Section 50C – Whether for the purpose of application of section 50C, the rates prevailing as on the date of agreement are to be adopted instead of rates prevailing on date of registration of property.

Income tax – Section 50C – Whether for the purpose of application of section 50C, the rates prevailing as on the date of agreement are to be adopted instead of rates prevailing on date of registration of property.

The assessee has declared 50% share of taxable short term capital gains on sale of plot and for determining the gains on sale transaction, the assessee adopted the sale value of property at Rs.16,02,000/-. However, on examination of the copy of the sale deed dated 3.2.2006, the market value of the property sold was shown at Rs.27,14,000/-. AO applied section 50C and made addition for the 50% of the difference amount. Assessee submitted that on the date of sale agreement i.e. 5th September 2005 on which the assessee also received the advance payment in cash and which was duly recorded in the books of account, as per the valuation certificate from the sub registrar office, the market value of the said property was Rs. 14,43,750/- which is less than the actual sale consideration. CIT (A) confirmed the order of the assessing officer stating that the value of the property was rightly taken by the AO on the date of registration of sale of property.

In appeal, the ITAT held: -

++ that the rates prevailing as on the date of agreement are to be adopted instead of rates prevailing on date of registration of property. Since the value of the property declared by the assessee as on the date of sale agreement is higher than the value shown in the certificate, the value declared by the assessee is to be adopted for computing the capital gain. Therefore, no addition is called for.

Assessee's appeal allowed

ORDER

Per: S K Yadav:

This appeal is preferred by the assessee against the order of the CIT(A) on following grounds:

1. The Ld. CIT(A) is not correct in confirming the order of the ITO, making the addition of Rs.5,56,000/- (50% of Rs.11,12,000/- being 50% share in Property by the Assessee) u/s 50C of the Act, 1961, being the difference between the Sale Consideration in Sale Deed and Market Value adopted by Registrar for Stamp Duty purpose without considering the circumstances in which the Assessee has entered into such a sale deed.

2. The Assessee contends that the Ld. CIT(A) is not considered the latest amended position of Provision 50C which applies to Sale Agreements also according to which the conditions of Sec 50C fulfilled at the time of Sale Agreement where the Market value of sold property for the purpose of stamp duty is less than the actual sale consideration. Sale deed is nothing but furtherance of sale agreement.

3. The Assessee contends that Cash advance was taken as soon as the deal was finalized through agreement not giving any scope for the Vendee to back trap from the deal if a condition is posed that may cause delay in arranging for a demand draft as the Assessee was in a desperate mood to sell. Since this advance amount was also mentioned in the regular sale deed with date, the transaction went on in a natural course and it did not amount to an afterthought arrangement to rule out the doubts. Since this happens to be a personal property, the law did not restrict for the payment in cash.

4. The assessee has disputed the value so adopted or assessed by the stamp valuation authority under Sub-sec(1) of sec. 50C before the Ld. CIT(A), Visakhapatnam.

5. These and other grounds that may be presented at the time of hearing, the aggrieved assessee filed this appeal.

2. Though the assessee has raised various grounds but they all relate to the calculation of short term capital gains on sale of plot measuring 275 Sq.yds. situated at Ramkrishnanagar, Gopalapatnam, Visakhapatnam. The facts in brief borne out from the record are that the assessee has declared 50% share of taxable short term capital gains on sale of plot and for determining the gains on sale transaction, the assessee adopted the sale value of property at Rs.16,02,000/-. However, on examination of the copy of the sale deed dated 3.2.2006, the market value of the property sold was shown at Rs.27,14,000/- as against the sale value of Rs.16,02,000/-. Accordingly, the market value of Rs.27,14,000/- was adopted as provided in the section 50C of the I.T. Act. The assessee's share of 50% was worked out to Rs.5,74,268/-. An appeal was filed before the CIT(A) with the submission that the assessee has entered into a sale agreement on 5th September, 2005 before the registration of the property. At the time of sale agreement, the assessee has received a sum of Rs.4,50,000/- in cash as advance. However, the sale deed was executed on 3rd February, 2006. He has also furnished the valuation certificate from the sub-registrar office as on 5.9.2005 wherein the market value of the said property was given at Rs.14,43,750/- which is less than the actual sale consideration of Rs.16,02,000/- agreed by the assessees. The CIT(A) was not convinced with the explanations of the assessee and he confirmed the action of the A.O. after holding the value has rightly been taken by the A.O. as on the date of registration of the property i.e. 3rd February, 2006.

3. Aggrieved, the assessee has preferred an appeal before the Tribunal with the submission that the impugned issue is squarely covered by the order of the Tribunal in the case of Koduru Satya Srinivas Vs. ACIT in ITA Nos.556&557 of 2008 in which the Tribunal has taken a view that the rates prevailing as on the date of agreement are to be adopted instead of rates prevailing on date of registration of property. Copy of the order of the Tribunal is placed on record.

