Capital Gains Tax Valuation in Court
Capital gains is the gains made in transfer of capital asset for a consideration and is subjected to tax known as Capital Gains Tax under the Income Tax Act and is applicable to urban land and buildings. If the transfer is made after three years of the date of acquisition, it is termed as long-term capital gains and the tax is 20% of the gains.
For computation of long term capital gains, the cost of acquisition would be the cost of fair market value on a specified date which is presently 1-4-1981.
The fair market value will apply only the properties acquired before 1-4-1981 and for to properties acquired after 1-4-1981 only cost of acquisition should be taken, as inflation index is only for the cost and not for the fair market value.
Section 48 of the Income – tax Act, inter alia, provides that the income chargeable under the head “Capital gains” shall be computed by deducting from full value of the consideration received or accruing as a result of the transfer of capital assets the following amounts, namely, the cost of acquisition of the assets and cost of any improvement thereto. The second proviso appended to the said section provides for indexed cost. Such methodology for valuing the property for the purpose of capital gains by way of indexed cost is taken recourse to having regard to the rate of inflation in mind.
Indexed Cost of acquisition means an amount which bears to the cost of acquisition the same proportion as the Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assesse or for the year beginning on the 1st Day of April 1981, whichever is later;
Cost Inflation Index in relation to a previous year, means such index as the Central Government may, having regard to seventy-five percent of average rise in the consumer Price Index for urban non-manual employees for the immediately preceding previous year, by notification in the Official Gazette, specify in this behalf.
An interesting Hon. Supreme Court Judgment in Dilip N shroff (Karta of N. D. shroff HUF) v Joint Commissioner of Income-tax and another Dated May 18, 2007 delivered by JJ S. B. Sinha and P. K. Balasubramanyan will throw some light on the subject (Based on Publication in Indian Valuer Journal Vol XXXIX No. 9 & 10 of 2007, not seen the full judgment):
Property: “Jekison Niwas”, 220 Walkeshwar Road, Mumbai. (Land: 5,250 sq. yd plus 16,000 sq, ft G+1 old bungalow)
The appellant (Late Mr. Natwarlal Shroff) had 1/4th Share in the above property (A G+1bungalow structure of 16,000 sq. ft, which has outlived its economic life) which sat on a piece of land admeasuring 5,250 sq. yd or 4,389.63 sq. m or 47,250 sq. ft. The appellant had entered into an agreement for sale of the above-undivided 1/4th, shares in the said property for a sum of Rupee 8 (Eight) Crore with one M/s Layer Exports PVT Ltd.
Brief History of the case:
The return filed by the appellant on September 30, 1998, came up for scrutiny before the first respondent, who in exercise of his power under section 55A of the Income-tax Act 1961, referred the matter for valuation of the said 1/4th, undivided share of the appellant as on April 1, 1981 to the District Valuation Officer (DVO); whereupon the DVO submitted a report dated June 29, 2000.
Then the appellant preferred an appeal thereagainst before the Commissioner. However, the said appeal was dismissed by the Commissioner by an Order dated November 13, 2000 observing inter alia, “………This is very strange way of valuing the land after arriving the value of the building and deducting therefrom the value of the superstructure instead of directly calculating value of land with reference to sales instances.” Secondly I find that the basis adopted by the Registered Valuer to rely upon a newspaper is totally unacceptable and does not confirm to the accepted principles of valuation.”
The appellant preferred an appeal before the income-tax Appellant Tribunal, which was dismissed again and confirmed the Order of the commissioner of Income-tax by an order dated August 10, 2001, holding, inter alia ………”The disclosure made of the particulars of income in the return under the head ‘Capital gain’ by the assesse is certainly incorrect for which the impugned penalty is eligible. The assesse can not take shelter under a report of a Registered Valuer which is found by the revenue authorities to have been prepared without due regard to the accepted principles of valuation…”
The learned Counsel Mr. Anil B. Dewan appearing on behalf of appellant argued inter alia ….the assesse having furnished all material facts and furthermore having appointed a registered Valuer recognized for the purpose of valuation of property specifically under the provisions of the Wealth Tax Act, can not be said to have the requisite mens rea which is the sine qua non for imposition of penalty….”
