Safiya Malik

The High Court of Kerala Division Bench of Justice Dr. A.K. Jayasankaran Nambiar and Justice P.M. Manoj dismissed an appeal filed by the Revenue challenging the order of the Income Tax Appellate Tribunal. The court held that the Commissioner of Income Tax had acted without lawful basis in invoking revisional powers under Section 263 of the Income Tax Act. The court declared that the material relied upon to justify the revision did not exist at the time the power was exercised, rendering the action unjustified.

The court concluded that the Assessing Officer had acted strictly in accordance with the directions issued by the Appellate Tribunal and had no liberty to disregard the valuation report furnished by the Department Valuation Officer (D.V.O). It was further held that subsequent administrative disagreements regarding the valuation report could not constitute a legal basis for revision. Accordingly, the High Court affirmed the Appellate Tribunal's decision and dismissed the Revenue's appeal, holding in favor of the assessee.

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The appeal before the High Court arose from a long-standing dispute concerning the assessment of capital gains arising from the sale of land by the respondent assessee. The core issue involved the valuation of land transferred through an agreement and its tax implications under the Income Tax Act.

The respondent assessee had entered into an agreement for the sale of 179.88 cents of land on 10.11.2010 and handed over possession to the purchaser immediately thereafter. However, the formal sale deed was executed on 28.09.2011, followed by a correction deed to account for an omitted portion of the property.

Though the deed execution occurred during the financial year 2011-2012, the Assessing Officer treated the capital gains as taxable in the assessment year 2011-2012. This conclusion was based on Section 2(47) of the Income Tax Act, read with Section 53A of the Transfer of Property Act. The Assessing Officer computed the capital gains at Rs.38,84,99,952/-.

The assessee appealed this computation. The First Appellate Authority found fault in the valuation approach and directed that the cost of acquisition be computed based on the fair market value as on 01.04.1981. Acting on this directive, the Assessing Officer revised the capital gains to Rs.38,09,53,320/-.

The assessee again appealed. This time, the First Appellate Authority fixed the land value at Rs.50,000/- per cent and remitted the matter for fresh computation. The Revenue challenged this decision before the Appellate Tribunal.

The Tribunal set aside the orders of the authorities below and mandated that the fair market value be determined in consultation with the Department Valuation Officer (D.V.O). In response, the Assessing Officer referred the matter to the D.V.O, who submitted a report dated 06.12.2019 valuing the land as on 01.04.1981 at Rs.49,650/- per cent.

Using this report, the Assessing Officer passed an order dated 06.05.2020 to give effect to the Tribunal’s directions.

Subsequently, the Assistant Engineer of the Valuation Cell expressed concerns via letter dated 21.01.2020 about the D.V.O’s methodology. An explanation was sought from the D.V.O, and the Assessing Officer was asked to pause proceedings. However, the Assessing Officer had already passed the consequential order by then.

Invoking Section 263 of the Income Tax Act, the Commissioner of Income Tax issued a show cause notice on 08.02.2021 and passed an order on 25.03.2022, setting aside the assessment order dated 06.05.2020. The Commissioner directed the Assessing Officer to issue a fresh speaking order.

This order was appealed by the assessee before the Tribunal. The Tribunal allowed the appeal and quashed the Commissioner's Section 263 order. The Revenue then challenged the Tribunal's decision before the High Court.

In the appeal, the Revenue framed four substantial questions of law, primarily challenging the Tribunal’s competence to interfere with the revisional authority’s order and the reliance on precedents such as the judgment in Dr. Indira Bhatnagar [2013] 30 taxmann.com 293 (Allahabad).

The Division Bench considered the submissions of both parties. The court observed that "once it was clear that the Assessing Officer had complied with the directions issued by the Appellate Tribunal, and had adopted the value as fixed by the D.V.O for the purposes of completing the assessment," then it was not open to the Commissioner to invoke Section 263.

The court recorded the Tribunal’s reasoning that "once the DVO had submitted its valuation report which stood accepted by the Assessing Officer, its later revision at administrative/departmental level would hardly have any adverse impact on assessment." Further, the court noted the Tribunal’s reliance on "CIT vs. Dr. Indira Bhatnagar (2013) 30 taxmann.com 293 (Allahabad)" which held that "the DVO's computation indeed binds the Assessing Officer."

The High Court stated that "the real reason for invoking his power under Section 263 was only that there was a doubt raised by the Assistant Engineer of the Valuation Cell as regards the fixation of the fair market value by the D.V.O."

It was recorded that "the clarifications sought for by the Assistant Engineer, Valuation Cell in Annexure-G letter were not sent to that office, and a final determination as to whether or not the queries raised merited consideration, was not obtained at any time before the issuance of a show cause notice dated 08.02.2021."

The court further stated, "as on the date of invoking his power under Section 263 of the IT Act, the Commissioner could not have had a 'reason to believe' that the assessment was erroneous and prejudicial to the interest of the Revenue since the material to inform that 'reason to believe' did not exist on the date of issuance of the show cause notice."

"His exercise of power under S.263 was therefore clearly unjustified," the Bench observed.

Accordingly, the High Court found that the Tribunal’s interference was lawful and did not require reversal.

The High Court concluded its judgment with the following directives: "Thus, we do not find any reason to interfere with the impugned order of the Appellate Tribunal. The I.T Appeal, therefore, fails and is accordingly dismissed by answering the questions of law raised against the Revenue and in favour of the assessee."

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"The Tribunal on its part vacated the findings of the authorities below and held that the fair market value had to be arrived at after ascertaining the views of the Department Valuation Officer (D.V.O)."

"We reverse the PCIT's order in issue and restore the impugned assessment herein dated 06.05.2020 as the necessary corollary."

By upholding the Tribunal’s findings, the High Court dismissed the Revenue’s contentions and restored the validity of the assessment order dated 06.05.2020 issued by the Assessing Officer.

Advocates Representing the Parties:

For the Petitioners: Shri. Jose Joseph, Senior Standing Counsel, and Sri. P.K. Ravindranatha Menon (Senior Advocate)

For the Respondents: Shri. P. Sathisan, Shri. Javed Haider, Shri. Abhiram Sunish, Shri. Biju P. Paul, and Shri. Shibu B.S

Case Title: The Principal Commissioner of Income Tax, Kochi-I v. M/s Ayyappa Roller Flour Mills Ltd.

Neutral Citation: 2025: KER:43849

Case Number: ITA No. 9 of 2024

Bench: Justice Dr. A.K. Jayasankaran Nambiar and Justice P.M. Manoj