GENERAL AMNESTY FOR RETROSPECTIVE RESTORATION OF NAMES

 

ANNOUNCEMENT
GENERAL AMNESTY FOR RETROSPECTIVE RESTORATION OF NAMES
FROM REGISTER OF MEMBERS AND CERTIFICATE OF PRACTICE
DATE: 03.01.2012
With a view to mitigating the hardships being faced by such members whose names stand removed
as on date due to non-payment of membership fee, the Council has decided to give them an
opportunity by way of General Amnesty for restoration of their names retrospectively.
Continuation of membership entitles to designate as `CA' and benefits alike monthly Journal of the
Institute , newsletters of Regional Councils & Branches of the Institute, participation in the
conferences, seminars and other programmes organized by the Institute, Regional Councils and/or
Branches at concessional rates; regular update of programs being organized and initiatives taken for
the benefit of the profession and members; emerging professional opportunities, practice area
development, publications of the Institute.
This is an excellent opportunity to get your name restored with retrospective effect by submitting
your application in Form 9 on or before 31
st
March, 2012 alongwith the outstanding fee for the
intervening period of nam e removal and restoration fee submitted. Details of General Amnesty
Scheme are given below:-
(i) Retrospective restoration of membership under General Amnesty Scheme:
Category I: The names of the members whose name is removed prior to 31
st
March 2011 on account
of non payment of fees and not restored as on date may apply for retrospective restoration of their
names under General Amnesty Scheme by filling Form 9 along with the membership fees for the year
during which the name was removed and for the current year together with the fee(s) for the
intervening years and the additional fee of Rs.1200/- towards restoration. To avail benefits of General
Amnesty Scheme, members should submit the requisite fees and Form upto 31
st
March 2012.
The scale of membership fee as applicable from time to time is as given below:
Effective from Associate Fellow
1
st
April, 2011 *Rs.800 *Rs.2200
1
st
April, 2008 *Rs.600 **Rs.1,800
1
st
April, 2000 Rs.300 Rs.900
1
st
April, 1996 Rs.225 Rs.700
1
st
April, 1991 Rs.150 Rs.400
1
st
April, 1986 Rs.100 Rs.275
1
st
April, 1982 Rs.80 Rs.200
1
st
April, 1976 Rs.60 Rs.125
1
st
April, 1975 Rs.45 Rs.110
1
st
April, 1964 Rs.28 Rs.83
1
st
April 1949 Rs.25 Rs.25
*Rs.450/- and Rs.*Rs.600/- where an Associate
member has attained the age of 65 years as on
1
st
April,

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This group is moderated by SHRI. BHUPENDRA SHAH, FCA, DISA(ICA)of Mumbai and DIPAK AGARWAL, FCA, DISA(ICA)of Guwahati. The opinion expressed here by any memebrs are of their own, and the user need to verify it from their own sources. No responsibility of any sort can be cast upon any members or the modertaor for any opinion expressed or the information posted on this group.

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Co-accused's statement not enough for conviction: HC

 

Co-accused's statement not enough for conviction: HC

January, 04th 2012
The Nagpur bench of Bombay high court has ruled that an accused can't be convicted just on the basis of a co-accused's statement. "The statement of co-accused can always be used if the accused is being tried primarily on other evidence. But his statement cannot be foundation to convict the accused when that is only the sole material," the court said.

A single judge bench of justice Ambadas Joshi then acquitted an accused for offences of theft, cheating and forgery. "Allowing the trial to proceed would mean nothing but waste of time of the court, the prosecution, and would burden the state exchequer. Apart from that it tends to disrepute the criminal law administrative system," a justice Joshi observed before disposing of the plea.

"Permitting trial on such unsustainable material would be vexing the accused and burdening the courts with prosecution which cannot be reasonably expected to fructify or at least could be worthy of trial," the court said before absolving accused Pravin Kalmegh who filed the petition through his counsel Akash Moon and PS Mohgaonkar of all charges.

Kalmegh (co-accused) along with Vijay Kene, the prime accused, were charged under sections 420, 34 and 379 of the Indian Penal Code (IPC). On First Information Report (FIR) of July 16, 2009, the Imambada police station arrested the duo and subsequently filed a chargesheet on September 20 in same year.

The petitioner filed four separate petitions contending he was prosecuted in four crimes only on the basis of Kene's version and there is no other evidence available against him. He further argued that Kene named him just to satisfy his personal grudge and enmity and falsely implicated him in the crime.

The HC found there indeed was no other proof on record against petitioner. The court citing many Supreme Court and HC judgments quashed and set aside the criminal proceedings in all four cases.

Whether profit from sale of shares intended as investment in books & treated as STCG

 

I-T - Whether profit from sale of shares intended as investment in books and treated as short-term capital gains, can be construed as business income on basis of frequency and magnitude of transactions - ruled in favour of Revenue by ITAT

MUMBAI, DEC 15, 2011: THE issues before the Tribunal are - Whether profit from sale of shares intended as an investment in the books of the assessee and supported by the resolution of its board of directors, and treated as short term capital gains, can be treated as business income on the basis of frequency and magnitude of the transactions and whether assessee's intention at the time of making the share purchase and the treatment given by the assessee to these transactions in its books of account, would overrule the facts of frequency and volume of the transaction to determine the nature of the transaction as investment or trade. And the answer partly goes in favour of Revenue.

