2019 (11) TMI 366 - AT - Income Tax

Capital gain computation - adoption of fair market value of the impugned land - HELD THAT - We have held that the valuation report furnished by the assessee was rightly rejected by the AO and at the same time, we have also held that the fair market value as on 1.4.1981 determined by the AO on the basis of sub-registrar rates was also not correct. There should not be any dispute that the industrial land located outside municipal limits, far away from the developed areas would certainly command lower rate. Further the market rate of a plot/land is dependent upon various factors. We have noticed earlier that, even between the plots/land having same characteristics, the bigger plot/land would command low rates than the smaller plot/land. Size of the plot/land, location, access to main road, availability of other amenities etc. would also determine the market rates. Both the parties could bring on record any comparable sale instances of similarly placed land. Hence, we have no other option, but to estimate the probable fair market value of the land as on 1.4.1981 on the basis of available material. The valuer has adopted the rate of ₹ 33.19 per sq.ft. on the basis of sale instances of developed housing sites located within the municipal limits. Further, the impugned land is located within 2.50 kms of municipal limits. These factors could be taken as a guidance, in the facts and circumstances of the case, particularly in the absence of any other sale instances for land of identical nature. There should not be any dispute that an industrial land would command higher rate than an agricultural land. Hence, on a conspectus of the matter, we are of the view that this controversy may be put to rest by adopting the fair market value of impugned land at 1/3rd value of rate determined by the approved valuer, i.e., at ₹ 11/- per sq.ft. Accordingly, we set aside the order passed by CIT(A) and direct the AO to determine the fair market value of impugned land by adopting the rate of ₹ 11/- per sq.ft - Appeal of the assessee is partly allowed.

Issues Involved:
Determination of fair market value as on 01-04-1981 of the industrial land sold by the assessee.

Issue-Wise Detailed Analysis:

1. Background and Context:
The assessee, a partnership firm, sold industrial land and computed the long-term capital gain by adopting a fair market value (FMV) of ?30.00 lakhs as on 01-04-1981. The AO rejected this valuation, adopting ?2,70,975/- instead, which was the value credited to the partner's capital account when the land was introduced into the firm. The Tribunal previously ruled that this book value was notional and could not be used for FMV computation, leading to multiple rounds of proceedings.

2. AO's Approach in Third Round:
In the third round, the AO sought FMV details from sub-registrar offices and noted that the government guideline rates for converted lands were available only from 1989. Using these rates and the cost inflation index, the AO calculated the FMV as ?12,500/- per acre, resulting in a total FMV of ?25,625/-. The AO rejected the assessee's valuation report, citing reasons such as reliance on residential site values, discrepancies in location and size, and lack of direct evidence from the valuer.

3. Assessee's Arguments:
The assessee argued that the AO's reliance on agricultural and residential land values was inappropriate for valuing industrial land. The assessee referenced case laws (Jawajee Nagnatham vs. Revenue Divisional Officer and CIT vs. Dr. D D Mundra) to support the claim that guideline values for stamp duty collection should not be considered as FMV. Additionally, the assessee contended that the AO violated natural justice principles by not confronting them with the results of local inquiries.

4. Revenue's Defense:
The Revenue argued that the valuation report's sale instances pertained to residential plots within municipal limits, which were not comparable to the industrial land outside municipal limits. The AO's rejection of the valuation report was justified, and the sub-registrar rates reasonably indicated the FMV.

5. Tribunal's Observations:
The Tribunal agreed with the AO that residential plot values in developed areas could not be used to value industrial land in underdeveloped areas. The Tribunal also noted that the sub-registrar rates from 1989, used by the AO for backward calculation, could not be considered FMV as per the cited case laws. The Tribunal highlighted the lack of comparable sale instances and the necessity to estimate FMV based on available material.

6. Final Decision:
The Tribunal concluded that the fair market value should be estimated at 1/3rd of the rate determined by the approved valuer, i.e., ?11/- per sq.ft., considering the proximity to municipal limits and the nature of the land. The Tribunal set aside the order passed by Ld CIT(A) and directed the AO to adopt this rate for determining the FMV of the impugned land.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal directing the AO to determine the FMV of the industrial land at ?11/- per sq.ft. The order was pronounced in the Open Court on 6th November 2019.

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