B.L. Chhibber, A.M.
1. The nodal dispute raised in these two appeals relating to the asst. yrs. 1991-92 & 1992-93 pertains to valuation of assessee's one-half share in the property situated at Walkeshwar Road, Malabar Hills, Bombay. For the asst. yr. 1991-92 the assessee filed return of net wealth on 31st December, 1991 declaring net wealth at Rs. 22,100 and the original assessment was completed under s. 16(3) on 31st March, 1994, taking the value of the assessee's one-half share in the above said property at Rs. 7,74,67,000 on the basis of preliminary valuation report of the DVO-II, Bombay.
2. In appeal the Tribunal CIT(A)-I, Ahmedabad set aside the assessment order vide his order dt. 11th August, 1994, with the direction to the AO to make a fresh assessment on the basis of the final report of the DVO and after giving due opportunity to the assessee to file the objections and explanation in respect of the final report of the DVO.
3. The final valuation report under s. 16A(5) of the WT Act was received by the AO under DVO's No. DVO-II/Bom/WT-22/94-95/822, dt. 17th January, 1995 in which the value of the property in question was determined by him at Rs. 9,64,17,000 on 31st March, 1991, the relevant valuation date for the asst. yr. 1991-92. As per the details of this immovable property, freehold plot of land admeasuring 1845.33 sq. mtrs. (2207 sq. yds.); the access road of 112 sq. yds. and foreshore land admeasuring 683 sq. yds. as reported by the assessee. At the time of inspection by the Valuation Officer there was no structure, as the construction activity was in progress. The DVO was supplied with various documents as mentioned in the order on p. 2, by the representative of the assessee for working of the basic details and relevant information in respect of the property in question. The DVO, according to the Revenue, gave opportunity to the assessee for comments and objections if any, on the proposed estimate of the valuation under s. 16A(4) of the WT Act. The DVO in his final report considered the comments and objections raised by the assessee as mentioned by the DVO in Annexure B to the valuation report and this Annexure B is now forming part of the assessment order under consideration.
4. On examination of the past records of the assessee-company, the AO, found that the assessee had disclosed the value of the property under consideration under r. 1BB of the WT Rules at Rs. 22,530 for the past assessment years on the ALV determined by the Tribunal at Rs. 6,000. The AO further found that the management of the assessee-company was transferred to Fairfield Petromarin Services (P) Ltd., Bombay (which is an ESSAR group company) as per the agreement dt. 17th January, 1992; that at the time when the aforesaid agreement was executed for transferring the management, the assessee-company had no business or other activity and no other assets except the one-half share in the said immovable property situated at Walkeshwar Road, Bombay. Therefore, the consideration that was received by the assessee for the transfer under the agreement dt. 17th January, 1992, was the value of the one-half share of the property in question. Hence, the consideration of Rs. 6,40,55,864 received on 17th January, 1992, was for the assessee's one-half share in the Walkeshwar property in question.
5. In view of the fair market value (FMV) of this property reflected in the agreement dt. 17th January, 1992, the AO was of the view that the value determined under r. 1BB on the basis of ALV of Rs. 6,000 was not adequate or correct market value of the property and, therefore, reference to the Valuation Officer was made under s. 16A of the WT Act. Now that the final report from the DVO-II, Bombay was available, the AO completed the assessment after adopting the value of assessee's one-half share in this property as determined by the DVO under s. 16A(4) of the WT Act. Since according to the DVO the property in question was sold on 17th January, 1992, for Rs. 12,81,11,728, he adopted the FMV of this property as on 31st March, 1991, at Rs. 9,64,16,925 which was in fact much less than the actual sale price realised after about 9 months on 17th January, 1992. The assessee's one-half share was adopted by the AO at Rs. 4,82,06,580 and after allowing deduction for wealth-tax liability he determined the net wealth of the assessee at Rs. 4,72,63,235 as on 31st March, 1991.
6. The assessee appealed to the CIT(A) and raised the following three grounds on the issue :
1. The impugned order is bad in law.
2. The valuation of the property was governed by r. 3 r/w r. 5 of Sch. III. Hence, question of finding out the market value of the property on land and building method of valuation does not arise.