Facts of the case

The assessee is a Private Limited Company engaged in the business of dealing in shares and securities. The Assessee was doing trading, speculation, investment and also had transactions from the derivative market. The assessee had switched from trading to the investment based business following a resolution passed by its Board of Directors in March 2005, stating that all transactions related to delivery based shares were to be carried out only on investment account. Accordingly, during the year, the assessee had not made any fresh purchases of shares in respect of trading. Through a software used by the assessee, all the trading transactions were automatically bifurcated on a day to day basis, as an investment or a speculative activity depending on when the contract for share purchase was squared up, whether on the same day without taking delivery or in a few days after taking delivery. Thus the assessee had a scrip wise analysis for every listed company share on a day to day basis.

During the year, the assessee had made an application for the initial public offers by M/s Shoppers Stop and YES Bank for which it had utilized the financial facilities from L&T Ltd and Kotak Mahindra Investment Ltd and paid interest on such borrowings. The shares acquired through these IPOs were sold as short term investment and the interest paid was reduced from the working of such gain. The assessee also maintained a running ledger with the share broker through whom such investments were arranged, which reflected the loans from and advances made to various associates and group concerns. This ledger showed huge loans taken and repaid for the activity of investment without any interest having been paid. The accounts were generally squared up at the end of the year and thus showed nil balance.

In its return of income, the assessee had shown its sale and purchase transactions and reported a net profit. After reducing miscellaneous expenses and the interest paid on two IPOs, the assessee had shown short term capital gains which were adjusted against the brought forward unabsorbed depreciation loss short term capital loss for earlier assessment years which resulted in short term capital gain on which the assessee had applied the tax rate of 10 per cent. The assessee had also shown long term capital gain which was claimed as exempt under section 10(38).

According to the assessee, the assessee was an investor. This was because the intention at the time of making an investment had to be seen, to determine whether the assessee was an investor or a trader. There was no trading transaction during the year and the trading profit had arisen only out of sale made from the opening stock of earlier year. Also, at the end of the year, the assessee company had sufficient funds and investment in shares had been made out of own funds.

While the AO accepted the long term capital gains and the short term capital losses posted by the assessee, he rejected the assessee's explanation of being an investor and objected to the short term capital gains on which the assessee had applied the lower tax rate of 10 per cent.

The AO noted that only in a few cases the assessee had squared up the contract of purchase and sale after more than one month. The AO thus held that the frequency and the amount of borrowing showed that the assessee's intention was business in the trading of shares and securities on a day to day basis. The scrip wise list showing stock in trade during the year, had shares of various listed companies which were also there in the huge list shown as investment. Even the purchases in the same scrip on the same day were divided into speculation and investment. Thus, the assessee had smartly but intentionally switched over its trading business to the investment business to have undue advantage of lower tax rate provided for short term capital gain. The assessee had utilised borrowed money for these huge investments made during the year. The assessee's IPO application for a huge amount had incurred a huge interest cost, which could not be treated as a short term investment by any prudent businessman and clearly showed the assessee's intention of doing business was a camouflage of showing the same as investment activity. Its accounts were also squared up at the end of the year to avoid the reflection in the balance sheet as borrowed loans. This view was also supported by the fact that the assessee was also trading in the derivative market with a huge volume on almost day to day basis. Thus the AO treated the short term capital gain as business income on which the higher tax rate of 30 per cent was applicable.

In appeal, the CIT(A) treated the short term capital gain on shares allotted in the IPO as business income but otherwise reversed the AO's order. The CIT(A) held that, there were no outstanding loans against the assessee; the net worth of the assessee company was substantial enough to cover the entire investment in shares, which proved that the assessee had made the entire investment out of its own funds without any borrowing. Also, considering the resolution passed by the assessee company's board of directors, the intention of the assessee at the time of purchase was accepted as that of investment. The CIT(A) held that it was immaterial whether the assessee held the shares for 90 days or 380 days and it could not alter the nature of transaction. Thus, the CIT(A) held that the short term capital gain earned on shares could not be taxed as business income. The CIT(A) then directed the AO to tax the income from short term capital gains at the lower rate of 10 per cent under section 111A.

In appeal before the Tribunal, the Revenue side submitted that the activity of frequent buying and selling of shares over a short span of period had to be treated as business being adventure in nature of trade. This was the first year where the volume and frequency were more and the holding period was less. Also, the frequency and amount of borrowings for investment in shares and the magnitude of the transaction justified the income as "business income" as against "short term capital gain" treated by the assessee. Thus, the profit from purchase and sale of shares had to be considered as business income and not capital gain as claimed by the assessee. The assessee's intention was to pay less tax that is at the rate of 10 per cent as against 30 per cent.

The assessee did not appeal against treating the short term capital gain on IPO shares as business income. The assessee submitted that in the earlier assessment years, the AO had accepted the short term capital gain and the long term capital gain without making any disallowance. Also, no borrowed funds had been utilized as its own funds and free reserves were higher than the value of investments. Also, as per CBDT circular, the assessee could have two portfolios of securities, one for investments and the other for stock in trade and the valuation of shares in the books of account had an important bearing in the matter.

