AO Must Refer to DVO for Fair Market Value: ITAT Deletes Addition Based Solely on Estimates

The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has recently held that an assessing officer must first refer the matter to the Departmental Valuation Officer (DVO) to determine Fair Market Value.

The assessee, Shri Yogesh Jashubhai, filed his Income Tax Return (ITR) for the AY 2011-12, declaring a total income of Rs 1,56,148. The case was selected for scrutiny, and the notices under sections 143(2) and 142(1) were issued to the assessee. The AO observed that the assessee, along with 11 co-owners, sold agricultural land in Naroda, Ahmedabad, on 07.02.2011, for a total sale consideration of Rs 10,46,562 (11.11% share of the assessee).

Further, while reviewing the calculation of LTCG reported by the assessee, the AO noticed that the assessee had adopted a cost of acquisition of Rs 1,25,220 on 01.04.1981. The AO believed that this amount was high, and the estimated cost of acquisition was Rs 60,000, and he proposed to adopt the same. However, since the assessee did not submit any response, the AO finalised the assessment. He recomputed the LTCG at Rs 6,19,962 instead of Rs. 1,56,248 and added an addition of Rs 4,63,534 to the income of the assessee, along with initiating penalty proceedings under section 271(1)(c).

The assessee filed an appeal before the CIT(A) challenging both the assessment and the penalty. However, the CIT(A) dismissed the appeal due to the delay in filing the appeal. Therefore, the assessee filed an appeal before the ITAT Ahmedabad.

The assessee submitted that he was a Non-Resident Indian (NRI) and had come to India recently. He said he was unaware of the assessment and penalty orders and when he came to know about them, he immediately filed the appeal but CIT(A) did not find the explanation enough and claimed that there was no evidence proving that he has not visited India during the intervening years.

The ITAT cited the case of Vedabai alias Vijayanatabai Baburao Patil v Shantaram Baburao Patil [2002] 253 ITR 798 (SC), where it was ruled that if the reason for delay is bona fide, the court should focus on substantial justice rather than technical consideration. Holding the same, the tribunal condoned the delay in filing the appeal before the CIT(A).

The ITAT found that the AO’s calculation of the cost of acquisition was made on estimation without any comparable sale instances, independent valuation, or expert opinion. The estimation was not even supported by any evidence or technical basis, which is bad in law.

The tribunal also cited a decision of the Hon’ble Bombay High Court in Rallis India Ltd. v. Commissioner of Income-tax (Appeals)-XXI, Mumbai [2015] 56 taxmann.com 282 (Bom), where it was ruled that the AO must refer the matter to a DVO for determining the fair market value, as required under section 55A of the Income Tax Act.

The tribunal held that the AO, being a non-technical authority, cannot reject the valuation given by a registered valuer and adopt its own value without seeking expert opinion from the DVO. Therefore, the tribunal deleted the addition made towards long-term capital gains along with the penalty levied under section 271(1)(c) of the Act.