2014 (3) TMI 1156 - AT - Income Tax

Capital gain computation - Value estimated by the DVO - fair market value of the property - HELD THAT - From the perusal of the compromise decree before the Lok Adalat, it is evident that there are legal disputes between the parties consequent to a registered 50 year lease deed executed between the parties in July, 1971. On a consideration of all the factors, the Lok Adalat has issued award determining the total consideration of sale at ₹ 2,62,35,000 on 20th March, 2005. On the facts and circumstances of this case, in our view, weight has to be given to this factor in determining the fair market value as on the date of sale. Admittedly, the compromise decree could not be executed because of the delay in obtaining ULC permission. The assessee had no other alternate but to execute the sale deed in view of the award given by the Lok Adalat. The sale deed executed refers to the civil litigation filed before the Principal Senior Civil Judge of Visakhapatnam vide O.S.No.1279/2004 and the Award of the Lok Adalat passed on 25th day of March, 2005 as a reason for executing the sale deed. The purchase consideration was fixed at ₹ 4,79,00,000 in place of ₹ 2,62,35,000 as awarded by the Lok Adalat. This figure of consideration as arrived at between the parties after long legal battles and negotiations. Under these circumstances, we are of the considered opinion that the figure mentioned in the sale deed is the fair market value on the facts and circumstances of the case. The report given by the DVO is nothing but an opinion, which when weighed against the actual fact of consideration paid for the purchase of the property, cannot be accepted on the fair market value of the property. It is a case where the facts have to be weighed against the opinions. Neither the AO nor the CIT(A) have based on themselves on any evidences or comparable documents or logical reasoning to come to a conclusion that the negotiated value of the property in question between the parties is not the fair market value of the property. Coming the base rate analysis given by the DVO in his report, we are unable to find logic in such analysis The land rates by sq.yards various between ₹ 1602 and ₹ 36,291. Such a variation demonstrates that the valuation report by the DVO is not correct and has to be seen as not given the appropriate fair market value. As the factual finding is that the fair market value in this case is that the negotiated value between the parties, which was a result of prolonged litigation, supported award by a legal authority, which ultimately culminated into a sale deed, and as we have found that the value by the DVO and the value arrived at by the learned CIT(A) are both opinions, we are of the considered opinion that the fair market value of the property has to be taken. We uphold the contention of the assessee and allow the appeals.

Issues Involved:
1. Computation of capital gains on the sale of property.
2. Applicability of Section 50C of the Income-tax Act, 1961.
3. Validity of the valuation by the Departmental Valuation Officer (DVO).
4. Acceptance of actual sale consideration versus DVO's valuation.
5. Impact of legal disputes and encumbrances on property valuation.
6. Role of compromise decree by Lok Adalat in determining fair market value.
7. Binding nature of DVO's report on the Assessing Officer.
8. Relevance of concessions made by the assessee during assessment proceedings.

Detailed Analysis:

1. Computation of Capital Gains:
The primary issue was the computation of capital gains on the sale of a property co-owned by the assessees, each holding a 1/3rd share. The assessees declared long-term capital gains based on the actual sale consideration of Rs. 4,79,00,000, with each assessee's share being Rs. 1,59,66,667. After reducing the cost of acquisition and indexation, the long-term capital gains declared were Rs. 55,89,227 each.

2. Applicability of Section 50C:
The Assessing Officer (AO) invoked Section 50C of the Income-tax Act, 1961, which mandates adopting the value assessed by the stamp valuation authority if it exceeds the declared sale consideration. The stamp valuation authority valued the property at Rs. 20,93,50,000, significantly higher than the declared sale consideration.

3. Validity of the Valuation by the Departmental Valuation Officer (DVO):
The AO referred the matter to the DVO, who estimated the fair market value of the property at Rs. 6,28,06,500. The AO, however, proposed to adopt the stamp valuation authority's value of Rs. 20,93,55,000, as the assessees did not contest this value before any Court.

4. Acceptance of Actual Sale Consideration versus DVO's Valuation:
The assessees argued that the actual sale consideration of Rs. 4,79,00,000 should be adopted, citing various factors including legal disputes, encumbrances, and the compromise decree by Lok Adalat. They contended that the DVO's valuation was notional and did not reflect the actual circumstances of the sale.

5. Impact of Legal Disputes and Encumbrances on Property Valuation:
The property was under a registered lease for 50 years, with legal disputes and a compromise decree by Lok Adalat affecting its marketability. The assessees argued these factors significantly depressed the property's value, making the stamp valuation authority's value unrealistic.

6. Role of Compromise Decree by Lok Adalat:
The compromise decree by Lok Adalat, dated 25th March 2005, determined the sale consideration at Rs. 2,62,35,000 due to ongoing legal disputes and leasehold rights. The sale deed executed in 2009 referenced this decree, and the final consideration was Rs. 4,79,00,000. The Tribunal gave weight to this compromise decree in determining the fair market value.

7. Binding Nature of DVO's Report on the Assessing Officer:
The Tribunal noted that the DVO's report is binding on the AO but not on the appellate authority. The CIT(A) partially accepted the DVO's valuation but made adjustments for certain factors, which the Tribunal found arbitrary and without sound reasoning.

8. Relevance of Concessions Made by the Assessee During Assessment Proceedings:
The assessees initially offered to accept the DVO's valuation to avoid penal consequences. However, as the AO did not accept this offer, the Tribunal held that the assessees were not bound by this concession. The Tribunal emphasized that tax liability should be based on facts and law, not on concessions.

Conclusion:
The Tribunal concluded that the actual sale consideration of Rs. 4,79,00,000, as evidenced by the registered sale deed and supported by the compromise decree, should be adopted as the fair market value. The Tribunal found the DVO's valuation and the CIT(A)'s adjustments to be opinions rather than facts. Therefore, the appeals were allowed in favor of the assessees, and the AO was directed to compute the capital gains based on the actual sale consideration.

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