Having heard the parties, the Tribunal held that,

++ the Board had accepted that an assessee could have two portfolios simultaneously – one, an investment portfolio comprising of securities which were to be treated as capital asset and two, a trading portfolio comprising of stock in trade which were to be treated as trading asset and the assessee could have income under both heads that is, capital gains and business income;

++ the AAR had culled out various principles from the decision of the Apex Court, following which the CBDT had issued guidelines for AOs to determine whether the shares held by the assessee were investment or stock-in-trade. Accordingly, it was possible for an assessee to be both an investor as well as dealer in shares. Following various legal precedents, whether a transaction of sale and purchase of shares was a trading or investment transaction was a mixed question of law and fact. Purchase with intention to resell could constitute capital gain or business profit depending on circumstances like quantity of purchase and nature of activity. A company that purchased and sold shares had to show that they were held as stock-in-trade and the existence of its power to purchase and sell shares in the memorandum of association was not decisive of the nature of transaction. The Board had also advised that no single principle was decisive and the total effect of all the principles had to be considered;

++ in this case, the shares were held for a few days or in few cases for a few weeks or months. Purchase of shares during the year and selling them frequently in a short period indicated that the assessee had purchased the shares with a motive to earn profit in a short period. Therefore, the frequency and volume of the transactions gave an impression that the assessee did not intend to acquire the shares with an investment motive. In the case of investment, the earning of dividend and the appreciation of the shares was the primary consideration. Only a trader looked for short term gains from purchase and sale of shares. Therefore, the treatment given by the assessee to these transactions in the books of account, could not be the only determinative factor about the nature of the transactions. The fact that the shares were disclosed as investment in the balance sheet had to be reckoned with but when other factors or circumstances threw some doubt on the motive of the assessee in acquiring the shares, as in this case, then the entries in the books of account or balance sheet would not override them and be taken as decisive of the intention of the assessee.

++ although in the preceding two years, the short term capital gain had been accepted by the Revenue in scrutiny/summary assessment, the assessee's argument that the same had to be followed this year too was without force as it was the settled proposition of law that principles of res judicata did not apply to income tax proceedings and every assessment was independent and separate;

++ in the preceding assessment year, the assessee traded in shares and the resolution to treat delivery based shares as investment was passed only towards the end of the financial year. The entire exercise was done by the assessee with a motive to reduce the tax liability which was 10 per cent for short term capital gains and 30 per cent for business income. Therefore notwithstanding the fact that the shares were shown as investment in the balance sheet of March 2005, which were earlier a part of stock in trade, sale of the same, could not be considered as sale of investment and consequently the profit had to be treated as business income. Also, it was the computer which decided whether the share was delivery based or non-delivery based and whether it was for trading or investment. Therefore the Board's resolution had lost its significance;

++ the assessee's argument that no borrowed funds had been utilized for making the investment was also without force as the AO had given a categorical finding that the assessee had used borrowed money from group concerns and associates and only towards the end of the year, the same was squared up so as to give an impression that no borrowed funds had been utilized for the purpose of investment in shares;

++ the assessee could have two portfolios; one for investment and one for trading. Mere volume of transaction did not mean that the assessee was a trader and the intention with which the purchase was made had to be seen. However, in this case, the intention of the assessee appeared to be whimsical. Purchases in the same scrip on the same day had been divided into speculation and investment whereby the intention of the assessee was just to reduce the tax liability by treating a part of the profit as short term capital gain. Therefore, the profit on account of purchase and sale of shares by the assessee had to be treated as income from business. The order of the CIT(A) was therefore set aside and the AO's order was restored. The grounds raised by the Revenue were accordingly allowed.

AUDIT OVERSIGHT KEY TO AUDIT INDEPENDENCE

 

AUDIT OVERSIGHT KEY TO AUDIT INDEPENDENCE

One of the important rights that shareholders enjoy is the right to receive financial information periodically. It is widely perceived that managers have a temptation to `cook' account books and provide favourable financial information to the investing public. Therefore, there is a need to have an independent third party, with adequate competency, to review those financial statements to assess whether they provide a `true and fair view'. The statutory auditor plays that important role. The auditor provides a reasonable assurance that the financial disclosures are fair and complete, and thus, enhances the investors' confidence, which is essential to the promote liquidity and efficiency of the capital market. A developed capital market ensures flow of capital to the corporate sector and efficient allocation of capital. Thus, the auditing profession plays a critical role in the economic development of a country. It is a well-established view that the statutory auditor is the watchdog of the public interest. Yet, the auditee (the company) pays the fees. Neither the government nor the public pays the audit fees. Although shareholders enjoy the right to appoint the auditor, in practice, the management appoints the auditor. Consequently, a fundamental tension exists for the auditor whereby the party to whom he technically owes primary allegiance is not the party who pays for his services. Thus, auditor's independence is potentially compromised simply by accepting the audit engagement. Audit firms, like any other professional firms, strive for growth and intend to retain the client. Therefore, while engaged in the audit of financial statements of a particular year, it expects to get appointment for the next year. Moreover, like any other professional firm, bottom line is important for audit firms. Therefore, they have a temptation to cut cost. As was revealed in the case of Enron, the audit techniques and procedures follo wed by the auditor (Arthur and Anderson, one of the then big Five audit firms) remained unchanged even when the audit risk enhanced significantly. This inherent tension and temptation to compromise on audit quality cannot be glossed over. Therefore, search for mechanisms to enhance auditor's independence and audit quality continues. It is imperative that effective oversight of the accounting profession and of independent audits is critical to the reliability and integrity of the financial reporting process. Various mechanisms exist for auditor oversight. About three decades back, auditor oversight through `self regulation' was prevalent in most countries. In this regard, auditing profession was no different from many other professions (e.g., medical and legal). `Peer review' and `disciplinary mechanism' were some of the systems being used by the accounting and auditing profession to ensure independence and quality. With large-scale audit failures, the credibility of `self-regulatory measures' is being questioned. Audit oversight mechanisms, which are not predominantly based on self-regulation, are being introduced as a part of the audit reform. One such system is the review of statuary audit by the audit committee of the board of directors. In USA, the Sarbanes-Oxley Act (2002) created the Public Company Accounting and Oversight Board (PCAOB). One of the PCAOB's responsibilities is to conduct independent inspections of public company audit firms. In India, in 2007, the government has constituted a `Quality Review Board'. It is generally believed that rotation of auditors or lead audit partner periodically will be mandatory on the promulgation of the new Companies Act. There is no consensus that this system will strengthen the auditor's independence and audit quality. There is a concern that, in absence of adequate number of large audit firms, Big Four will enter into a tacit arrangement to rotate audit among them. Luckily, in India, share of the BIG Four is around 50 per cent. Therefore, most companies should be able to appoint auditor of their choice. However, they might also prefer to restrict the rotation among two or three firms of their choice. International Organization of Securities Commissions (IOSCO) has recommended establishment of an independent regulator to oversee the auditing profession. India should not jump to accept the recommendation of the IOSCO. Some research findings observe that PCAOB's inspections have not yielded better results than those from the peer review system. It is not a great idea to introduce all the systems at a time without evaluating the experience of other countries. Rather, the accounting profession and the government should work together to strengthen the existing `audit oversight' systems. - www.business-standard.com

