2016 (12) TMI 52 - AT - Income Tax

ITAT rules in favor of Assessee on Section 50C issue, rejecting AO's valuation substitution

The ITAT allowed the appeal in favor of the Assessee, setting aside the lower authorities' orders. It was held that Section 50C did not apply to ... Applicability of section 50C to unregistered agreements executed before 01/10/2009 - CBDT Circular No.5/2010 clarifying scope of section 50C - DVO valuation substituted for declared sale consideration - Deviation threshold of 10% for disregarding declared consideration - Pre-amendment transactions exclusion from section 50CApplicability of section 50C to unregistered agreements executed before 01/10/2009 - CBDT Circular No.5/2010 clarifying scope of section 50C - Pre-amendment transactions exclusion from section 50C - Section 50C was not applicable to the unregistered sale agreements executed during financial year 2006-2007 (prior to 01/10/2009), and the CBDT Circular No.5/2010 confirms that transactions not registered with the stamp valuation authority are outside the scope of section 50C for such pre-amendment transfers. - HELD THAT: - The Tribunal examined Circular No.5/2010 which states that the then existing scope of section 50C did not include transactions not registered with the stamp valuation authority and that the amendments clarifying scope apply with effect from 01/10/2009. The transfers in dispute were made during financial year 2006-2007 (i.e., prior to 01/10/2009). Applying the circular and the Madras High Court precedent cited, the Tribunal held that section 50C cannot be invoked to substitute DVO-assessed value for the declared sale consideration in respect of unregistered agreements executed before the effective date of the clarification/amendment. The Tribunal therefore set aside the substitutions made by the lower authorities on this ground and allowed the appeal. [Paras 10, 11, 12, 13, 14]Section 50C not attracted to the unregistered sale agreements executed in financial year 2006-2007; appeal allowed on this ground.DVO valuation substituted for declared sale consideration - Deviation threshold of 10% for disregarding declared consideration - The small difference (approximately 5.5%) between the assessee's declared sale consideration and the DVO valuation did not justify substitution of the declared consideration by the AO. - HELD THAT: - The Tribunal noted that the DVO valued the flats marginally higher than the consideration declared by the assessee, the differential being about 5.5% of the declared amount. Relying on the coordinate-bench decision in Rahul Constructions (as applied to the factual matrix), the Tribunal observed that where the DVO-determined value exceeds the declared consideration by less than 10%, the AO was not justified in substituting the DVO value for the sale consideration. Consequently, even setting aside the section 50C question, the limited percentage deviation was an additional ground for not upholding the addition. [Paras 6, 11, 14]Difference of approximately 5.5% is insufficient to warrant substitution of declared sale consideration; addition set aside.Final Conclusion: The appeal is allowed: the AO's substitution of DVO value for the declared sale consideration is set aside because (i) section 50C does not apply to the unregistered agreements executed in financial year 2006-2007 (pre-01/10/2009) per CBDT Circular No.5/2010 and relevant precedent, and (ii) the modest difference of approx. 5.5% (below 10%) did not justify replacing the assessee's declared consideration. Issues:- Appeal against order of CIT(A) for assessment year 2007-08 regarding addition of property valuation difference by DVO- Applicability of Section 50C to unregistered property sale before 01/10/2009Analysis:- The appeal was filed against the CIT(A)'s decision upholding the addition of Rs. 10,91,130 as the difference in property valuation by the District Valuation Officer (DVO). The Assessee, engaged in construction and sale of flats, sold 4 flats on 07/08/2006 for Rs. 1,96,60,000. The AO referred the valuation to the DVO, who valued the property at Rs. 2,07,51,130, resulting in the addition by the AO under Section 50C. The CIT(A) affirmed the AO's action, leading to the appeal before ITAT.- The Assessee argued that the difference in valuation was only 5.5% of the declared sale consideration, which should be ignored for computing Long Term Capital Gains. Reference was made to a previous decision supporting this argument. It was contended that Section 50C did not apply as the property was unregistered and sold before 01/10/2009, as clarified in Circular No.5/2010. The Assessee cited relevant circulars and judicial decisions to support this position.- The Revenue, however, supported the lower authorities' decision, emphasizing that the DVO's valuation was expert-based and justified. The Revenue argued that the addition to Long Term Capital Gain was correct and should be upheld.- After considering the contentions and relevant provisions, ITAT found that the transactions were executed before 01/10/2009, making Section 50C inapplicable to unregistered property sales. ITAT agreed with the Assessee's arguments regarding the valuation difference and applicability of Section 50C. Referring to judicial precedents and circulars, ITAT concluded that the AO's substitution of DVO's value was unjustified. Consequently, the lower authorities' orders were set aside, and the appeal was allowed in favor of the Assessee. The decision was pronounced on 23/11/2016.