ITAT Surat Deletes LTCG Addition: DVO Reference Held Invalid for Pre-July 2012 Transaction

Background of the Dispute

The Income Tax Appellate Tribunal, Surat Bench, in the case of Virendra Natwarlal Jariwala Vs DCIT, examined whether a reference made by the Assessing Officer (AO) to the Departmental Valuation Officer (DVO) under Section 55A was legally sustainable for a property transaction completed before 01.07.2012.

Two connected appeals were heard together, both pertaining to Assessment Year (AY) 2013-14. The appellants were co-owners of a non-agricultural plot of land sold through a registered conveyance deed dated 04.06.2012. Each co-owner held a 1/4th undivided share in the land.

For computing long-term capital gains (LTCG), the assessees substituted the actual cost with the fair market value (FMV) as on 01.04.1981, taking support from a report issued by a Government-approved registered valuer.

  • FMV adopted by the assessees as on 01.04.1981: ₹700 per sq. mtr
  • FMV determined by the DVO as on 01.04.1981: ₹550 per sq. mtr

Relying on the DVO report obtained in the case of one co-owner, the AO recomputed LTCG in the case of each assessee, resulting in an upward adjustment of ₹7,52,950 in one appeal (with a proportionate corresponding impact in the co-owner’s case).

The key question before the Tribunal was:

Whether, for a property sale completed on 04.06.2012, the AO was legally empowered to refer the matter to the DVO by invoking the post-amendment language of Section 55A(a) made effective from 01.07.2012.

Facts in Brief

Property and Transaction Details

  • The assessees jointly owned a non-agricultural parcel of land in Surat along with three other co-owners.
  • Each assessee held a 1/4th share.
  • The land was sold through a conveyance deed dated 04.06.2012 for a total consideration of Rs. 4.90 crore.
  • One of the assessees (as a 1/4th share holder) received Rs. 1.22 crore as sale consideration.

Valuation Adopted by the Assessees

For LTCG computation, the assessees chose to adopt the FMV of the land as on 01.04.1981 in terms of the option permitted under the Income Tax Act 1961.

  • FMV claimed as on 01.04.1981: Rs. 700 per sq. mtr.
  • Basis: Valuation report of a Government-approved registered valuer, Shri K.O. Shah, an experienced professional with long-standing practice in property valuation.

AO’s Action and DVO Reference

In the case of one co-owner, the AO (ITO Ward-3(1)(5), Surat) had already referred the issue of cost of acquisition as on 01.04.1981 to the DVO. The DVO issued a valuation report dated 25.02.2016, determining:

  • FMV as on 01.04.1981: Rs. 550 per sq. mtr.

Relying on that DVO report, the AO in the present appeals:

  1. Issued a show-cause notice asking why LTCG should not be recomputed using the DVO’s valuation.
  2. Rejected the explanation furnished by the assessees, which supported the higher rate of Rs. 700 per sq. mtr.
  3. Adopted the DVO’s rate of Rs. 550 per sq. mtr.
  4. Recomputed LTCG at Rs. 94,37,095 as against the self-declared LTCG of Rs. 86,84,145.
  5. Made an addition of Rs. 7,52,950 to LTCG in one appeal (with similar impact in the co-owner’s appeal).

Proceedings Before CIT(A)

The assessees carried the matter in appeal to the Commissioner of Income Tax (Appeals). They reiterated that:

  • The registered valuer’s rate reflected the strategic location of the land, which was:
    • On the main road connecting Varachha,
    • Very close (less than 1 km) to the Railway Station,
    • In the established commercial hub of the Diamond Market.
  • The DVO, by contrast, had relied on sale instances of properties located in other areas of the wider Varachha region and had worked out an average rate, which did not fairly capture the specific commercial potential and micro-location of their land.
  • One comparable considered even showed sale to a Scheduled Bank at Rs. 666 per sq. mtr, indicating that Rs. 700 per sq. mtr adopted by the assessees was reasonable.

Despite these submissions, the CIT(A):