC, Brihanmumbai wherein the ULC had declared that the entire land pertaining to the property is “non vacant” land .
The assessee company also submitted that the AO erred while valuing the property in 2004 as the AO has adopted the building residual technique and for valuing the same property in 1981, the AO has adopted the value of land by taking ready reckoner rates of 1981 whereby the rate adopted is Rs 280 psf while the same also is based on FSI of 1.33 while the FSI is 2.35 and the rate will then also comes to Rs.494.73 psf. The assessee company submitted that the correct basis of valuation should be land residual technique method for assigning value to land and building seperately.
The assessee company also rebutted the allegations as contained in the assessment order w.r.t. valuation of November 2004 as under:
1. Reference used in valuation report are 4 to 5 years old – The assessee company submitted that the same are admissible in valuation as well as evidence. Reliance placed by the assessee company on Collector of Raigarh’s case A.1964 MP 196 and Gundappa’s case 1996 A IHC 502.
2. Reference properties in valuation report are small in size- the assessee company submitted that quantity allowance of 10% is given by the valuer while computing FMV.
ITA 4441/M/2009 & 4461/M/2009 27
3. Wide variations in the square feet rates of the two reference properties-The assessee company submitted that rates are based on the negotiations between buyers and seller and need of the both. The registered valuer has averaged the same along with the ready reckoner rate for 2004 to eliminate possibility of error in the valuation.
4. It is not known whether both the reference properties are in the same sub- zone of BMC as that of the assessee company property- The assessee company submitted that all the properties are in “G” ward of BMC.
5. The cost of construction of the building as per ready reference is Rs.6500 per square meter while the valuation report , the cost of construction is Rs.16953 per sq meters- The assessee company submitted that the cost of construction depends upon the quality of construction and if higher value is adopted by the assessee as compared to ready reckoner rate , then the AO should have no objection as the value of building will be higher .
6. The rate of depreciation should be 40% for 32 year old building- The assessee company submitted that valuer has adopted depreciation at 90% of 40% i.e. 36 year keeping in view the quality of construction was better.
7. There is requirement of adjustment for carpet area and built up area- The assessee company submitted that the adjustment is required when the property is valued on carpet area basis . The valuer has valued the property based on built up area and hence no adjustment is required.
The assessee company also rebutted the allegations as contained in the assessment order w.r.t. valuation of the property as on 01/04/1981 as under:
1. The reference to ASAVARI building is not comparable- The assessee company submitted that the ‘ASAVARI’ property is located at Veer ITA 4441/M/2009 & 4461/M/2009 28
Savarkar Marg where the assessee company property is situated. The revenue has accepted rate of flat as on 01/04/1981 at Rs.550 per square feet and the rate of office premises in this area would be 50% more i.e. Rs 825 per square feet.
2. The method of valuation mentioned in the valuation book has not been followed for determining the FMV as on 01/04/1981- The assessee company submitted that valuer has followed the method of valuation mentioned in the valuation book.
3. The valuation book provide the rate of land as on 01/04/1981 duly factored for FSI- The assessee company submitted that it is not correct as the valuation book provides rate of land considering FSI at 1.33 while the assessee company has utilized FSI of 2.35. This need to be done to arrive at correct FMV as on 01/04/1981. The AO itself applied FSI of 2.35 for computing FMV on the date of transfer.
4. The valuer has considered the land area equal to the constructed area- The assessee company submitted that constructed area is plot of area multiplied by the FSI utilized. The area of the plot of the land is 5484.22 square yards and FSI utilized is 2.35 and hence constructed area is 12898.50 square yards or 116086.52 sq feet.
5. The rate mentioned by the assessee company in letter dated 19.08.2008 was not correct- the assessee company submitted that no adequate opportunity was given to the assessee company to explain the same.
6. The correct depreciation rate as provided in the valuation book is not adopted by the registered valuer- The assessee company submitted that ITA 4441/M/2009 & 4461/M/2009 29
the registered valuer has adopted the rate based on quality of construction.
7. The cost of construction of the building as per valuation book is Rs.80 per square feet as on 01/04/1981 while the valuation report , the cost of construction is Rs.250 per square feet- The assessee company submitted that the cost of construction depends upon the quality of construction and if higher value is adopted by the assessee company as compared to ready reckoner rate , then the AO should have no objection as the value of building will be higher.
The CIT(A) considered the submissions of the assessee company and the material produced before him . The CIT(A) rejected the contentions of the assessee company that in case the AO did not agree with the report of registered valuer relied upon by the assessee , then non referral of the matter by the AO to DVO will invalidate the additions made by the AO. The CIT(A) held that judgment of Hon’ble Himachal Pradesh High Court in the case of Raghunath Singh Thakur reported in 304 ITR 268(HP) supports the assessee company but the Hon’ble Himachal Pradesh High Court has not appreciated the findings of Hon’ble Delhi High Court in the case of Sharabati Devi Jhalani 159 ITR 549(Del) and Hon’ble Punjab & Haryana High Court in the case of Raj Paul Oswal 171 ITR 489(P&H) whereby in both the judgments Hon’ble High Court has restored the matter back to the AO for fresh adjudication in accordance with law.
