ORDER
M.V.R. Prasad, A.M.
1. This appeal is directed against the order of the CIT(A) dt. 13th October, 1997 for the asst. yr. 1994-95. The first ground taken reads as follows :
“On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the addition of the amount of interest not charged from sister concern Designers (P) Ltd. & Patel India (Delhi) (P) Ltd. against interest-free advances made to them amounting to Rs. 2,74,430”.
2. The assessee has advanced certain loans to its sister concerns, (1) A.J. Patel (P) Ltd., (2) Designer (P) Ltd. and (3) Patel India (P) Ltd. The AO made an addition of Rs. 5,15,682 on the ground that the interest on borrowed funds claimed to have been paid by the assessee has to be disallowed to the extent of diversion of funds interest-free to sister concerns. The CIT(A), in principle, agreed with the findings of the AO but restricted the addition to only Rs. 2,74,430 on the ground that the amount debited to the P&L a/c is only this amount.
3. Before us, the learned counsel for the assessee pleaded that the assessee has no unsecured loans towards the year end, i.e., 31st March, 1994, and so, no disallowance out of the interest paid is called for. It is also argued that the aggregate advances to the above three sister concerns have come down from Rs. 36,30,411 as on 31st March, 1993, to Rs. 13,07,057 on 31st March, 1994.
4. We agree with the findings of the CIT(A). We find that the above mentioned interest-free advances were made in the earlier years when the share capital of the assessee was only Rs. 15,00,000. The shareholders’ funds of Rs. 2,15,93,870 as on 31st March, 1994, represent mainly the accretion by way of capital gains on the sale of a flat during the year of account relevant for the asst. yr. 1994-95. As the advances were made in the earlier years and as in those two years they were made only out of borrowed funds, we have to sustain the addition of Rs. 2,74,430. The ground is rejected.
5. The next two grounds relate to the addition of Rs. 1,25,17,061 made by the AO under the head “long term capital gains” and they read as follows :
“2. The learned CIT(A) erred in confirming the addition of the amount of Rs. 1,25,17,061 under the head “long term capital gains” as under :
Rs.
L.T.C.G. as calculated by AO 3,12,26,451
L.T.C.G. as per computation of income (-) 1,87,09,390
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1,25,17,061
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3. Without prejudice to the above, the learned CIT(A) erred in not referring the matter for valuation to the valuation cell, since the AO is not a competent person to determine the value of the asset as at 1st April, 1981. In view of this, the CIT(A) should have set aside the assessment for reference to the Valuation Officer”.
6. The assessee-company owned a property named “White House” in Walkeshwar Road, Mumbai, and it sold a part of this property vide a conveyance deed dt. 23rd April, 1993 for a consideration of Rs. 4,09,00,000. It offered the long-term capital gains at Rs. 1,87,09,390 as per the following computation :
Rs.
Sale proceeds as per conveyance deed dt.
23rd April, 1993 4,09,00,000
Less: Cost of improvement paid as per
conveyance deed dt. 23rd April, 1993. 18,00,000
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3,91,00,000
Less: Security deposit (interest-free) incurred
in total sale proceeds 1,00,000
3,90,00,000
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Less: Expenditure incurred wholly and
exclusively in connection with the transfer
of property :
(a) Legal & professional expenses
Paid to Little & Co. Solicitors as per Bill
No. 366 of 1994 vide cheque No. 862522 dt.
26th March, 1994 drawn on Hong Kong and Shanghai
Banking Corporation, M.G. Road, Bombay 2,26,500
(b) Brokerage
Paid to Laljee Thakkar & Co. by account payee
cheques as under:
on 27-1-1994 2,00,000
on 08-2-1994 2,09,000
on 22-3-1994 4,09,000 8,18,000 10,44,500
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3,79,55,500
Less: Improved cost of acquisition as per cost-inflation index
Fair market value as at 1-4-1981
multiplied
By cost inflation index of 1993-94
Divided
By cost inflation index of 1981-82
(Since property purchased before 1-4-1981)
Fair market value as per valuation report dt. 26-2-1994 of Roshan H.
