CA Virat A. Bhavsar

CA Virat A. Bhavsar

While working on computation of capital gains, we are generally facing various small issues such as difference between fair value and full value of consideration, undervalued and understated capital asset, and their tax treatment according to their respective meaning. So therefore in this article we are explain these differences alongwith some reference to related judgements.

General Principles related to Real Income and Fair Value

1.) It is a well settled and in substance a legal precedent that what is subject to tax is a real income. The principle of real income has been subject matter of intrinsic litigation in past and the possibility of probable dispute on the scope of what constitutes real income in days to come cannot be completely ruled out despite there have been series of amendments/clarification brought into the existing provisions of the Income Tax Act 1961 (the Act).  The Apex court on several occasions have gone into the depth of the matter and decided the principles of Real Income and eventually these principles have been the backbone for enacting new provision of the Act or amending existing provision. Over the years, it is seen that many amendments are moved in the Act to bring certainty and clarity on the stand of the department in taxing receipt to tax net, nonetheless, it is not surprising that some of the provisions supplement tax liability on the fictional value despite in normal parlance it may not be the income.

2.) “Fair Value” is one of such precedent in recent past which has gained tremendous amount of attentions of the legislature. It would not be wrong in quoting that the taxing provisions are moving towards the “Fair Income”. Almost the entire gamete of taxing provisions has been so centered around this Principe.

3.) Chapter IV of the Income Tax Act 1961 broadly deals with the classification of head of the total income. Section 4 and section 5 of the Act deals with the scope of total income and income is defined in section 2(24). It is important to note that the precept of “Fair Value” is unified in each of the heads of the income. May it be income chargeable under the head salary or house property or income from Business or Profession, Capital Gain or residual head of income, application of “Fair Value” principle is not an exception.

Capital gain

Full Value of Consideration and Fair Value

4.) Often, the question arises as to whether it is the fair value or the full value of consideration accrues to the Assesse is taxable under the head Capital Gain (Refer Note-1). Section 45 talks about substitution of fair market value with the full value of consideration only in certain special circumstances, such as, determination of value of damage as a result of flood, riot, accident, fire, etc. , section 45(4) which prescribes that the fair market value be deemed to the full value of the consideration in respect of distribution of capital asset on the dissolution of a firm or where there is liquidation proposition u/s 46A. Certain specific instances have been prescribed under the Act and only under those circumstances the fair market value can be substituted with the amount of full value of consideration. Hence, unless otherwise it is specifically provided in the Act, there is no such clause of substitution of fair value while computing the capital gain under section 48 of the Act and the gain has to be computed on the basis of the ‘full value of the consideration’. Full value of consideration is the consideration received/ receivable by the transferor in respect of Capital Asset transferred. The consideration may be received in Cash/ Kind. However, following aspects are noteworthy to this effect:

a) Adequacy or Inadequacy of Consideration is not a relevant factor for the purpose of determining the full value of consideration.

b) It does not make any difference whether full value of consideration is received in totality or, in installments during the previous year, since in both cases full value of consideration due will be taken for the purpose of calculation of computing capital gains.

c) In case of exchange, the full value of consideration will be the market value of the property transferred. The provision in this propositions do clearly take into cognizance of fair value.

d) Section 50C on the other hand mandates stamp duty value as deemed to be full value of consideration.

e) Also section 50CA which now mandates that transfer of securities shall also be transacted at Fair value.

It is pertinent to mention that what is subject matter of tax is the actual consideration received after negotiation. It is therefore the negotiated consideration which can be termed as full value consideration for section 48. Full Value of Consideration amplifies that it is negotiated and settled consideration between two parties and fair value has no say what so ever. This is for the reason that the consideration agreed between the parties do take into account several commercial factors, consideration into account and therefore, it has been held in various pronouncements that FV is not at all relevant for section 48.  This is also clear from the language of section 48.

Understated Asset Vs Undervalued Asset

5.) The provision of section 50C has been introduced in the Act to deem Stamp Duty Value (SDV) assessable (as amended with effect from 1st October, 2009) as full value of consideration for section 48 of the Act. Post insertion of section 50C of the Act, the emphasis has been shifted on SDV rather than the Fair Value ( FV )since the provision of deeming fiction operates only when actual sale consideration is less than SDV. In view thereof, it becomes expedient to understand the implication of capital gain taxability in following propositions namely;

I) Undervalued Capital Asset – where the actual consideration negotiated between the parties is below the Fair Value

II) Understated Capital Asset– where the consideration received is below the actual consideration negotiated (This may be above SDV)

The term undervalues means the transaction is executed at a price which is below the fair value. On the other hand the term understated asset signifies that the transacted price is below the price actually negotiated or agreed in between the parties. It need not necessarily implies that such transacted price is not in conformity with SDV.