3. The AO, ought to have adopted the value of the property as declared on the basis of r. 3 of Sch. III of the WT Act.
After hearing the representative of the assessee and for the detailed discussion given in his order the learned CIT(A) dismissed all the three grounds and held as under :
(a) The reference by the AO to the DVO under s. 16A was within the jurisdiction of the AO and hence was valid. He held that the learned CIT(A)-I, Ahmedabad, had set aside the original order for the limited purpose of reframing the assessment on the basis of the final report from the DVO-II, Bombay under s. 16(4) of the WT Act. This order of the CIT(A) was accepted by the assessee as the assessee did not file appeal to the Tribunal. According to the learned CIT(A) it implied that the assessee did not have any objection to the said reference under s. 16A. He accordingly held that it was too late to raise this objection and he accordingly overruled and held that the reference to the DVO was in order and valid.
(b) That the DVO, Bombay has rightly valued the property as on 31st March, 1991 at Rs. 9,64,16,925 : That the DVO had met all the objections raised by the assessee and arrived at the correct valuation.
(c) That the report submitted by the DVO was not time-barred. As the learned CIT(A)-I, Ahmedabad. had set aside the original assessment with very clear directions and the assessment has been completed as per these directions within the permissible time. Therefore, there is no anomaly or infirmity either in the DVO's valuation report or in the assessment order passed on that basis.
(d) As per the clear provision of s. 16A(5) of the WT Act the AO had rightly adopted the valuation as determined by the Valuation Officer under s. 16A(4) of the WT Act. He had no discretion but to adopt the same as it was. Therefore no purpose would have been served by the AO in again giving an opportunity to the assessee.
(e) During the course of proceedings before the learned CIT(A) it was pointed out that the value of the house property was being considered as per r. 1BB in the past years w.e.f. 1st April, 1989, this r. 1BB had been replaced vide Sch. III and the DVO ought to have applied the provisions of Sch. III. The learned CIT(A) rejected this contention holding that the assessee's insistence on the application of rr. 3 to 7 of Sch. III is without any merits because as stated by the learned DVO, Bombay the case is covered by r. 8A of Sch. III and hence the valuation would to be made as specifically provided in r. 20(2) of Sch. III. The learned CIT(A) further held that the learned DVO, Bombay had considered comparative sales instance from the same locality while from the assessee's side no sales instance had been filed.
In the light of the above discussion, the CIT(A) concluded that in the facts and circumstances of the case he did not see any reason to hold that the value determined by the Valuation Officer was not the correct one or was on the higher side.
7. Before us the assessee has raised five grounds. The first three grounds challenge the action of the learned CIT(A) in confirming the valuation of the property in dispute. In the first ground it has been submitted that the learned CWT(A) has grossly erred in not ordering for cancellation of the assessment order impugned before him for being bad in law inter alia for following reasons :
(a) For having been based on such an order of valuation which had itself been passed without jurisdiction since the very reference to the valuation officer under s. 16A of the WT Act, 1957, was without jurisdiction;
(b) For having been based on such an order of valuation which had itself been passed under s. 16A(5) of the WT Act, 1957, on 17th January, 1995 which was long after the assessment proceedings for the present asst. yr. 1991-92 had become time-barred on 31st March, 1994;
(c) For having been based on an order of valuation which was itself illegal for the reason that what the Valuation Officer had done was to value the immovable property in question as if it were a plot of land and, accordingly, otherwise than in accordance with the mandatory rr. 3 to 7 of Sch. III to the WT Act, 1957, even though it was the admitted position that the immovable property was a residential building with appurtenant land.
In the second ground it has been submitted that the learned CWT(A) has grossly erred in failing to appreciate the merits of the assessee's case for the substitution of the valuation of Rs. 4,82,08,600 of the immovable property in question adopted by the AO on the basis of the valuation report of the Valuation Officer passed under s. 16A(5) by the value of Rs. 1,00,738 which was arrived at by the assessee's approved valuer in accordance with rr. 3 to 7 of the WT Act, 1957. The above two grounds have been combined in ground No. 3 which reads as under :
"The appellant, therefore, prays that this Hon'ble Tribunal may be pleased to hold that the assessment order impugned before the learned CWT(A) was bad in law and deserved to be quashed or in the alternative, to direct that the value of the immovable property in question be taken to be Rs. 1,00,738 as arrived at in accordance with rr. 3 to 7 of Sch. III to the WT Act, 1957 by the appellant's registered valuer."