4. The Ld. D.R. placed a reliance upon the order of the CIT(A).

5. Having gone through the order of the Tribunal in the light of rival submissions, we are of the view that impugned issue is squarely covered by the aforesaid order of the Tribunal. The Tribunal while adjudicating the issue in the aforesaid case has followed its order in the case of M/s. Lahiri Promoters in ITA No.12/Vizag/2009 dated 22.6.2010. The relevant observation of the Tribunal on this issue is extracted hereunder:

"8. We have heard the rival contentions and carefully perused the record. The issue agitated before us revolves around section 50C of the Act. For the sake of convenience, we extract the section 50C(1) below:

"50C (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 by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer."

This section provides for adoption of value assessed/determined by the Stamp valuation authority for the purpose of payment of stamp duty ( hereinafter "stamp duty value"), if the sale consideration disclosed in the sale deed is less than the stamp duty value. Section 50C was inserted by the Finance act 2002 w.e.f. 1.4.2003.

9. In the instant case, there is no dispute that the assessee herein entered into a separate sale agreement with the two vendees respectively on 27.3.2003. The assessee has cited certain reasons for not executing the sale deed immediately which were not found to be false. Thereafter, the sale deeds were executed on 30.6.2005 by complying with the terms of the sale agreement. Hence the sale deed was executed for the consideration as agreed between the parties as per the sale agreement. If we apply the provisions of section 50C literally, the tax authorities are right in adopting the value assessed by the stamp authority for the purposes of computation of capital gains. However, Ld AR has heavily placed reliance on the decision of Hon'ble Supreme Court in the case of K.P.Verghese Vs. ITO, referred supra, with regard to the proper interpretation of section 50C in the facts and circumstances of the case.

10. The Hon'ble Supreme Court in the case of Shri K.P. Varghese Vs. ITO Supra has observed that while interpreting a provision, strictly literal reading of Section should not be adopted if it leads to manifestly unreasonable and absurd consequences. However attempt should be made to discover the intent of the legislature from the language used by it. The Hon'ble Apex Court rendered the said decision in the context of then existing Sec 52(2) of the Act, which provided that where a capital asset is transferred and if in the opinion of the ITO, the fair market value of that asset exceeds the full value of the consideration declared by the assessee by an amount of not less than 15% of the value so declared, then the full value of the consideration shall be taken to be its fair market value on the date of its transfer. The revenue took the stand that in order to invoke the provisions of section 52(2), it is enough if it is shown that the fair market value exceeded the disclosed value by 15%. However, the Hon'ble Supreme Court held that a fair and reasonable construction of Sec 52(2) would be to read into it a condition that it would apply only where the consideration for the transfer is under- stated and hence it would have no application in the case of a bonafide transaction where the full value of the consideration for the transfer is correctly declared by the assessee. For the sake of convenience, we extract below the relevant observations of the Hon'ble Apex Court on the rule of interpretation and the logical conclusion:

"5. Now, on these provisions the question arises as to what is the true interpretation of s.52, sub-s.(2). The argument of the Revenue was, and this argument found favour with the majority judges of the Full Bench, that on a plain and natural construction of the language of s.52, sub-s.(2), the only condition for attracting the applicability of that provision was that the fair market value of the capital asset transferred by the assessee as on the date of the transfer exceeded the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15% of the value so declared. Once the ITO is satisfied that this condition exists, he can proceed to invoke the provision in s.52, sub-s.(2), and take the fair market value of the capital asset transferred by the assessee as on the date of the transfer as representing the full value of the consideration for the transfer of the capital asset and compute the capital gains on that basis. No more is necessary to be proved, contended the Revenue. To introduce any further condition such as under-statement of consideration in respect of the transfer would be to read into the statutory provision something which is not there; indeed, it would amount to re-writing the section. This argument was based on a strictly literal reading of s.52, sub-s. (2), but we do not think such a construction can be accepted. It ignores several vital considerations which must always be borne in mind when we are interpreting a statutory provision. The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be "drafted with divine prescience and perfect clarity". We can do no better than repeat the famous words of judge Learned Hand when he said:

…it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing: be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary: but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning".

We must not adopt a strictly literal interpretation of s.52, sub-s. (2), but we must construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which s.52, sub-s (2) appears, because, as pointed out by Judge Learned Hand in the most felicitous language:

"… the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create."

Keeping these observations in mind we may now approach the construction of s.52, sub-s. (2).

