DVO Valuation and 10% Tolerance Band: Can the Income Tax Department Tax a Difference in Property Value after DVO report?
A difference between the actual sale consideration of an immovable property and its valuation by the Departmental Valuation Officer (DVO) does not automatically mean additional tax. Where the difference is within the permissible 10% tolerance band, the taxpayer may be entitled to protection from addition.
This important principle has once again received judicial recognition from the Nagpur Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Shree Maya Real Estate Pvt. Ltd. v. DCIT, ITA Nos. 227 & 228/Nag./2022, order dated 02.09.2024. The decision is particularly relevant because the valuation was not merely based on the stamp duty value—the matter had gone a step further, with the Assessing Officer making a reference to the Departmental Valuation Officer (DVO).
The Question: Can a DVO’s Higher Valuation Trigger Tax?
Imagine this situation.
A property is actually sold for ₹100 lakh. The stamp valuation authority considers its value to be ₹130 lakh. The Assessing Officer is not satisfied with the difference and refers the matter to the DVO. The DVO determines the fair market value at ₹106 lakh.
Can the Assessing Officer say: “The DVO has valued it at ₹106 lakh. Therefore, ₹6 lakh is taxable”?
The answer, according to the judicial principle applied by the Nagpur ITAT, is not necessarily.
Where the difference between the actual consideration and the DVO valuation is within the prescribed tolerance band of 10%, such minor variation should not ordinarily result in substitution of the actual sale consideration by the estimated value.
The Shree Maya Real Estate Case
The facts of the case are quite interesting.
The assessee, Shree Maya Real Estate Pvt. Ltd., had entered into an MOU with the purchaser for sale of certain agricultural land. The property consisted of three contiguous parcels covered by Khasra Nos. 85/1 & 85/2, 72 and 83.
Although there was one overall transaction pursuant to the MOU, the sale deeds were executed in three parts at the instance of the purchaser. Two sale deeds were executed on 29 March 2016 and the third on 31 May 2016.
The aggregate figures were:
| Particulars | Amount |
| Actual Sale Consideration | ₹8.25 crore |
| Stamp Duty Valuation | ₹13.49 crore |
| DVO Valuation | ₹8.8268 crore |
| The difference between the actual sale consideration and the DVO valuation was ₹57.68 lakh, which appeared substantial in absolute terms. But percentage matters in this context. | |
| The difference worked out to only 6.99% of the actual sale consideration. | |
| And that 6.99% became the turning point of the case. |
Why Was the DVO Reference Important?
The Assessing Officer had originally proceeded on the basis of the stamp duty value. The stamp valuation was ₹13.49 crore, whereas the actual consideration was ₹8.25 crore.
However, on reference to the DVO, the Department’s own valuation officer determined the value at only ₹8.8268 crore.
In other words, the DVO’s valuation was substantially lower than the stamp duty valuation.
The ITAT observed that where the DVO valuation is lower than the stamp duty valuation, the appropriate comparison has to be made between the actual sale consideration and the DVO valuation. In this case, the difference was only 6.99%.
The 10% Tolerance Band
This is where section 43CA became important.
Section 43CA deals with transfer of land or building or both held as an asset other than a capital asset. Broadly speaking, where the declared consideration is lower than the stamp duty value, the stamp duty value can be deemed to be the full value of consideration, subject to the statutory conditions and tolerance provisions.
The law originally provided a smaller tolerance margin. The Finance Act, 2018 introduced a 5% tolerance limit. Subsequently, the Finance Act, 2020 enhanced this tolerance band to 10% with effect from 1 April 2021.
But what about transactions of earlier years?
That was the crucial question before the Tribunal.
Can the 10% Tolerance Apply to Earlier Years?
The Nagpur ITAT relied upon the reasoning adopted in Maria Fernandes Cheryl v. ITO (International Taxation) and other decisions concerning section 50C.
The underlying reasoning is quite practical.
Property valuation is not an exact science. Even a valuation made by a statutory authority involves estimation. Different properties in the same locality may command different prices because of factors such as location, shape, accessibility and other commercial considerations.
The Tribunal noted the reasoning that the tolerance provision was introduced as a curative measure to protect genuine transactions involving minor variations between declared consideration and stamp valuation.
The Tribunal therefore held that the enhancement of the tolerance band to 10% was curative in nature and could be applied retrospectively.
Since section 43CA was made effective from 1 April 2014, the Tribunal held that the 10% tolerance provision would relate back to the date on which section 43CA itself became effective.
DVO Valuation: A Key Protection for the Taxpayer
The decision also highlights an important practical aspect of a DVO reference.
When the Assessing Officer refers the property to the DVO, the DVO’s report becomes relevant in determining the fair market value. But the DVO’s valuation is itself an estimated valuation. It cannot automatically be treated as an infallible or precise figure.
In fact, in this case, the DVO’s valuation was ₹8.8268 crore against the stamp duty value of ₹13.492 crore.
Once the DVO valuation was taken into consideration, the difference from the actual consideration was only 6.99%.
The Tribunal held that the difference was within the 10% tolerance band and consequently directed deletion of the entire addition of ₹57.68 lakh under section 43CA.
What About Section 50C?
The principle is not confined only to section 43CA.
Section 50C deals with transfer of land or building or both being a capital asset, whereas section 43CA deals with land or building or both which are not capital assets, such as property held as stock-in-trade by a real estate developer.
The Nagpur ITAT noted that the two provisions are pari materia in this respect. Both contain a deeming mechanism based upon stamp valuation, although they apply to different categories of assets. Therefore, the judicial reasoning developed under section 50C regarding tolerance of minor variations can equally apply to section 43CA.
This makes the ruling particularly significant for both property investors and real estate businesses.
A Simple Example
Suppose:
Actual sale consideration = ₹1 crore
DVO valuation = ₹1.08 crore
Difference = ₹8 lakh
The difference is 8% of the actual consideration.
If the applicable statutory conditions are satisfied, the taxpayer has a strong basis to contend that the difference falls within the 10% tolerance band and should not result in substitution of the actual consideration merely because the DVO valuation is higher.
The important point is that the percentage difference, rather than merely the absolute difference, becomes relevant.
But Is Every 10% Difference Automatically Protected?
A word of caution is necessary.
The 10% tolerance band should not be understood as a universal rule that applies mechanically to every property valuation dispute. The applicable section, assessment year, nature of the asset, statutory wording applicable to that year and the precise facts of the transaction must all be examined.
The Shree Maya decision is particularly significant because the Tribunal considered the legislative history, the amendment enhancing the tolerance band and the judicial reasoning treating the amendment as curative. It then applied that principle to section 43CA.
Therefore, taxpayers should not merely calculate a percentage and stop there. The underlying statutory provision and the date of the transaction must also be checked.
The TAX Take
A DVO report may look authoritative because it comes from the Income Tax Department’s own valuation machinery. But a valuation is still an estimate.
The Shree Maya Real Estate ruling sends an important message: minor variations in property valuation should not automatically become tax additions.
Where the DVO’s valuation is within the permissible tolerance band of 10% of the actual declared consideration, the taxpayer can legitimately rely upon the statutory tolerance principle, subject to the facts and applicable law.
In the case before the Nagpur ITAT, the Revenue sought to tax a difference of ₹57.68 lakh. Yet, when viewed proportionately, the difference was only 6.99%. The Tribunal held that such difference fell within the 10% tolerance band and deleted the addition.
So, the next time a DVO’s valuation is higher than your declared property consideration, don’t look only at the rupee difference. Look at the percentage difference—and check whether the 10% tolerance band comes to your rescue.
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The copy of the order is as under:
