Chinks in the Armour of the Assessee
Chinks in the Armour of the Assessee
    Chinks in the Armour of the Assessee vide Deeming Provision sec 50c of the Income Tax Act, 1961

    Consider a situation where an assessing officer deems the stamp duty valuation as the full value of the consideration without reference to the valuation officer where the difference in the value between stamp duty valuation and the actual consideration is huge. There have been situations where in the actual consideration derived from the fair market value of the land bears no relation whatsoever with the stamp duty valuation of the land. This typically happens due to host of other factors like:

    1. Presence of some other right on the land like some ongoing litgation which the buyer may have to settle separately.
    2. Legally Constructed units on the land, to be bought or settled separately.
    3. Slum Dwellers which may have to be relocated or settled separately.
    4. Land reserved by the local authorities for various purposes like gardens, playgrounds, green zone, etc.

    In these situations, the cost of land would vastly differ from the stamp duty valuation. In such a situation, Sec 50C offers a solution.: We have reproduced Sec 50C verbatim as follows: "

    1. Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed (or assessable) 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, for the purposed of Section 48, be deemed to be full value of the consideration received or accruing as a result of such transfer.
    2. Without prejudice to the provisions of sub-section (1), where-

    a. the assessee claims before any Assessing Officer, that the value adopted or assessed by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer;
    b. the value so adopted or assessed by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court,

    The Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of sub-section (2), (3), (4), (5) and (6) of Section 16A, clause (i) of sub-section (1) and sub-section (6) and (7) of Section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 35 of the Wealth Tax Act, 1957 (27 of 1957) shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the Assessing Officer under sub-section (1) of section 16A of that Act." 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 safeguards 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 above case of Jodhpur Bench of Income Tax Tribunal is very significant, as it lays down that the AO should refer the matter to a Valuation Officer in case of a difference between the stamp duty valuation and the agreed consideration.
    The clause relating to reference to the valuation officer was introduced with the sole intent to reduce the wide spasm between the stamp duty valuation and the fair market value. In case this reference is made at the sole discretion of the valuation officer, the clause would be rendered redundant as has been explained by the Jodhpur Tribunal. Such a situation would be very harsh on the assessee and would not reflect the practical difficulties faced by the assessees in case the stamp duty valuation is hugely overestimated and bears no relation with the actual worth of the land.
    Relying on the above judgement, the AO should, in the light of objections raised and documents placed by the assessee, refer the Departmental Valuation Officer (DVO) for determining the fair market value.
    We only hope that we get some more clarity on this aspect in the Direct Tax Code (DTC).