COURT AUCTION SALES: STAMP DUTY VALUATION

Introduction

Last month, we examined a
decision of the Bombay High Court rendered by Justice Gautam Patel in respect
of stamp duty on antecedent title documents. That was a pathbreaking decision
which will help ease the property-buying process. This month, we will examine
another important decision, again rendered by Justice Gautam Patel and again in
the context of the Maharashtra Stamp Act, 1958.

The issue before the Bombay
High Court this time was what should be the value on which stamp duty should be
levied in the case of sale of property through a Court public auction. Would it
be the value as mentioned by the Court on the Sale Certificate, or would it be
the value as adjudicated by the Collector of Stamps? This is an important issue
since many times the Stamp Duty Ready Reckoner rate is higher than the value
arrived at through a public auction.

THE CASE

The decision was rendered
in the case of Pinak Bharat & Co. and Bina V. Advani vs. Anil Ramrao
Naik, Comm. Execution Application No. 22/2016, Order dated 27.03.2019 (Bom).
The facts of the case were that there was a plot of land at Dadar, Mumbai which
was being auctioned to satisfy a Court decree. The Court obtained a valuation
which pegged the value at more than Rs. 30 crore. It was then sought to be sold
through a Court-conducted public auction twice but both attempts failed.
Finally, the claimants offered Rs. 15.30 crore as the auction price for the
property. Their bid was accepted by the Court which issued a Sale Certificate
in their favour. The Sheriff’s Office directed the Stamp Office to register the
sale certificate on the basis of the auction price of Rs. 15.30 crore.

When the purchasers went to
register the Sale Certificate, the Collector first stated that the fair market
value as per its adjudication was Rs. 155 crore. Aggrieved, the purchasers
moved the High Court since they would have had to pay stamp duty based on the
valuation of Rs. 155 crore and there would also have been adverse consequences
u/s. 56(2) of the Income-tax Act for the buyers.

At the hearing, the
Collector stated that the earlier assessment was tentative or preliminary, without
having all necessary information at hand. Now that additional material was
available, including a confirmation that there were tenants, the market value
had been reckoned again and was likely to be assessed in the region of about
Rs. 35 crore. This value, too, was more than double the Court-discovered price
of Rs. 15.30 crore. Hence, the question before the Court was which valuation
should be considered – the adjudication by the Collector or the
Court-discovered public auction price?

COURT’S ORDER

The Bombay High Court held
that the questions that arose for determination were that when a sale
certificate issued under a Court-conducted public auction was submitted for
adjudication under the Maharashtra Stamp Act, how should the Collector of
Stamps assess the ‘market value’ of the property? Was he required to accept the
value of the accepted bid, as stated in the Court-issued Sale Certificate, or
was he required to spend time and resources on an independent enquiry? Could a
distinction be drawn between sales by the government / government bodies at a
predetermined price, which had to be accepted by the Collector as the market
value, and a sale by or through a Court?

For
this purpose, Article 16 of Schedule I to the Maharashtra Stamp Act provides
that a Certificate of Sale granted to the purchaser of any property sold by
public auction by a Court or any other officer empowered by law to sell
property by public auction was to be stamped at the same duty as is leviable on
a conveyance under Article 25 on the market value of the property. Thus,
it becomes necessary to determine the market value of the property.
When an instrument comes to the Collector for adjudication, he must determine
the duty on the same. If he has reason to believe that the market value of the
property has not been truly set forth in the instrument, he must determine ‘the
true market value of such property’ as laid down in the Maharashtra Stamp
(Determination of True Market Value of the Property) Rules, 1995.

Thus, the Collector is not
bound to accept as correct any value or consideration stated in the instrument
itself. Should he have reason to believe that it is incorrect, he is to
determine the true market value. Rule 4(6) of these Rules states that every
registering officer shall, when an instrument is produced before him for
registration, verify in each case the market value of land and buildings, etc.,
as the case may be, determined in accordance with the above statement and
Valuation Guidelines issued from time to time (popularly, known as the Stamp
Duty Ready Reckoner). However, it provides an important exception inasmuch as
if a property is sold or allotted by government / semi-government body /
government undertaking or a local authority on the basis of a predetermined
price, then the value determined by said bodies shall be the true market value
of the subject matter property. In other words, where the sale is by one of the
government entities, then the adjudicating authority must accept the
value stated in the instrument as the correct market value. He cannot make any
further enquiry in this scenario. However, it is important that this exception
makes no mention of a sale through a Court auction!

The Court raised a very
important question that why should a sale through a Court by public auction on
the basis of a valuation obtained, i.e., by following a completely open and
transparent process, be placed at any different or lower level than the
government entities covered by the first proviso? It observed that the process
that Courts follow was perhaps much more rigorous than what the exception
contemplates, because the exception itself did not require a public auction at
all but only that the government body should have fixed ‘a predetermined
price’. The Court explained its system of public auction:

(a) A sale through the Sheriff’s Office was always
by a public auction.

(b) If it was by a private treaty, it required a
special order.

(c) A sale effected by a Receiver was not,
technically, a sale by the Court. It was a sale by the Receiver appointed in
execution and the Receiver may sell either by public auction or by private
treaty.

(d) Wherever a sale took place by public auction,
there was an assurance of an open bidding process and very often that bidding
process took place in the Court itself.

(e) Courts always obtained a valuation so that they
could set a reserve price to ensure that properties were not sold at an
undervaluation and to avoid cartelisation and an artificial hammering down of
prices.