Nanavati
Rs. 78,87,750
Cost inflation index of 1993-94
244
Rs. 78,87,750 x 244
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100 1,92,46,110
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Long term capital gains on sale of
immovable property 1,87,09,390
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It may be observed that the assessee opted for the fair market value of the property as on 1st April, 1981, as permitted under s. 55 of the IT Act. The fair market value as on 1st April, 1981, returned by the assessee was supported by a valuation report from an approved valuer, Roshan Nanavati, who valued the property at the rate of Rs. 1,250 per sq. ft. at Rs. 78,87,758 (inclusive of garages, etc.) The AO held that the sale instances cited by the said approved valuer were not really comparable as they related to different localities and he worked out the fair market value as on 1st April, 1981, at Rs. 433 per sq. ft. at Rs. 27,57,807 (inclusive of garages, etc.) Thus, there is a big difference between the fair market value as on 1st April, 1981, of the property in question estimated by the approved valuer and that worked out by the AO. The CIT(A) agreed with the findings of the AO and confirmed the addition made by the AO.
7. Before us, the learned counsel for the assessee pleaded that valuation is a technical matter and as the assessee has returned the fair market value as on 1st April, 1981, of the property in question on the basis of the report of the approved valuer, the minimum that should have been done was to refer the property to the valuation cell of the Department under s. 55A of the IT Act. It is also mentioned that an argument to this effect was raised orally before the CIT(A) but the CIT(A) did not agree. In this context, the learned counsel for the assessee has also filed an affidavit dt. 28th May, 1998, from the Chartered Accountant of the assessee, Atul Arun Kumar Mehta, which reads as follows :
“1. Atul Arunkumar Mehta, Chartered Accountant of Patel India (P) Ltd., do hereby solemnly affirm and declare as under:
1. That I had attended before the CIT(A), XL, Mumbai Shri Beharilal in the Appeal of Patel India (P) Ltd. for the asst. yr. 1994-95.
2. That in the course of hearing, an oral plea for sending the appeal back to the AO for reference to the Valuation Cell was made.
3. That from the reading of the CIT(A), XL, Mumbai, Order, the honourable CIT(A) did not consider this plea and has not given any reasons for not referring the case back to the AO.
Solemnly affirmed and declared
This 28th May, 1998.”
It is pleaded that under the provisions of s. 55 it is mandatory for the AO to have made the reference to the valuation officer and as he has not made the reference, the fair market value worked out by him is vitiated and it is not valid in law. In this context, reliance is placed upon the Circular No. 96, dt. 25th November, 1972, of the CBDT, which explains the scope of s. 55A and may be seen at p. 2126 of Chaturvedi & Pithisaria Vol. 2, Fourth Edition, which reads as follows :
“26. A new s. 55A has been inserted in the IT Act enabling the ITO to refer the valuation of any capital asset to the Valuation Officer with a view to ascertaining the market value of such asset. References under this section will lie only after 31st December, 1972, as the provisions of s. 2 of the Amending Act will come into force w.e.f. 1st January, 1973.
Under the new provision, an ITO may refer the valuation of any capital asset to a Valuation Officer in a case where the assessee has got the assets valued by a registered valuer and the ITO is of opinion that the value as estimated by the registered valuer (i.e., a person registered as a valuer under s. 34AB of the WT Act) is less than the fair market value of the asset. Other cases in which a reference may be made to the Valuation Officer would be where the ITO is of opinion that the fair market value of the asset exceeds the value of the asset as claimed by more than 15 per cent of the value claimed or by more than Rs. 25,000, whichever is less or where, having regard to the nature of the asset and other relevant circumstances, the ITO considers it necessary to do so. It will be seen that in case where the assessee has opted for substitution of the cost of acquisition of an asset by its fair market value as on 1st January, 1954, the fair market value as claimed by him may be higher than its actual fair market value. The provisions of s. 55A(a) and (b)(i) will, therefore, not apply in such a case. It will however, be open to the ITO to make a reference to the Valuation Officer under s. 55A(b)(ii).”
The learned counsel for the assessee has also relied on the decision of the Hon’ble Punjab & Haryana High Court in the case of Raj Paul Oswal vs. CWT (1988) 171 ITR 489 (P&H), in the light of which, according to the learned counsel, such a reference is mandatory.