The CIT(A) also held that on going through the assessment order dated 22-08-2008, it is observed that the AO has not inspected the property before assuming the task of valuation and hence the valuation adopted by the AO cannot be upheld. The CIT(A) also held that land residual technique is the correct method of valuation which should be adopted in the case of the assessee company. The CIT(A) also held that the rate of vacant developed land of Rs.24,400 per square meters adopted by ITA 4441/M/2009 & 4461/M/2009 30 the AO also lack merit because FSI utilized by the assessee company of 2.35 is not factored in the rate of vacant land and if it is factored , the rate of land will be Rs.57,340 per square meters. Based on this, the value of land and building should be segregated as under:
Land(per square meter) Rs. 57340 Building(balancing figure) Rs.13,660 Total Rs.71,000 Based on the rates prescribed in the ready reckoner, the FMV value of the property comes to Rs. 32,54,51,930/- as under :
Land (Rs.57,340 X 4583.83 sq meters) Rs.26,28,36,812/- Building(balancing figure) Rs 6,26,15,118/- Value of the Property (Rs 71000 X 4583.83 sq mtrs) Rs. 32,54,51,930/- The assessee company having received Rs 61,74,39,625/- as sales consideration (Rs.62,00,000/- less Rs. 25,60,375/- for accessories like AC installation , lifts etc) towards land and building. Since the sale consideration was higher then the FMV of the property of Rs.32,54,51,930/- based on ready reckoner rates, the sales consideration between the land and building should be segregated as under as per method adopted by the AO :
Land (Rs.617439625 X Rs.262836812/Rs.325451930) Rs.49,86,47,719/- Building(balancing figure) Rs.11,87,91,906/- Sales Consideration Rs.61,74,39,625/- Based on the above , the CIT(A) held that the building residual technique adopted by the AO can seriously be doubted. The CIT(A) also find force in the argument of the assessee company (without prejudice) that the AO vide para 9 page 8 of the ITA 4441/M/2009 & 4461/M/2009 31 assessment order has stated that valuation of the property (i.e. office premises) as per ready reckoner of 2004 is to be computed as under:
(Value of land + cost of construction ) X 1.2 Further at para 3 page 4 of the assessment order , the AO has admitted that the value of the property (land and building together) as per ready reckoner rate is Rs.71,000 per square meters. Further at the end of page 5 of the assessment order, the AO has stated that the cost of construction as per the ready reckoner rate is Rs.6500 per square meters and the depreciation for a 32 year old building should be taken @40%. Accordingly the cost of construction after depreciation works to Rs.3900 per square meters. Considering this, the CIT(A) held that the value of land would be as under:
Value of the Property as per the Ready Reckoner(Rs per sq. meters) Rs.71,000 Less: Builder’s Profit @20%(per sq meters) Rs.14,200 --------------- Rs.56,800 Less: Cost of Construction(per square meters) Rs.3,900 ---------------- Value of land Rs.52,900 ----------------- On allocating builder profit in the ratio of principal values of land and building , the value of land and building per square meters would be as under:
Value of Land including Builder profit(per sq mtrs) Rs.66,125 Value of Building including builder profit(per sq mtrs) Rs 4,875 --------------- ITA 4441/M/2009 & 4461/M/2009 32
Total Rs71,000 ---------------- Therefore, the AO should have segregated the sale consideration between land and building as under:
Land (Rs.617439625 X Rs.66125/Rs.71000) Rs.57,50,45,003/- Building(Rs.61,74,39,625 X Rs.4875/Rs.71000) Rs.4,23,94,622/- Sales Consideration Rs.61,74,39,625/- However, the values adopted by the assessee company in the return of income filed with the revenue are as under: Land Rs.43,56,21,000/- Building Rs.18,18,18,625/- Lifts Rs. 16,86,314/- AC installations Rs. 8,74,061/- ----------------------- Total Rs.62,00,00,000/- ----------------------- The CIT(A) also held that the AO erred in rejecting the comparables considered by the valuer in the valuation report of the registered valuer without bringing on record any fresh comparables to substantiate its case. The CIT(A) held that the sufficient details about comparables are given in the valuation report and suitable adjustments were made for making them comparable with the assessee property. The CIT(A) also observed that the selling price of the property is based on the negotiation between the buyer and seller and the need of the parties. The CIT(A) also held that reliance of the AO on Section 50C of the Act is also without merit as the sale consideration of Rs.62 crore stand accepted by the AO and Section 50C does not stipulate how to bifurcate the sale consideration between land and ITA 4441/M/2009 & 4461/M/2009 33 building component in case of transfer of both land and building. Thus, the CIT(A) rejected the basis of valuation of the property adopted by the AO for bifurcation of the sales consideration of Rs. 62 crores and directed the AO to accept the valuation of land and building shown by the assessee company in the valuation report of the registered valuer.
Similarly for valuation adopted as on 01/04/1981, the CIT(A) held that the AO erred in adopting the rate of Rs.280 per square feet which is for the land falling under the category ‘Vacant Land’ while the NOC issued from the office of the Additional Collector & CA, ULC, Brihanmumbai wherein the ULC had declared that the entire land pertaining to the property is “non vacant” land and there is no surplus vacant land in the property. The CIT(A) held that correct method considering the facts of the assessee’s company case will be land residual technique as adopted by the registered valuer in the valuation report. The CIT(A) also held that reference of ASAVARI building was considered in the valuation report to show that on Veer Savarkar Marg (i.e. Prabhadevi where the assessee property is situated ) the valuation cell of the Income Tax Department has accepted the rate of flat as on 01/04/1981 at Rs.550 per square feet and thus there was no basis for rejecting the same. The AO has not assigned any reasons before rejecting the NABARD property as a comparable.
Thus, the CIT(A) allowed the appeal of the assessee company and directed vide orders dated 26th May 2009 the AO to compute the value of the property at Prabhadevi sold by the assessee company as on 01/04/1981 and in the year 2004 as per the valuation reports of the registered valuer furnished by the assessee company by using the land residual technique method.
22.Aggrieved by the orders of the CIT(A) dated 26th May 2009, the Revenue is in appeal before us.
ITA 4441/M/2009 & 4461/M/2009 34
The Ld. DR relied upon the assessment order dated 22.08.2008 passed by the AO. The Ld. DR submitted that the property situated at Prabhadevi owned by the assessee company was sold for a composite consideration of Rs. 62 crores vide sale agreement dated 15th March 2005. The said property consisted of land and office building constructed on the said land. Since the land sold is subject to Long Term Capital Gains while the Building sold will be subject to short term capital gains to be computed u/s 50 of the Act as the assessee company availed the depreciation on said building , the main dispute between the revenue and the assessee company is w.r.t. bifurcation of the composite aggregate consideration of Rs.62 crores into assigning mainly value’s of land and building separately for computing long term capital gain on sale of land and short term capital gain u/s 50 of the Act w.r.t. Building. The Ld. DR submitted that the AO has rightly computed the bifurcations of the value of land and building for the purposes of determining the capital gains chargeable to tax. The Ld. DR also submitted that the AO has rightly rejected the value as bifurcated between land and building as per registered valuer report submitted by the assessee company and the AO has rightly differentiated the same to compute value of land and building for the purposes of computing capital gains both short term and long term as per assessment order dated 22.08.2008 instead of referring to the valuation officer(DVO).
The Ld. Counsel of the assessee company reiterated its submissions before us as made before the authorities below. The Ld Counsel of the assessee company made statement before us that the assessee company sold the office property consisting of land admeasuring 5484.22 square yards together with office Building thereon with aggregate built up area of 12898.50 square yards whereby the building constructed is on plot area of 3224 square yards(approx.) consisting of ground floor and three upper floors (total built up area 116086.52 square feet) and the open plot area is 2260 square yards situated at 414, Veer Savarkar Marg, Prabhadevi, Mumbai for a composite consideration of Rs.62 crores for which the assessee company placed on record the sale agreement dated 15th March, 2005 for transfer of ITA 4441/M/2009 & 4461/M/2009 35 this property which is placed at page 1-15 of paper book. The Ld. Counsel also stated that two valuation reports both dated 11.11.2004 issued by a very reputed valuer Dr. Roshan H.Namavati,B.E.(Civil) Hons., PH.D., F.I.I.A, F.I.E, F.I.S.,Mumbai, who is a government approved registered valuer , valuing this entire property as on 08-11-2004 and 01-04-1981 are also placed by the assessee company in the paper book at page 16-29. The ld. Counsel with a view to establish high credentials of Dr. Roshan H. Namavati referred to the Hon’ble Supreme Court judgment in the case of Sumangalam Coop. Housing Society Ltd. v. Suo Motu , High Court of Gujarat and Ors. In civil appeal no 3986 of 2004 with CA. Nos. 3987,3988- 3989,3990, 3991 and 3992-3993/2004 in JT 2007(1) SC 211 and refer to para 13 and 15 of the said judgment which is reproduced below :
“13. The credentials of the valuer Dr. Roshan H. Namavati are quite impressive . He is an approved valuer and author of several books on valuation….. ….. ……
15……………….The valuation done by Dr. Roshan H. Namavati demolishes the basis of the conclusion by the High Court regarding undervaluation.”