6. The primary objection against the literal construction of s.52, subs,(2), is that it leads to manifestly unreasonable and absurd consequences. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but it can certainly help to fix its meaning. It is a well recognized rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. There are many situations where the construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature. Take, for example, a case where A agrees to sell his property to B for a certain price and before the sale is completed pursuant to the agreement – and it is quite well known that sometimes the completion of the sale may take place even a couple of years after the date of the agreement – the market price shoots up with the result that the market price prevailing on the date of sale exceeds the agreed price, at which the property is sold, by more than 15% of such agreed price. This is not at all an uncommon case in an economy of rising prices and in fact we would find in a large number of cases where the sale is completed more than a year or two after the date of the agreement that the market price prevailing on the date of the sale is very much more than the price at which the property is sold under the agreement. Can it be contended with any degree of fairness and justice that in such cases, where there is clearly no understatement of consideration in respect of the transfer and the transaction is perfectly honest and bonafide and, in fact, in fulfilment of a contractual obligation, the assessee, who has sold the property, should be liable to pay tax on capital gains which have not accrued or arisen to him? It would indeed be most harsh and inequitable to tax the assessee on income, which has neither arisen to him nor is received by him, merely because he has carried out the contractual obligation undertaken by him. It is difficult to conceive of any rational reason why the legislature should have thought it fit to impose liability to tax on an assessee who is bound by law to carry out his contractual obligation to sell the property at the agreed price and honestly carried out such a contractual obligation. It would indeed be strange if obedience to the law should attract the levy of tax on income, which has neither arisen to the assessee nor has been received by him. If we may take another illustration, let us consider a case where A sells his property to B with a stipulation that after some time which may be a couple of years or more, he shall re-sell property to A for the same price. Could it be contended in such a case that when B transfers the property to A for the same price at which he originally purchased it, he should be liable to pay tax on the basis as if he has received the market value of the property as on the date of resale, if, in the meanwhile, the market price has shot up and exceeds the agreed price by more than 15%. Many other similar situations can be contemplated where it would be absurd and unreasonable to apply s.52, sub-s (2), according to its strict literal construction. We must, therefore, eschew literalness in the interpretation of s.52, sub-s (2), and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from the tyranny of the literal interpretation. It is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even "do some violence" to it, so as to achieve the obvious intention of the legislature and produce a rational construction; Vide Luke vs. IRC (1963) AC 557 : (964) 54 ITR 692(HL). The Court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision. We think that, having regard to this well recognized rule of interpretation, a fair and reasonable construction of s.52, sub-s (2), would be to read into it a condition that it would apply only where the consideration for the transfer is understated or, in other words, the assessee has actually received a larger consideration for the transfer than what is declared in the instrument of transfer and it would have no application in the case of a bonafide transaction where the full value of the consideration for the transfer is correctly declared by the assessee. There are several important considerations which incline us to accept this construction of s.52, sub-s.(2)."

The Hon'ble Supreme Court also observed that while interpreting a section it would be legitimate to consider what was the mischief and defect, which was sought to be remedied by an enactment. In that connection the speech made by the Finance Minister while moving the amendment is extremely relevant as it throws a considerable light on the objectives and purpose of enactment. However, as pointed out by Ld AR the purpose of introduction of Sec 50C was not mentioned by the Finance Minister at the time of moving amendment. It was also not explained in the Notes on clauses and Explanatory Memorandum attached to the relevant Finance Bill. However, the Hon'ble Madras High Court in the case of K.R. Palani Swamy and others Supra, while upholding the constitutional validity of Sec 50C, had an occasion to spell out the objective of introducing Sec 50C. The relevant observations are extracted below:

"17. Let us consider the legislative competence of the Parliament in inserting the provision s.50C in the IT Act. It is obvious from the reading of the above provision and rather it is not disputed that the same is inserted to prevent large scale under valuation of the real value of the property in the sale deed so as to defraud Revenue the Government legitimately entitled to by pumping in black money. The impugned provision has been incorporated to check such evasion of tax by undervaluing the real properties.

………………….

Tax could be evaded by breaking the law or could be avoided in terms of the law. When there is a factual avoidance of tax in terms of law, the legislature steps into amend the IT law to catch such an income within the net of taxation."

Hence the object of introduction of section 50C is to prevent under valuation of the real value of the property in the sale deed to avoid payment of tax or duty which the Government is entitled to, which, in our opinion, is akin to the objective of introduction of section 52, which was existing earlier.

11. In the case of K.P. Varghese, supra the Hon'ble Apex Court contemplated a situation, by way of an example, where the completion of sale took place after a couple of years after the date of agreement. In this connection it is pertinent to extract the relevant observations of the Hon'ble Supreme Court, at the cost of repetition, as the said example contemplated by the Hon'ble Apex Court is squarely applicable to the facts of the present case.