On merits, it is explained that Shri Roshan Nanavati has given a rejoinder dt. 28th September, 1997, which was produced before the CIT(A) and has mentioned in this rejoinder that the Departmental Valuation Cell itself valued the properties even in Walkeshwar as on 1st April, 1981, at much higher figures. So, it is pleaded that the sale instances cited by the AO cannot be taken as reflecting the correct values because of the rampant understatement of values in the sale deeds.
8. It is also pleaded that the value worked out by the AO is so low that if the cost of construction and the contractors profits normally accepted are reduced therefrom, the land value would work out to a ridiculously low figure. So, it is requested that in the interests of justice, the property in question should be got valued by the Valuation Cell.
9. The learned Departmental Representative on the other hand, pleaded that there is no evidence of understatement of sale consideration in the sale instances cited by the AO and so, the assessee should not be allowed to take such a plea. It is also pleaded that the sale instances quoted by the AO are much nearer in time and location to the property in question sold by the assessee and as such, the AO was justified in working out the fair market value as on 1st April, 1981, on the basis of the sale instances gathered by him.
10. We are of the view that the matter deserves to be sent to the valuation cell for working out the fair market value as on 1st April, 1981. However, we make it clear that we do not agree with the argument of the learned counsel for the assessee that such a reference under s. 55A of the Act is mandatory. The decision of the Hon’ble Punjab & Haryana High Court in the case of Raj Paul Oswal vs. CIT cited (supra) by the learned counsel for the assessee was given in the context of s. 16A of the WT Act and the language of this section is totally different from that of s. 55A of the IT Act. Under s. 16A of the WT Act, specified circumstances are laid down under which a reference has to be made to the Valuation Officer and it is because of the specification of the circumstances, the Hon’ble High Court held that a reference is mandatory when those circumstances are specified. Such is not the case under s. 55A of the IT Act. The provisions of s. 55A are attracted only when the AO is of the opinion that the fair market value of the assets exceeds the value of the assets as claimed by the assessee and not in a reverse case such as the present one where the assessee claims that the value as on 1st April, 1981, exceeds the fair market value determined by the AO. So, on the plain language of the section, the provisions of s. 55A(a) and (b)(i) are not attracted and that is also made clear by the Board’s Circular No. 96 dt. 25th November, 1972, extracted hereinabove. As mentioned in the above circular, a reference can be made under s. 55A(b)(ii) when having regard to the nature of the asset and other relevant circumstances, it is necessary so to do. In the circumstances, we hold that it is not correct to say that it was mandatory in the present case to have made a reference under s. 55A(a) or 55A(b)(i).
11. However, we are of the view that valuation of a flat is highly technical matter and varies not only from road to road but between building and building and even between one flat and another in the same building while the sale instances taken by the AO definitely support the stand of the Department. We also find that there are other properties which have been valued by the Departmental Valuation Officer as on 1st April, 1981 at much higher figures. For example, at p. 75 of the assessee’s paper-book, there is a report in respect of flat No. 201, Jamuna Niketan Manav Mandir Road, Mumbai-6, which has been valued as on 1st April, 1981, at Rs. 800 per sq. ft. This is only a residential property and the AO himself has given 25 per cent addition for a commercial property like the flat of the assessee. So, the valuation of Rs. 800 has to be increased by another 200 rupees and that gives a value of Rs. 1,000 as on 1st April, 1981. Similarly, there is another property, flat No. 21 B-6 Dongersay Road, which has been valued by the Valuation Cell under s. 55A as on 1st April, 1981, at Rs. 905 per sq. ft. This is also a residential property and this valuation has also to be increased by 25 per cent and it gives a valuation of Rs. 1,130 per sq. ft. Compared to this valuation, the value worked out by the AO is very low. In the circumstances, in the interest of justice, we are of the view that the matter deserves to be referred to the Valuation Cell for working out the fair market value as on 1st April, 1981. Reference may be made under s. 55A(b)(ii) of the IT Act. We direct accordingly. The AO is free to bring all the sale instances on which he has relied in the assessment order to the notice of the Valuation Officer.
12. Subject to the above remarks, we set aside the order of the Revenue authorities on the issue of addition of Rs. 1,25,17,061 under the head long-term capital gains.
13. The appeal is partly allowed.