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Issue for consideration
Section 50 C has been introduced by the Finance Act, 2002, with effect from 01-04-2003, to provide for substitution of the full value of consideration with the stamp duty valuation, in cases where such valuation happens to be more than the agreed value. As a result in computing the capital gains, on transfer of land or building or both, as per section 48, the assessee, in ascertaining the full value of consideration, is required to adopt the higher of the agreed value or the stamp duty valuation. The objective behind the introduction of section 50C is to eliminate or reduce the possibility of unaccounted element in the real estate transactions and it is on this account that the provision has been found to be constitutional by a number of high courts.
The provision contains an in-built safeguard, for authorising the assessee to seek a reference to the Valuation Officer, in a case where he is of the opinion that the stamp duty value does not represent the fair market value of the asset transferred by him. In spite of this statutory safeguard , it is usual to come across numerous cases where the assessee genuinely is aggrieved on the valuation put forth by the Valuation Officer.
It is also usual to come across instances, where the assessee is subjected to the additional taxes and interest in cases involving a marginal or insignificant difference. This difference, howsoever insignificant, arises mainly on account of the inherent element of estimation in valuation that is unavoidable. Realising this handicap in the past, while dealing with the similar provisions, the Supreme court held that a tolerance band of 15% be read in to such provisions by the authorities while applying such provisions, with the idea that no taxpayer is unjustly punished for the difference.
It is on this touchstone of avoiding unjust outcome of the literal reading of a statutory provision, one has to test the provisions of section 50C to ascertain,
whether it is possible to read therein, the existence of a tolerance band, to save the tax payers in cases of marginal differences form the noose of additional taxation. The Pune bench of the tribunal is in favour of reading such a tolerance band in the provisions of section 50C while the Kolkata bench holds a contrary view.
Rahul Constructions’ case
The issue first came up for consideration of the Pune bench of the tribunal, in the case of Rahul Constructions vs. DCIT, reported in 38 DTR at page 19, for assessment year 2004-05. In that case, the assessee firm had sold two units in the basement for the total sale consideration of Rs. 19 lakh. The stamp valuation authorities had adopted the value of Rs. 28.73 lakh for the said units. The AO invoking the provisions of section 50C, made a reference to the DVO, u/s. 50C(2), for valuation as per the law. The DVO valued the said units at Rs. 20.55 lakh. The AO adopting the said value of Rs. 20.55 lakh, substituted the full value of consideration and computed the capital gains at a higher amount than the one returned by the assesssee firm.
The explanations advanced by the firm to the AO and the DVO to the effect that the basement in rear building had no “commercial” value, the height was 8-1/2’ only, the units got waterlogged during the rainy season, they were old premises and were used by tenant/lessee and were sold on as is where is basis and the booking was in February, 2001, so valuation of 2001 be considered, were all rejected by them.
The said contentions were reiterated before the CIT(A) and in addition he was asked to apply the tolerance band due to insignificant difference between the agreed value and the DVO’s valuation. It was submitted that there was a marginal difference of Rs. 1,55,000 only, which was 8.5 per cent of the estimated sale value which was within the tolerance limit of 15 per cent for variation as was held by the Supreme Court in the case of C.B. Gautam vs. UOI, 199 ITR 530 (SC) under Chapter XX-C of the Act. The CIT(A) rejected the contentions of the firm to dismiss the appeal by observing that
the provisions of section 50C(1) of the Act were unambiguous and the AO was bound to take the rate as per the stamp valuation authorities and he was not empowered to go beyond the valuation made by the DVO. He distinguished the decision in the case of C.B. Gautam (supra) on the ground that the said decision concerned itself with the case of a purchase of property under Chapter XX-C of the Act. He upheld the action of the AO.
The firm aggrieved with such order of the CIT(A), appealed to the tribunal, inter alia, on the ground that on the facts and in law the learned CIT(A) erred in not appreciating that the difference between the sale consideration shown by the assessee and the value determined by the DVO was marginal and therefore, no addition was justified on account of the valuation determined by the DVO.