(f)  The reserve price was at or close to a true
market value. Usually, the price realised approximates the market value.
Sometimes the valuation was high and no bids were at all received. However, in
such a scenario, the decree holders could not be left totally without recovery
at all and it was for this reason that Courts sometimes permitted, after
maintaining the necessary checks and balances, a sale at a price below the
market value even by public auction.

The Court held that if the
sale by the Deputy Sheriff or by the Court Receiver was by a private treaty,
then it was definitely open for the adjudicating authority to determine the
true market value.

However, it held that
totally different considerations arose where there was a sale by a
Court-conducted public auction and such a sale was preceded by a valuation
obtained beforehand. The Court held that such a sale or transaction should
stand on the same footing as government sales excluded in Rule 4. The correct
course of action in such a situation would be for the adjudicating authority to
accept the valuation on the basis of which the public auction was conducted as
fair market value; or, if the sale is confirmed at a rate higher than the
valuation, then to accept the higher value, i.e., the sale amount accepted.

The Court
laid down an important principle that there could not be an inconsistency
between the Court order and a Court-supervised sale on the one hand and the
adjudication for stamp duties on the other. This was the only method by which
complete synchronicity could be maintained between the two. It held that
consistency must be maintained between government-body sales at predetermined
prices and Court-supervised sales.

If a Court was satisfied
with the valuation and accepted it, then it was not open to the adjudicating authority
to question that valuation. The Court emphatically held that it was never open
to the adjudicating authority to hold, even by implication, that when a Court
sold the property through a public auction by following due process, it did so
at an undervaluation! The seal / confirmation of the Court on the sale carries
great sanctity. It held that if the validity or the very basis of the sale was
allowed to be questioned by an executive or administrative authority, then it
would result in the stamp authority calling into question the judicial orders
of a Court. This, obviously, cannot be the case!

An important principle
reiterated by the Court was that the Stamp Act was not an Act that validated,
permitted or regulated sales of property. It only assessed the transactions for
payment of a levy to the exchequer. The stamp adjudicating authority can only
adjudicate the stamp duty and can do nothing more and nothing less. It cannot,
therefore, question the sale in any manner. Hence, the Court-discovered public
auction price could never be questioned by the stamp office. The Court,
however, added a caveat that this principle would only apply to a situation
where the Court had actually obtained a fair market value of the property
before confirming the sale (even if the sale took place at a value lower than
such a valuation). If there was no fair market valuation obtained by the Court,
or an authenticated copy of a valuation was not submitted along with the sale
certificate, then the adjudicating authority must follow the usual provisions
mentioned in the Rules.

Hence,
the Court laid down a practice that in all cases where the Deputy Sheriff
lodges a sale certificate for stamp duty adjudication, it must be accompanied
by a copy of the valuation certificate which must be authenticated by the
Prothonotary and Senior Master of the High Court. It negated the plea of the
government to use the valuation carried out by the Town Planner’s office in all
public auctions conducted by the Court. It held that the discretion of a Court
could not be limited in such a manner. The Court could use such a valuation, or
it may prefer to use the services of one of the valuers on its panel, or may
even obtain a valuation from an independent agency. That judicial discretion
could not be circumscribed on account of a Stamp Act requirement.

Finally, the Court laid
down the following principles when it came to levying stamp duty on
Court-conducted sales:

(a)    Where there was a sale by a private treaty,
the usual valuation rules stipulated in the Maharashtra Stamp Act would apply,
i.e., adjudication in accordance with the Reckoner;

(b)   Where the sale was by the Court, i.e., through
the office of the Sheriff, or by the Court Receiver in execution, and was by
public auction pursuant to a valuation having been  previously obtained, then –

(i)     If the sale price was at or below the
valuation obtained, then the valuation would serve as the current market value
for levying stamp duty;

(ii)    If the final sale price, i.e., the final bid,
was higher than the valuation, then the final bid amount and not the valuation
would be taken as the current market value for the purposes of stamp duty;

(iii)   Where multiple valuations were obtained, then
the highest of the most recent valuations, i.e., most proximate in time to the
actual sale, should be taken as the current market value.

Accordingly, since in the
case at hand the valuation was obtained at Rs. 30 crore, that value was treated
as the value on which stamp duty was to be levied. Thus, the lower auction
price of Rs. 15.30 crore was not preferred but the valuation of Rs. 30 crore
was adopted.

CONCLUSION

The above judgement would
be relevant not only for levying stamp duty in Court-conducted public auctions,
but would also be useful in determining the tax liability of the buyer and the
seller. The seller’s capital gains tax liability u/s. 50C of the Income-tax Act
or business income u/s. 43CA of the Income-tax Act, are both linked with the
stamp duty valuation. Similarly, if the buyer buys the immovable property at a
price below the stamp duty valuation, then he would have Income from Other
Sources u/s. 56(2)(x) of the Income-tax Act. Several decisions have held in the
context of the Indian Stamp Act and the Stamp Acts of other States that the
Ready Reckoner Valuation is not binding on the assessees. Some of the important
decisions which have upheld this view are Jawajee Nagnatham (1994) 4 SCC
595 (SC), Mohabir Singh (1996) 1 SCC 609 (SC), Chamkaur Singh, AIR 1991 P&H
26. This decision of the Bombay High Court is an additional step in the
same direction.

However, it must be
remembered that in cases where the valuation is higher than the auction price,
the auction price would be considered for levying stamp duty. Hence, this
decision has a limited applicability to those cases where the Reckoner Value is
higher than the valuation report and the public auction price.