The Income Tax Appellate Tribunal, Mumbai, has reaffirmed that an assessee’s statutory right to substitute fair market value as on 01.04.2001 for capital assets acquired before that date cannot be denied on technical grounds, even if supporting valuation reports are submitted after the assessment is completed. This ruling clarifies the procedural and substantive obligations of tax authorities under the capital gains computation regime.
Background & Facts
The Dispute
The appellant, Padma Plastic, a partnership firm engaged in labour job work and manufacture of Gum Rosin, sold two industrial units located at MIDC, Pawane, Navi Mumbai, during the Assessment Year 2017-18. The sale consideration received was Rs. 4.42 crores, comprising Rs. 2.36 crores for Unit No. C-166/1 and Rs. 2.06 crores for Unit No. C-166/2. The Assessing Officer treated the entire amount as long-term capital gain without allowing any deduction for cost of acquisition, indexed cost, or transfer expenses. The appellant challenged this assessment before the Commissioner of Income Tax (Appeals) and subsequently before the Income Tax Appellate Tribunal.
Key Facts
- Unit No. C-166/2 was acquired on 09.12.1986 from the Court Receiver, High Court, Bombay, for Rs. 25 lakhs
- Unit No. C-166/1 was acquired on 03.11.2000 from the same Court Receiver, also for Rs. 25 lakhs
- Both properties were acquired through distress auction sales conducted by Bank of India against defaulting borrower M/s. Atul Traders
- The business ceased operations from Financial Year 2009-10 due to labour unrest and regulatory changes
- No income tax returns were filed from Assessment Year 2011-12 onwards
- A robbery occurred at the factory on 17.01.2012, resulting in loss of records
- Sale to M/s. GD Coldzone LLP occurred during AY 2017-18; tax was deducted under Section 194IA
- Notice under Section 148 was issued on 23.03.2021
- Return filed declaring Nil income and long-term capital loss of Rs. 67,93,833
- Valuation reports prepared by Government Approved Valuer M/s. S.V. Joglekar & Associates estimated FMV as on 01.04.2001 at Rs. 64.88 lakhs for Unit C-166/1 and Rs. 42.12 lakhs for Unit C-166/2
- Transfer premium paid to MIDC amounted to Rs. 22.20 lakhs
Procedural History
- 09.12.1986: Acquisition of Unit C-166/2
- 03.11.2000: Acquisition of Unit C-166/1
- 2009-10: Business operations ceased
- 17.01.2012: Robbery at factory premises
- 23.03.2021: Notice under Section 148 issued
- 25.03.2022: Assessee sought adjournment to produce valuation report
- 27.03.2022: Assessment completed under Section 147 read with Sections 143(3) and 144B
- 28.03.2022: Valuation report received and submitted to CIT(A)
- 2022: CIT(A) confirmed assessment, rejecting FMV claim and transfer premium
- 12.03.2026: Hearing before ITAT Mumbai
- 02.06.2026: Judgment pronounced
Relief Sought
The appellant sought:
- Allowance of indexed cost of acquisition based on fair market value as on 01.04.2001 under Section 55(2)(b)
- Deduction of transfer premium of Rs. 22.20 lakhs paid to MIDC
- Setting aside of the assessment order and consequential relief under Sections 234A and 234B
The Legal Issue
The central question was whether an assessee, having acquired a capital asset prior to 01.04.2001, is statutorily entitled under Section 55(2)(b) of the Income Tax Act to substitute the fair market value as on that date as cost of acquisition, even if the supporting valuation report is submitted after the completion of assessment proceedings.
Arguments Presented
For the Appellant
The appellant argued that Section 55(2)(b) grants an absolute statutory right to substitute FMV as on 01.04.2001 for assets acquired before that date, irrespective of when the valuation report is produced. The valuation report by a Government Approved Valuer was obtained during the pendency of appellate proceedings and was not fabricated post-assessment. The auction purchase price of Rs. 25 lakhs could not be equated with market value, as distress sales routinely yield below-market prices. The claim for transfer premium was intrinsically linked to the transfer of leasehold rights and should be deductible under Section 48. Reliance was placed on CBDT Circular No. 14 (XL-35) dated 11.04.1955, which mandates tax authorities to assist taxpayers in securing lawful reliefs.
