The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a capital gains addition made by the Assessing Officer after referring the valuation of two properties to the Departmental Valuation Officer (DVO), but completing the assessment without awaiting the valuation report.

The Bench of Beena Pillai (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) has observed that once the Assessing Officer had invoked the valuation mechanism under Section 50C(2) of the Income-tax Act, 1961, the reference ought to have been taken to its logical conclusion before the capital gains were finally determined.

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The dispute arose from the sale of two plots of land situated at Bhinmal in Rajasthan. The taxpayer disclosed sale consideration of ₹3 lakh for one property and ₹18 lakh for the other, aggregating to ₹21 lakh, and claimed a long-term capital loss.

During scrutiny proceedings, the Assessing Officer noticed a difference between the consideration disclosed by the taxpayer and the valuation information available through the Annual Information Return. The officer consequently sought valuation particulars from the Sub-Registrar under Section 133(6) of the Act.

The registration authorities reported stamp-duty values higher than the disclosed sale consideration. The Assessing Officer proposed to adopt those values for computing capital gains under Section 50C.

The taxpayer maintained that ₹21 lakh represented the entire consideration actually received and that no additional amount had been paid.

The taxpayer submitted that the properties were subject to disputes involving encroachment. According to the taxpayer, these circumstances affected the consideration that could be realised.

It was also submitted that the purchasers had settled the disputes independently using their own resources. Copies of the relevant litigation papers were furnished before the Assessing Officer in support of these submissions.

Without prejudice to the claim that the actual consideration should be accepted, the taxpayer requested an independent valuation by the DVO if the stamp-duty values were proposed to be substituted.

Although the Assessing Officer made the valuation reference, the assessment was completed without waiting for the DVO’s report. Capital gains were instead computed using the values furnished by the stamp valuation authorities.

The Commissioner (Appeals) upheld the adoption of the stamp-duty valuation, reasoning that Section 50C provided for substituting the value adopted by the stamp authorities where it exceeded the declared consideration.

The appellate authority also proceeded on the basis that the taxpayer had not sought a DVO reference or produced sufficient material to establish that the stamp-duty valuation exceeded the properties’ fair market value.

Before the Tribunal, however, the taxpayer specifically pointed out that the Assessing Officer had already referred both properties to the DVO. The taxpayer argued that neither the assessment nor the appellate decision could properly disregard the outcome of that reference.

The department supported the orders of the lower authorities.

The Tribunal identified the central issue as whether the Assessing Officer could complete the assessment using stamp-duty values while the valuation reference under Section 50C(2) remained pending.

That decision explained that the statutory valuation procedure protects the taxpayer’s opportunity to contest the stamp-duty valuation before an independent valuation authority. Completing the assessment before the DVO’s determination would defeat the purpose of making the reference.

Applying that reasoning, the Mumbai Bench held that the Assessing Officer, having himself sought a DVO valuation, could not appropriately conclude the capital gains computation by adopting the stamp-duty value without considering the determination sought through that reference.

The Tribunal also referred to the statutory provisions concerning exclusion of the valuation-reference period when computing the assessment limitation period.

The Tribunal expressly clarified that financial hardship or a pending property dispute does not, by itself, displace the operation of Section 50C.

The Bench further observed that failure to await the report deprived the taxpayer of an effective opportunity to place objections and supporting material on record concerning the DVO’s valuation, if any.

The Tribunal concluded that completing the assessment and making the addition without awaiting the DVO’s report was contrary to the statutory scheme under Section 50C(2).

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