ITAT remands Matter back to AO for Determination Fair Market Value Valuation in Distress Sale [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench has set aside the assessment for Satya Pal Khurana, directing the Assessing Officer (AO) to re-evaluate the fair market value of a shop sold under distress circumstances for capital gains calculation.

The dispute arose from Khurana’s sale of a shop in Kalkaji, New Delhi, which had been under tenancy with Mohan Lal Sahini for over 40 years. Following years of litigation for eviction and failed attempts to secure vacant possession, even after a favorable court order, Khurana agreed to sell the property to the tenant in April 2012 for ₹15,00,000. Of this, ₹14,50,000 was received upfront through account payee cheques, with the remainder to be paid at deed execution.

During assessment, however, the AO replaced the stated sale value with the higher circle rate of ₹44,50,000 as per section 50C of the Income Tax Act. This resulted in an addition of ₹29,50,000 to Khurana’s taxable income, treating the difference as long-term capital gains.

The Income Tax Appellate Tribunal noted Khurana’s circumstances amounted to a distress sale: with vacant possession unobtainable, no other buyer was willing to purchase the disputed property except the tenant himself. The Bench observed that applying the circle rate was inappropriate in such unique conditions, as “no other person would be interested in buying such type of disputed property.” The sale, compelled by legal setbacks and lack of market interest, required a specialized approach for fair market valuation.

The Tribunal faulted the lower authorities for failing to refer the case to the AO for determination of fair market value at the time of the original sale agreement (April 2012), explicitly directing that such valuation consider the distress sale context. The AO must now determine an appropriate value and recalculate Khurana’s capital gains accordingly, providing a fair opportunity for the assessee to present additional evidence.

The appeal was partly allowed for statistical purposes, with the matter remanded for fresh adjudication. Tax professionals note this decision as an important clarification: when a property’s sale is forced under exceptional conditions, standard stamp duty valuations may not apply, and actual market realities must be considered in capital gains calculations.

The Order was pronounced by the Bench of Anubhav Sharma (Judicial Member) and Manish Agarwal (Accountant Member) earlier this year.

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