2 Strategies to Tackle Scrutiny When Stamp Duty Valuation u/s 50C of Your Property is Much Higher Than Actual Value?

The stamp duty valuation of an immovable property is done by the state government and usually accepted by the parties to a sale transactions. But the impact of stamp duty on property affects both buyer and seller. Buyer of the property, if Individual or HUF, is now affected due provision under section 56(2)(vii) of the Income Tax Act. Then seller is affected by section 50C of the Income Tax Act under which the stamp duty is taken as deemed sale consideration for computing the long term capital gain on sale of house property or other immovable properties.The problem is real for honest taxpayers because most of the state governments have also made rules of fixing stamp duties  based on the area and not on actual assessment of the fair market value of the property.

So , let us face it. There is a central law u/s 50C and there is stamp valuation of properties. We have to abide by the law . So , following strategy can be adopted to legally lessen the impact of the unsavory provision under Income Tax Act .

Strategy 1 : Dispute Adoption of Stamp Duty Valuation

The legislature have provided a safeguard for such harsh situation by providing within section 50C itself under which an assessee is given choice of disputing the stamp duty valuation. Here is the relevant portion of section 50C(2) excerpt

(2) Without prejudice to the provisions of sub-section (1), where—

 (a) the assessee claims before any Assessing Officer that the value adopted or assessed or assessable] by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer;
 (b) the value so adopted or assessed [or assessable] by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court, the Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (i) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act.

In following cases, it has been held that  if the assesse disputes the stamp duty valuation, A.O is bound to refer the valuation issue.

Allahabad High Court in case of CIT vs Narain Chandra Chaudhry in No. – 287 of 2013 vide its order dated 29/08/2013 held as under :

whenever objection is taken or claim is made before AO, that the value adopted or assessed or assessable by the Stamp Valuation Authority under sub-section (1) of Section 50-C exceeds the fair market value of the property on the date of transfer, the AO has to apply his mind on the validity of the objection of the assessee. He may either accept the valuation of the property on the basis of the report of the approved valuer filed by the assessee, or invite objection from the department and refer the question of valuation of the capital asset to DVO in accordance with Section 55-A of the Act. In all these events, AO has to record valid reasons, which are justifiable in law. He is not required to adopt an evasive approach of applying deeming provision without deciding the objection or to refer the matter to the DVO u/s 55-A of the Act as a matter of course, without considering the report of approved valuer submitted by assessee. In all such cases, the reasons recorded by the AO may be questioned by the assessee or the department as the case may be. Matter is remanded to AO, to decide the valuation of the capital asset in accordance with law as explained in this judgement.

Kolkata High Court in a recent judgment in the case of Sunil Kumar Agarwal vs CIT  in ITA no 221 of 2013 vide order date 13th March 2014  have gone to the extent that even if prayer by assesse is not made , the A.O should take the view of registered valuer .

The legislature did not intend that the capital gain should be fixed merely on the basis of the valuation to be made by the District Sub Registrar for the purpose of stamp duty. The legislature has taken care to provide adequate machinery to give a fair treatment to the citizen/taxpayer. There is no reason why the machinery provided by the legislature should not be used and the benefit thereof should be refused. Even in a case where no such prayer, the AO, discharging a quasi judicial function, has the bounden duty to act fairly and to give a fair treatment by giving him an option to follow the course provided by law.

There are also a number of other favourable judgment on this issue.

Three sub-strategies must be formulated from above

1.    Get a fair market valuation of your property  determined  by a Registered Valuer.

A good registered valuer should be entrusted for determining the Fair Market Value of the property who determines FMV by following principles of valuation of immovable property. An unscientific or valuation report which raises many questions may be rejected by following the judgment of  Punjab & Haryana High Court in Krishan Kumar Jhamb v. ITO 179 Taxman 141 (P& H) [2009] in which the Hon’ble high court held that where the valuation report of approved valuer submitted by the assessee suffered from grave infirmity, in as much as it did not take into account a number of items used by assessee for construction of the property, AO can adopt the value determined by DVO.

2.    The sale has to in & around the fair market value determined by the Registered Valuer

3.    Strategy for scrutiny : If your case is scrutinized, and A.O ask for why section 50C valuation not be taken, for computing capital gains, you prepare the case based on your registered valuer and request him to in writing at the end for that reason that based on registered valuer report , you dispute acceptance of the stamp duty valuation.

Strategy 2 : Take Action According to Valuation Report by DVO

As per the law, DVO will give notice to you for the  valuation purpose. The date and time will also be fixed as per notice. You must submit in writing all the details asked for. There can be following  kinds of final report on valuation of your property

1.    DVO gives valuation report more than or equal to Stamp Valuation or
2.    DVO valuation is way below than Stamp Valuation but above your registered valuer
3.    DVO valuation is more or less value equal to the valuation done by a registered valuer.
4.    . DVO valuation is below than valuation by registered valuer.

In situation 1, you must object to the report by filing the reasons why the estimate done by the DVO is not correct. Most practical advice in this regard is that seek the DVO report from assessing officer if not given to you by the DVO and take it to your registered valuer, for his comment on shortcomings or error in estimates.

1.    You must submit the objection in writing.
2.    Despite all this, in all probability, the A.O will not accept your contention on account of psychological fear they have regarding the system prevailing in the income tax department.
However, the whole exercise will be of help when you prefer appeal.

In situation 2, the A.O is bound to follow the value done by DVO. In following two cases , the premise that A.O is bound to accept DVO report is confirmed

1.    Allahabad High Court in CIT v. Dr. Indra Swaroop Bhatnagar [2012] 349 ITR 210/[2013] 213 Taxman 52/30 taxmann.com 293 (All.)

2.    Karnataka High Court in Gouli Mahadevappa v ITO [2013] 356 ITR 90/215 Taxman 145/33 taxmann.com 47 (Kar)

You need to do cost & time analysis of litigation further. So , if a little bit higher valuation is acceptable, do not go for litigation.

In situation 3: Since it is more or so equal to the registered valuer, you should not have any problem.

The chance of 4th situation is very very low. So no need to discuss it.

Can there be penalty u/s 271(1)© if any addition u/s 50C based on stamp duty or DVO is made by A.O ?

It has now been settled legally that no penalty under section 271(1)©  can not be imposed in case of addition by resorting to section section 50C of the Income Tax Act.

The facts before Kolkata High Court in case of CIT vs Madan Theatres Ltd [2013] 260 CTR 75 (Calcutta) was that the assessee sold property for a consideration of Rs. 2.50 crore. However, for the purpose of stamp duty, the property was valued at Rs. 5.19 crore and stamp duty was paid on that value. The assessee offered capital gains on the basis that the sale consideration was Rs. 2.50 crore. The AO invoked s. 50C and held that the sale consideration had to be taken at Rs. 5.19 crore and capital gains computed on that basis. The AO imposed penalty u/s 271(1)(c) which was deleted by the CIT(A) and the Tribunal by relying on Renu Hingorani. On appeal by the department to the High Court, HELD dismissing the appeal:

Though the assessee could have disputed the valuation on the basis of the deemed value and chose not to do so, the fact remains that the actual amount received was offered for taxation. It is only on the basis of the deemed consideration that the proceedings u/s 271(1)(c) started. The revenue has failed to produce any iota of evidence that the assessee actually received one paise more than the amount shown to have been received by him. As such, there is no scope to admit the appeal

 Conclusion on Strategies to Tackle Stamp Duty Valuation u/s 50C

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