The Ld. Counsel of the assessee company also submitted that above documents consisting of sale agreement dated 15th March 2005 and both the valuation reports dated 11.11.2004 were duly submitted before the AO and the CIT(A) during the relevant proceedings before them. The Ld. Counsel of the assessee company submitted that the afore-stated property was sold for a composite aggregate consideration of Rs.62 crores which is not in dispute as the sale consideration received by the assessee company is accepted by the Revenue as full value of consideration as per the Act. The said composite aggregate consideration of Rs. 62 ITA 4441/M/2009 & 4461/M/2009 36 crores for sale of the property in the sale deed dated 15th March 2005 consisted the sale consideration for land, office building constructed on the land and thirdly accessories such as lifts, AC’s installations etc. without assigning any specific values to these above-stated three components included in the sale consideration. The dispute has arisen about the allocation/ bifurcation of the sale proceed mainly between the land and Building. The Ld. Counsel submitted that this property is owned by the assessee company for a very long period of time i.e. even prior to 01/04/1981 which is not disputed by the Revenue . The gain arising on the sale of land in question shall be chargeable to tax as Long Term Capital Gain after availing cost inflation index while the gains arising on the sale of building being part of block of asset on which depreciation is availed by the assessee company shall be chargeable to tax as short term capital gain without availing cost inflation index as per provisions of Section 50 of the Act, hence the need for allocation and bifurcation of composite aggregate consideration of Rs.62 crores between the three components of Land, Building and Accessories like lifts, AC’s etc has arisen as well to value the said property as on 01/04/1981 for the purposes of computing the long term capital gains on land after allowing the benefit of cost inflation index . The Ld. Counsel relied upon the decision of the Tribunal in the case of Statesman Limited reported in 114 ITD 595(Kol.) to support the proposition that the bifurcation of the values between the land and building is to be done to compute capital gain chargeable to tax under the Act . The Ld. Counsel submitted that the assessee company relied upon the technical expert Dr Roshan H Namavati who is an government approved registered valuer who has submitted the detailed valuation report valuing the property both as on 08-11-2004 and 01-04-1981 after surveying and inspecting the property and based on the comparables being actual sale transactions entered into in the vicinity of the property under consideration as also the ready reckoner rates for stamp duty purposes announced by the Government of Maharashtra for the area where the property is located. The Ld. Counsel submitted that the AO has rejected the technical expert report’s on the valuation of this property submitted by the assessee company on his whims and fancies and the AO ITA 4441/M/2009 & 4461/M/2009 37 has not even inspected the property in question. The Ld. Counsel of the assessee company submitted that if the AO is not accepting the values assigned / bifurcated by the assessee company which is based on valuation report of government approved registered valuer, the only option left with the AO was to refer the matter to the DVO who is an technical expert in this field for valuation of the said property as per provisions of Section 55A of the Act. The AO being non technical person does not have requisite technical expertise to decide on the valuation of land and building . The Ld. Counsel submitted that the word ‘may’ used in the Section 55A of the Act is to be read as ‘Shall’ meaning thereby the provisions of Section 55A of the Act are mandatory in nature and leaves no discretion with the AO as the discretion with the AO will lead to arbitrary exercise of power. The ld. Counsel of the assessee company drew our attention to the provisions of Section 55A of the Act which reads as under:
“[55A. Reference to valuation officer.
With a view to ascertaining the fair market value of a capital asset for the purposes of this Chapter, the Assessing] Officer may refer the valuation of the capital asset to a Valuation Officer --
(a) in a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, if the [Assessing] Officer is of opinion that the value so claimed [is at variance with its fair market value];
(b) in any other case, if the [Assessing] Officer is of opinion --
(i) that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than such percentage of the value of the asset as so claimed or by more than such amount as may be prescribed in this behalf; or (ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do, and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clauses (ha) and (i) of sub-section (1) and sub- sections (3A) and (4) of section 23, sub-section (5) of section 24, section 34AA, ITA 4441/M/2009 & 4461/M/2009 38 section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall with the necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the [Assessing] Officer under sub-section (1) of section 16A of that Act.
Explanation : In this section, Valuation Officer has the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).]”