Reference under section 142A made for estimation of sale consideration-Possibility

 

Reference under section 142A made for estimation of sale consideration-Possibility
No reference can be made under section 142A to the Valuation Officer for estimating the full value of consideration in respect of property for the purpose of computation of capital gains under section 48.

Vide Sumit Khurana v. ACIT (2011) 42(II) ITCL 252 (Del-Trib)

S. 2(22)(e): “Trade Advances” are not “loans & advances”

 

CIT vs. Arvind Kumar Jain (Delhi High Court)

S. 2(22)(e): "Trade Advances" are not "loans & advances"

The assessee held 50% of the shares of a closely held company. The assessee's books showed that he had taken an "unsecured loan" of Rs. 47 lakhs from the company. The AO assessed the said amount as "deemed dividend" u/s 2(22)(e) though the CIT (A) & Tribunal deleted it on the ground that there was a running business relationship between the assessee and the company and the said amount was not a loan but was the result of those business transactions. The department filed an appeal before the High Court. HELD dismissing the appeal:

(i) S. 2(22)(e) provides that any "loan or advance" by a closely held company to a substantial shareholder shall be assessed as "deemed dividend". The purpose is to tax accumulated profits distributed in the form of loans. Bearing this purpose in mind, the word "advance" has to be read in conjunction with the word "loan". The attributes of a loan are that it involves a positive act of lending coupled with acceptance by the other side of the money as loan: it generally carries interest and there is an obligation of re-payment. The term "advance" may or may not include lending. The word "advance" if not found in conjunction with the word "loan" may or may not include the obligation of repayment. If it does then it would be a loan. Applying the doctrine of noscitur a sociis, the word "advance" means such advance which carries with it an obligation of repayment. Trade advance which are in the nature of money transacted to give effect to a commercial transactions do not fall within the ambit of s. 2(22)(e) (CIT Vs. Raj Kumar 318 ITR 462 followed);

(ii) The fact that the assessee has himself shown the amount in his books of accounts as "unsecured loan", is not determinative of the true nature of transaction. (India Discount Co Ltd 75 ITR 191 (SC) followed).

Related Judgements
CIT vs. Parle Plastics Ltd (Bombay High Court) S. 2(22)(ii) excludes loans and advances where (a) the loan or advance was made by the lending-company in the ordinary course of its business and (ii) lending of money is a "substantial part" of the business of the lending-company. The first condition was satisfied as the business of the…
CIT vs. Ankitech Pvt Ltd (Delhi High Court) U/s 2(22)(e), any payment by a closely-held company by way of advance or loan to a concern in which a substantial shareholder is a member holding a substantial interest is deemed to be "dividend" on the presumption that the loans or advances would ultimately be made available to the…
CIT vs. M/s Khemchand Motilal Jain (Madhya Pradesh High Court) While kidnapping is an offense, paying ransom is not; Bar in Explanation 1 to s. 37(1) not attracted The assessee, engaged in manufacture and sale of bidis, sent its whole-time director to a forest area for purchase of tendu leaves. There, the director was kidnapped by dacoits and…

I-T - Whether AO can brush aside actual rent received and reopen assessment on g

 

I-T - Whether AO can brush aside actual rent received and reopen assessment on ground that sister concern earned higher rent from property located in vicinity of assessee's property - NO, rules ITAT

MUMBAI, NOV 01, 2011: THE issues before the Bench are - Whether AO can brush aside actual rent received and reopen assessment on the ground that the sister concern per se earned higher rent from the property located in the vicinity of the assessee's property and whether reasons alone are to be seen while scrutinizing the jurisdiction of AO under section 147. And the ruling goes in favour of the assessee.

Facts of the case

Assessee Company let out its property on rent and reflected the actual rent as income from house property - the AO while assessing the sister concern, observed that the sister concern had let out its premises, situated in the same building, at a higher rent - Accordingly, the AO formed a view that the property of the assessee should also be assessed at the same value, and hence he reopened the assessment and assessed the case - CIT(A) affirmed the order of the AO - Before ITAT, assessee interalia challenged the jurisdiction of the AO under section 147 on the ground that there was no material with the AO on the basis of which it can be opined that income has escaped assessment.

