In Absence of Concrete Material Revision u/s 263 of Income Tax Act Not Possible on Assessment Based on DVO's Valuation: Kerala HC [Read Order]

The Kerala High Court ruled that, in the absence of tangible evidence, an assessment based on the Department Valuation Officer's (DVO) valuation cannot be changed under Section 263 of the Income Tax Act, 1961.

The assessee/respondent, Ayyappa Roller Flour Mills Ltd., had consented to the land transaction and promptly transferred ownership of the property to the intended buyer. The assessment of the assessee to capital gains was completed in the assessment year 2011-2012 by utilizing the provisions of Section 2(47) of the Income Tax Act read with Section 53A of the Transfer of Property Act, even though the sale deed and the correction deed were executed in the fiscal year 2011-2012. Normally, the assessment to capital gains in relation to the aforementioned transactions would have only been included in the assessment orders for the year 2012-2013 under the Income Tax Act.

The assessee appealed the aforementioned Assessing Officer order. The matter was returned to the Assessing Officer for a new capital gains calculation after the First Appellate Authority ordered that the land value be set at Rs. 50,000/-per cent.

The Revenue appealed to the Appellate Tribunal the aforementioned First Appellate Authority ruling. The Tribunal, for its part, overturned the conclusions of the lower authorities and ruled that the Department Valuation Officer's (D.V.O.) opinions had to be consulted before determining the fair market value.

As a result, the Assessing Officer, to whom the matter was now remanded, reported it to the D.V.O. The Assessing Officer completed the assessment of capital gains on the assessee and noted the fair market value determined in the report before issuing instructions that gave effect to the Appellate Tribunal's ruling based on the D.V.O. report.

The Commissioner used his authority under Section 263 of the Income Tax Act to issue a show-cause notice to the assessee on February 8, 2021, after concluding that the Assessing Officer's assessment was inaccurate and detrimental to the Revenue.

Justices A.K. Jayasankaran Nambiar and P.M. Manoj observed that the Commissioner of Income Tax was not permitted to use his authority under Section 263 to suo motu revise the Assessing Officer's order under the Income Tax Act once it was evident that the Assessing Officer had followed the Appellate Tribunal's instructions and had adopted the value set by the D.V.O. in order to complete the assessment in relation to the assessee. This was especially true when the Assistant Engineer of the Valuation Cell had raised a doubt regarding the D.V.O.'s determination of the fair market value.

Want a deeper insight into the Income Tax Bill, 2025? Click here

The bench noted that, in any event, the Assistant Engineer, Valuation Cell did not receive the clarifications that were requested in the letter, and no final decision regarding the merits of the questions raised was made prior to the issuance of a show cause notice dated 08.02.2021, which invoked the authority granted by Section 263 of the Income Tax Act.

The court while dismissing the appeal held that the Commissioner could not have had "reason to believe" that the assessment was incorrect and against the interests of the Revenue on the date he invoked his authority under Section 263 of the IT Act because there was no information available to support that "reason to believe" at the time the show cause notice was issued. Thus, his use of authority under S.263 was obviously unwarranted.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates