The Government has been rightly concerned about the component of black money in real estate transactions and consequent evasion of tax. With a view to curb the said menace and to tax the unaccounted money, the Government has time and again made amendments in the Income-tax Act (Act) by introducing different provisions to tackle the issue.

Under the Act of 1922 , we had the first proviso to Section 12B(2), which entitled the Assessing Officer to ignore the actual consideration received for the transfer and to substitute a notional or artificial consideration based on the fair market value of the asset on the date of transfer in such cases where the transfer was to a person directly or indirectly connected with the assessee and the Income-tax officer had reason to believe that the transfer was effected with the object of avoidance or reduction of the liability of the assessee to capital gains tax. With the enactment of the 1961 Act, the said provision found place in Section 52 of the said Act. It provided that only when both the conditions specified in the said Section were satisfied, viz. (1) the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 45 and (2) the fair market value exceeded the amount of declared consideration by more than 15%, that the difference between the agreed consideration and market value could be subjected to tax. The scope of the said provision was thus restricted. The said provision was found unworkable as the Assessing Officers found it difficult to establish that the consideration had been understated with the object of avoidance or reduction of the capital gains tax liability. The vires of this Section was examined by the famous decision of the Apex Court in K. P. Varghese’s case 131 ITR 597 (SC) and the provisions were made virtually inapplicable.

Thereupon in the year 1982, Chapter XXA was inserted in the Act, providing for compulsory acquisition of immovable properties. As the provisions of the said Chapter too were not successful in arresting the proliferation of black money in the transfer of immovable properties, the said Chapter was replaced by a new Chapter XXC by the Finance Act, 1986. Under the provisions contained in the said Chapter XXC any person intending to transfer immovable property in specified areas at values exceeding specified amounts was required to file a statement in Form 37-I before the appropriate authority within the prescribed time before the intended date of transfer. The transfer could be effected, only if the appropriate authority did not pass an order of pre- emptive purchase of the property and a ‘No Objection Certificate’ was issued by the said authority. As compared to Chapter XXA, the said Chapter XXC did not provide for compulsory acquisition of immovable properties, but enabled the Central Government to purchase the property which had already been offered for sale. The said Chapter was found to be creating procedural delay in registration of transfers. The provisions of the said Chapter were read down by the Apex Court in C. B. Gautam’s case 199 ITR 530 (SC) and were finally abandoned with a view to remove the source of hardship to the taxpayers and instead Section 50C was introduced by the Finance Act, 2002.

The said Section provides that where the consideration received or accruing as a result of the transfer of land or building or both is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration and capital gains shall be computed accordingly. The said provision has been enacted notwithstanding adverse observations that had been made by the various courts of law against the reliance on stamp duty valuations for the purpose of computation of capital gains. The Gujarat High Court in the case of New Kalindi Kamavati Co-op. Housing Society Ltd. vs. State of Gujarat & Ors. (2006)(2) Guj. L. R. Vol. XLVII(2) has observed that the valuation adopted by the Stamp authorities cannot be considered conclusive. The Court while observing that : Sole reliance was placed on ‘jantri’ by Dy. Collector for determination of market value for stamp duty held that ‘jantri’; i.e., market valuation record book maintained by the Stamp Valuation authorities reflects probable market value and the same was not a conclusive evidence.

The Allahabad High Court in the matter of Dinesh Kumar Mittal vs. ITO & Ors., 193 ITR 770 (All) has observed : We are of the opinion that we cannot recognise any rule of law to the effect that the value determined for the purpose of stamp duty is the actual consideration passing between the parties to a sale. The actual consideration may be more or may be less. What is the actual consideration that passed between the parties is a question of fact to be determined in each case having regard to the fact and circumstances of the case.

The Madras High Court in the case of Hindustan Motors Ltd. vs. Members, Appropriate Authority, (2001) 249 ITR 424 (Mad.) while dealing with the provisions of Chapter XX-C of the Income-tax Act has observed : Guideline values are fixed by registering authorities for purposes of collection of stamp duty and therefore, those guidelines can have no application for determining market value under Chapter XX-C . . . . Valuation depends on the location of property, the purpose for which the property is used, the nature of the property, and the time when the agreement is entered into and similar other objective factors. The valuation therefore has to be done by a method, which is more objective and can furnish reliable data to arrive at a just conclusion. The market rates notified by the Sub Registrar for the purpose of registration cannot be proper guide for valuation in respect of pre-emptive purchase.