The ld. Counsel submitted that as per Section 55A(a) of the Act, the AO has to mandatorily refer the matter to DVO in case in the opinion of the AO the value so claimed by the taxpayer based on the estimate given in the valuation report prepared by government approved registered valuer is less than its fair market value ( provisions as applicable for assessment year 2005-06 under appeal ) as in this instant case the assesee company has duly relied upon the estimates made in the government approved registered valuer report to determine the bifurcation of the composite aggregate consideration of Rs. 62 crores mainly into land and building separately both on the date of sale i.e. 15th March 2005 and also on 01/04/1981. The ld counsel of the assessee company relied upon the decisions of the Tribunal- Agra Benches in Shri Pyare Mohan Mathur, HUF v. ITO reported in (2011) 12 taxmann.com 170(Agra), (2011) 46 SOT 315(Agra), CWT v. Raghunath Singh Thakur (2008) 304 ITR 268 (HP), Sharbati Devi Jhalani v. CWT 159 ITR 549(Delhi HC),Ashwin Vanaspati Industries v. CIT (2002)255 ITR 26(Guj.), Unimed Technologies Ltd. v. DCIT (2000) 73 ITD 150(Ahd. Trib.), Raj Paul Oswal v. CWT (1988) 171 ITR 489(P&H HC) to support its above stated contention of mandatory reference to DVO by the AO in case the AO disputes the value as estimated in the valuation report prepared by the government approved registered valuer and relied upon by the taxpayer. The Ld. Counsel submitted that on this short ground only the valuation adopted and assigned by the AO to the land and building separately as on the date of sale on 15th March 2005 and 01st April 1981 cannot be relied on and the ld. CIT(A) has rightly set aside the respective valuations adopted by the AO and directed the AO to adopt the respective values assigned for land and building separately by the assessee company based on the valuation report submitted by ITA 4441/M/2009 & 4461/M/2009 39 government approved registered valuer. The Ld. Counsel of the assessee company relied upon the orders of the CIT(A) except the findings in para 1.9 page 21 whereby the CIT(A) held that the in the case of Sharbati Devi Jhalani (supra) and Raj Paul Oswal(supra) , the Hon’ble Courts have restored the matter to the AO for fresh adjudication in accordance with law. The ld. Counsel stated before us that in both the above cases the reference to the DVO by the AO was held to be mandatory in case the AO dispute the valuation submitted by the taxpayer based on the registered valuer report.He stated that the courts have quashed the proceedings by holding that reference to the DVO in such case is mandatory. He also stated that Section 16A of Wealth Tax Act,1957 and Section 55A of the Income Tax Act,1961 are similar and the word ‘may’ used in both the sections has to be read as ‘shall’ as reference to the DVO by the AO being mandatory in the circumstances so mentioned in the said Sections as held by the several courts vide decisions cited above. The Ld. Counsel submitted that the AO has adopted stamp duty value i.e. ready reckoner rates announced by Government of Maharashtra as the value for land and the residual value is assigned to the building which is not correct as the same is giving absurd results. The AO has adopted the value of developed land of Rs.24,400 per square meters as per ready reckoner rates for 2004 which is not correct as the value for office premises consisting of both land and building is Rs.71000 per square meters as per ready reckoner rates for 2004. Similarly, it was submitted by the ld Counsel that AO adopted ready reckoner rate of Rs 280 per square feet for vacant land as on 1-4-1981 is also not correct as the land is not vacant as per certificates from the authorities submitted by the assessee company. The ld. Counsel submitted that the AO has not brought on record any cogent material/evidences such as comparables of other sales in vicinity etc to dislodge the technical expert report of government approved registered valuer who has given instances of comparable sales in the vicinity and made due modification to compare with the property under consideration as well as considered the ready reckoner rates announced by the Government of Maharashtra to arrive at the bifurcation of the values of land and building separately which should be accepted. Thus, the Ld. ITA 4441/M/2009 & 4461/M/2009 40 Counsel submitted that the valuation for land and building adopted by the AO should not be accepted rather the values as estimated by the government approved registered valuer should be accepted. The Ld. Counsel showed us the values as computed by the assessee company based on the report of government approved registered valuer as well the values adopted by the AO which are detailed by us in the preceding para’s and are not repeated for the sake of brevity.
25.We have considered the rival contentions and perused material on record. We have observed that the assessee company has sold the office property consisting of land admeasuring 4583.83 square meters (equivalent to 5482 square yards) or thereabout bearing final plot no 1216(2) of TPS IV –Mahim as per the extract of C S Register and bearing final Plot No. 1216(A) and admeasuring 4585.50 square meters or thereabouts as per Form No 1 of TPS IV Mahim together with office Building thereon with aggregate built up area of 116086.52 square feet situated at Cadel Road , within in the Registration District of Mumbai and assessed by the Assessor and Collector under Ward No G/South 2663, 1284 Street Nos. 128A, 108,109,76- 107A , situated at 414, Veer Savarkar Marg, Prabhadevi, Mumbai for composite aggregate consideration of Rs.62 crores as per sale agreement dated 15th March 2005 . The said office property is stated to be consisting of land admeasuring 5484.22 square yards together with office Building thereon with aggregate built up area of 12898.50 square yards whereby the building constructed is on plot area of 3224 square yards(approx.) consisting of ground floor and three upper floors (total built up area 116086.52 square feet) and the open plot area is 2260 square yards situated at 414, Veer Savarkar Marg, Prabhadevi, Mumbai for a composite aggregate consideration of Rs.62 crores for which the assessee company has placed on record the sale agreement dated 15th March, 2005 for transfer of this property which is placed at page 1-15 of paper book. The assessee company has obtained two valuation reports both dated 11.11.2004 issued by a government approved registered valuer Dr. Roshan H.Namavati, , valuing this entire office property as on 08-11-2004 and 01-04-1981 and the valuation reports are also placed by the ITA 4441/M/2009 & 4461/M/2009 41 assessee company in the paper book at page 16-29.These afore-stated documents i.e. sale agreement and two valuation reports are also stated to be placed before the authorities below during relevant proceedings. The afore-stated property was sold for a composite aggregate consideration of Rs.62 crores which is not in dispute as the same is accepted by the Revenue. The said composite aggregate consideration of Rs. 62 crores in the sale deed dated 15th March 2005 included the sale consideration for land, office building constructed on the land and thirdly accessories such as lifts, AC’s installations etc. in the said property. The sale agreement dated 15th March 2005 specifies only composite aggregate consideration for above three components being Rs 62 crores without assigning any specific values to these three components. The dispute has arisen about the allocation/ bifurcation of the sale proceed mainly between the land and Building. It is also stated before us that this office property is owned by the assessee company for a very long period of time i.e. even prior to 01/04/1981 which is not disputed by Revenue and hence there arises a need to value the land as on 01/04/1981 to determine cost of acquisition in terms of Section 55 of the Act read with section 48 of the Act to compute long term capital gain on sale of land after allowing cost inflation index while the Building being part of block of asset on which the assessee company has claimed depreciation , the written down value of the Building shall be taken as cost in terms of Section 50 of the Act to compute short term capital gain without providing the benefit of cost inflation index , hence the need for allocation and bifurcation of composite aggregate consideration of Rs.62 crores received on sale of this property between the three components of land, Building and accessories like lifts, AC’s etc has arisen as well to value the said property as on 01/04/1981 for the purposes of computing the capital gains on sale of land and these separate values assigned to land and building are mainly a matter of dispute between the assessee company and the Revenue. The assessee company relied upon the technical expert Dr Roshan H Namavati who is an government approved registered valuer for assigning the separate values for land and building , who has submitted two valuation reports both dated 11.11.2004 valuing the property both ITA 4441/M/2009 & 4461/M/2009 42 as on 08-11-2004 and 01-04-1981 and assigning separate value for land and building using land residual technique method after surveying , inspecting and measuring the property in question and based on the actual comparable sale transactions entered into in the vicinity of the property under consideration with suitable modifications as also the ready reckoner rates for stamp duty purposes announced by the Government of Maharashtra for the area where the property is located. We have observed that in the valuation report , the afore-stated government approved registered valuer has mentioned various factors in the report including the rate as per stamp duty ready reckoner for Mumbai. The registered valuer has adopted land residual technique while valuing the property. The value using land residual technique assigned by the registered valuer to the land and building separately as on 08th November 2004 vide his valuation report dated 11th November 2004 are as under:
