AO must refer property valuation to DVO under section 50C(2) when assessee objects to stamp duty valuation

ITAT Ahmedabad allowed the appeal for statistical purposes, setting aside the addition under section 50C where the AO adopted stamp duty value as deemed consideration without referring to the Departmental Valuation Officer despite the assessee's objection. The Tribunal held that once an assessee objects to stamp duty valuation, it is obligatory for the AO to refer the matter to DVO under section 50C(2) before invoking section 50C(1). The matter was restored to the AO with directions to refer property valuation to DVO and recompute capital gain accordingly.

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The core legal questions considered in this appeal include:

1. Whether the Assessing Officer (AO) was justified in making an addition towards long-term capital gain under section 50C of the Income-tax Act, 1961 by adopting the stamp duty value as deemed sale consideration without referring the matter to the Departmental Valuation Officer (DVO) under section 50C(2), despite the assessee's objection.

2. Whether the AO erred in not accepting the sale value declared by the assessee and in not granting a proper opportunity of hearing.

3. Whether the Commissioner of Income-tax (Appeals) [CIT(A)] erred in confirming the addition without verifying the documents and evidence submitted by the assessee and without directing a reference to the DVO.

4. Whether the reopening of the assessment under section 147 was valid and within jurisdiction.

5. Whether penalty proceedings initiated under section 271(1)(c) for concealment of particulars of income were justified.

Issue-wise Detailed Analysis

Issue 1: Legality of addition under section 50C without DVO reference

The relevant legal framework is section 50C of the Income-tax Act, which stipulates that if the consideration received or accruing as a result of transfer of an immovable property is less than the value adopted or assessed by any authority for stamp duty purposes, the value so adopted shall be deemed to be the full value of the consideration received. However, sub-section (2) of section 50C provides that if the assessee objects that the stamp duty valuation exceeds the fair market value and has not been received, the AO may refer the valuation of the capital asset to a Valuation Officer for determination of fair market value.

Precedents have consistently held that once an objection is raised by the assessee against the stamp duty valuation, the AO is under an obligation to refer the matter to the DVO before invoking section 50C(1) to adopt the stamp duty value as deemed consideration.

In this case, the assessee had objected to the adoption of the stamp duty value, contending that the actual sale consideration was Rs. 5,00,000/- (1/5th share), as the property was sold to a community trust at a value lower than the market rate. The assessee also requested the AO to refer the valuation to the DVO under section 50C(2). The AO, however, did not make such a reference and proceeded to adopt the stamp duty value as deemed consideration, making an addition of Rs. 22,02,858/- towards long-term capital gain.

The CIT(A) confirmed the addition, holding that since the assessee did not produce documentary evidence to support the objection, reference to the DVO was not mandatory. The CIT(A) did not examine the merits of the objection or direct any factual verification.

The Tribunal noted that the assessee's objection was recorded orally during assessment proceedings and was also part of the written submissions. The Court held that the CIT(A)'s reliance on the absence of documentary evidence to deny a DVO reference was misplaced. The obligation on the AO to refer the matter to the DVO arises once the objection is raised, irrespective of documentary proof at that stage.

The Tribunal cited settled legal principles that the AO must refer the matter to the DVO before applying section 50C(1) if the assessee objects to the stamp duty valuation. Given the sale was to a charitable community trust at a lower than market value, the Tribunal found it appropriate to remit the matter to the AO with a specific direction to refer the valuation to the DVO and decide afresh in accordance with law.

Issue 2: Acceptance of declared sale consideration and opportunity of hearing

The assessee contended that the AO erred in not accepting the declared sale consideration and in not providing an adequate opportunity of hearing. The AO's failure to refer the matter to the DVO also deprived the assessee of a fair adjudication on the valuation dispute.

The Tribunal observed that the AO did not provide a proper opportunity to the assessee to substantiate the objection to the stamp duty valuation. The CIT(A) also failed to consider the merits of the objection and merely faulted the assessee for lack of documentary evidence. The Tribunal emphasized the principle of natural justice requiring that the assessee be given reasonable opportunity to present evidence and explanation.

Accordingly, the Tribunal directed the AO to grant a reasonable opportunity to the assessee during the remand proceedings.

Issue 3: Validity of reopening assessment under section 147

The assessee challenged the reopening of assessment on grounds of limitation and jurisdiction. However, the Tribunal did not adjudicate on this issue at this stage, noting that it was consequential and dependent on the outcome of the valuation dispute. The issue was left open for consideration after fresh assessment.

Issue 4: Penalty proceedings under section 271(1)(c)

The assessee also challenged the initiation of penalty proceedings for concealment of particulars of income, arguing that the addition under section 50C was unjustified. The Tribunal refrained from adjudicating on this issue pending the outcome of the reassessment after DVO valuation, as the penalty proceedings were consequential.

Significant Holdings

The Tribunal held:

"It is well-settled law that once the assessee raises objection to the adoption of stamp duty valuation, it is obligatory for the AO to refer the matter to the DVO before proceeding to invoke section 50C(1)."

"The appellate authority failed to deal with the merits of such objection or direct the AO to make factual verification."

"Considering the sale of property to a charitable community trust at lesser than market value, we find it appropriate to restore the matter to the file of the Assessing Officer with a specific direction to refer the valuation to the DVO under section 50C(2) and decide the matter afresh in accordance with law."

The Tribunal directed the AO to:

• Refer the property valuation to the DVO under section 50C(2) of the Act;
• Recompute the capital gain based on the valuation so obtained;
• Grant reasonable opportunity to the assessee for furnishing necessary evidence and explanation;
• Pass a fresh order after carrying out the above directions and in accordance with law.

The Tribunal set aside the orders of the lower authorities insofar as they related to the addition under section 50C and allowed the appeal for statistical purposes.

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