2018 (1) TMI 847 - AT - Income Tax

Computation of capital gain - invocation of provisions of sec 50C - most appropriate method for valuation of the galas/building of the assessee - FMV determination - satisfaction of conditions contemplating a transfer as per Sec. 2(47)(v) - Held that - The tenancies in Mumbai are statutorily controlled by the rent control legislations and rent fetched were likely to remain unaltered for years to come, therefore, in the case of the present assessee before us the valuation of the property was required to be done as per the Rent Capitalization Method. We do not approve of the summary acceptance by CIT-A of the claim of the assessee that as the sale price of the galas/buildings received by the assessee was more than the value determined as per the Rent Capitalisation Method, therefore, no addition was called for in the hands of the assessee. We though are not oblivious of the fact that the assessee had placed on record the valuation of the 31 galas/building as per the Schedule III Part B of the Wealth tax Act, 1957, but then, we are of the considered view that the said valuation furnished by the assessee was required to be verified and could not have been accepted on the very face of it. We thus in all fairness restore the matter to the file of A.O, and therein direct that the Fair market value of the property be got determined as per the Rent Capitalization Method - Decided in favour of assessee for statistical purposes. Not allowing set-off of the Short Term Capital Loss against the capital gains - Held that - As perused the order of the A.O in context of the issue under consideration and are of the considered view that he had conclusively proved that the transaction carried out by the assessee was merely a sham transaction with a purpose of evading the tax liability. We have deliberated at length on the orders of the lower authorities as regards the issue under consideration and find ourselves to be in agreement with the view taken by the lower authorities. Before parting, we may herein observe that nothing was brought to our notice which could prove that the observations of the lower authorities were perverse or incorrect. The Ground of appeal No. 1 raised by the assessee is dismissed

Issues Involved:
1. Application of Section 50C of the Income-tax Act, 1961.
2. Valuation method for capital gains computation.
3. Set-off of Short Term Capital Loss (STCL) against capital gains.

Issue-wise Detailed Analysis:

1. Application of Section 50C of the Income-tax Act, 1961:
The primary issue in these appeals is whether the provisions of Section 50C, which mandates the adoption of stamp duty valuation for computing capital gains, are applicable. The revenue contends that the CIT(A) erred in not upholding the application of Section 50C, which was rightly invoked by the AO. The CIT(A) directed the AO to accept the sale consideration as per the sale agreements, which the revenue argues is in contravention of Section 50C. The CIT(A) relied on various High Court decisions rendered before the insertion of Section 50C by Finance Act, 2002, effective from 01.04.2003. The revenue also cited the ITAT, Mumbai Special Bench decision in ITO vs. United Marine Academy, which held that Section 50C applies to the transfer of depreciable assets covered by Section 50.

2. Valuation Method for Capital Gains Computation:
During the assessment proceedings, the AO observed discrepancies between the sale consideration received by the assessee and the value adopted by the Stamp Valuation Authority. The AO computed the income under "Capital gain" by adopting the stamp duty valuation. The assessee argued that the valuation should be based on the Rent Capitalization Method as per Schedule III - Part B of the Wealth Tax Act, 1957, because the properties were old tenanted properties. The CIT(A) agreed with the assessee, stating that the most appropriate method for valuation was the Rent Capitalization Method. The CIT(A) directed the AO to consider the sale price shown by the assessee for computing capital gains, not the value adopted by the AO or the AVO's valuation.

3. Set-off of Short Term Capital Loss (STCL) against Capital Gains:
The assessee claimed a STCL of ?76,50,000, which the AO disallowed, considering it a sham transaction intended to reduce taxable short-term capital gains. The CIT(A) upheld the AO's decision, stating that the transaction was not genuine and was a device to reduce taxable short-term capital gain. The assessee's appeal on this ground was dismissed, as the lower authorities conclusively proved the transaction was a sham.

Detailed Observations:

For A.Y. 2006-07:
The AO computed the income from the sale of industrial galas by adopting the stamp duty valuation under Section 50C, resulting in a capital gain of ?2,02,95,694. The CIT(A) remanded the matter for obtaining the AVO's report, which used the physical method of valuation. The assessee objected, arguing for the Rent Capitalization Method. The CIT(A) agreed with the assessee, but the ITAT noted that the valuation needed verification and restored the matter to the AO for determining the fair market value using the Rent Capitalization Method.

For A.Y. 2007-08:
The facts and issues were similar to A.Y. 2006-07. The AO computed the capital gains using the stamp duty valuation, while the CIT(A) directed using the Rent Capitalization Method. The ITAT applied its observations from A.Y. 2006-07, allowing the revenue's appeal for statistical purposes and restoring the matter for verification.

For A.Y. 2008-09:
Again, the facts and issues mirrored the previous years. The AO used the stamp duty valuation, while the CIT(A) directed using the Rent Capitalization Method. The ITAT's decision followed the same reasoning as for the earlier years, allowing the revenue's appeal for statistical purposes and restoring the matter for verification.

Conclusion:
The appeals of the revenue for A.Ys. 2006-07, 2007-08, and 2008-09 were allowed for statistical purposes, with the matters restored to the AO for determining the fair market value using the Rent Capitalization Method. The assessee's appeal for A.Y. 2007-08 regarding the STCL was dismissed. The ITAT emphasized the need for verification of the valuation method and fair market value in line with the Rent Capitalization Method.

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