After hearing the parties the ITAT held that,

++ as noted by the Assessing Officer in reasons recorded for reopening the assessments, the actual rent received by the assessee is to be substituted for the rent received for a similar property by an associate concern. We are unable to see any legal support for this approach of the Assessing Officer. Just because a similar property is let out for a higher rent, the Assessing Officer cannot determine annual value on the basis of such higher rent, and disregard the actual rent received. No doubt a higher rent being received by a sister concern for a similar property may prima facie indicate that "the sum for which the property might reasonably be expected to let out from year to year" could be higher than actual rent received, but that does not per se justify such a higher rent being adopted as the annual value of Rs.2,62,25,960 which is what Assessing Officer has done in the reasons recorded by the Assessing Officer;

++ it is also important to bear in mind that, as held by Bombay High Court in the case of Hindustan Lever Ltd. vs. R. B. Wadkar (2004-TIOL-72-HC-MUM-IT ), ... It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to these reasons". Similarly, in the case of Prashant S. Joshi Vs. ITO (2010-TIOL-146-HC-MUM-IT), Hon'ble Bombay High Court has observed that "the reasons which are recorded by the AO are the only reasons which can be considered when formation of belief is impugned." Viewed in this perspective, when we examine reasons recorded for reopening the assessment, we find that these reasons proceed on the fallacious assumptions that when a higher rent is received for same property by a person other than the assessee, the rent so received can be substituted for the rent actually received by the assessee. We are unable to see any legal support for this assumption;

++ it was not even the case of the Assessing Officer that the sum for which subject property might reasonable be expected to let out is to be ascertained by making further enquiries. That apart, Hon'ble Bombay High Court, in the case of Smt. Smitaben N Ambani V CWT (2009-TIOL-86-HC-MUM-WT) and while dealing with the scope of expression "the sum for which the property might be reasonably expected to let from year to year", has observed that rateable value, as determined by the Municipal Corporation, shall be the yardstick. In view of these discussions, in our considered view, the reasons for reopening the assessment cannot be sustained in law, and are contrary to the plain provisions of statute and law as laid down by Hon'ble Jurisdictional High Court

Section 271 (1) (c) of the Income-tax Act, 1961

Section 271 (1) (c) of the Income-tax Act, 1961

SECTION 271 (1) (c)

PENALTIES

Penalty under clause c of Sub-Section 1 of Section 271 of the Income-tax Act, 1961, if the Assessing Officer or the Commissioner of Income Tax (Appeals) during the course of the Assessment Proceedings under the Act is satisfied that any person has ‘concealed’ or ‘furnished inaccurate particulars of income’. The words ‘concealed’ or ‘furnished inaccurate particulars of income’ has been defined either in this Section nor any where else of the Act. One thing is certain that these two circumstances are not identical in details although they may lead to the same effect, namely, keeping a certain portion of the income. The word ‘conceal’ is derived from the Latin word ‘concelare’ which implies to ‘hide’. It signifies a deliberate act of omission on the part of the assessee. A mere omission or negligence would not constitute a deliberate act suppressio veri or suggestio falsi – T. Ashok Pai Vs. CIT (2007) 161 Taxman 340, 292 ITR 11 (SC).

The words ‘furnishing inaccurate particulars of income’ refer to the particulars which have been furnished by an assessee of his income and the requirements of concealment of income is that income has not been declared at all or is not even recorded in the books of accounts or in a particular case the concealment of the particulars of income may be from the books of accounts as well as from the furnished – CIT vs. Raj Trading Co. (1996) 217 ITR 208, 86 Taxman 282 (Raj).

Above provisions of the Section clarifies that:

a) The penalty could only be levied by the Assessing Officer and/or the Commissioner of Income Tax (Appeals) and not higher authorities to that such as Income Tax Appellant Tribunal, High Court, and Supreme Court.

b)   It would only be levied during the Assessment Proceedings under the Income-tax Act, 1961.

c)   The penalty is in addition to the tax, if any payable by the assessee.

d)  Penalty could not be levied where the Total Income of the Assessee is in negative i.e. loss after the completion of the Assessment Proceedings under the Income-tax Act, 1961. Commissioner of Income Tax vs. Rajasthan Vanaspati Product Limited, (2008) 8 DTR (Raj) 282, were it has been held that, Penalty under section 271(1)(c)—Concealment—Assessment at loss—Penalty under s. 271(1)(c), prior to amendment of Explanation 4 thereof by the Finance Act, 2002, w.e.f. 1st, April, 2003, could not be imposed in cases where, even after adding the concealed income, the assessed income remained a loss. And concluded that, Penalty under s. 271(1)(c), prior to amendment of Explanation 4 thereof by the Finance Act, 2002, w.e.f. 1st April, 2003, could not be imposed in cases where, even after adding the concealed income, the assessed income remained a loss.

HISTORY OF THE SECTION

It all started way back in 01.04.1965 when the word ‘deliberately’ was omitted by the Finance Act 1964. It is obvious that the onus to prove the ‘deliberately’ was on the department. But, the same had been causing difficulties to the assessee as the departments are used to levy penalty almost under all the circumstances of disallowance or additions as the case may be.

The principal object of enacting this section was to provide prevention against recurrence of default on the part of the assessee. The basic sense of this section was to stop the practice of what the legislature considers to be against the public interest. The department was unable to prove one’s deliberateness towards certain act, thus the whole onus was on the laps of the department wholly and solely.

To overcome this difficulties in discharging this ‘onus’ the legislature came with an amendment under the Finance Act, 1964 w.e.f. 01/04/1965 by deleting the word ‘deliberately’ from the section. With this the burden once again fell on the assessee. Thus, the assessee was the one who had to prove that the particular act has not been done deliberately. An explanation was also added at the end of the section in order to cast upon the assessee the ‘onus’ to prove that the omission of income did not arise from any fraud or gross or wilful neglect in case where the difference between the returned income and assessed income was at a certain specified percentage.

