2016 (9) TMI 103 - AT - Income Tax

Applicability of section 50C - challenging the valuation done by stamp duty authorities - reference to dvo - Held that - The assessee rightly exercised its right and invoked the provisions of Section 50C(2) of the Act to refer the matter to DVO albeit this plea was taken by the assessee for the first time on 23-12-2009 which was at the fag-end of the assessment proceedings u/s 143(3) read with Section 143(2) of the Act being getting time-barred on 31-12-2009 under the provisions of Section 153(1) of the Act. Hence, keeping in view the interest of justice and fair play, in our considered view this matter/issue needs to be set aside and restored to the file of the A.O. for de-novo determination of the issue on merits after referring the matter to DVO for valuation report and thereafter the AO shall complete the assessment de-novo on merits after considering the evidences/explanations submitted by the assessee in its defense, valuation report of DVO as well the value adopted by the stamp duty authorities to arrive at the full value of consideration to compute capital gains chargeable to tax under the head Income from capital gains under Chapter IV-E of the Act. Needless to say that the A.O. shall provide proper and adequate opportunity of being heard to the assessee in accordance with the principles of natural justice in accordance with law.

Issues Involved:
1. Applicability of Section 50C of the Income Tax Act, 1961 to the transfer of development rights.
2. Classification of the asset as a capital asset or business asset.
3. Consistency in the treatment of income from the sale of properties.
4. Validity of the valuation method and the necessity of referring the matter to the Departmental Valuation Officer (DVO).

Issue-wise Detailed Analysis:

1. Applicability of Section 50C of the Income Tax Act, 1961 to the Transfer of Development Rights:
The primary issue was whether Section 50C, which applies to the transfer of capital assets being land or building or both, could be invoked for the transfer of development rights. The Assessing Officer (AO) applied Section 50C, treating the development rights as capital assets, and computed the capital gains based on the stamp duty valuation. The assessee contended that Section 50C was not applicable as it had transferred development rights, not land or building. The CIT(A) agreed with the assessee, referencing the ITAT Mumbai decision in Smt. Kishori Sharad Gaitonde, which held that Section 50C applies only to the transfer of land or building, not development rights. However, the Tribunal found that the assessee effectively sold the land with ownership rights, making Section 50C applicable.

2. Classification of the Asset as a Capital Asset or Business Asset:
The AO classified the land as a capital asset, arguing that it was held as an investment since 1994, shown as 'Investment in Properties' in the balance sheet, and no development work was undertaken. The assessee argued that the land was held as stock-in-trade, intended for development and sale, and consistently treated as a business asset in previous assessments. The CIT(A) supported the assessee's view, emphasizing the principle of consistency and the intention to use the land for business purposes. However, the Tribunal concluded that the land was a capital asset, noting the long-term holding period, lack of development activity, and the manner of its reflection in the books of accounts.

3. Consistency in the Treatment of Income from the Sale of Properties:
The assessee argued that the income from the sale of properties shown under 'Investment in Properties' had always been assessed as business income, invoking the principle of consistency. The CIT(A) upheld this argument, referencing the Supreme Court's decision in Radhasoami Satsang v. CIT, which supports maintaining consistency in tax treatment. However, the Tribunal found that the facts and circumstances indicated that the land was held as a capital asset, not a business asset, thus justifying the treatment of the income as capital gains.

4. Validity of the Valuation Method and the Necessity of Referring the Matter to the DVO:
The AO did not refer the matter to the DVO despite the assessee's request, arguing that the request was made too late in the assessment process. The Tribunal noted that under Section 50C(2), the AO is mandated to refer the valuation to the DVO if the assessee disputes the stamp duty valuation. The Tribunal set aside the matter, directing the AO to refer the valuation to the DVO and reassess the case de novo, providing the assessee with an opportunity to present its case.

Conclusion:
The Tribunal concluded that the land was a capital asset, and the gains from its sale should be treated as long-term capital gains, not business income. The Tribunal also directed the AO to refer the valuation to the DVO and reassess the case accordingly. The appeal by the Revenue was allowed for statistical purposes, and the matter was remanded for further proceedings.

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