8. Shri K. C. Patel, the learned counsel for the assessee submitted that both the authorities below have gone wrong while determining the value of the said property. He submitted that the assessee can for the first time challenge the aspect of the jurisdiction and legality of the reference, approval and DVO's report by the WTO, Dy. CIT and DVO, respectively in second round of appeal before of the Tribunal, assuming that it was not objected to in the first round of appeal. He submitted that the reference to the DVO was without jurisdiction on account of :
(i) Non-fulfilment of conditions precedent for making a reference to Dy. CIT and absence of notice of hearing to the assessee, reference itself is bad and illegal ab initio.
(ii) That the conditions prescribed under r. 8 Sch. III as to 'not practicable' not alleged nor proved.
(iii) That r. 8 r/w r. 20 being in nature of 'exceptions' to application of rr. 3 to 7 of Sch. III the burden of proving applicability is not discharged especially in absence of any allegation or proof as to valuing the property under rr. 3 to 7 being 'not practicable'.
(iv) That in absence of any allegation or proof as to 'necessary facts and circumstances' and in view of admitted position as to non-applicability of cl. (b) and cl. (c) of r. 8 of Sch. III the AO, could not have formulated requisite belief that it was not practicable to apply r. 3 of Sch. III.
(v) That the reference is illegal and invalid being quite contrary to the valuation of property in question the same could not have been treated as a legal reference under s. 16A(5).
(vi) Copies of reference not supplied to assessee.
The learned counsel further submitted that the approval by the Dy. CIT(A) was not valid and enforceable because of the following facts :
(i) Similarly, previous approval said to have been granted by the Dy. CIT having been accorded without notice of hearing and without hearing to the assessee, the same could not have been acted as the base for making reference against the provisions of Sch. III rr. 3 to 7.
(ii) That in absence of any requisite material, belief and lawful reference the approval granted mechanically could not have acted as 'foundation' or 'base' for final report from DVO.
(iii) Copy of 'Approval' was not supplied to assessee.
The learned counsel further submitted that admittedly the property in question on the relevant valuation dates was 'building' and the DVO could not have treated the same as 'open plot' and thus he had exceeded jurisdiction vested in him in determining the nature of the property under valuation. He further submitted that the entire assessment order based on the alleged report dt. 17th January, 1995 is not enforceable in absence of any service or supply of the said report to the assessee, the objections having been filed only against 'proposed valuation' and in reply to notice under s. 16(1)(4) of the Act. According to the learned counsel the mandatory conditions precedent contained in the r. 8 having not been complied with the entire reference, approval and valuation report are unenforceable at law and on admitted facts, Sch. III rr. 3 to 7 is fully applicable, the working of the valuation of the property submitted by the registered valuer as per the said rules deserves to be accepted in toto. The learned counsel concluded his arguments with the following remarks :
"That without prejudice to all the legal contentions referred above, and assuming for a while that the order of valuation and consequential estimate of value are not 'nullity' and 'non est' in the eye of law, the valuation worked out by the registered valuer of the assessee as per the established valuation of all the preceding years either under r. 1BB or Sch. III (in turn based on established 'ALV' under the IT Act for number of years) deserves to be accepted, the same being Rs. 1,00,738 in relation to 1/2 share in the property belonging to the assessee."
Shri Surendra Pal, the learned Departmental Representative strongly supported the order of the authorities below. He submitted that during the proceedings before the CIT(A)-I, Ahmedabad, who had set aside the original order no objection was taken to the reference made to the DVO and now it was too late for the assessee to object to the reference made under s. 16A(5). He submitted that the reference made to the DVO was legally valid and in support of this contention he relied upon the decision of the Tribunal, Madras Bench 'B' in the case of C. S. Shastri vs. WTO (1991) 38 ITD 338 (Mad).