Undervalued Asset

6.) As far as this proposition is concerned, it is important to understand the scope of section 50C vis a vis section 55A which predominantly deals with the Fair Value mechanism.  Section 50C is applicable in case of transfer of land and building or both is transacted below the stamp duty value. Therefore, technically when it is proved that the transaction is at SDV, the AO then hardly left with the choice of exercising his description of replacing SDV with the FV unless, the facts and the circumstances of the case warrant for determining the FV. It is the substance of provision of section 142A. Post amendment brought into section 142A, it becomes one of the vital tool available to the AO for making assessment and reassessment. The section 142A has been drastically changed so as to cover in its ambit all types of assets, investments etc. Therefore, section 142A will play significant role in such propositions.

On the contrary, where the Assessee claims that the value adopted by stamp duty authority is more than the FV but he has not disputed such valuation in stamp duty proceedings, then AO may refer the valuation to DVO. If the value adopted by DVO is less than stamp duty valuation, then the Fair Market Value as determined by DVO shall be full value of consideration. If the value adopted by DVO is higher than stamp valuation, then stamp duty valuation shall be deemed full value of consideration for the purpose of capital gains. Similarly, a reference to valuation Officer under section 55A can be made to ascertain the fair market value of a capital asset if the Assessing Officer is of the opinion, that valuation of the capital asset is required, but such reference can be made only to ascertain the fair market value, therefore, the applicability of section is limited one. Section 55A is meant only to ascertain the fair market value of a capital asset but not meant to determine the full value of the consideration received as a result of the transfer therefore section 55A has its own limitation for its operation. In substance, therefore what emerges is that;

a.) So long as the transacted price is above the SDV, unless some evidences contrary to the facts are found, the SDV become the full value of consideration. In the contrary state of affairs, the AO can exercise judication u/s 142A of the Act and can certainly refer the valuation to DVO for determining the capital gain tax liability despite the provision of section 48 does not make reference to fair value. This is what has been recently decided by the Gujarat High Court (Refer Note 2). While adjudicating the issue of scope of the power of the AO, the HC clearly explained the law of section 142A vis a vis 50C and 55A and held that the power of the AO is wide enough and accordingly, the AO can refer the valuation of capital asset u/s 142A (post amendment) despite the fact that the transacted value is in line with the provision of section 50C. Thus, it can be asserted that the fiction of section 50C is not a remedy for wrong doing. It applies only when the actual consideration is below the SDV. Thus, If the consideration appears to be higher than SDV, the fiction of section 50C will not apply and accordingly, the AO can assume jurisdiction under other provision of the Act which empowers him to do so.      The Gujarat High Court held as under;

Section 50C, read with section 142A of the Income-tax Act, 1961 – Capital gains – Special provision for full value of consideration in certain cases (Jantri rates) – Assessment year 2008-09 – During relevant year, assessee sold three pieces of agricultural lands situated in different villages -While scrutinizing such assessment, Assessing Officer desired to obtain valuation of such properties, for which purpose he made a reference to DVO under section 50C(2) – Assessee raised a plea that capital gain could not be computed on basis of report of DVO as same had been assessed on basis of Jantri rates prevailing at time of sale – It was noted that Jantri rates had not been revised for a long time – Moreover, in terms of section 142A Assessing Officer had power to obtain valuation reports even in context of issues other than that of capital gains computation – Whether in view of aforesaid, writ petition filed by assessee was to be dismissed – Held, yes [Paras 7 and 18] [In favour of revenue]

(Emphasis supplied)

b.) On the contrary, the situation where the transacted value is below the SDV, the proposition is well within the ambit of section 50C.

Understated Assets

7.) Section 48 does not show that only consideration shown in sale deed is to regarded as full value of consideration received; there is nothing in section which precludes AO from substituting actual sale consideration for consideration shown in sale deeds provided that there is evidence to show that Assessee has indeed received higher amount. There is no doubt that the Assessing Officer has the powers and jurisdiction to examine and verify the fact, if the Assessing Officer has doubted that the Assessee has understated the sale consideration. The initial burden to prove the same is undoubtedly on the department. But in such a case the onus clearly shifts upon the Assessee. If the Assessee is unable to offer an explanation, the department must be taken to have discharged the burden. This is what came up for consideration before the Punjab and Haryana High Court (refer Note-3) wherein the AO shown his desire to refer the valuation of capital asset on the premise that the transaction is between related party and he doubted the genuineness of the said transaction. Before addressing this issue, let’s analyses what was held in this decision Section 48, read with section 55A of the Income-tax Act, 1961 – Capital gains – Computation of (Full value of consideration) – Assessment year 2006-07 – Whether for purpose of computing capital gain, full value of consideration is neither market value nor necessarily price stated in document for sale but price actually arrived at between parties to transaction – Held, yes – Whether, therefore, where it is found that price actually agreed upon between parties is not price reflected in document, it is price bargained for by parties to sale that must be considered for determining capital gain under section 48 – Held, yes – During relevant year, assessee sold land and building to ‘Q’ Ltd. for a consideration of Rs. 25 crores – Assessing Officer noticed that assessee and purchaser company were related parties with common directors and management – He thus taking a view that price mentioned in sale deed was not market value, made a reference to D.V.O. under section 55A to ascertain fair market value of property – DVO estimated value of property at Rs. 70 crores – On basis of valuation made by DVO, Assessing Officer made addition to capital gains declared by assessee – Commissioner (Appeals) as well as Tribunal held that since Assessing Officer had not shown that assessee received any consideration other than consideration mentioned in sale agreement, reference to DVO under section 55A was without jurisdiction – Accordingly, addition made by Assessing Officer was deleted – Whether since revenue failed to controvert aforesaid finding of fact recorded by authorities below, impugned order passed by Tribunal was to be upheld – Held, yes [Paras 16, 23 and 28] [In favour of assessee]