For the Respondent
The Revenue contended that the burden of proving FMV lay entirely on the assessee, and since the valuation report was submitted only after the assessment was completed on 27.03.2022, it could not be considered. The valuation was deemed excessive, particularly as Unit C-166/1 was purchased for Rs. 25 lakhs in 2000. The non-filing of returns for several years indicated non-cooperation. The transfer premium claim lacked documentary substantiation and was rejected as unsubstantiated.
The Court's Analysis
The Tribunal emphasized that Section 45 (charging provision) and Section 48 (computation) operate as an integrated statutory code. Taxing the entire sale consideration without applying the computation mechanism prescribed under Section 55(2)(b) is legally impermissible. The court observed:
"Taxing the entire sale consideration without giving effect to the statutory computation provisions is contrary to the scheme of the Act itself."
The Tribunal rejected the Revenue’s reliance on the timing of the valuation report. It noted that the assessee had sought an adjournment on 25.03.2022 to produce the report, which was received two days after the assessment. This was not a case of post-hoc evidence creation but of evidence becoming available during the pendency of proceedings. The court held:
"Appellate proceedings under the Income Tax Act are a continuation of assessment proceedings and their primary object is to determine the correct tax liability in accordance with law."
The Tribunal further dismissed the Revenue’s argument that the FMV of Rs. 64.88 lakhs was excessive because the asset was purchased for Rs. 25 lakhs in 2000. It clarified that distress auction sales, especially those conducted under court supervision, do not reflect market value. No contrary evidence, reference to the Departmental Valuation Officer, or technical flaw in the valuation methodology was presented. The court held:
"In absence of any contrary material, an expert valuation report prepared by a Government Approved Valuer cannot be rejected merely on suspicion or conjecture."
The Tribunal also noted that the CIT(A) himself had observed the Assessing Officer’s approach was excessive, yet still confirmed the order - a failure of appellate duty. The non-filing of returns in prior years was held irrelevant to the computation of capital gains for AY 2017-18.
Regarding the transfer premium, the Tribunal found the claim prima facie connected to the transfer of leasehold rights and held that rejection without examination of underlying documents was arbitrary.
The Verdict
The appeal was allowed for statistical purposes. The Tribunal set aside the assessment order and the CIT(A)’s order. The matter was restored to the file of the Assessing Officer, who is directed to:
- Examine the valuation reports of M/s. S.V. Joglekar & Associates
- Consider the claim for substitution of fair market value as on 01.04.2001 under Section 55(2)(b)
- Examine the claim for deduction of transfer premium of Rs. 22.20 lakhs
- Recompute the capital gains strictly in accordance with law
- Grant adequate opportunity of hearing and consider all evidence
- If in doubt, invoke statutory valuation mechanism under the Act
- Recompute interest under Sections 234A and 234B consequentially
What This Means For Similar Cases
Statutory Rights Cannot Be Denied on Procedural Grounds
- Practitioners must assert Section 55(2)(b) rights even if valuation reports are obtained post-assessment
- Tax authorities cannot reject FMV claims merely because documents were filed after assessment completion
- The timing of evidence submission is irrelevant if the claim is substantiated and the valuation is by a Government Approved Valuer
Distress Sales Are Not Market Value Indicators
- Auction purchases under court supervision, especially in recovery proceedings, are not reliable proxies for fair market value
- Tax officers must not equate distressed sale prices with market rates without expert analysis
- Valuation reports must be evaluated on methodology, not on comparison with anomalous purchase prices
Appellate Authorities Must Correct Errors, Not Confirm Them
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CIT(A) has a duty to correct erroneous assessments, not perpetuate them
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If an assessment is found to be excessive or legally flawed, the appellate authority must recompute or remand - not confirm
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Non-filing of returns in prior years cannot be used to justify incorrect computation of current-year liability
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Practitioners should always file valuation reports during assessment proceedings, but if delayed, they must be submitted immediately with a request for adjournment and record the same in writing
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Always invoke CBDT Circular No. 14 (XL-35) to argue for substantive justice over technical compliance
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Transfer premiums, brokerage, or other directly attributable costs must be documented and claimed under Section 48 with supporting evidence
