Whether when comparable sale instances as on 01-04-1981 are available, same should be given priority for computing fair market value of a property as on that date - YES: ITAT

THE issues before the Bench are - Whether when comparable sale instances as on 01-04-1981 are available, the same should be given a priority for computing fair market value of a property as on that date; Whether in such a case recourse to reverse indexation method can be allowed ; Whether there is always an element of estimation and guess work involved in arriving at fair market value of properties as on 01-04-1981 - Whether AO can reject the valid sale instances available for computing fair market value, merely because it can have an effect of reducing the amount of capital gains tax. And the
verdict partly goes in favour of the assessee.

Facts of the case

Assessees, mother and daughter received 1/4th share each in the property following a partition of the HUF. During the previous year the 4 members of the HUF i.e,. including the father and the son held three properties ie,. i) property at Kankanady ‘B’ Village measuring 2.90 acres (First property); ii) property at Kankanady ‘B’ village measuring 0.46 acre (Second Property); iii) property at former Casba Bazar Village, measuring 3.85 cents (Third Property). The first property was sold for a sale consideration of Rs.1,71,12,500/-. The first property apart from land area also had a building with a plinth area of 11,925 sq.ft which had been built in the year 1956. The assessee Smt. Mizar Anita Pai, computed capital gains on sale of her 1/4th share of right, title and interest over the first property which yielded negative capital gains. The fair market value (FMV) as on 01-04-1981 was adopted at Rs.11,000/- per cent in respect of the land and Rs.3,57,750/- in respect of the building built on the land in 1956 and Rs.5,000/- for the common well in the property. These values adopted by the assessee were based on the valuation report of a registered valuer, Mr. Satish Rao Iddya. The dispute was with respect to the adoption of the FMV of the three properties as on 01-04-1981.

Under the provisions of section 55(2)(b)(i), where the capital asset became the property of the assessee before 01-04-1981, the assessee had an option to adopt the FMV of the capital asset as on 01-04-1981 as cost of acquisition of the capital asset. According to the AO, the value of the land as on 01-04-19881 adopted at Rs.11,000/- per cent by the registered valuer was not done on the basis of comparable sale instances and had been done only on the basis of local enquiries. According to the AO, the better way of determining the FMV of the property as on 01-04-1981 was to refer to comparable sale instances in the same area. The AO accordingly, procured comparable sale instances from the Subregistrar’s office which showed substantial variation from the FMV adopted by the assessee and hence, summoned the registered valuer. The registered valuer could not provide the details of the person who were contacted for arriving at the FMV during the local inquiry. Also, the registered valuer could not explain why he did not try to get comparable sale instances for arriving at the FMV. The assessee differed from the opinion of the AO and contended that submitted before the AO that the Mangalore Urban Development Authority (MUDA) had given a letter to the assessee in the year 1987 in which they have charged Rs.10,000/- per cent in Kankanady Village, in a place named Nethravathi Nagar. The AO on perusal of the documents was of the view that the sale in question was in the year 1987 six years from 01-04-1981. Apart from this, the AO was also of the view that the MUDA property were closer to the city and was a planned layout development. He was also of the view that the cost in question also included development cost and therefore, the land cost would at best can be only 60% and therefore, he was of the view that Rs.6,000/- as land cost in 1987 could be appropriate. Therefore, the AO computed the maximum price of the land at Rs 2,000 per cent instead of Rs 11,000 per cent.

With respect to the building the AO cited the instance from the record of Sub-registrar of sale of a building measuring 398 sq.ft with stone foundation, mud walls and tiled roof, whose cost was valued as on 01-04-1981 at Rs.6,000. Thus, the cost per sq.ft was Rs 15. The year of construction was stated to be 1961 and therefore working backwards with appreciation of 2% per year, the cost of construction as on 1961 was calculated as Rs.25 per sq.ft and as on 1956 came to be Rs.28 per sq.ft as against Rs.60 per sq.ft claimed by the assessee. The AO finally determined the FMV of the land at Rs3,500/- per cent in respect of the first property and the building was valued at Rs 20/- sq.ft as on 01-04-1981. Hence, the long term capital gains (LTCG) was recomputed at Rs Rs.26,45,219. Similar on the identical grounds LTCG was recomputed with respect to the second property.