Land Component Rs.30,94,85,276/- Building Rs.13,09,91,820/- Builder’s Profit Rs.12,81,58,944/- ------------------------- Total Rs.56,86,38,040/- -------------------------- We have observed that the assessee company submitted that the basis for valuation by the said registered valuer in his valuation report for value as on 08-11-2004 is the actual comparable sale of two office properties in the vicinity (one admeasuring 1916 sq feet sold in May 2000 @ Rs7481 psf and another admeasuring 462 sq. feet in December 2001 @ Rs.4329 psf both located at Prabhadevi ) and the ready reckoner rate for office for the year 2004 for G Ward sub-zone 17/121 which was Rs.71000/- per square meter i.e. Rs 6596 psf. The value so arrived at by averaging the three rates was Rs 5520 psf after allowing quantity allowance of 10%. The registered valuer has assigned the cost of construction of the building @ Rs.1750 ITA 4441/M/2009 & 4461/M/2009 43
per square feet (psf) being costly building of superior quality as mentioned in the valuation report and then the residual value is assigned to the value of land. Thus, the said registered valuer adopted land residual technique method to apportion and assign the values to land and building separately. The apportionment of the fair market value was done as under by the registered valuer :
Base Rate Rs.5520/- psf Less Builder Profit@20% Rs.1104/- Cost of Construction Rs.1750/- Rs.2854/- psf ------------ Value of Land Rs.2666/- psft Based on the above, the said registered valuer worked out the Fair Market value with depreciation as on 08-11-2004 in his valuation report as under:
1. Land Component 116086 sqft area X Rs 2666 Rs.30,94,85,276/- 2.Construction: a)Building=116086X1750 Rs.20,31,50,500/- b)Accessories-depreciated cost Rs. 9,75,000/- ----------------------- Rs.20,41,26,000/- Less: Depreciation on main building = 116086X 630 Rs. 7,31,34,180/- ------------------------ Rs.13,09,91,820/- 3.Builders Profit @20% Rs.12,81,58,944/- ------------------------ Total Rs.56,86,38,040/- -------------------------- ITA 4441/M/2009 & 4461/M/2009 44 The sale consideration being Rs 62 crore, the assessee company has proportionately apportioned excess of Rs.5,13,63,960/- received as sale consideration over fair market value computed by the registered valuer in the valuation report as on 08-11- 2004 and the Builder profit of Rs.12,81,58,944/- was proportionately apportioned by the assessee company to land and building in the ratio of value of land and building determined by the registered valuer and the value arrived is as under:
Land Rs. 43,56,21,000/- Building Rs.18,18,18,625/- Lifts Rs. 16,86,314/- AC Installation Rs. 8,74,061/- ----------------------- Total Rs.62,00,00,000/- ------------------------ The AO rejected the references adopted by the valuer as being not appropriate and reliable due to following reasons: a) References are 4 to 5 years old. b) Reference properties are very small in size as compared to the property of the assessee. c) There are wide variations in the square feet rates of the two reference properties. d) The two reference properties cannot be compared to each other based on their square feet rates.
ITA 4441/M/2009 & 4461/M/2009 45 e) It is not known that both the reference properties are also in the same subzone of BMC as the property of the assessee company sold during the assessment year. f) The valuer has not followed the method of valuation as mentioned in stamp duty ready reference reckoner 2004 and has not adopted the cost of construction and depreciation rates given therein. The ready reckoner has mentioned cost of construction at Rs. 6500/- per square meter whereas the valuer has adopted the cost of construction at Rs.16,953/- per square meters. g) The rate of depreciation for a 32 years old building should be taken at 40%. h) The adjustment for carpet area and build up area does not appear to have been done as mentioned in the ready reckoner by the registered valuer.
The AO observed that the reference rate of two buildings adopted by the said government approved registered valuer are not appropriate and reliable references. Further , the AO observed that value of land on the date of transfer determined by the valuer does not match with the value of land as given in the stamp duty ready reckoner for the year 2004 for plot of the assessee which in developed land in sub- zone 17/121 of 2004 stamp duty ready reckoner is Rs.24,400/- per square meter. The AO referred to Section 50C of the Act and stated that the full value of consideration for the land transferred can be determined on the basis of valuation of the land as per stamp valuation authority for the purposes of Section 48 of the Act to compute capital gain as per the Act and in the instant case, the stamp duty rate of land is Rs 24,400/- per square meter in sub-zone 17/121 which can be adopted .Thus, the AO adopted the 2004 stamp duty ready reckoner rate of the ITA 4441/M/2009 & 4461/M/2009 46 fully developed land as the correct value of the land to determine the full value of consideration received by the assessee company for transfer of the land and hence the value of land computed after considering FSI of 2.35 used on the land computed value of land at Rs.26,28,36,812/- and balance residual consideration of Rs.35,46,02,813/- was adopted for consideration for building and rest Rs.25,60,375/- was considered for accessories like lift and AC’s . Thus, the AO has adopted the building residual technique while the registered valuer adopted the land residual technique.
We have observed that the assessee company duly rebutted the allegations as contained in the assessment order w.r.t. valuation of November 2004 are as under:
1. Reference used in valuation report are 4 to 5 years old – The assessee company submitted that the same are admissible in valuation as well as evidence. Reliance placed by the assessee company on Collector of Raigarh’s case A.1964 MP 196 and Gundappa’s case 1996 A IHC 502.
2. Reference properties in valuation report are small in size- the assessee company submitted that quantity allowance of 10% is given by the valuer while computing FMV.
3. Wide variations in the square feet rates of the two reference properties-The assessee company submitted that rates are based on the negotiations between buyers and seller and need of the both. The registered valuer has averaged the same along with the ready reckoner rate for 2004 to eliminate possibility of error in the valuation.
4. It is not known whether both the reference properties are in the same subzone of BMC as that of the assessee company property- The assessee company submitted that all the properties are in “G” ward of BMC.
ITA 4441/M/2009 & 4461/M/2009 47
The cost of construction of the building as per ready reference is Rs.6500 per square meter while the valuation report , the cost of construction is Rs.16953 per sq meters- The assessee company submitted that the cost of construction depends upon the quality of construction and if higher value is adopted by the assessee company as compared to ready reckoner rate , then the AO should have no objection as the value of building will be higher .
6. The rate of depreciation should be 40% for 32 year old building- The assessee company submitted that valuer has adopted depreciation at 90% of 40% i.e. 36 year keeping in view the quality of construction was better.
7. There is requirement of adjustment for carpet area and built up area- The assessee company submitted that the adjustment is required when the property is valued on carpet area basis . The valuer has valued the property based on built up area and hence no adjustment is required.