9. Shri M. D. Mehra, the learned DVO from Bombay explained the salient features of the valuation report. He submitted that the property has been valued as a composite property. He admitted that in the notice under s. 16A(4) of the WT Act, 1957, dt. 15th February, 1994 the property was described as land and bungalow building as is evident from the opening paragraph of notice which reads as "whereas determination of fair market value of the property land and bungalow building at 16 Walkeshwar Road, Bombay as on 31st March, 1991, and 31st March, 1992, has been referred by the Asstt. CIT, Cir. 9(1), Ahmedabad vide his letter No. Cir. 9(1)/CZ/1919/CZ-6059/93-94, dt. 27th August, 1993". He also admitted that when the DVO visited the site the old structure had been demolished by the purchaser of the property namely, ESSAR group and construction work on a huge scale of a multi-storied building was in progress. He submitted that the property in question was a prime land located in prime locality of Bombay with development potential. According to the learned DVO such development potential plays important role rather than assuming and making details. He further submitted that rr. 3 to 7 of Sch. III were not applicable to the property in question because it was actually sold after a period of 9 months for huge consideration and further the value so worked out was not in consonance with the location, size and potential development of the property in question. He dealt on the details given in the valuation report and maintained that the valuation had been rightly worked out at Rs. 9,64,16,925.
10. We have considered the rival submissions and perused the facts on record. The immovable property under consideration, the valuation of which had been referred by the AO to the Valuation Officer under s. 16A was a building with appurtenant land which the assessee had acquired sometime in the year 1975 jointly with another company viz. Rupa Investment (P) Ltd. (both having 1/2 share each) and it has been let out by the assessee to its directors w.e.f. 1st April, 1978. The property had been subjected to assessment in the assessee's hands under the head "Income from house property' for all the years since inception right upto asst. yr. 1992-93 and there had been a dispute with the Department in the matter of its ALV which the Hon'ble Tribunal had ordered to be taken at Rs. 6,000 vide its order for asst. yr. 1976-77 which had become final. In the past this property had also been assessed under the WT Act for value arrived at in accordance with r. 1BB of the WT Rules. Rule 1BB was replaced by Sch. III to the WT Act, 1957, by the Direct Tax Laws (Amendment) Act, 1989 w.e.f. 1st April, 1989. Thus, the immovable property in question being a building with appurtenant land, it was mandatorily required to be valued by the rules of valuation of immovable property contained in rr. 3 to 8 of Sch. III to the WT Act, 1957.
11. A plain reading of r. 3 of Sch. III shows that it prescribed a mandatory method of valuation of immovable property being a building or land appurtenant thereto or part thereof and that the only exception to that mandate was contained in r. 8 of that Schedule reading as under :
"8. Rule 3 not to apply in certain cases. - Nothing contained in r. 3 shall apply :
(a) where, having regard to the facts and circumstances of the case, the AO, with the previous approval of the Dy. CIT, is of opinion that it is not practicable to apply the provisions of the said rule to such a case; or
(b) where the difference between the unbuilt area and the specified area exceeds twenty per cent., of the aggregate area; or
(c) where the property is constructed on leasehold land and the lease expires within a period not exceeding fifteen years from the relevant valuation date and the deed of lease does not give an option to the lessee for the renewal of the lease,
and in any case referred to in cl. (a) or cl. (b) or cl. (c), the value of the property shall be determined in the manner laid down in r. 20."
Further a plain reading of r. 8 together with r. 20 shows :
(i) that so far as the valuation of immovable property being a building or land appurtenant thereto was concerned, since that was an asset specifically covered by rr. 3 to 7, recourse to r. 20 can be taken only if any of the clauses of r. 8 was attracted,
(ii) that there was nothing in r. 20 itself which could entitle the AO to bypass the provisions of rr. 3 to 7 in a case where r. 8 was not attracted.