DETAILED VIEW ON CASE LAWS

1.   VOLUNTARY SURRENDER OF UNDISCLOSED INCOME

A close study of the recent cases reveals the liberal judicial approach in applying the specific and strict provisions of section 271(1)(c). Voluntary surrender of the alleged undisclosed income just to buy peace of mind has emerged as an exception protecting the assessee against penalty even in an obvious case.

Thus, the Madras High Court in the case of CIT vs. Jayaraj Talkies (1999) 239 ITR 914 (Mad) held that mere agreement to addition of income or surrender of income did not imply concealment of income where the assessee surrendered certain amount to assessment because it was unable to substantiate its claims with necessary vouchers.

Similarly, the Kerala High Court in the case of CIT vs. M. George & Brothers (1987) 59 CTR (Ker) 298 : (1986) 160 ITR 511 (Ker) held that where the assessee for one reason or the other agrees or surrenders certain amounts for assessment, the imposition of penalty solely on the basis of the assessee's surrender will not be well founded.

In CIT vs. Suraj Bhan (2006) 203 CTR (P&H) 230 : (2007) 294 ITR 481 (P&H), the Punjab & Haryana High Court held that penalty cannot be imposed merely on account of higher income having been subsequently declared.

In this case, the assessee filed revised return showing higher income and gave the explanation that the higher income was offered to buy peace of mind, and to avoid litigation.

The Punjab & Haryana High Court, again, seems to have gone a step further in defying the specific provision of Explanation 1. In this case, transportation charges to the tune of Rs. 12,12,880 debited in the profit and loss account, when detected and investigated by the Assessing Officer during the assessment proceedings, the assessee could not satisfactorily explain the same. The assessee, without filing a revised return, surrendered the said uncorroborated amount of expenses merely to buy peace of mind and to avoid further litigation.

Although it was a clear-cut case of concealment penalty but the Punjab & Haryana High Court rather unconvincingly found that since the impugned payments were directly made by the suppliers, therefore, there was neither concealment of income nor furnishing of inaccurate particulars of income within the meaning of section 271(1)(c). "The Department has to prove mens rea before levying penalty under section 271(1)(c) and it cannot be made out that the assessee has concealed income or furnished inaccurate particulars merely because he has surrendered certain amount to avoid litigation and to buy peace of mind."

It appears that in all the aforediscussed cases, the respective Madras, Kerala, Punjab & Haryana High Courts relied on the two rulings of the Supreme Court, viz., Sir Shadi Lal Sugar & General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199 : (1987) 168 ITR 705 (SC) and CIT vs. Suresh Chandra Mittal (2001) 170 CTR (SC) 182 : (2001) 251 ITR 9 (SC).

In Sir Shadi Lal Sugar & General Mills Ltd. (supra) it was categorically ruled that if the assessee had agreed to the assessment of undisclosed income, it did not absolve the Revenue from proving mens rea in a quasi criminal offence.

In Suresh Chandra Mittal's case (supra) the Court came out with an epoch-making ruling, viz., if an assessee files a revised return showing higher income and gives explanation that he has offered higher income to buy peace of mind and to avoid litigation, penalty cannot be imposed merely on account of higher income having been subsequently declared.

2.   IF EXPLANATION IS NOT PRESSED INTO SERVICE BURDEN IS ON THE DEPARTMENT

It would indeed be a misconception of law to assume that merely by bringing the case under section 271(1)(c), its Explanation 1 would automatically be made applicable. Instead, Explanation 1 has to be specifically referred in the relevant notice; otherwise the case has to be adjudicated in the light of the main provision of section 271(1)(c) which has to be construed in the light of the ruling of Anwar Ali (supra). Consequently, the initial burden which has been cast upon the assessee by reason of Explanation 1 would automatically be on the Department by virtue of the rule of Anwar Ali. This, as a matter of fact and law, is the stand repeatedly taken by the Bombay High Court in the two cases of CIT vs. P.M. Shah (1993) 203 ITR 792 (Bom) : TC 50R.800 and CIT vs. Dharamchand L. Shah (1993) 113 CTR (Bom) 214 : (1993) 204 ITR 462 (Bom).

In both the cases, penalty proceedings were initiated without mentioning in the notice that Explanation 1 to section 271(1)(c) was being resorted to. The assessee objected the application of Explanation 1 at a subsequent stage. When the controversy came up before the Bombay High Court by way of a reference, the Court, concurring with the Tribunal, held that in the absence of any intimation of penalty proceedings under the Explanation 1 to section 271(1)(c), levy of penalty under the Explanation was not sustainable.

To clarify its finding, the Court, stressed that the Explanation cannot in any manner be said to be merely an elucidation of what was already contained in section 271(1)(c); instead, the Explanation makes a considerable difference to what was contained in section 271(1)(c).

3.   UNSATISFACTORY EXPLANATION WOULD NOT ATTRACT PENALTY

In the case of Roshan Lal Madan (supra), the Chandigarh Bench of the Appellate Tribunal came out with a very peculiar construction of clause (A) to Explanation 1, which, in effect, renders the whole statutory exercise in this respect as quite futile.