We have observed that for purpose of computation of capital gains chargeable to tax u/s 45 of the Act , the assessee company also got the said property valued as on 1st April 1981 from the same government approved registered valuer Dr. Roshan H Namavati vide valuation report dated 11th November 2004 as under:
Land Component Rs.3,93,37,068/- Building Rs.2,62,75,430/- Builder’s Profit Rs.1,70,64,642/- ------------------------- Total Rs.8,62,77,140/- -------------------------- ITA 4441/M/2009 & 4461/M/2009 48 We have observed that the assessee company submitted that the basis for valuation by the registered valuer is the sale of two properties in the vicinity (one sold in December 1982 @ Rs1250 psf (after adjusting for cut back for time difference the rate adopted was Rs 922 psf ) and another in 1981 @ Rs.550 psf and multiplied with 1.5 times to arrive at rate for commercial premises which comes to Rs.825 psf both located at Veer Savarkar Marg, Mahim,Mumbai and the ready reckoner rate for commercial premises for the year 1981 which was Rs.720/- per square feet . The value so arrived at by averaging the three rates was Rs 735/- psf after allowing quantity allowance of 10%. The apportionment of the fair market value was done as under by the registered valuer :
Base Rate Rs.735/- Less Builder Profit@20% Rs.147/- Cost of Construction Rs.250/- Rs.397/- ------------ Value of Land Rs.338/- psf Based on the above, the registered valuer worked out the Fair Market value with depreciation as under:
1. Land Component 116086 sqft area X Rs 338 Rs.3,93,37,068/- 2. Construction: a)Building=116086X250 Rs.2,90,21,500/- b)Accessories-depreciated cost Rs. 1,56,080/- ----------------------- Rs.2,91,77,580/- Less: Depreciation on main building = 116086X 25 Rs. 29,02,150/- ------------------------ Rs.2,62,75,430/- ITA 4441/M/2009 & 4461/M/2009 49
3. Builders Profit @20% Rs.1,70,64,642/- ------------------------ Total Rs.8,26,77,140/- ------------------------- The assessee company allocated the builder profit proportionately to the value of the land which then work out the value of land as on 01/04/1981 at Rs.4,95,67,929/-.
We have observed that the AO also held that the registered valuer has not adopted the correct depreciation rates for the building as per rates provided in the ready reckoner. It was also held by AO that cost of construction in 1981 as provided in ready reckoner is Rs.80 per square feet whereas the valuer has adopted the cost of construction of Rs.250 per square feet. Thirdly, the AO held that value of office property in sub zone 3A(zone of the assessee company ) as per stamp duty ready reckoner for the year 1981 is Rs.880/- per sq. feet whereas the rate of residential premises in subzone 10 ( zone of ASAVARI ) is Rs.480 per square feet and the two properties are not comparable. The valuer has adopted rate of Rs.550/- per square feet for ASAVARI property and multiplied by 1.5 and applied to the office property of the assessee as reference rate which is highly improper as per the AO.
We have observed that the AO also referred to the ready reckoner published by Architect Publishing Corporation of India(APCI) for market value of property as on 01/04/1981 whereby it has held that the rates adopted by the Collector of Stamps , Mumbai appeared to be fairly reasonable and which can be adopted with suitable modifications for valuing the property in Mumbai as on 01/04/1981 for capital gain tax purposes. The rate of Rs.280 per square feet for the value of the land as on 01/04/1981 was adopted by the AO as per date available in the compilation of APCI and 1981 ready reckoner rate for zone 3A which contained the same description of location property as per zone 17/121 of 2004 ready reckoner by which the total value of land transferred as on 01/04/1981 is Rs.1,38,15,664/- as per AO.
ITA 4441/M/2009 & 4461/M/2009 50 We have observed that the assessee company submitted before the AO that the value of vacant land in the 1981 ready reckoner is not applicable to its case rather the value of the property along with land is applicable as the land is not vacant land as on 01/04.1981.
We have observed that the AO due to following reasons held that the valuation report as submitted by the assessee is not acceptable: a) Reference to ASAVARI building is not applicable in this case. b) The assessee has not followed the method of valuation mentioned in the stamp duty ready reckoner for 01/04/1981. c) The stamp duty ready reckoner provides the rate of developed land as on 01/04/1981 duly factored for FSI. d) The valuation method adopted by the valuer has considered the land area equal to constructed area. e) The rate mentioned by the asssessee in its 19/08/2008 letter is not correct.
We have observed that the assessee company also submitted that the reliance placed by the AO on the book titled “Indian Valuers Directory and Reference book incorporating market value of property in Mumbai as on 01st April 1981” by Mr Santosh Kumar & Mr. Sunit Gupta is misconceived as the AO has not appreciated the same :
ITA 4441/M/2009 & 4461/M/2009 51 “ Above rates are adopted for valuing the property for collecting the stamp duty amount by the state government. Hence in our opinion the same values could be reasonably relied upon with suitable modifications for valuing the property in Mumbai as on 01/04/1981 for capital gain tax purpose.
In order to work out capital gain tax, on sale of property acquired before 01/04/1981 , assessee has an option to take the purchase value of that immovable property or value as on 01/04/1981. This value is accepted as acquisition cost and indexing is allowed on this value for working out capital gain tax.
If the assessee opts for the purchase value, there is no problem, but in case he prefers the valuation as on 01/04/1981 , which is normally the case, then he has to get a report from the Government Registered Valuer. On the basis of Government Registered Valuer’s report he works out the tax amount and pays the capital gains tax. Registered valuers can adopt above values subject to valuation factors mentioned in this book along with their judgment and observations to arrive at just and fair value for capital gain purpose.
The rate quoted will differ from structure to structure depending upon the services available,location and amenities provided. Hence from the judgment valuers should accordingly modify the rates while preparing valuation report. The rates should not be considered final and binding which may vary depending on various factors. However these rates give fairly correct idea about the rate prevailing in 1981 for property assuming full payment is made in white. As such these rates are adopted by the Collector of stamps , Mumbai and sub-registrar of Assurance, Mumbai for valuation purpose for all documents executed during the year 1981 for determining the stamp duty. Accordingly, Income Tax Department should have no objection if the valuation ITA 4441/M/2009 & 4461/M/2009 52 report is prepared on the basis of rates and guidelines illustrated in this chapter.”(emphasis supplied)
We have observed that the assessee company submitted that :
(a) That the ld author submitted that fair market value of the property to be computed as on 01/04/1981 based on the Government registered valuer report as on 01/04/1981 which has been done by the assessee company.
(b) The assessee company submitted that the ld author has observed that the rates given in the valuation book could be reasonably relied with suitable modification as per judgment of registered valuer.
(c) That the rates given in the valuation book should not be considered as final and binding.
(d) That the valuer has considered two sales instances for computing FMV of the property as rates in the valuation book are not final and binding and these comparables are not doubted by the AO.
(e) That the ld author has stated that the income tax department should have no objection if the valuation report is prepared based on rates given in the valuation book and that the valuation report is prepared on the basis of the rates given in the valuation book.
We have observed that the assessee company also submitted that the AO erred in adopting the rate of Rs.280 psf of ‘vacant land’ for computing the FMV as on 01/04/1981 from ready reckoner rates published by Government for zone 3-A which is not applicable to the property transferred by the assessee company as the property transferred is land and building both and not vacant plot of land. We have observed that the assessee company also ITA 4441/M/2009 & 4461/M/2009 53 submitted before the authorities below that NOC from the office of the Additional Collector & CA, ULC, Brihanmumbai wherein the ULC had declared that the entire land pertaining to the property is “non vacant” land .