12. Looking to the facts and circumstances of the assessee's case, and especially considering the nature of the immovable property in question and the fact that it had been subjected to assessment under the head 'Income from house property' for a number of years and further that it had also been subjected to the levy of wealth-tax by the application of r. 1BB of the WT Rules for a number of years, the application of rule of Sch. III was a mere matter of arithmetics and it was impossible to suggest, as envisaged by cl. (a) of r. 8 that it was not practicable to apply the provisions of r. 3 of Sch. III to the assessee's present case. Accordingly we hold that it was not open to the AO to hold the opinion that in the assessee's present case it was not practicable to apply the provisions of the aforesaid r. 3 of Sch. III and accordingly it was not equally open to the Dy. CIT to grant his prior approval to the AO for holding that opinion in a mechanical way. Even if the learned AO were to hold such opinion, it was incumbent upon him to confront the assessee with his proposal to do so, so that the assessee could have had an opportunity to show to him that any such opinion that he may be inclined to hold was entirely misplaced and it is noted that no such opportunity whatsoever had been granted to the assessee during the assessment proceedings. Equally it was incumbent upon the Dy. CIT to grant his prior approval to the AO for holding any such opinion only after confronting the assessee with his proposal to do so and granting it an opportunity of being heard in that behalf especially when the consequences of his granting of such approval were bound to be far-reaching for it and it is noted that no such opportunity had been granted to the assessee.
13. It is an admitted position that the un-built area of the immovable property in question exceeded the specified area by only 7.45 per cent. of the aggregate area, the excess was far below 20 per cent. of the aggregate area and therefore, there could be no question for applying cl. (b) of r. 8 of Sch. III.
14. Since the building in the assessee's case was admittedly situated on freehold land cl. (c) of r. 8 could not be applied since that clause can be applied only if the property was constructed on leasehold land.
15. In view of the above position none of the provisions of r. 8 was attracted to the facts of the assessee's case and hence the value of the immovable property in question was mandatorily required to be determined in accordance with rr. 3 to 7 of Sch. III of the WT Act, 1957. The above legislative mandate contained in s. 7(1) of the WT Act, 1957 and rr. 3 to 7 of Sch. III could not be disregarded even on the ground that comparable cases of transactions of sale of immovable property showed that the real market value of the property was much higher than the value determined in accordance with the said rr. 3 to
7. The said legislative mandate can also not be disregarded on the alleged ground that by transfer of the entire share capital of the assessee-company (which incidentally had taken place after the valuation date) in fact, the property in question had itself been sold for a much higher price than the value determined in accordance with the said rr. 3 to 7. This is because of the sheer reason that it was a legislative mandate that the value of the immovable property being a building and appurtenant land should be valued only in the manner laid down in rr. 3 to 7 of Sch. III. Since none of the rr. 3 to 7 envisaged taking into 'market value' of the immovable property in question, it was not at all open to the learned AO to refer its valuation to the Valuation Officer under s. 16A of the WT Act, 1957 as it read after the amendment by the Direct Tax Laws (Amendment) Act, 1989.
16. In CWT vs. Kasturbhai Mayabhai (1987) 164 ITR 107 (Guj), the Hon'ble Gujarat High Court considered the applicability of r. 1BB. The following is the relevant observation of A. M. Ahmedi, J. (as he then was) speaking for the Division Bench, which delivered the said judgment :
"Counsel for the Revenue next contended that s. 16A empowers the WTO to make a reference to the Valuation Officer if in his opinion the returned value is less than the market value of the asset in question. According to him, if r. 1BB were to operate retrospectively, it would render ss. 7(3) and 7(4) as well as s. 16A(6) redundant. Under s. 7(4), the assessee has the option of valuing the property on : (i) the valuation date following the date on which he became the owner; (ii) on the valuation date relevant to the assessment year commencing on 1st April, 1971, whichever is later. He pointed out that once a reference is made to the Valuation Officer under s. 16A(1), the Valuation Officer is required to follow the procedure set out in the subsequent sub-sections and after his order is received, the law expects the WTO to complete the assessment in conformity with the estimate of the Valuation Officer, Mr. Shelat therefore, urged that it would not be possible to apply r. 1BB retrospectively having regard to the scheme of these provisions.
