2018 (1) TMI 183 - AT - Income Tax

Addition on account long term capital gain - estimating the fair market value by adopting rent capitalization method - Held that - Basically the property was a residential property. The property was let out but it was constructed in the back portion of the plot of land. The District Valuation Officer has treated the property as fully commercial, which is not justified. It is also a fact that no site plan was sanctioned by the local bodies, which the assessee could submit to the District Valuation Officer, therefore, the District Valuation Officer s observation was that the assessee did not file site plan is factually incorrect. Further it is also important to note that to invoke the rent capitalization method, the period of tenancy has to be considered. Further the termination date of tenancy is also relevant factor to invoke the rent capitalization method. The dispute with tenant is also very relevant aspect which needs consideration while valuing the property. No lease deed was executed with the bank due to dispute in the property. The strong room facility was not constructed due to dispute with the owner. It was only constructed in setback area illegally. Further the stairways were common and other facilities like overhead water tank were also common with part owner of plot, which reduces the fair market value in terms of salable price and also in terms of the rent. It is also important to note that the property was in dispute and the court cases were going on. The assessees were residing outside the Jaipur. It was difficult for them to travel to Jaipur every time to negotiate the deal when they were senior citizens. The structure was very old as it was constructed in 1972. Considering all we hold that the District Valuation Officer has not considered all these various aspects which has direct bearing on the fair market value of the land on the date of transfer. The facts of the case also suggest that it can be termed as distress sale, therefore, the District Valuation Officer was not justified in estimating the fair market value by adopting rent capitalization method, therefore, direct to delete the same.

Issues Involved:
1. Validity of action taken under Sections 147 and 148.
2. Addition on account of Long Term Capital Gain (LTCG).
3. Method of valuation of the property.
4. Charging of interest under Sections 234A, 234B, 234C, and 234D and withdrawal of interest under Section 244A.

Detailed Analysis:

1. Validity of Action Taken under Sections 147 and 148:
Grounds 1.1 and 1.2, which challenge the validity of the action taken under Sections 147 and 148, were not pressed during the hearing. Consequently, these grounds were dismissed as not pressed.

2. Addition on Account of Long Term Capital Gain (LTCG):
The primary issue revolved around the addition of ?10,70,750/- as LTCG, which was confirmed by the CIT(A). The assessee declared LTCG of ?84,161/-, but the AO adopted a higher sale consideration based on the valuation report of the District Valuation Officer (DVO).

The property in question was sold for ?23,00,000/-, but the Sub Registrar valued it at ?48,60,591/- under Section 54 of the Stamp Duty Act. Upon the assessee's request, the valuation was referred to the Assistant Valuation Officer, who initially proposed a value of ?46,75,000/- and after objections, finalized it at ?44,41,500/-. The AO adopted 50% of this value for each assessee, leading to the contested addition.

The assessee argued that the sale was a distress sale due to ongoing litigation with the bank, which affected the property's marketability and value. The property was partly occupied by the original sellers, lacked a sanctioned site plan, and had common facilities like stairways and an overhead water tank, which further reduced its market value. The DVO's adoption of the Rent Capitalization Method was challenged, as the property was not generating rent due to the dispute.

The Tribunal noted that the DVO treated the property as fully commercial, which was incorrect. The property was primarily residential with some commercial use due to tenants. The Tribunal found that several factors, such as the absence of a sanctioned site plan, common facilities, and the ongoing dispute, were not adequately considered by the DVO. These factors justified treating the sale as a distress sale, and the Rent Capitalization Method was deemed inappropriate. Consequently, the Tribunal directed the deletion of the addition.

3. Method of Valuation of the Property:
The Tribunal emphasized that the DVO did not consider all relevant aspects affecting the property's fair market value. The property was a residential property with some commercial use, and the ongoing dispute with the bank significantly impacted its value. The Tribunal criticized the DVO for not considering the property's condition, the absence of a sanctioned site plan, and the common facilities shared with the original sellers. The Tribunal concluded that the Rent Capitalization Method was not suitable for this case and directed the deletion of the addition based on this method.

4. Charging of Interest under Sections 234A, 234B, 234C, and 234D and Withdrawal of Interest under Section 244A:
The assessee challenged the charging of interest under Sections 234A, 234B, 234C, and 234D, as well as the withdrawal of interest under Section 244A. However, specific details and arguments regarding this issue were not elaborated in the judgment.

Conclusion:
The Tribunal allowed both appeals, directing the deletion of the addition made on account of LTCG and criticizing the method of valuation adopted by the DVO. The decision emphasized the importance of considering all relevant factors affecting the property's value, particularly in cases involving distress sales and ongoing disputes. The Tribunal's findings applied to both appeals, resulting in the deletion of the contested additions.

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