We have observed that the assessee company also submitted that the AO erred as while valuing the property in 2004 has adopted the building residual technique and for valuing the same property in 1981, the AO adopts the value of land by taking ready reckoner rates of 1981 whereby the rate adopted is Rs 280 psf while the same also is based on FSI of 1.33 while the FSI is 2.35 and the rate will then also comes to Rs.494.73 psf. We have observed that the assessee company submitted that the correct basis of valuation should be land residual technique.
We have observed that the assessee company also rebutted the allegations as contained in the assessment order w.r.t. valuation of the property as on 01/04/1981 are as under:
The reference to ASAVARI building is not comparable- The assessee company submitted that the ‘ASAVARI’ property is located at Veer Savarkar Marg where the assessee company property is situated. The revenue has accepted rate of flat as on 01/04/1981 at Rs.550 per square feet and the rate of office premises in this area would be 50% more i.e. Rs 825 per square feet.
The method of valuation mentioned in the valuation book has not been followed for determining the FMV as on 01/04/1981- The assessee company submitted that valuer has followed the method of valuation mentioned in the valuation book.
ITA 4441/M/2009 & 4461/M/2009 54
The valuation book provide the rate of land as on 01/04/1981 duly factored for FSI- The assessee company submitted that it is not correct as the valuation book provides rate of land considering FSI at 1.33 while the assessee company has utilized FSI of 2.35. This need to be done to arrive at correct FMV as on 01/04/1981. The AO itself applied FSI of 2.35 for computing FMV on the date of transfer.
The valuer has considered the land area equal to the constructed area- The assessee company submitted that constructed area is plot of area multiplied by the FSI utilized. The area of the plot of the land is 5484.22 square yards and FSI utilized is 2.35 and hence constructed area is 12898.50 square yards or 116086.52 sq feet.
5. The rate mentioned by the assessee company in letter dated 19.08.2008 was not correct- the assessee company submitted that no adequate opportunity was given to the assessee company to explain the same.
The correct depreciation rate as provided in the valuation book is not adopted by the registered valuer- The assessee company submitted that the registered valuer has adopted the rate based on quality of construction.
The cost of construction of the building as per valuation book is Rs.80 per square feet as on 01/04/1981 while the valuation report , the cost of construction is Rs.250 per square feet- The assessee company submitted that the cost of construction depends upon the quality of construction and if higher value is adopted by the assessee company as compared to ready reckoner rate , then the AO should have no objection as the value of building will be higher.
ITA 4441/M/2009 & 4461/M/2009 55 We have observed that the AO rejected both the valuation report given by the government approved registered valuer for the reasons cited in the assessment orders which are detailed in the preceding para’s and are not repeated for the sake of brevity. We have observed that the assessee company submitted that the report of the registered valuer is rejected without making statutory reference to the departmental valuation officer(DVO) and instead the valuations are estimated by the AO himself who is not a technical expert and the bifurcation of the land and building were disturbed by the AO. We have observed that the assessee company submitted that Section 55A of the Act stipulate that it is mandatory on the part of the AO to refer to the DVO for valuation of the property if the AO does not agree with the report of registered valuer submitted by the taxpayer. The assessee company submitted that in such a situation if no reference is made to the DVO , then the valuation report by registered valuer submitted by the assessee be accepted. We have observed that the assesssee company relied upon the decision of Hon’ble Himachal Pradesh High Court in Raghunath Singh Thakur reported in 304 ITR 268(HP). We have observed that the assessee company submitted that the registered valuer Dr. Roshan H. Namavati being one of the most renowned registered valuer in Mumbai had been commended by Hon’ble Supreme Court in the case of Sumangalam Coop. Housing Society Limited 2007Jt(1) SC 211.
We have observed that the assessee company submitted that the assessee company has adopted land residual technique for the purpose of valuing the property while the AO has adopted the building residual technique for valuing the property on the date of sale and adopted ready reckoner rates for vacant land as on 01-04-1981. We have observed that the assessee company submitted that the bulk of the payments are for land and small component was meant for building, the method adopted by the assessee company being land residual technique be accepted which gives correct value of land while the method adopted by the AO gives absurd results.We have observed that the assessee company submitted that as per valuation method of building residual method adopted by the AO, the value of building as on date of ITA 4441/M/2009 & 4461/M/2009 56 sale comes to Rs.35,46,02,813/- with the built up area of 116086.52 sft i.e. Rs 3050 psft while ready reckoner rate of RCC Cost of building is Rs.6500 per square meters which comes to Rs. 603.86 psf which is absurd. The assessee company referred to book of author Kahn – Cases – Schirmmel 1963 Ed. P 149 whereby it is written that the building residual technique can be adopted when :
“ The building residual technique is a means of determining building values under the following conditions:
1. 1. The value of the land can readily be estimated by sales or by use of the hypothetical – building land residual technique.
2. The building is an improper improvement.
3. The building is in late or middle life, with obvious deficiencies due to deterioration or obsolescence.”
We have observed that the assessee company submitted that its case does not fall within above parameters as laid down by the author as above to be covered under building residual technique method as adopted by the AO and the Revenue also has not brought on record any justification to support how the building residual technique is the most appropriate method for bifurcating the values between land and building.
We have observed that the AO has not brought on record any cogent material/ evidences such as sales comparables in the vicinity etc. to establish and substantiate that the value assigned by the AO to land and building separately is to be accepted but merely ready reckoner rates for developed land is adopted to assign value to land and then the balance is treated as the value assigned to the Building for valuing as on date of sale in March 2005 while the AO has adopted the ready reckoner rates for vacant land while valuing the land as on 01/04/1981. Thus, no cogent material has been brought on record by the AO such as sales comparables in the vicinity etc. to demolish the valuation report of the said government approved ITA 4441/M/2009 & 4461/M/2009 57 registered valuer while the valuation reports submitted by the assessee company is based not only on the ready reckoner rates announced for stamp duty purposes by Government of Maharashtra in 2004 as well 1981 but is also based on the sales comparables in the vicinity for valuing at both the dates with suitable modifications. It is also stated that AO has not even inspected and measured the property before embarking on the huge exercise of determining the values of the land and building separately . The AO also failed to cross examine the government approved registered valuer to demolish the valuation report’s of the said registered valuer who is a technical expert of the field who incidentally has been acclaimed by none other than Hon’ble Apex Court in the case of Sumangalam Coop. Housing Society Ltd. v. Suo Motu , High Court of Gujarat and Ors.(supra) whereby Hon’ble Supreme Court has held at para 13 and 15 of the said judgment as under :
“13. The credentials of the valuer Dr. Roshan H. Namavati are quite impressive . He is an approved valuer and author of several books on valuation….. ….. ……
15……………….The valuation done by Dr. Roshan H. Namavati demolishes the basis of the conclusion by the High Court regarding undervaluation.”