"There are many situations where the construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature. Take, for example, a case where A agrees to sell his property to B for a certain price and before the sale is completed pursuant to the agreement – and it is quite well known that sometimes the completion of the sale may take place even a couple of years after the date of the agreement – the market price shoots up with the result that the market price prevailing on the date of sale exceeds the agreed price, at which the property is sold, by more than 15% of such agreed price. This is not at all an uncommon case in an economy of rising prices and in fact we would fine in a large number of cases where the sale is completed more than a year or two after the date of the agreement that the market price prevailing on the date of the sale is very much more than the price at which the property is sold under the agreement. Can it be contended with any degree of fairness and justice that in such cases, where there is clearly no under-statement of consideration in respect of the transfer and the transaction is perfectly honest and bonafide and, in fact, in fulfilment of a contractual obligation, the assessee, who has sold the property, should be liable to pay tax on capital gains which have not accrued or arisen to him? It would indeed be most harsh and inequitable to tax the assessee on income, which has neither arisen to him nor is received by him, merely because he has carried out the contractual obligation undertaken by him. It is difficult to conceive of any rational reason why the legislature should have thought it fit to impose liability to tax on an assessee who is bound by law to carry out his contractual obligation to sell the property at the agreed price and honestly carried out such a contractual obligation. It would indeed be strange if obedience to the law should attract the levy of tax on income, which has neither arisen to the assessee nor has been received by him."

11.2 The Hon'ble Apex court in the case of K.P.Verghese, supra has held that the provisions of section 52(2) that was existing at the relevant point of time was not applicable to a honest and bona fide transaction where the consideration received by the assessee was correctly declared or disclosed by him and there was no concealment or suppression of the consideration. The Hon'ble Supreme Court, after considering the speech of the Finance Minister, has understood that the object of introduction of section 52(2) was to curtail those transactions of sale of property, where the actual consideration received was understated in the sale deed. However, though the object of introduction of section 50C was not mentioned in the relevant Finance bill or in the speech of the Finance minister, yet, the Hon'ble Madras High Court in the case of K.R. Palani Swamy and others, Supra has stated that the provision of Sec 50C was inserted in the income-tax act to prevent large scale under valuation of real value of property in the sale deed, so as to defraud revenue which the government is legitimately entitled to, by pumping in black money. Thus we can see that the purpose of introduction of section 52(2) earlier and section 50C w.e.f. 1.4.2003 are for the purpose of achieving similar objectives.

11.3 In the instant case also, the assessee herein has fulfilled a contractual obligation on 30-6- 2005, which the assessee is bound by law to carry out as per the sale agreement entered in March, 2003. Now the next question that requires to be addressed is whether there was any under statement of actual consideration at the time when the sale agreements were entered into. The assessee has placed a copy of the certificate dated 16.4.2010 issued by the Jt. Sub Registrar, Visakhapatnam by way of additional evidence. According to the said certificate, the market value of the impugned property located at Allipuram Ward was Rs.5000/- as on 26.3.2003. According to Ld AR, the sale value agreed to by the parties, as per the sale agreement entered into on 27-03- 2003 was more than the market value fixed by the Jt. Sub Registrar at the time the sale agreement was entered into. Thus according to Ld AR, there is no understatement or suppression of actual consideration. It is also not the case of revenue that there was any understatement of actual consideration.

12. Thus, by executing the sale deed in June, 2005, the assessee has only completed the contractual obligation imposed upon it by virtue of the sale agreement. Since the process of sale has been initiated from the date of sale agreements, in our opinion, the character of the transaction vis-à-vis Income tax Act should be determined on the basis of the conditions that prevailed on the date the transaction was initially entered into. Accordingly, the applicability of the provisions of section 50C should be looked at only on the date of sale agreement. The assessee has filed a certificate obtained from the Joint Sub Registrar, Visakhapatnam, regarding market value of the impugned property as on the date of the sale agreements. The said certificate was not produced before the tax authorities. We have already held that the provisions of section 50C should be applied to the impugned sale transactions as on the date on which sale agreements were entered into. Since the applicability of section 50C as on the date of sale agreements is required to be examined by the AO, we set aside the issue to the file of the AO with a direction to compute the capital gains on sale of impugned properties after applying the provisions of section 50C as on the date of sale agreements. Accordingly, the order of Ld CIT(A) is reversed."

6. Since the impugned issue is squarely covered by the aforesaid order of the Tribunal, we decide this issue in favour of the assessees. We therefore hold that since the value of the property declared by the assessee as on the date of sale agreement is higher than the value shown in the certificate, the value declared by the assessee is to be adopted for computing the capital gain. Therefore, no addition is called for. Accordingly, the order of the CIT(A) is set aside and we direct the A.O. to delete the addition made in this regard. Accordingly, the appeal stand disposed off.

7. In the result, the appeal of the assessee is allowed.

(Pronounced in the open Court on 10.12.2010)