FMV of property on lease to be determined by rent capitalization method not fair market rent – ITAT

FMV of property on lease to be determined by applying rent capitalization method taking the rent actually received by the assessee and not the fair market rent – ITAT

ABCAUS Case Law Citation:
ABCAUS 2985 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
Kerala v. Hassan Koya, AIR 1968 SC 1201
CIT vs. Asha Devi Agarwal 169 ITR 400
CIT Vs. New India Construction Co. 123 ITR 68,
Prafulla Kr. Bhose vs. ITO
CIT vs. Inderjit Singh, (1985) 153 ITR 372 (P&H)

In the instant appeal, the assessee, had challenged the orders passed by the Commissioner of Income Tax (Appeals) in upholding the addition on account of Long Term capital gain on sale of immovable property. The assessee had also challenged  the reference to Departmental Valuation Officer for the Valuation of immovable property as bad in law.

The assessee was the co owner of the property (owned by them by inheritance) having 1/6th share in a property. The assessee along with his other co-owners entered into an agreement for sale of the said property which was already leased for 61 years on a monthly lease rent of Rs. 10,000 per month.

At the time of conveyance of the sale, the fair market value (FMV) by the stamp authority was determined approximately ten times than the actual sale value claimed to have been received by the assessee for the sale of his 1/6th share in terms of the agreement for sale.

In the assessment proceedings the assessee challenged the sale value u/s 50C(2) of the Act and the Assessing Officer (AO) referred the matter of valuation to the DVO.

The assessment was completed by the AO by making addition on account of adopting the FMV of the property as calculated by the DVO.

The assessee carried the matter in appeal before the CIT(A), who confirmed the addition.

Before the Tribunal the assessee raised a limited issue that while determining the fair market value of the assessee’s property, the valuation of the property, should be determined by applying the rent capitalization method taking the rent actually received by the assessee and not the fair market rent as done by the DVO.

The Tribunal opined that the DVO was not justified in valuing the building, as because the assessee was owner of the land only and the building was not constructed or owned by assessee. The building was constructed by the Lessee.

Further, the Tribunal noted that DVO had failed to appreciate that the property being sold by the assessee was on lease which was continuing and the assessee and the other co owners were only entitled to receive a sum of Rs. 10,000 per month as rent.

Relying upon various judgments of the High Courts, the Tribunal held that the valuation of the property had to be made as per Rent Capitalization method.

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