In the above proportions, it is important to note that the HC has held that the AO is not empowered to go beyond the price negotiated in the sale deed. The precept of Fair Value, though is relevant, but for section 48 it hardly finds any room to play. Accordingly, it can be asserted that the price negotiated between the parties, may or may not be related, is relevant for the purpose of section 48 and unless something contrary to the facts are found or proved by the department, the onus shifts on the Assessee to rebut the same. In absence of this, the department cannot doubt the genuineness of the transaction. Therefore, it is submitted as under;

a.) In case where the transacted value is understated and the evidences to that effect clearly exist as well, the AO is well within his power to refer the matter to the DVO. It is case of understatement of actual consideration negotiated.

b.) On the contrary, when the facts clearly indicate that the price negotiated is actual consideration agreed, despite it being less than FV, the AO is not permitted to raise doubt on the genuineness of the transaction.

Friction of Section 50C and 142A- Specific provision will prevail of General provision

8.) When the transaction value of the capital asset is found to be understated, and coincidentally it is also found that the said transacted value is below the SDV. In this proposition the fiction of section 50C become deem operative and accordingly, the SDV becomes deems to be the full value of conservation for section 48. Say for example, the actual value of the asset agreed is Rs.10 Cr. The SDV is 6.5 Cr. As against this, the transacted value is say 5.75 Cr, then, the provision of section 50C deems value of Rs.6.5 cr. As full value of consideration. In this proposition, the question that will seek attention is the scope of section 142A when section 50C is already applied. In this scenario, though the possibility of litigation cannot be completely ruled out, one may still argue that;

i. The principle of Specific provision of law will prevail over the general provisions and accordingly since specific provision of section 50C deems SDV as full value of consideration, other general provision cannot be applied and FV cannot be replaced.

ii. Section 50C is deeming provision. On the other hand, section 142A does not automatically deem the Fair value determined by the DVO as full value of consideration.

iii. Section 50C(3) also put emphasis on the FV. It is clearly stated that when the independent valuation carried out by the DVO is higher than the value assesse/assessable by the Stamp authority, then, section 50C mandates that the SDV shall be taken to be the full value of consideration. Accordingly, it is specific mandate of 50C to deem the SDV or the value found to be lower than SDV as full value of consideration. Accordingly, in this proposition, the referring to the valuation u/s 142A might be regarded as without jurisdiction.

Concluding Remarks 

9.) In light of the recent decisions of Gujarat High Court and Punjab & Haryana High Court, certainly question that needs to be addressed is whether the AO can refer to matter of determining the valuation of Capital Asset to DVO u/s 142A of the Act for determining the income chargeable u/s 45 or not.  Both these decisions are based on different facts, yet it lay down important guiding principles. The onus is always on the department to question the genuineness of the transaction, yet the transaction having been transacted at SDV, though it shall not be regarded as a remedy for wrong doing, the AO is always well within his reach to reach to the bottom of the case. The AO is vested with this power u/s 142A to go beyond the price mentioned in the sale deed. The provision of section 142A   is wider and it is applicable irrespective of the defects in the Books of Account. Unlike section 55A, the AO is also not required to also form an opinion for exercising jurisdiction u/s 142A. In case of undervalued asset or understated asset, the important principle laid down in these two decisions needs to be kept in mind. The law at present is shifting on Fair Value and therefore, it would not be wrong in concluding that it is Fair Income which is taxable.

Notes to above

1. ITO vs Chandrakant R. Patel(2011) 11 180 (Ahd.) ;SIL employee welfare trust vs JCIT[2012] 27 214(Mumbai); ACIT vs Akash association [2016] 76 344 (Ahmedabad – Trib.); CIT vs Gauranginiben S. Shodhan Indl. [2014] 45 356 (Gujarat)

2. Kanaiyalal Dhansukhlal Sopariwala vs DVO [2016] 75 271 (Gujarat)

3. Pr.CIT vs Quark Media House India (P.) Ltd[2017] 77 301 (Punjab & Haryana)


The contents of this document are solely for informational purpose. It does not constitute professional advice or recommendation of author. The authors neither accepts any liabilities for any loss or damage of any kind arising out of any information in this document nor for any actions taken in reliance thereon. Readers are advised to consult the professional for understanding applicability of this newsletter in the respective scenarios. While due care has been taken in preparing this document, the existence of the mistakes and omissions herein is not ruled out. No part of this document should be distributed or copied (except for personal, non-commercial use) without written permission of author.

(Republished with Amendments)

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January 2021