It was virtually pointed out that "The words used in clause (A) of the Explanation 1 "found to be false" expressly imports the element of deceitful intent. The word "false" in its juristic sense implies something more than a mere untruth. Untruth is simply a statement which is not true and may have been uttered without intention to deceive and through ignorance. However, falsehood necessarily denotes the violation of truth for the purposes of deceit. Merely because the explanation furnished by the assessee is considered not satisfactory or unreasonable would not ipso facto justify the invocation of clause (A) to levy penalty under section 271(1)(c)".

The Tribunal, accordingly, came to the conclusion that an unsatisfactorily explained investment would result into the addition of the impugned amount as income from undisclosed sources under section 69 but would not justify the levy of penalty under section 271(1)(c), Explanation 1(A).

4.   SPECIFIC INVOCATION OF EXPLANATION NOT REQUIRED

As has already been stated in the beginning, in the recent case of K.P. Madhusudhanan (supra) a three Judges Bench of the Supreme Court has categorically laid down that no express invocation of the Explanation to section 271 in the notice under section 271 is necessary for applying the provisions of said Explanation and after the introduction of Explanation, there is no question of proof of mens rea.

Affirming the decision of the Kerala High Court in CIT vs. K.P. Madhusudhanan (2001) 165 CTR (Ker) 353 : (2000) 246 ITR 218 (Ker) and overruling the aforediscussed (contrary) decision of the Bombay High Court, the apex Court in K.P. Madhusudhanan’s case (supra) clarified that "The Explanation to section 271(1)(c) is a part of section 271". Therefore, when the designated tax-authority issues to an assessee a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. The notice under section 271 puts the assessee to notice that he has to rebut the presumption drawn against him by virtue of the Explanation; otherwise he has to bear the penalty, emphatically concluded the Court.

5.   ASSESSEE’S CONSENT FOR ADDITION SHALL NOT ABSOLVE THE ASSESSEE FROM BURDEN OF PROOF

In an earlier case of Sir Shadilal Sugar & General Mills Ltd. vs. CIT (1987) 64 CTR (SC) 199: (1987) 168 ITR 705 (SC) : TC 50R.300, a two Judges Bench of the Supreme Court, in the context of the assessment year 1958-59, firmly stated that if an assessee admitted that there were incomes, it could not amount to an admission that there was deliberate concealment. "From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e., when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of a quasi criminal offence".

The three Judges Bench of the Supreme Court in the recent case of K.P. Madhusudhanan (supra) expressly stated that the aforequoted observation was made prior to the insertion of Explanation. Therefore, it is no longer good after the insertion of Explanation. No burden lies on the Revenue to prove mens rea even if the assessee has agreed the additions to his income as by virtue of the Explanation the assessee is not absolved from the initial burden laid on him by the Explanation, Emphatically stated the Court.

6.   PRINCIPLES EMERGING FROM DILIP N. SHROFF'S CASE

A careful reading of the judgment of the Supreme Court reveals the following legal positions regarding the provisions of section 271(1)(c) read with Explanation 1 thereto :

(a)     The Explanations to section 271(1)(c) are applicable to both the concealment of income and the furnishing of inaccurate particulars. Clause (c) of sub-section (1) of section 271 categorically states that the penalty would be leviable if the assessee conceals the particulars of his income or furnishes inaccurate particulars thereof. By reason of such concealment or furnishing of inaccurate particulars alone, the assessee does not ipso facto become liable for penalty. Imposition of penalty is not automatic. Levy of penalty not only is discretionary in nature but such discretion is required to be exercised on the part of the Assessing Officer keeping the relevant factors in mind. Penalty proceedings are not to be initiated, only to harass the assessee. The approach of the Assessing Officer in this behalf must be fair and objective.

(b)     Only in the event the factors enumerated in clauses (A) and (B) of Explanation 1 are satisfied and a finding in this behalf is arrived at by the Assessing Officer, the legal fiction created thereunder would be attracted.

(c)      Both the expressions, viz., concealment and the furnishing of inaccurate particulars signify a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing of inaccurate particulars.

(d)     In view of clause (A) of Explanation 1, the Assessing Officer is required to arrive at a finding that the explanation offered, if any, by the assessee is false. In view of clause (B), findings have to be given by the Assessing Officer (i) that the assessee has failed to prove that explanation given by him is bona fide and (ii) that all the facts relating to the same and material to the computation of income have not been disclosed by him. Thus, apart from his explanation being not bona fide, it should have been found as of fact that he has not disclosed all the facts which are material to the computation of his income.

(e)     Primary burden of proof, therefore, is on the Revenue. The statute requires satisfaction on the part of the Assessing Officer. He is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee has concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the Department.

(f)       While considering as to whether the assessee has been able to discharge his burden, the Assessing Officer should not begin with the presumption that he is guilty.

(g)     Once the primary burden of proof is discharged, the secondary burden of proof would shift on to the assessee because the proceeding under section 271(1)(c) is of penal nature in the sense that its consequences are intended to be an effective deterrent  which will put a stop to practices which the Parliament considers to be against the public interest and, therefore, it is for the Department to establish that the assessee is guilty of concealment of income or of furnishing inaccurate particulars thereof.

(h)     The order imposing penalty is quasi-criminal in nature and, thus, burden lies on the Department to establish that the assessee has concealed his income. Since burden of proof in penalty proceedings varies from that in the assessment proceedings, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitutes good evidence in the penalty proceeding. In the penalty proceedings, thus, the authorities must consider the matter afresh as the question hasto be considered from a different angle.

(i)       Thus, before a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represents income and that the assessee has consciously concealed the particulars of his income or has furnished inaccurate particulars thereof.