The AO also failed to refer the matter to DVO for obtaining his valuation report to ascertain the fair market value as per mandate of Section 55A of the Act as the AO has challenged the fair market value adopted by the assessee company based on the estimate in the valuation report prepared by the registered valuer so far so for computing cost of acquisition of the land being fair market value as on 01/04/1981 in terms of Section 55 read with Section 48 of the Act and instead the AO chose to compute fair market value of the land of his own as on 01/04/1981 based on the ITA 4441/M/2009 & 4461/M/2009 58 ready reckoner rates for vacant land published by Government of Maharashtra while the land incidentally was not a vacant land but consisting of land and office building constructed on the land which is not in dispute. The method of valuation based on building residual technique as adopted by the AO in this peculiar case based on facts and circumstances of the case is erroneous as the AO adopted the value of land based on ready reckoner rate announced by the Government of Maharashtra for developed land in 2004 and thereafter the residual value was considered as the value of the building . It is well established fact that the ready reckoner rate announced by the Government for stamp duty purposes cannot be considered as full value of consideration received/receivable by taxpayer as required to compute the capital gains as per the Act except as provided u/s 50C of the Act whereby the consideration received/receivable by the taxpayer is less than the stamp duty rates adopted by the government , then in that case the stamp duty rates shall be deemed to be full value of consideration received/ receivable by the taxpayer for computing capital gains which is not the case here as the sale consideration of Rs.62 crores received by the assessee company has been accepted by the Revenue rather the dispute is as to how to bifurcate the sale consideration between the land and building separately to compute capital gains as per the Act and Section 50C of the Act does not provide how to bifurcate the sale consideration between the land and building to compute capital gains as per the Act. . The method of valuation of land and building seperately adopted by AO of building residual technique is not giving appropriate results in this peculiar case keeping in view the facts and circumstances of the case as the value of building comes to Rs.35,46,02,813/- with the built up area of 116086.52 sft i.e. Rs 3050 psft while ready reckoner rate of RCC Cost of building is Rs.6500 per square meters which comes to Rs. 603.86 psf . We have observed that the assessee company also referred to book of author Kahn – Cases – Schirmmel 1963 Ed. P 149 whereby it is written that the building residual technique can be adopted when :
ITA 4441/M/2009 & 4461/M/2009 59 “ The building residual technique is a means of determining building values under the following conditions:
1. 1. The value of the land can readily be estimated by sales or by use of the hypothetical – building land residual technique.
2. The building is an improper improvement.
3. The building is in late or middle life, with obvious deficiencies due to deterioration or obsolescence.”
We have observed that the assessee company submitted that its case does not fall within above parameters as laid down by the author as above and the Revenue also has not brought on record any justification to support how the building residual technique is the most appropriate method for bifurcating the values between land and building. On the other hand we have also observed that the CIT(A) has undertaken an exercise to evaluate the results arrived at by using the land residual techniques which are contained in para 1.10 page 21-25 of the CIT(A) orders dated 26-05-2009 to arrive at conclusion that the land residual technique method adopted by the assessee company is most appropriate to the facts and circumstances of the case and is producing the results which are more accurate. The CIT(A) even demonstrated that even by following the building residual method as followed by the AO , if it is properly and correctly followed by the AO will lead to no prejudice to the revenue by following the method of valuation adopted by the assessee company based on the valuation report of the government approved registered valuer. The extract of the CIT(A) orders page 23-24 are as under:
“Further at para 3 page 4 of the assessment order , the AO has admitted that the value of the property (land and building together) as per ready reckoner rate is Rs.71,000 per square meters. Further at the end of page 5 of the assessment order, the AO has stated that the cost of construction as per the ready reckoner rate is Rs.6500 per square meters and the depreciation for a 32 year old building should be taken @40%. Accordingly the cost of construction after ITA 4441/M/2009 & 4461/M/2009 60 depreciation works to Rs.3900 per square meters. Considering this, the CIT(A) held that the value of land would be as under:
Value of the Property as per the Ready Reckoner(Rs per sq. meters) Rs.71,000 Less: Builder’s Profit @20%(per sq meters) Rs.14,200 --------------- Rs.56,800 Less: Cost of Construction(per square meters) Rs.3,900 ---------------- Value of land Rs.52,900 ----------------- On allocating builder profit in the ratio of principal values of land and building , the value of land and building per square meters would be as under:
Value of Land including Builder profit(per sq mtrs) Rs.66,125 Value of Building including builder profit(per sq mtrs) Rs 4,875 --------------- Total Rs71,000 ---------------- Therefore, the AO should have segregated the sale consideration between land and building as under:
Land (Rs.617439625 X Rs.66125/Rs.71000) Rs.57,50,45,003/- Building(Rs.61,74,39,625 X Rs.4875/Rs.71000) Rs.4,23,94,622/- Sales Consideration Rs.61,74,39,625/- ITA 4441/M/2009 & 4461/M/2009 61 However, the values adopted by the assessee company in the return of income filed with the revenue are as under: Land Rs.43,56,21,000/- Building Rs.18,18,18,625/- Lifts Rs. 16,86,314/- AC installations Rs. 8,74,061/- ------------------------------ Total Rs.62,00,00,000/- ------------------------------“ The Revenue has also not brought on record any cogent material / evidences to demolish both the valuation report’s dated 11.11.2004 submitted by the government approved registered valuer such as comparable sales in the vicinity etc. and has instead erroneously assigned ready reckoner rate of the land announced by Government of Maharashtra to the land. In our considered view, the working adopted by the AO to bifurcate the values of land and building cannot be accepted due to reasons cited above keeping in view the peculiar facts and circumstances of the case and the working adopted by the assessee company based on the valuation report submitted by the government approved registered valuer using land residual technique and which is also supported by the comparable sales in the vicinity and also ready reckoner rates announced by the Government is to be preferred keeping in view peculiar facts and circumstances of the case more so when the said report of the registered valuer has not been demolished by the AO with cogent evidences . The CIT(A) has allowed the appeal of the assessee company based on well reasoned order which we uphold as we have not find any infirmities in the said order whereby the CIT(A) directed the AO to adopt the values assigned to land and building by the assessee company based on the valuation report of government approved registered valuer by following land residual technique method. Hence, we direct that the values as assigned by the assessee company in valuing land and building separately both on the date of sale as also on 01/04/1981 based on the valuation report(s)
ITA 4441/M/2009 & 4461/M/2009 62 dated 11.11.2004 of government approved registered valuer using land residual technique method be accepted in this particular case keeping in view facts and circumstances of the case. We order accordingly.
In the result, appeal filed by the Revenue is dismissed whereas the assessee’s appeal is partly allowed for statistical purpose.