Land within municipal limits can not be treated agricultural based on revenue record. Revision u/s 263 upheld for wrong DVO report – Allahabad High Court

Land within municipal limits can not be treated agricultural based on revenue record. Revision u/s 263 upheld for assessment based on wrong DVO report – Allahabad High Court

Land within municipal limits

ABCAUS Case Law Citation:
ABCAUS 1195 (2017) (04) HC

Assessment Year : 2004-05
Date/Month of Pronouncement: March, 2017

Brief Facts of the Case:
The respondent assessee filed return of income tax for showing income and long term capital loss. Assessing Officer (‘’AO’) accepted returned income under Section 143(3) of the Income tax Act, 1961 (‘the Act’).

The CIT issued notice initiating proceedings under Section 263 of the Act stating that with respect to the sale of piece of land by the assessee, the AO had accepted the sale consideration/value of land without importing Section 50C of Act. According to section 50C  if consideration received or accrued as a result of transfer by an assessee of a capital asset of a land or building, is less than the value adopted or assessed by any authority of State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed for the purposes of Section 48 be deemed to be the full value of consideration received or accrued as a result of such transfer.

The Commissioner also found that value adopted by Stamp Valuation Authority was Rs. 3,24,84,000/- which should have been taken as value of sale consideration for the purpose of computation of capital gains.

The assessee in its reply said that if AO finds that value of asset sold is less than the value as adopted or assessed for the stamp duty purpose, it had two options, (i) it may accept valuation disclosed by Assessee; and (ii) may refer the matter to Valuation Officer and the value so estimated by such officer would be taken into account for completion of assessment. 

The assessee further submitted that the AO had referred the matter to District Valuation Officer (‘DVO’) for valuation under Section 50C(2) of the Act and after receiving report, issued notice to Assessee also. It was only thereafter, valuation disclosed by assessee was accepted. The assessee, thus contended that AO passed order with deep and indepth inquiry and the order passed by the AO was neither erroneous nor it was prejudicial to Revenue, therefore, Section 263 of Act, 1961 would not be attracted. 

However, the CIT found that in the order passed by A.O., all the details and factum regarding valuation of DVO were not mentioned. The order was cryptic and stereotyped. Thus, it could not be said that AO had made detailed inquiry in the claim of capital loss made by Assessee. CIT also held that AO did not make any attempt to verify veracity or otherwise of evidence available on record and there was a complete failure on the part of AO to make necessary inquiry.

The CIT set aside assessment order. The CIT directed AO to complete assessment de novo after making necessary inquiries and giving opportunity of hearing to Assessee. 

Aggrieved by the said order, assessee filed appeal before Tribunal (‘ITAT’), which allowed the appeal by setting aside the order passed by CIT u/s 263.

Aggrieved, the Revenue contested the order of the ITAT before the High Court.

Contentions of the Appellant Revenue:
It was contended that DVO had valued land by treating it as agricultural land whereas the land was situated in the municipal limits of Lucknow city and therefore, under Section 2(14) of the Act it could not have been treated to be an agricultural land, excluded from the term, ”capital asset’. It was submitted that the DVO failed to consider this aspect but AO ought to have applied its mind which he had failed, therefore, power was rightly exercised by CIT.

Contention of the Respondent Assessee:
It was contended that sale deed could not be taken into consideration since it was not a material available before AO or CIT.

Observations made by the High Court:
The The Hon’ble High Court observed that DVO in his report remarked that valuation unit of department has no provision to value agricultural land as per statutory provisions, hence he did not determine fair market value of property and sought for the direction, again it was required to provide fair market value of the property sold by assessee. 

The confidential letter of the DVO which was reproduced in the order of Tribunal showed that he determined the value of the land treating it as agricultural land and for that purpose relied on sale deed as also revenue record. 

The Hon’ble High Court observed that  the sale deed was part of record and the DVO treated the land in dispute as an agricultural land since based on entry in revenue records without noticing the fact that under the Act an agricultural land which is within municipal limits of Nagar Nigam is not excluded from the term, ”capital asset’.  Further when Assessee himself had shown market value as Rs. 3,24,84,000/- on the basis of circle rate, DVO apparently ignored the fact that in the sale deed, itself, it was mentioned that land was within municipal limits. This fact was noticed by AO as mentioned in its letter treating it as capital asset of assessee. Consequently, all the provisions relating to taxation of capital gains as contained in Sections 45 to 55A of Act, would apply. 

The Hon’ble High Court observed that the DVO instead of considering this aspect, wrote a letter to Additional Commissioner, Income Tax stating that assessee himself had admitted fair market value of land at Rs. 60,00 lacs, while he had estimated at Rs. 59.30 lacs. Being agricultural land there was no further necessity for determination of market value of land again. Thereafter, DVO sent letter to Additional Commissioner of Income Tax, that AO, if wants to stay on its own interpretation of law he could proceed. The Hon’ble High Court opined that the tone of letter was a veiled threat to AO.

The Hon’ble High Court observed that it was true that A.O. made reference to DVO for valuation of land in dispute under Section 50C(2) of the Act, but DVO examined the matter erroneously by taking nature of land as agricultural, ignoring that in the sale deed itself it was also mentioned that land was within limits of Nagar Nigam and that being so, its value ought to have been examined as an urban land and not agricultural land. AO treated estimation of DVO as final and proceeded accordingly.

The Hon’ble High Court opined that the order of the assessment passed by the AO was clearly erroneous and also prejudicial to the interest of Revenue. Tribunal had dealt in detail, various inquires made by AO with regard to valuation of property but the basic fact regarding nature of land which was relevant for determination of fair market value was erroneous and had not been examined at all. The Assessee himself knew that the land was within the municipal limits of Nagar Nigam, therefore, fair market value mentioned in the sale deed was not taken by it, which was applicable to an agricultural land but assessee admittedly applied the circle rate applicable to urban land.

The Hon’ble High Court stated that,

the land which was within the municipal limits, could not have been treated to be agricultural land on the basis of revenue records.

The Hon’ble Court observed that the AO also did not examine that when the assessee admitted circle rate, applicable to ”urban land’ for the purpose of fair market value, for stamp duty, then, why for determination of market value by DVO, land should be taken as an agricultural land. 

CIT rightly exercised power under Section 263 of Act and Tribunal had erred in law in taking otherwise cognizance and setting aside order of CIT. The order of Tribunal was set aside and the order of CIT was restored. 

Land within municipal limits

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