The constitutional validity of the provisions of Section 50C was challenged before the Madras High Court in the case of K. R. Palanisamy vs. UOI, 306 ITR 61 (Mad). The provisions of the Section were attacked on the following grounds :

(i) lack of legislative competence — It was urged that while under Entry 82 List I of Schedule VII of the Constitution of India, tax could be levied on income other than agricultural income, Section 50C seeks to charge tax on artificial or deemed income, which is neither received nor is accrued;

(ii) provisions of Section 50C are arbitrary in nature due to adoption of guideline values and thus being violative of Article 14 of the Constitution — It was urged that the provisions contained in the said Section fail to take cognizance of genuine cases, where actual sale consideration passing between the parties for various valid reasons could be lower than the guideline values, which it was further urged are normally fixed for survey numbers or particular area and it fails to take into account that within the particular area the value of the property may differ widely depending upon various locational advantages and disadvantages;

(iii) the provisions of the Section are discretionary inasmuch as it covers only the transfer of the property in the nature of ‘capital asset’ leaving out of its ambit the transfer of land and building held as trading asset/stock-in-trade, as there is no deeming provision that could apply to the determination of income under the head ‘profits and gains of business or profession’;

(iv) the provisions being beyond the legislative competence and violative of Articles 14 and 265 of the Constitution should be read down.

The Court while upholding constitutional validity of the provisions of Section 50C observed that these provisions are directed only to check and prevent the evasion of tax by undervaluing the consideration of the transfer of capital assets and held that when there is a factual avoidance of tax in terms of law, the Legislature is justified in enacting the impugned provisions and it is not hit by the legislative incompetence of the Central Legislature. The Court while referring to the provisions contained in Section 47A of the Indian Stamp Act, 1989, pointed out that every safeguard has been provided allowing the aggrieved assessees to establish before the authorities the real value for which the capital asset has been transferred. The Collector is empowered to determine the market value of the property after giving an opportunity of being heard. The Court further ruled that sub-sections 2 and 3 of Section 50C further provide safeguard to the assessees in the sense that if the assessee claims before the Assessing Officer that the value adopted by the stamp duty authorities exceeds the fair market value and the value adopted by the stamp duty authorities has not been disputed in any appeal or revision before any authority, the Assessing Officer may refer the valuation of the capital asset to the Department Valuation Officer and if the value determined by the DVO be more than the value adopted by the stamp duty authority, the AO shall adopt the market value as determined by the stamp duty authorities. The Court thus held that the contention that Section 50C is arbitrary and violative of Article 14 cannot be accepted. In the context of the contention that the impugned provision is discriminatory, the Court while relying on a number of juridical pronouncements of the Apex Court ruled that : There exists intelligible differentia between the categories of assets, which had a rational nexus with the object of plugging the leakage of tax on income from the capital asset by undervaluation of the document. Thus holding that ‘differentiation is not always discriminatory’ it held that the contention that the impugned provision is discriminatory cannot be accepted. As regards the last contention, the Court ruled that in view of sufficient opportunity being available to the assessees under the Stamp Act to dislodge the value adopted by the stamp authorities the provision is not hit by legislative incompetence.

In the context of the safeguard available to the assessees under sub-Section (2) of Section 50C for reference being made to D.V.O. for determining the value of the property, it may, with due respect to the Hon’ble High Court, be pointed out that the word ‘may’ occurring in the said sub-Section suggests that the option in this regard is vested in the Assessing Officer, who may choose to refer the valuation to DVO or not.

The said question came up for consideration before the Jodhpur Bench of the Income-tax Appellate Tribunal in the case of Meghraj Baid vs. ITO, (2008) 4 DTR 509. The Tribunal in that case took the view that in case the AO did not agree with the explanation of the assessee with regard to lower consideration disclosed by him, then the Assessing Officer should refer the matter to DVO for determination of the fair market value. The Tribunal observed that if the provision was read to mean that if the AO was not satisfied with the explanation of the assessee, then he has a discretion to not send the matter to DVO, the provision would then be rendered redundant. Since the Courts of law, as discussed hereinabove have observed that the value determined for the purpose of stamp duty is not conclusive evidence of the actual consideration passing between the parties to a sale, the principles of natural justice demand that in all such cases, where there is a difference between the agreed consideration and the value assessed for the purpose of stamp duty, the AO should refer the matter to DVO for determination of fair market value for the purpose of computing capital gains, instead of placing sole reliance on the value determined for stamp duty in all cases where the assessee has computed capital gains on the basis of agreement value.