With respect to the third property, relying upon the comparable sale instance obtained by the AO, the cost of the land was computed at Rs 4,477/- per cent though the assessee contended that comparable sale instances of property in Kasba Bazaar village on 10-07-1981 whereby the value of land value was adopted at Rs.35,000/- per cent. When the said documents was filed before the AO, the AO was of the view that the said property was a commercial property in the middle of the business centre of Mangalore i.e. Hampankatta. He also expressed the view that the assessee’s property was on the 16 ft road and therefore, the rate of Rs.14,000/- per cent adopted by the registered valuer cannot be accepted. Finally the AO computed the value of the third property at Rs 7,000/- per cent and the LTCG was arrived at Rs. 56, 740. On appeal, the AO's order was upheld by the CIT(A) and aggrieved, the appeal was filed before the Tribunal.

Having heard the parties, the Tribunal held that,

+ as far as the decision of the Karnataka High Court in the case of Smt.S. Neelaveni, is concerned, it was a case of determination value of self acquired house property. Observations rendered therein have to be understood in the context of facts and circumstances in that case. The question was whether the rental method was applicable for valuing residential house. The High Court held that rental method will be valid and relevant in determining the value of self occupied residential house. The observations relied upon by the counsel for the assessee have been made in the context of the above decision of the High Court. It is not an authority for the proposition that FMV as on 01-04-1981 can be determined by admitting the sale consideration received on transfer and applying the cost index and working backwards and arriving at the value. As far as the decision of the Gujarat High Court in the case of Shantadevi Gaekwad Vs DCIT is concerned, the process of reverse indexation was accepted by the Gujarat High Court in the matter of valuation of jewellery where the valuation of the very same jewellery was available in the wealth tax assessment as on 31-03-1989. The Court held that the revenue had accepted the value of jewellery given by the assessee for wealth tax purposes as on 31-03-1989. The aforesaid decision in our view, therefore, cannot be taken as laying down any general purpose as canvassed by the counsel for the assessee. The decision in the case of Jahanganj Cold Storage, was a case where the assessee admitted the FMV as on 01-04-1981 by applying the cost inflation index to the sale value of land for a stamp duty purpose in the reverse order. The AO further estimated the FMV on the basis of value of agricultural land whereas the property that was sold was as a commercial property. In these circumstances, it was held by the Tribunal that basis adopted by the assessee has to be accepted. This decision also cannot be taken as laying down any proposition that FMV as on 01-04-1981 can be adopted by applying the cost inflation index to the sale value of land for stamp duty in the reverse order;

+ we have duly considered the several aspects of the valuation as brought out by the AO in the order of assessment and are of the view that the prima-facie the conclusion of the AO are justified. We are of the view that in the matter of valuation of FMV as on 01-04-1981 there is always an element of estimation and guess work as the data available cannot be comparable with the property in question in all aspects. We are also keeping in mind that even the AO does not dispute with the fact that the MUDA has sold house sites in the vicinity of the property in the year 1987 at Rs.10,000/- per cent. In the matter of valuation FMV as on 01-04-1981, the revenue always takes a stand that the same is less than what is adopted by the assessee, because doing so, will increase the quantum of capital gains. The assessee on the other hand, will content with the FMV as on 01-04-1981 is higher, because that will result in capital gains being computed at a lower figure. Keeping in mind that valuation can never be exact, we would be much more magnanimous than the AO and fix the value of FMV of the property as on 01-04-1981 at Rs.5,000/- per cent for the first and second property;

+ as far as the third property is concerned namely Kasba Bazaar property. There is evidence available that the value of the land was adopted as on 10-07-1981 at Rs.14,000/- per cent. The assessee has also adopted the same value while computing the capital gains. The reasons assigned by the AO for rejecting the comparable sale instances are not justified. The valuation as declared by the assessee for this property is directed to be accepted. Thus, the appeals are partly allowed.