2012 (11) TMI 847 - HC - Income Tax

Valuation of the Land Held that - Valuation done by the Valuation Officer taking note of the sale instances which are near to the date of sale merit acceptance is correct. As far as the land value of 23.60 grounds is concerned, the value arrived at by the District Valuation Officer at Rs.8,30,800/- does not call for any disturbance in determining what could be the value of the deemed gift for the purpose of assessment. Apart from that, the building portion value arrived at by the Gift Tax Act at Rs.24,46,711/- is to be considered with appropriate depreciation at Rs.1.125 per year to arrive at annual letting value at 9% return. Thus after arriving at the annual letting value, deducting the outgoings and adopting 8% capitalisation factor, the value has to be arrived at by Revenue which would be in the spirit of Schedule II of the Gift Tax Act - In the circumstances, Tax Case (Appeal) filed by the assessee is partly allowed only to the extent referred to above taking into consideration the matter of valuation done by the Assessing Authority by adopting the District Valuation Officer including the reversionery interest - valuation of the land as done by the valuation officer is upheld, however on the portion of the building accepting the valuation in calculating the annual letting value, the Officer shall take note of depreciation allowed on the building portion and adopt capitalisation factor at 8% to arrive at the valuation for the purpose of assessment - To the above stated extent, the order of the Tribunal stands modified.

Issues Involved:
1. Deemed gift on transfer of reversionary rights.
2. Adoption of market value for determining deemed gift.
3. Valuation method as per Schedule II of the Gift Tax Act.

Detailed Analysis:

Issue 1: Deemed Gift on Transfer of Reversionary Rights
The core issue revolves around whether the transfer of reversionary rights attached to the property, executed by the assessee to M/s. Gemini Film Processing Industries Private Limited for Rs.10 lakhs, constituted a deemed gift under Section 4(1) of the Gift Tax Act. The Assessing Authority noted a significant discrepancy between the registered value of Rs.80,26,874/- and the sale consideration, thus invoking the deemed gift provision. The District Valuation Officer initially valued the property at Rs.41,93,000/- and subsequently at Rs.1,98,51,600/-, leading to the conclusion that the difference constituted a deemed gift. The assessee contended that the valuation failed to account for the long-term lease encumbering the property until 2039, which should have significantly reduced the reversionary value, aligning it closer to the Rs.10 lakhs consideration.

Issue 2: Adoption of Market Value for Determining Deemed Gift
The Tribunal upheld the valuation by the District Valuation Officer, which was based on the assumption that the property was freehold and ignored the lease agreement. The Tribunal's decision was influenced by the fact that the lessee, Vasan Publications, paid Rs.2,59,50,000/- for surrendering the leasehold rights shortly after the sale, suggesting that the Rs.10 lakhs consideration was not reflective of the fair market value. The Tribunal thus justified the deemed gift valuation at Rs.1,88,51,600/-, contrasting the Rs.10 lakhs sale consideration with the fair market value.

Issue 3: Valuation Method as per Schedule II of the Gift Tax Act
The assessee argued that the valuation should adhere to Schedule II of the Gift Tax Act, which aligns with Schedule III of the Wealth Tax Act, emphasizing the need to consider reversionary interest. The Commissioner of Income Tax (Appeals) accepted the assessee's valuation, noting that the valuation by the District Valuation Officer for Wealth Tax purposes, which considered reversionary interest, supported the assessee's stance. The Tribunal, however, sided with the Revenue, emphasizing the higher valuation post-transfer and the control of management by the assessee, which suggested collusion in the lease arrangement.

Judgment Summary:
The High Court acknowledged that the valuation for deemed gift purposes should follow the methodology prescribed in Schedule II of the Gift Tax Act, incorporating Schedule III of the Wealth Tax Act. The Court agreed with the Revenue on the land valuation at Rs.8,30,800/- per ground but emphasized that the building valuation should consider depreciation and annual letting value, adopting an 8% capitalization factor. The Court thus modified the Tribunal's order, upholding the land valuation by the District Valuation Officer but directing a recalculation of the building's value to reflect the reversionary interest and lease encumbrances.

Conclusion:
The appeal was partly allowed, with the Court affirming the District Valuation Officer's land valuation but requiring adjustments to the building valuation to account for depreciation and reversionary interest, ensuring compliance with Schedule II of the Gift Tax Act. The Tribunal's order was modified accordingly, with no costs awarded.

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