The learned Additional Solicitor appearing on behalf of the respondents argued inter alia ….”existence of mens rea is no longer an essential element for initiating the penalty proceedings having regard to the amendments made in the Act.
Purpose of Valuation: For computation of Capital Gains.
- Material Date of Valuation: 1997 – 98
- The Registered Valuer, Shri U. D. Chande valued the 1/4th shares @ Rupee 2,52,00,000/=
- The DVO (District Valuation Officer) valued the said 1/4th shares @ Rupee 1,44,92,907/=
The extent of Land: 5,250 sq. yd or 4,389.53 sq. m or 47,250 sq. ft.; 1/4th Shares: 11,812.5 sq. ft. Developable Built-up area as per prevailing FSI: 15,711 sq. ft FSI (Floor Space Index: 1.33); Land value by Developable square footage basis is land value based on its development potential, in this particular case rate per Built-up area square foot excluding building cost, whereas Composite rate is including building cost.
The BUA of old G+1 Bungalow: 16,000 sq. ft; 1/4th Shares worksout to 4,000 sq. ft
Comparison of Valuation by the learned Registered Valuer (Regd Valuer) and the learned District Valuation Officer (DVO): Both have valued land by Composite Rate Method (Land area x 1.33), which was unknown to judiciary as per the judgment in the Hon’ble Courts, including the Highest Court on the Land.
Detail Regd. Valuer DVO
Land area 16,536.5 sq. ft 15,710.3 sq. ft
Land Rate Rupee 1,525/sq.ft 897/sq.ft
BUA AREA 4,000 sq. ft 4,000 sq. ft
Land Value 2,52,18,163 1,40,92,139
Scrap value of Bldg 2,00,000 4,00,000
Fair Market Value 2,54,18,163 1,44,92,139
Recorded Valuation 2,52,00,000 1,44,92,907
The Registered Valuer has opined:
“……….. When I inspected the premises I found the building in a dilapidated condition. In fact part of the building has collapsed. I am informed that in 1981 the building was in a similar condition. I am therefore inclined to consider only the scrap value of the building and the value of only land as the basis of my valuation. ……….. I am informed that the land was reserved for a vegetable and retail market before 1965. I am of the opinion that it is possible to get this reservation modified or waived and hence I consider the effect of this on the value of the property negligible. In any event there will be no loss of FSI even if reservation is retained for the purpose of my valuation of share in the property.
Based on the sales instances the prices given in “Accommodation Times” I am of the opinion and feel that the rate of the residential apartment in the area in 1981 would be in between Rs. 2,500 and 3,000 per sq. ft. I think that the lower value of Rs 2,500 per sq. ft as fair and reasonable.
The DVO has valued relying upon two sales instances as below:
- Date of Sale: 27/11/1979 Property: Vacant Land on Survey No. 218 (Pt), Street No. 25, 27, 27 (A) at Narayan Dhabolkar Road off N. S. Road, Mumbai, Consideration: Rs. 3,15,00,000; extent of land: 7,114.08 sq. m, Rate/sq.m: 4,428 or 437/sq. ft
- Date of Sale: 19/10/1982 Property Flat No. 302, 3rd, Floor at Sanudeep CHS Ltd. Plot No. 631 (pt) at Altamount Road, Mumbai. Consideration Rs. 68,00,000; Area: 346.60 sq. m; Rate: Rs 1,823/sq. ft.
By comparing and considering the sale instances property with the subject property after taking into account size-shape, time-gap, location-situation and also the factors like physical, social, legal and economical, the land FSI rate as on April 1, 1981 is Rs. 897 per sq. ft is considered to be fair and reasonable.
