Learning from reported judgment and practical support:Addition due to valuation differences cannot be made in intimation or order u.s. 143.1 – proper course for AO is to issue notice u.s 143.2, in case of need to make reference to Departmental Officer for valuation, and then pass order u.s. 143.2.Assesse must challenge addition made u.s.143.1 as beyond scope of S. 143.1. In case of addition is made after valuation made by DVO, the valuation alos need to be challenged if it is excessive.

[DEVKUMAR KOTHARI]

Learning from reported judgment and practical support:

Addition due to valuation differences cannot be made in intimation or order u.s. 143.1 – proper course for AO is to issue notice u.s 143.2, in case of need to make reference to Departmental Officer for valuation,  and then  pass order u.s. 143.2.Assesse must challenge addition made u.s.143.1 as beyond scope of S. 143.1. In case of addition is made after valuation made by DVO, the valuation alos need to be challenged if it is  excessive.

General brief discussion- valuation difference and addition:

There are some provisions under which valuation  difference between valuation made by stamp authority (or ascertained in prescribed  manner), as per relevant provisions,   and actual consideration can be added in income.

 For example:

43CA. Special provision for full value of consideration for transfer of assets other than capital assets in certain cases – relating to land and / or building held as stock-in-trade.

S. 50C -Special provision for full value of consideration in certain cases – relating to immovable properties being land and / or building.

S.50CA - Special provision for full value of consideration for transfer of share other than quoted share. ( valuation as per Rules)

S.50D- Fair market value deemed to be full value of consideration in certain cases.

S.56 – Other sources-   some clauses of sub-section (2) of  S. 56  fair market value or excess of fair market value of certain property received without or lower consideration .

In case of immovable properties being  land and or building valuation adopted by stamp authorities or circle rates, or value assessable as such, are considered as fair  market value.

This write-up is a general discussion on basics of  difference in valuation  which can be deemed income.

Readers are requested to refer to applicable provision to the nature of transaction, nature of property, applicable valuation method,   and applicability in particular circumstances and particular year or on or after particular date and limits of amount above which the provision apply etc.

Central Processing Center (CPC) communication and addition:

A practice adopted by CPC  of the Income tax department is to issue a communication about difference of valuation observed from disclosure made by assesse in ITR of from  other sources available  in its data base and to make addition in income.

The basic point is that the CPC can make adjustments or variation in income for any arithmetical mistakes, or certain omissions or mismatch found.

CPC need to communicate the same and seek reply from assessee, consider the reply and then can make an addition if it is within scope of S. 143.1 of IT Act.

If it is not within scope of S. 143.1  the matter should be sent to the jurisdiction Assessing Officer for proper action that can include issue of notice u.s. 143.2  and scrutiny of ITR for limited or specified purposes or unlimited scrutiny as the circumstances require.

In case of valuation difference, where provisions require ascertainment of fair market valuation and where assesse has disputed fair market valuation, as is in knowledge of CPC or Assessing Officer the requirement under  provisions have to be complied with by the Assessing Officer.

When Assessee has made  computation based on actual consideration, then it can be said that Assessee has disputed the fair market valuation as adopted by the stamp authority.

In ITR form assessee  should disclose valuation made by  stamp authority  and still can compute profits or  gains as the case may be based  on actual consideration.

This would  clearly imply  that the assesse disputes valuation made by stamp authority. If valuation made by stamp authority is not disclosed, it can be considered a case of not furnishing prescribed information or hiding information.

Provision of reference to Valuation Officer:

In section 50C we find specific provision for reference to departmental valuation officer, the relevant portion is reproduced below:

Special provision for full value of consideration in certain cases.

(1) ....

(2) Without prejudice to the provisions of sub-section (1), where-

(a) the assessee claims before any Assessing Officer that the value adopted ²[or assessed or assessable] by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer;

(b) the value so adopted or assessed or assessable by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,

the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act.

Explanation 1..- For the purposes of this section, "Valuation Officer" shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).

Claim or dispute by assesse

Where assessee computes his capital gain in ITR  based on actual consideration it means that he has disputed valuation made by stamp authority for the  purpose of Income –tax Act.  However, when a communication is received from CPC or Assessing Officer, in reply it must be specifically disputed in a suitable manner.

