AO’s duty to refer property valuation to DVO when stamp value is challenged: Analysis of ITAT Delhi in Sarwan Kumar Vs ITO

Background and case overview

The Delhi Bench of the Income Tax Appellate Tribunal in Sarwan Kumar Vs ITO examined two connected issues:

  1. Whether the Assessing Officer (AO) can directly adopt stamp duty valuation under Section 50C without referring the matter to the Valuation Officer when the assessee disputes such valuation; and
  2. Whether penalty under Section 271(1)(c) can be sustained where the capital gains addition is made solely on the basis of Section 50C valuation.

The assessee, a proprietor engaged in dairy business, had sold an industrial property located in Abadanpur, District Bareilly. The sale was executed through two registered sale deeds for a total stated consideration of Rs. 10 lakh (one deed for Rs. 8 lakh and another for Rs. 2 lakh).

However, for stamp duty purposes, the registration documents reflected a value of Rs. 64.10 lakh, agreed between the parties for higher stamp payment. The circle rate in the area was claimed to be Rs. 24 lakh per hectare, and the land sold measured 0.967 hectare.

The core controversy was whether the AO was justified in treating the stamp duty value of Rs. 64.10 lakh as the “full value of consideration” under Section 50C, despite the assessee’s specific objection that such value exceeded the fair market value (FMV) of the property on the date of transfer.

Alongside the quantum dispute, the Revenue also appealed against deletion of penalty under Section 271(1)(c) imposed on the alleged under-reporting of capital gains.

Facts relating to capital gains addition under Section 50C

Sale transaction and assessment

  • The assessee sold the industrial land for an actual consideration of Rs. 10 lakh.
  • In the registered sale deeds, for stamp duty purposes, the property was valued at Rs. 64.10 lakh.
  • The AO invoked Section 50C(1) and substituted the sale consideration with the stamp duty value of Rs. 64.10 lakh, treating it as deemed full value of consideration.
  • After computing capital gains on this deemed consideration, the AO completed assessment under Section 143(3) and determined total income at Rs. 57,54,670.

Assessee’s objections before AO and CIT(A)

The assessee contested the AO’s approach on multiple grounds:

  • The actual sale value was Rs. 10 lakh, and comparable land parcels in the same locality had been sold at even lower prices than this amount.
  • The stamp value of Rs. 64.10 lakh was not the circle rate-based value adopted by the stamp authority, but a voluntary higher value agreed between buyer and seller for stamp purposes.
  • The circle rate in that industrial area was Rs. 24 lakh per hectare, and for 0.967 hectare, the notional valuation would be significantly lower than Rs. 64.10 lakh.
  • The assessee had categorically stated before the AO that the value taken for stamp duty exceeded the fair market value and requested that the valuation be referred to the Departmental Valuation Officer (DVO) under Section 50C(2).

Despite these submissions, the AO refused to make a reference to the DVO. The reasoning was:

Section 50C(2) uses the word “may” and not “shall”, therefore it is not mandatory to refer the case to the Valuation Officer. Further, sufficient evidence was not furnished to justify such a reference.

The CIT(A) upheld the AO’s view, observing inter alia that:

  • There was allegedly no proper claim made before the AO satisfying Section 50C(2) conditions; and
  • The AO was within her discretion in not sending the matter to the DVO.

Aggrieved, the assessee filed an appeal before the ITAT Delhi.

The central legal question before the Tribunal was:

When the assessee asserts that the value adopted by the stamp valuation authority is higher than the fair market value as on the date of transfer, is the AO obliged to refer the valuation to the DVO under Section 50C(2)(a) or is it a purely discretionary choice?

Relevant statutory framework