The counsel for the assessee reiterated the submissions as were made before the AO and the CIT(A). Referring to the DVO’s report he submitted that the difference between the value adopted by the DVO and the sale consideration received by the firm was less than 10 per cent and submitted that the consideration received by the firm should be considered as representing the fair market valuation and no addition was justified on account of the valuation by the DVO.
In reply the Departmental Representative submitted, that once the matter was referred to the DVO and the valuation adopted by the DVO was found to be less than the value determined by the stamp valuation authorities, the AO was bound to substitute the value determined by the DVO as the deemed sale consideration and the assessee could not challenge the same.
On due consideration of the rival submissions made by both the sides, the tribunal held that the valuation adopted by the DVO was subject to appeal and the same was not final. The value adopted by the DVO was also based on some estimate and that the difference between the sale consideration shown by the assessee at Rs. 19,00,000 and the FMV determined by the DVO at Rs. 20,55,000 was only Rs. 1,55,000 which was less than 10 per cent. It observed that the courts and the tribunals were consistently taking a liberal approach in favour of the assessee where the difference between the value adopted by the assessee and the value adopted by the DVO was less than 10 per cent.
The tribunal noted that the Pune bench of the tribunal in the case of ACIT vs. Harpreet Hotels (P) Ltd. vide ITA Nos. 1156-1160/Pn/2000 had dismissed the appeal filed by the Revenue, where the CIT(A) had deleted the addition made on account of the unexplained investment in house construction on the ground that the difference between the figure shown by the assessee and the figure of the DVO was hardly 10 per cent. Similarly, the Pune bench of the tribunal in the case of ITO vs. Kaaddu Jayghosh Appasaheb, vide ITA No. 441/Pn/2004, for the asst. yr. 1992-93, following the decision in the case of Honest Group of Hotels (P) Ltd. vs. CIT 177 CTR (J&K) 232 had held that when the margin between the value as given by the assessee and the Departmental valuer was less than 10 per cent, the difference was liable to be ignored. In the result, the appeal of the assessee was allowed by the tribunal.
Heilgers’ case
The issue again came up recently, for consideration of the Kolkata tribunal, in the case of Heilgers De-velopment & Construction Co. (P) Ltd. vs. DCIT, 32 taxmann.com 147 by way of appeal by the assessee, for the assessment year 2008-09, on the ground that the ld. CIT(A) erred in confirming the addition made on account of capital gains based on the value determined by the Stamp Valuation Authority that was higher than the sale consideration declared by the assessee which was wrong and needed to be deleted.
In that case, the assessee had sold two commercial premises admeasuring 3265 sq.ft. in aggregate, for the stated aggregate consideration of Rs. 2.12 crore against the stamp duty valuation of about Rs. 2.23 crore, in aggregate. The difference was attributed by the assessee to the long gap of 7 to 9 months between the date of agreement and the date of conveyance. It was argued that considering the difference in market value when compared with the consideration received by the assessee was less than 10%. And therefore the net difference of Rs. 10,98,980 should be ignored in computing the long term capital gains. None of these submissions found favour with the AO and the CIT(A).
In the further appeal before the tribunal, the assesssee’s counsel’s first and basic contention was that the provisions of section 50C could not be invoked at all where the difference in stamp duty valuation vis-a-vis stated sales consideration was less than 15% of the stamp duty valuation; that every valuation was at best an estimate and therefore under valuation could not be presumed when there was only a marginal difference between such an estimate and the apparent consideration declared in the sale document; that the Honourable Supreme Court, in the case of C.B. Gautam vs. Union of India, 199 ITR 530, had recognised a tolerance limit for pre-emptive purchase of property under Chapter XXC, at 15% of variation, mainly for a similar reason, even though no such tolerance band was prescribed in the statute.
Quoting from certain observations in “Sampat Iyen-gar’s Law of Income Tax” (Volume 3; 10th Edition) at page 4362, it was submitted that by the same logic that was employed by the Honourable Supreme Court in Gautam’s case (supra), section 50C was also subject to similar tolerance for the cases with the marginal difference. It was pleaded that the difference in valuation as per the sale deed vis-a-vis the stamp duty valuation being much less than 15% in the present case, the provisions of section 50C did not come into play at all.