 Better course , particularly when difference is know to the assesse and amount of difference  involved is also significant, it is advisable to make a claim about excessive valuation made by stamp authority by way of available method on  line or at least by sending email or other communication  to the JAO before filing ITR to be on safe side.

Dispute before stamp authority may not be possible, because stamp duty is payable by buyer, and it is up to him whether to dispute or not. In case of immovable properties, bought, there is urgency to obtain title deed, for obtaining loan or provide security for other loan and many times for mental peace and satisfaction that stamp duty is paid to get registered document as soon as possible.

If there is scope to raise a dispute, before stamp authority, it must be explored.

Claim in appeal:

In case addition has been made by CPC, or JAO  in order u.s 143.1 or u.s. 143.2 ( with or  without making a reference to the Valuation Officer, )  assesse need to file an appeal before CIT(A) to seek remedy for deleting or reducing addition.

 In the statement of facts and grounds of appeal the difference in valuation being excessive must be emphasized .

Furthermore, action of CPC in intimation, u.s. 143.1 or by JAO in order u.s. 143.1 or u.s. 143.2 ( with or without reference to Valuation Officer )  must also be challenged including  as beyond scope of S.143.1 hence void and on amount of valuation applied and addition made.

Both these aspects that is excessive valuation and jurisdiction of CPC or AO u.s. 143.1 and excessive valuation etc. as may be applicable in any given case must be emphasized.

In case it is not so disputed then it  may  depend on discretion of appellate authority or Tribunal or Court in case the   matter need  to be carried in appeal by assessee or is carried by tax department in appeal or revision or other proceeding.

Case study :

SUNIL KUMAR AGARWAL VERSUS D.C.I.T, CIRCLE-2, SILIGURI - 2013 (8) TMI 1198 - ITAT KOLKATA

This case has some peculiar aspects.

In this case assesse had sold  one  plots of land for consideration received Rs. 10 lakh. Assessee invested entire actual sale consideration in capital gain bonds for Rs.10 lakh and claimed deduction u.s. 54EC .

It appears that the asesse took view that entire actual consideration was reinvested in capital gain bonds so  there is no taxable capital gains. 

However,   the market value of the said land was assessed at Rs. 35 lakhs by the District Sub Registrar being the Stamp Valuation Authority.  The AO considered valuation made by stamp authority and computed capital gains of Rs.23, 11, 719/- as long term capital gains, after allowing deductions of cost and deduction u.s. 54EC as claimed.

On appeal, first appellate authority CIT(A) confirmed order of AO.

In second appeal, assessee preferred grounds of appeal as follows:

I) For that the Ld. CIT(A) erred in confirming the application of Section 50C of the I.T.Act while allowing exemption u/s 54EC on sale of Long Term Capital Asset.

 2) For that the deeming provisions of Section 50C cannot control the provisions of Section 54EC of the LT.Act.

 3) For that the Ld. CIT(A) erred in mis-interpreting the decision given by jurisdictional ITAT, Kolkata Bench in case of Smt. Chandrakala Devi Bansal vs ITO, ITA No: 2481K/2005.

 4) For that the appellant craves leave to add, alter any further ground of appeal before the hearing.

During hearing the A.R. of assesse submitted  on the following lines:

 ( as analyzed and extracted from para 4 of the order of ITAT):

a. The assessee had sold a plot of land during the relevant assessment year for Rs. 10 lakhs.

b.  The assessee had invested the sale proceeds of Rs. 10 lakhs in the Bonds and claimed deduction u/s. 54EC of the Act

c. The market value of the said land was assessed at Rs. 35 lakhs by the District Sub Registrar being the Stamp Valuation Authority.

d.  Applying provisions of section 50C of the Act, the Assessing Officer had adopted the sale value of the land at Rs.35 lakhs and computed the long term capital gains at Rs. 23, 11, 719/-.

e. The Assessing Officer had granted the benefit of exemption u/s. 54EC to the extent of Rs. 10 lakhs and treated the amount of Rs.23, 11, 719/- as long term capital gains.

f. The assessee had not received the amount of Rs. 35 lakhs. The assessee has received only Rs. 10 lakhs.

g. Consequently, the capital gain was liable to be assessed only by taking into consideration the sale consideration received by the assessee being Rs. 10 lakhs.

h. That the A.R  had no objection, if the issue of valuation of the property was sent to the D.V.O.

i. The order of the learned Commissioner of Income-tax (Appeals) confirming the stand of the Assessing Officer was liable to be reversed.