The Income-tax Appellate Tribunal in the case of Navneet Kumar Thakkar vs. ITO, (2007) 112 TTJ 76 (Jd) held that unless the property transferred has become the subject matter of registration and for that purpose has been assessed by the stamp duty authorities at a value higher than the amount of agreed consideration, the provisions of Section 50C cannot come into operation. This decision seems to provide for a release from the stringent clutches of S.50C. It is seen that quite often than not the parties do not register the sale deeds. In such cases, the onus would be upon the revenue to establish that the sale consideration declared by the assessee was understated and in such event as observed by the Tribunal, the ratio of the decisions of the Apex Court in the matter of K. P. Varghese vs. ITO, 131 ITR 597 and CIT vs. Shivakarni Co. Pvt. Ltd. (1986) 159 ITR 71 would be applicable. The Supreme Court in the case of Varghese was concerned with the provisions of Section 52(2) of the Act, which was in force at the relevant time and had remained on the statute till 31.3.1987. The said Section provided that where in the opinion of the Assessing Officer the fair market value (FMV) of the capital asset on the date of its transfer exceeded the sale consideration by not less than 15 per cent, the Assessing Officer with the previous approval of the Inspecting Asst. Commissioner can adopt FMV as the full consideration received by the assessee. It was held by the Apex Court that Section 52(2) can be invoked only where the consideration for the transfer has been understated by the assessee or in other words, the consideration actually received by the assessee is more than what is declared or disclosed by him and the burden of proving such an understatement is on the Revenue. It was also observed that the said Section has no application in the case of an honest and bona fide transaction, where the consideration in respect of transfer has been correctly declared or disclosed by the assessee even if the condition of 15 per cent difference between the FMV of the capital asset as on the date of transfer exceeds full value of the consideration declared by the assessee. If, therefore, the Revenue seeks to bring a case within sub-Section (1), it must show not only that the fair market value of the capital asset as on the date of transfer exceeds the full value of the consideration declared by the assessee by not less 15 per cent of the value so declared but also that the consideration has been understated and the assessee has actually received more than what is declared by him. These are two conditions which have to be satisfied before sub-Section (2) can be invoked by the Revenue and the burden of showing that these two conditions are satisfied rests upon the Revenue.

It may further be pointed out that Section 50C targets the vendor or transferor of the property and not the purchaser or transferee. It is an accepted position in law that the legal fiction cannot be extended beyond the purpose for which it is enacted. Section 50C embodies the legal fiction by which the value assessed by the stamp duty authorities is considered as the full value of consideration for the property transferred. It cannot thus be extended to rope in the purchasers on the ground of undisclosed investment. It may nonetheless be pointed out that in the case of Dinesh Kumar Mittal vs. ITO and Ors., (1992) 193 ITR 770 (All) the Income-tax officer in the course of proceedings relating to AY 1984-85 had invoked the provisions of Section 69 of the Act in the hands of purchaser by holding that the purchase consideration declared was less than the value determined for the purpose of stamp duty and had made an addition of 50 per cent of the difference in his hands. The said addition was upheld by AAC and the revision petition moved by the assessee was rejected by the CIT. The Allahabad High Court while holding that there was no rule of law to the effect that the value determined for the purpose of stamp duty was the actual consideration passing between the parties to a sale had eventually quashed all the three orders and had remanded the matter to the ITO for determination of actual consideration, which was paid by the assessee.

Section 69 does not embody the legal fiction by which the value assessed by stamp authorities could be considered to be the actual consideration paid by the purchaser of the property. In fact in Section 69 the word ‘may’ has been deliberately used. It may be recalled that when the Bill was introduced for insertion of S.69, in the Parliament the draft provision required that the value of investment ‘shall’ be deemed to be the income of the assessee for such financial year. However at the suggestion of the Select Committee of the Parliament, the word ‘may’ was substituted for the word ‘shall’ and has been finally adopted in the Act. It indicates that there is no presumption that unexplained investment must necessarily be added to the assessee’s income. It vests substantial amount of discretion unto the Income-tax authorities. The Courts have ruled that even ‘the unsatisfactoriness of the explanation need and did not automatically result in deeming the value of investment to be the income of the assesee’. That is still a matter within the discretion of the officer and therefore of the Tribunal as has been held in [(1980) 123 ITR 3 (Ker) and, (1995) 216 ITR 301 (AP)]. Thus it may be concluded that the scope of Section 50C is limited to the extent that it cannot be utilised as a tool for additions in the hands of a purchaser.

Author/s : A. Y. Kably, Chartered Accountant

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