Report Year: 1997 –98
Valuation by DVO for long – term Capital Gain Tax:
Sale Value (1/4th, Share of the said property) Rs. 8,00,00,000
Less: Cost of acquisition as on April 1, 1981 as per DVO’s
Report Rs. 1,44,92,907
Indexed Cost: 1,44,92,907 x 331/100 (-) 4,79,71.522
Less Expenses incurred in relation to sale of property
Solicitor’s fees: Rs 2,50,000
Total expenses: (-) 10,50,000
Long term capital gains 3,09,78,478
The Hon’ble Supreme Court has observed (Obiter Dictum): “It is one thing to say that the valuation based on a news paper is totally unacceptable, but it is another thing to say that by reason of the return, the assessee furnished inaccurate particulars. The question, which was inter alia required to be posed, was whether the method adopted by the Registered Valuer was wholly unknown to law or was contrary to all modes of valuation. Whether the particulars sought to have been concealed were necessary for the purpose of arriving at a correct valuation or otherwise mis-leading? Whether the method of valuation adopted by the Registered Valuer resulted in a grossly unfair valuation, which could not have been done by any reasonable person? Was the methodology adopted totally wrong?
The methods of valuation, as we know, may be different. A Registered Valuer is supposed to know as to which method or mode should be adopted for the purpose of valuing a particular land or a building having regard to a large number of factors involved therein. The tax on capital gains does not envisage that the valuation given must be true and exact market value. Even the market value of a property may be found to be different having regard to the locale thereof. There was no direct sale instance. The sale instances relied upon by the DVO were of 1979 and 1982.
The Hon’ble Court has has referred and answered in the following including Union of India v Pramod Gupta (2005) 12 SCC 1 in this regard. “…………In absence of any direct evidence, the court, however, may take recourse to various other known methods. Evidences admissible therefore inter alia would be judgments and awards passed in respect of acquisition of lands made in the same village and /or neighboring villages. ‘Such a judgment and award, in the absence of any other evidence like the deed of sale, report of the expert and other relevant evidence would have only evidentiary value”.
…”It was further observed: We have earlier noticed that one of the modes of computing the market value may be based on a judgment or award in respect of acquisition of similar land, subject of course to such increase or decrease thereupon as may be applicable having regard to the accepted principles laid down therefore and as may be found applicable.
This court therein noticed a large number of decisions where different principles of arriving at a market value have been noticed but it has also been noticed that even while determining market value under the Land Acquisition Act, some guesswork may be inevitable”.
In D. M. Mansawi v CIT (1973) 3 SCC 207) reported (1972) 86 ITR 557 (SC), it was observed the primary burden of proof, therefore, is on the Revenue”.
In Anwar Ali and Khoday Eswarsa reported (1972) 76 ITR 696 (SC), “Once the primary burden of proof is discharged, the secondary burden of proof would shift on the assesse because the proceeding under section 271 (1) (c ) is of penal nature in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which Parliament considers to be against the public interest and therefore, it was for the Department to establish that assesse shall be guilty of particulars of income”.
As in the facts and circumstances of the case, there are enough materials to show that the action on the part of the appellant may not be said to be such which would attract the penal provision under section 271(1) (C) of the Act. (We may notice the legal history of the provisions of Section 271 (1) (c) of the Act. In the Indian Income-tax Act, 1922, the provisions for penalty was provided in S 28 (1) (c) which dealt with the matter relating to imposition of penalty for concealment of income or improper distribution of profits)
For the reasons aforementioned, the impugned judgment (High Court) cannot be sustained. It is set aside accordingly. The appeal is allowed. However, in the facts and circumstances of this case, there shall be no order as to costs. Full judgements can be viewed in ^ http://indiankanoon.org/doc/1614118/
A. M. Ibrahim
Architect - Valuer
Kadayanallur – Tamil Nadu