2016 (12) TMI 1584 - AT - Income Tax

Determine fair market value of the property - reference matter to DVO - contemplation under section 50C(2) - Held that - At the time of execution of agreement in respect of an immovable property the right in persona is created in favour of the transferee/vendee. When such right is created in favour of the vendee vendor is restrained from selling the said property to someone-else because vendee in whose favour the right in persona is created has legitimate right to enforce specific performance of the agreement if vendor for some reason is not executing sale deed. Thus by virtue of agreement to sell some right is given to the vendee by the vendor. It is an encumbrance on the property and considering this aspect the ld.AO should have remitted this issue to the file of DVO for determining fair market value on the date of transfer of land. DVO will have to keep in mind the encumbrance over the property by virtue of sale agreement. It is also pertinent to note that validity or genuineness of the agreement has also to be decided because under the agreement consideration was promised and not paid at the time of agreement. It was paid on 15.12.2008. All these factors are to be kept in mind by the DVO while determining the FMV of the property. Considering these aspects we deem it appropriate to set aside the issue to file of the AO for re-adjudication. The ld.AO shall refer the matter to the DVO as contemplated under section 50C(2) of the Income Tax Act 1961. The ld.DVO shall determine fair market value of the property on the date of sale deed but keep in mind the encumbrance over the property by virtue of agreement. The ld.AO shall determine the long term capital gain thereafter. Accordingly appeal of the assessee is partly allowed for statistical purpose.

Summary

Issues Involved:
1. Confirmation of addition made by the AO under section 50C of the Income Tax Act, 1961.
2. Determination of the applicable circle rate for the purpose of calculating the value of the property.

Detailed Analysis:

Issue 1: Confirmation of Addition under Section 50C

The assessee challenged the addition of ?96,29,357/- made by the AO under section 50C, arguing that the sale consideration should be based on the circle rate applicable in the year 2008-09 when the agreement for the sale of land was made, not the year 2011-12 when the sale deed was registered. The AO adopted the sale consideration of ?4,35,62,500/- based on the stamp duty valuation at the time of registration of the sale deed in 2011. The assessee contended that the AO should have referred the matter to the DVO under section 50C(2) to determine the fair market value as of the agreement date. However, the CIT(A) upheld the AO’s decision, rejecting the assessee's contention.

Issue 2: Determination of Applicable Circle Rate

The assessee argued that the circle rate applicable in 2008-09 should be used for calculating the property value, as the agreement for sale was made in that year. The AO and CIT(A) both used the circle rate of 2011-12, the year the sale deed was registered. The Tribunal noted that the assessee did not receive any payment at the time of the agreement in 2008, and the entire consideration was received in December 2008. The Tribunal also referred to amendments in the Registration Act and the Transfer of Property Act, which require registration of agreements for them to be effective under section 53A. Since the agreement was not registered and no consideration was paid at the time of the agreement, the Tribunal concluded that the transfer could not be recognized in the assessment year 2008-09.

Tribunal's Decision:

The Tribunal held that the capital gain should be taxed in the assessment year 2011-12, as the sale deed was registered in that year and the assessee recognized the sale in that year. The Tribunal also addressed the alternative contention of the assessee for referring the matter to the DVO. It was observed that the AO should have referred the issue to the DVO to determine the fair market value of the property, considering the encumbrance created by the agreement to sell. The Tribunal set aside the issue to the AO for re-adjudication, directing the AO to refer the matter to the DVO under section 50C(2) and determine the fair market value of the property on the date of the sale deed, taking into account the encumbrance by the agreement.

Conclusion:

The appeal of the assessee was partly allowed for statistical purposes, with the Tribunal directing the AO to re-adjudicate the matter after referring it to the DVO to determine the fair market value of the property considering the encumbrance created by the agreement to sell.