(j)       Penalty provisions have to be strictly construed. Even when the burden is required to be discharged by an assessee, it would not be as heavy as in the case of prosecution.

(k)     It may be true that the legislature has attempted to shift the burden from Revenue to the assessee. It may further be correct that different views have been expressed as regards construction of statutes in the light of the changing legislative scenario, but the tenor of a penal proceeding remains the same.

(l)       The omission of the word "deliberately" from section 271(1)(c), thus, may or may not be of much significance but what is material is its application.

(m)   "Concealment of income" and "furnishing of inaccurate particulars" are different. Both concealment and furnishing of inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppression veri or suggestio falsi. Although it may not be very accurate or apt but suppressio veri would amount to concealment, suggestio falsi would amount to furnishing of inaccurate particulars.

(n)     The Assessing Officer is required to arrive at a satisfaction that there is "falsity" in furnishing of explanation by the assessee. Explanation 1, therefore, categorically states that such Explanation must either be false or not otherwise substantiated.

(o)     Concealment and furnishing of inaccurate particulars would not overlap each other as they represent different concepts. Had they not been so, the Parliament would not have used the different terminologies. Where the show-cause notice issued by the Assessing Officer does not clearly say whether it is issued for concealment of income or for furnishing inaccurate particulars of income, it will mean non-application of mind on the part of the Assessing Officer.

(p)     The Assessing Officer is bound to comply with the principles of natural justice while passing the order levying penalty for concealment.

I-T - Whether merely incurring expenditure and paying by account payee cheques a

 

I-T - Whether merely incurring expenditure and paying by account payee cheques apart from deducting tax at source on such payments are not enough to claim an expenditure as revenue expenditure - Yes, rules ITAT

AHMEDABAD, OCT 18, 2011: THE questions before the Tribunal are - Whether merely incurring business expenditure and paying by cheque apart from deducting tax at source on such payments are not enough to claim business expenses; Whether assessee is required to establish that such expenses were incurred wholly and exclusively for the purpose of business; Whether interest paid on capital can be disallowed notionally ignoring that no disallowance was made in earlier year in which such advances were made and the assessee had sufficient interest free funds and whether failure to attend proceedings before AO attracts penalty for non-appearance. And the verdict partly goes against the assessee.

Facts of the case

Assesses is engaged in the manufacturing of yarn. It filed its ROI claiming deduction of certain payments made by it on account of services obtained, AO asked the details, assessee filed details in parts however could not file any document establishing that the services obtained were wholly and exclusively for the purpose of business- CIT(A) affirmed the order of the AO rejecting the contention that the payments are allowable since made by account payee cheques and TDS was also deducted from the same.

Assessee gave certain advances to its near and dears and hence the AO disallowed notional interest attributable to these advances from the payments of interest made by assessee- CIT (A) affirmed the same- Before ITAT AR of the assessee points out that the advances were made in preceding assessment year and no disallowance was made beside this the assessee was having ample funds at the time of advancing of the funds- In respect of third issue the AO levied penalty of 271(1)(b) on account of non-appearance of the assessee-CIT(A) affirmed the same.

After hearing the parties the ITAT held that,

++ the assessee failed to submit any test report either before the authorities below or before the Tribunal. In the absence of any evidence of testing of yearn by this Consultancy Services, the assessee failed to prove that they had rendered any services for the purpose of business of the assessee. The AO also specifically asked the assessee to produce the person to whom consultancy service charges have been paid and to establish their identity. The assessee however, did not produce any such persons before the AO and even the identity is not established. The AO also noted in the assessment order that as per information available during the course of assessment proceedings, the assessee was purchasing some cotton bales from other parties for supply to Mafatlal Industries Ltd. Considering the facts of the case noted above and failure of the assessee to prove that expenses were incurred wholly and exclusively for the purpose of its business, the authorities below were justified in rejecting the claim of the assessee;

++ copy of the intimation u/s 143(1) of the IT Act for preceding assessment year 2006-07 is also filed at PB-26 in which no disallowance out of interest have been made. Since the interest has not been disallowed in the earlier year on the same facts, therefore, on mere opening balances in the assessment year under appeal, no disallowance could have been made. We rely upon the decision of the Hon'ble Karnataka High Court in the case of Sridev Enterprises;

++ the assesses filed copy of the balance sheet for the assessment year under appeal to show that interest-free funds from M/s. Travel World was available to the assessee in a sum of Rs.30,00,000/- and sufficient capital was available in the capital account of the partners. The profit of the assessee as per profit & loss account was also shown at Rs.28,95,852/-. Thus, sufficient interest free funds were available with the assessee to give interest-free loans and advances to these 3 parties. The AO has also not made out any case if any borrowed funds have been diverted for non-business purposes;

++ the AO noted in the penalty order that despite show cause notice for levy of penalty was served upon the assesses but the assessee did not give any reasons why penalty should not be imposed. Thus, according to the AO no explanation is filed for failure to comply with statutory notice. The learned Counsel for the assessee however, referred to the show cause notice dated 17-07-2009 and the reply filed by the assessee on 23-07-2009 (PB-19) which according to her also is referred to in the assessment order. We find that though this reply dated 23-07-2009 was filed before the AO but no reasons have been given for failure to comply with the statutory notices. The assessee from Para 1 to 8 submitted the details on merit and in the bottom merely stated that the assessee has no intention to not to comply with the statutory notices and that the notice u/s 143(2) of the IT Act could not be complied with because it was not possible to collect various information. Thus, the assessee has not given any specific or reasonable cause to show why there was failure to comply with the statutory notices.

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)