The departmental Representative submission

As analyzed and extracted from para 5 of the order of ITAT:

a.  referred  to pages 2 -4  of the order of the learned Commissioner of Income-tax(Appeals).

b. The  assessee has placed reliance on the provisions of section 54F of the Act, howeve, section 54F and section 54EC were different.

c. The assessee had not made any claim for reference to the D.V.O before the Assessing Officer nor had pointed out any specific requirement for referring the valuation to the D.V.O

d. The sale consideration was rightly taken at Rs. 35 lakhs.

e.  that the order of the learned Commissioner of Income-tax (Appeals) was liable to be upheld.

Order of Tribunal analyzed  from para 6 of the order:

a.  A perusal of the grounds of appeal as raised by the assessee clearly shows that the assessee has not pointed out any reason for reference to the D.V.O in respect of the provisions of section 50C of the Act.

b. Valuation of the property by the stamp valuation authority at Rs. 35 lakhs has not been disputed by the assessee.

c.  Once the stamp valuation authority’s value has been accepted by the assessee, then the same would have to be adopted in view of the specific provisions of section 50C of the Act.

d.  Learned Commissioner of Income-tax (Appeals) has given detailed reasons to show that the provisions of section 54F of the Act cannot be considered or treated as to be in pari materia with provisions of section 54EC of the Act.

e. The Assessing Officer had provided the assessee an opportunity to take its stand in respect of the provisions of section 50C and the assessee had not replied in respect of section 50C.

f. Findings of the learned Commissioner of Income-tax (Appeals) and the Assessing Officer are on a right footing and do not call for any interference.

Hence appeal was dismissed.

Observations of author:

In this case  assessment was completed u.s. 143.3 as scrutiny assessment and assesse did never challenged valuation by stamp authority as excessive. Even before CIT(A) and ITAT  such challenge was not made specifically by proper ground.

 Even in grounds of Appeal before Tribunal, any ground was not preferred.

It was only during the hearing  before Tribunal that Ld. A.R. mentioned that  he had no objection, if the issue of valuation of the property was sent to the D.V.O . As per understanding of author, it may imply that  that even before Tribunal a proper  prayer was not made in this regard.

It seems that view taken by assesse was that once entire sale value is reinvested in capital gain bonds,   exemption is available. The effect of section 50C  that it deems stamp valuation as consideration was not properly understood.

Therefore, if exemption is to be sought on basis of reinvestment, then reinvestment should be equal to valuation by stamp authority and not actual consideration received. This is because in case of no dispute raised, the valuation made by stamp authority is deemed to be consideration for all provisions relating to capital gains including for reinvestment.

Therefore, challenging valuation by stamp authority is an essential aspect if actual consideration is to be adopted for computing capital gains.

Assessee relied on judgment of ITAT in case of Smt. Chandrakala Devi Bansal vs ITO, ITA No: 2481 /K/2005. That judgment is not found in web search on this website and  website of ITAT and other websites also.

 However, it is likely  that the case relates to period before S.50C came into force w.e.f. 01.04.2003 because it is not likely that case for AY 2003-04 would have reached Tribunal  after completion of  scrutiny assessment, first appeal and filing of  appeal before ITAT  in year 2005.

In this case if the assessee has made specific dispute and request  before the AO to make a reference to Valuation Officer, and then if the AO did not make a reference, perhaps the assessment order could be set aside as void in first appeal itself.

Case before High Court:

Since relief was not allowed by Tribunal, assesse preferred appeal before honorable Calcutta High Court.

The following questions of law  were  raised by the assesse ( with highlights added) :

(a) Whether, the Tribunal misdirected itself in law in proceeding on the basis that reliance by the appellant on the deeds of conveyance containing the recital that the agreed consideration represented the highest prevailing market price was not sufficient for disputing the stamp value and making reference to the departmental valuation officer in terms of sub-section (2) of section 50C of the Income Tax Act, 1961 and its purported findings in that behalf are arbitrary, unreasonable and perverse?

(b) Whether and in any event, upon a true and proper interpretation of the material provisions of the Income Tax Act, 1961, the entire capital gain would be exempted if the sale consideration received is fully invested in bonds notified for the purpose of section 54EC and the Tribunal was justified in law in taking a contrary view ?”

