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I-T - Once AO has failed to make reference to DVO, he cannot go back for computation of capital gains: ITAT

By TIOL News Service

HYDERABAD, FEB 16, 2017: THE ISSUE IS - Whether reference to DVO is mandatory for computing capital gains u/s 50C(2) of I-T Act, and the AO having failed to follow such provisions cannot put the assessee in trouble of facing a virtual trial even after five years of appearing before the AO to prove that the sale price declared by him is reasonable. YES is the verdict.

Facts of the case:

The assessee declared income of Rs. 31,90,770/- including LTCG of Rs. 14,23,805/- on sale of property. The AO found that the stamp valuation authority has taken the market value of the property at Rs. 1,35,57,500/- for the purpose of levying of stamp duty. Accordingly, the AO was of the view that the case of the assessee attracts provisions of section 50C as per which he has to adopt the value adopted by the stamp valuation authority for the purpose of computation of capital gains. The Assessee objected for adoption of stamp duty valuation and requested that the same may be referred to the DVO as per section 50C .The AO observed that he is bound to adopt the value of the stamp valuation authority u/s 50C for the purpose of computation of capital gains and has no discretion of whatsoever in this matter and hence, the circumstances of sale of property explained by the assessee have no relevance to the adoption of valuation while applying the said section. He, further observed that the assessee's request for reference of the case to the DVO for valuation also cannot be accepted .The AO computed the LTCG in respect of the sale of property at Mumbai at Rs. 62,52,550/- as against Rs. 14,23,800/- returned by the assessee. The CIT(A) held that the AO has not referred the matter to Valuation Officer as mandated u/s 50C and did not consider valid reasons put forward by the assessee for the actual consideration being less than the value adopted for registration purposes. He, therefore, concluded that the addition made by the AO is without following the due process of law and, hence, the same cannot be sustained and accordingly the addition is deleted by the CIT(A).

On Appeal, the ITAT held that,

++ the powers of CIT(A) are subject to section 250 whereby the CIT(A) has no power to set aside any issue, hence, the only option left to the CIT(A) is either to allow the appeal or to dismiss the appeal of the assessee. The AO has not found any material to indicate that the assessee has received any excess money over and above what was declared by her. No material was placed. When deeming provision was to be invoked, the same has to be construed strictly and it has to be taken to its logical conclusion i.e. upon not following the proper procedure prescribed therein, particularly, in the backdrop of the fact that the assessee has prima-facie shown that it was a tenanted property and, therefore, subjected to certain encumbrances and also the fact that in the absence of obtaining a DVO's report, assessee cannot be put to the trouble of facing a virtual trial even after five years of appearing before the AO/DVO at this stage to prove that the sale price declared by her is reasonable. There are catena of decisions on this point and, on other hand, referring to the speech of the Finance Minister as well as circular issued by the CBDT bringing the intention of the legislature whereby it was held that the AO is duty bound to refer the matter to the Valuation officer when the reasons were thoroughly mentioned by the assessee for the FMV that the assessee could fetch in these circumstances. Despite making request to refer the matter to the DVO, the AO purposely did not refer the matter to the DVO on the ground that he is duty bound to go by the valuation adopted by the stamp valuation authority. The Courts time and gain held that reference u/s 50C(2) is mandatory and the AO having failed to follow the provisions, he should not be given one more chance to refer the matter to the DVO. When the AO has not followed the procedure prescribed in law, the addition made deserved to be deleted. The order of the CIT(A) upheld.

(See 2017-TIOL-127-ITAT-HYD)