It is indeed true that sub-ss. (3) and (4) of s. 7 which begin with a non obstante clause have overriding effect on sub-s. (1) of s. 7 r/w r. 1BB. Once a reference is made to the Valuation Officer, the asset has to be valued in accordance with s. 7(3) or 7(4) as the case may be. Sub-s. (3) of s. 7, however, reiterates the principle of sub-s. (1), namely, that the value of an asset shall be estimated to be the price which it would fetch if sold in the open market on the valuation date. In the case of a house owned and exclusively used by the assessee, the assessee has been given the option of valuing the asset on the two dates mentioned in s. 7(4) of the Act; but while valuing the asset under s. 7(3) or s. 7(4) r/w ss. 16A(1) and 16A(5), the Valuation Officer must have regard to the well-recognised method or valuation adverted to earlier. Rule 1BB merely introduced one such method - the rental or yield method with suitable modifications so that it can govern practically all cases of assets used wholly or mainly for residence. It would, therefore, not be inconsistent with the scheme of the Act if we hold that the Valuation Officer would have to estimate the value in conformity with r. 1BB in cases which are pending before him. In the case of an asset governed by s. 7(4), the choice would remain with the assessee to opt for that estimate which he considers beneficial."
So, in the above decision, the above non obstante clause appearing in s. 7(3) of the WT Act was taken note of and yet it was held that even when the value-question was referred to the Valuation Officer, the said officer has to fix up the value only in accordance with r. 1BB.
The judgment of the Hon'ble Gujarat High Court in the case of Kasturbhai Mayabhai (supra) has been affirmed by the Hon'ble Supreme Court in CWT vs. Sravankumar & Sons (1994) 210 ITR 886 (SC). Following the ratio laid down by the Hon'ble Supreme Court we hold in favour of the assessee.
17. As regards the observations of the learned CIT(A) that the original assessment order had been set aside by the learned CIT(A)-I, Ahmedabad, for the limited purpose of reframing the assessment on the basis of the final report from DVO II, Bombay under s. 16A(4) of the WT Act and since the assessee had accepted this order by not preferring the appeal to the Tribunal it was too late to raise this objection, we do not find any merit in the same. No direction of the first appellate authority can confer jurisdiction on the AO or the Valuation Officer if it was not lawfully seized of jurisdiction and the fact that the contention as regards lack of jurisdiction was not urged during the first round of proceedings was beside the point. There could never be a waiver of mandatory provisions such as those of s. 16A or s. 17A of the WT Act, 1957, for the simple reason that jurisdiction cannot be conferred on an authority by mere consent. The learned CIT(A) ought to have appreciated that the assessee's challenge to the legality of the assessment order impugned before him was, in nature, such as to cut at the very root of the matter and that, being such, it was open to the assessee to raise it before him in its appeal against the assessment order impugned before him even if that order had come to be passed upon the original assessment having been set aside in first appeal. This principle is well settled by the Gujarat High Court in CIT vs. Nanalal Tribhovandas (1975) 100 ITR 734 (Guj) and P. V. Doshi vs. CIT (1978) 113 ITR 22 (Guj), and the Hon'ble Bombay High Court in Investors Industrial Corpn. Ltd. vs. CIT (1992) 194 ITR 548 (Bom). In our opinion the challenge of lack of jurisdiction went to the very root of the matter and that the jurisdictional defect cannot be made good by relying on the order passed by the first appellate authority because the first appellate authority itself had no jurisdiction to issue directions so as to confer jurisdiction upon the AO or the Valuation Officer which he was not lawfully seized of.
18. In the light of the above discussion, we hold that the property in question was mandatorily required to be valued by the rules of valuation of immovable property contained in rr. 3 to 7 Sch. III of the WT Act, 1957 and accordingly we direct the AO to do the same. The ground raised by the assessee succeed as indicated above.
19. Ground No. 4 raised by the assessee reads as under :
"In law and, in the facts and circumstances of the appellant's case, the learned CWT(A) has grossly erred in not ordering for the cancellation of the levy of interest under s. 17B of the WT Act, 1957, made by the learned AO vide the assessment order impugned before him."
20. This ground is consequential in nature. The AO is directed to charge interest under s. 17B of the WT Act 1957, if any after taking into consideration the relief given by our order.
21. Ground No. 5 raised by the assessee reads as under :
"In law and in the facts and circumstances of the appellant's case, the learned CWT(A) has grossly erred in not upholding the appellant's challenge to the initiation, vide the assessment order impugned before him, of penalty proceedings under s. 18(1)(c) of the WT Act, 1957."
This ground was not pressed at the time of hearing. The same is accordingly dismissed.
22. In the result, the appeals are allowed in part.