After hearing arguments of both side and perusing orders of lower authorities and recital in the conveyance deed  honorable High Court took a liberal view and also considered duty of the Assessing Officer to refer the matter to Valuation Officer.

From The order and judgment of High Court order portion,  with highlight added:

         “We have considered the rival submissions advanced by the learned advocates appearing for the parties. The submission of Ms. Ghutghutia that the requirement of clauses a) and (b) of sub-Section 2 of Section 50C has not been met by the assessee, can hardly be accepted. The requirement of clause (b) of sub-Section 2 of Section 50C was evidently met. The only question is whether the requirement of clause (a) of sub-Section 2 of Section 50C was met by the assessee.

We have already set out hereinabove the recital appearing in the Deeds of Conveyance upon which the assessee was relying. Presumably, the case of the assessee was that price offered by the buyer was the highest prevailing price in the market. If this is his case then it is difficult to accept the proposition that the assessee had accepted that the price fixed by the District Sub Registrar was the fair market value of the property. No such inference can be made as against the assessee because he had nothing to do in the matter. Stamp duty was payable by the purchaser. It was for the purchaser to either accept it or dispute it. The assessee could not, on the basis of the price fixed by the Sub-Registrar, have claimed anything more than the agreed consideration of a sum of Rs.10 lakhs which, according to the assessee, was the highest prevailing market price. It would follow automatically that his case was that the fair market value of the property could not be Rs.35 lakhs as assessed by the District Sub Registrar. In a case of this nature the assessing officer should, in fairness, have given an option to the assessee to have the valuation made by the departmental valuation officer contemplated under Section 50C. As a matter of course, in all such cases the assessing officer should give an option to the assessee to have the valuation made by the departmental valuation officer.

For the aforesaid reasons, we are of the opinion that the valuation by the departmental valuation officer, contemplated under Section 50C, is required to avoid miscarriage of justice. The legislature did not intend that the capital gain should be fixed merely on the basis of the valuation to be made by the District Sub Registrar for the purpose of stamp duty. The legislature has taken care to provide adequate machinery to give a fair treatment to the citizen/taxpayer. There is no reason why the machinery provided by the legislature should not be used and the benefit thereof should be refused. Even in a case where no such prayer is made by the learned advocate representing the assessee, who may not have been properly instructed in law, the assessing officer, discharging a quasi judicial function, has the bounden duty to act fairly and to give a fair treatment by giving him an option to follow the course provided by law.

For the aforesaid reasons, the order under challenge is set aside.

The impugned order including orders passed by the CIT(A) and the assessing officer are all set aside. The matter is remanded to the assessing officer. He shall refer the matter to the departmental valuation officer in accordance with law. After such valuation is made, the assessment shall be made de novo in accordance with law.”

Un quote observations of author:

In view of author, the assesse missed to raise all possible contentions, options  and grounds before the AO and also in first appeal and second appeal.

 If a ground was raised before ITAT ( it could have been raised by way of an additional ground also), perhaps judgment of Tribunal could be in favor of assesse.

Therefore, we learn from this case that when litigation is  required, all possible contentions must be raised.

 In this case, perhaps the assesse was confident on one contention that entire sale proceed was invested in capital gain bond, so long term capital gains is reduced to  Nil.

This understanding of author also becomes clear when we find that even before the  High Court, proper and direct question for excessive valuation by stamp authority was not made out but only inference from the recital in conveyance deed was drawn to say that the said recital clearly make out case that the price realized was highest, therefore, valuation by stamp authority was not fair and was excessive.

 In fact, the provision cast duty on assesse to claim that the stamp valuation is excessive and is not acceptable  and that it was not disputed before stamp authority  because vendor cannot do so.

Therefore,  request should be made to the AO to refer the matter to the valuation authority.

As observed earlier, in absence of such a claim it will be at discretion of the AO or appellate authority whether to refer the matter to Valuation Officer or not? 

Now we find that in this case Honorable High Court took a liberal view, and also applied presumption and inference and highlighted duty of the AO to be fair and reasonable and provide opportunity to assesse  in such cases to seek reference to the valuation officer.

Therefore, the honorable High Court set aside all orders of lower tribunal and authorities and restored the matter back to the AO with Directions to refer the matter to the Valuation Officer, obtain valuation report and make a fresh assessment as per law.