The submissions of the assesssee failed to con-vince the tribunal. It noted that the submissions, howsoever attractive as they seemed at the first blush, were lacking in legally sustainable merits. The tribunal observed that ; when a provision for tolerance band was not prescribed in the statute, it could not be open to tribunal to read the same into the statutory provisions of section 50 C- no matter howsoever desirable such an interpretation was; what the provisions of section 50C clearly required was that when stated sales consideration was less than the stamp duty valuation for the purposes of transfer, the stamp duty value, subject to the safeguards built in the provision itself, should be taken as the sales consideration for the purposes of computing capital gains; casus omissus, which broadly referred to the principle that a matter which had not been provided in the statue but should have been there, could not be supplied by the tribunal as laid down in the case of Smt. Tarulata Shyam vs. CIT, 108 ITR 345(SC); the tribunal was itself a creature of the Income-tax Act and it could not, therefore, be open to it to deal with the question of correctness or otherwise of the provisions of the Act.
The tribunal also did not find any merits in the assessee’s claim of undue hardship being caused to the taxpayers and to avoid that a tolerance band be read into the provisions of the section 50C. The safeguard built in section 50C, the tribunal noted, did envisage a situation that whenever an assessee claimed that the fair market value of the property was less than the stamp duty valuation of the property and allowed for a reference to the DVO and at which point all the issues relating to valuation of the property – either on the issue of allowing a reasonable margin for market variations, or on the issue of time gap , could be taken up, before the DVO and, therefore, before subsequent appellate forums as well. This inherent flexibility, the tribunal held might rescue the assessee particularly in the case of marginal differences however, challenging the very application of section 50C was something which tribunal found to be devoid of legally sustainable merits.
Observations
The avowed legislative intention behind the introduction of section 50C is to bring to tax the unaccounted funds, used in the real estate transactions, involving land and/or building. There is no dispute about this aspect. The objective is certainly not to tax a tax payer in respect of the sterile transactions. In this background, any attempt to tax a clean transaction amounts to penalising the person for having entered in to a transaction and such attempt becomes punishing in a case where the difference is marginal.
The valuation, including the valuation by the stamp duty authorities, without doubt involves an element of estimation and can never be precise. Such a valuation, as has been repetitively held by the courts, is, at the most, a guiding factor and cannot be conclusive of the fact of the use of unaccounted funds. Interestingly, the ready reckoner rate, so famously applied by the authorities and blindly relied upon by the AOs, are nothing but the standard and generic rates annually prescribed by the stamp authorities. The prescribed rate is not even the ‘valuation’ of a specific asset. This rate is prescribed for an entire locality or an area and does not take in to consideration several factors that have a direct bearing on the price and therefore the valuation. Hardly does one come across a case where the transaction value exactly matches with the prescribed rates; it is either less or more and in most of the cases more. The values do match only in those transactions where it is so designed to match to avoid the attending issues.
It is therefore essential for the revenue to appreciate and concede that the stamp duty valuation or the DVO’s valuation is essentially an estimation that requires to be adjusted by some tolerance band. Once this wisdom, based on the ground reality, is allowed to percolate, resulting litigation or the fear or the threat thereof shall rest at least in half the cases.
One of the main reasons advanced by the Kolkata bench, for not allowing the case of the assessee, was the inability of the tribunal, as a body, to read down the provisions of the law. The bench stated in clear terms that their powers are circumscribed and the tribunal as a creature of the Income-tax Act cannot read down the provisions of the law so as to permit the application of a tolerance band. The bench expressed its helplessness and explained that such powers were vested with the courts. This also confirms that the last word on the possibility of applying the tolerance band is yet to be said.
The better course, with respect, in our considered view, for the tribunal should have been to accept that the agreed value, considering the insignificant difference, represented the fair market value.
On a careful reading of the provisions of section 50C, one gathers that a reference to the DVO is possible on the primary assumption that the stamp duty valuation exceeds the fair market value. It is also gathered that the job of the DVO is to ascertain the fair market value. The fair market value, so ascertained by the DVO, is subject to the scrutiny of the appellate authorities whose word about the correctness of the fair market value is the final word. In this background of the facts, we are of the considered view that the tribunal, in all such cases involving the marginal difference, shall accept the agreed value as the fair market value, independent of the statutory tolerance band.
