2009 (12) TMI 714 - AT - Income Tax

Capital gain computation - determination of sale price - undervaluation of sale price of the property based on rent capitalisation method - section 50C applicability - AO made addition in the sale price adopting the report of the Valuation Officer in some other case of rented property, taking rent capitalisation as the basis and adopting a multiplier of 12.5 - as contended that the property held by the assessee is stock-in-trade and not a capital asset - CIT(A) deleted the addition stating merely on suspicion and by applying the rent capitalisation method, it cannot be upheld that the actual sale consideration received by the assessee was much higher. Since the sale proceeds could not be determined on the basis of estimation, the addition made by the AO is not justified. HELD THAT - The assessee is following the mercantile system of accounting. As per the mercantile system of accounting those income which accrues to the assessee is chargeable to tax. On the sale of stock-in-trade, what accrues to the assessee is accruing as per the sale deed executed by the assessee. The assessee has declared the income on the basis of sale deed executed by it. There is no provision in section 28 to substitute the accrued consideration for market value of such consideration. Assessing Officer has simply applied the Wealth-tax Rules for valuing the property but has neither examined the purchaser nor has independently found out whether the assessee has received any consideration over and above the stated consideration. Except the suspicion or an opinion that the property is undervalued, no material is available to the Assessing Officer to presume that any on money was received by the assessee or that anything over and above the stated consideration accrued to the assessee. Where the asset sold by the assessee is a capital asset, the income from which is chargeable as capital gain. Prior to insertion of section 50C there was no provision to substitute the fair market value for the consideration accruing as a result of transfer for the purpose of capital gain under section 48 of the Act. While considering those provisions the hon'ble Delhi High Court in the case of Smt. Nilofer I. Singh 2008 (8) TMI 165 - DELHI HIGH COURT held that the Revenue is not justified in substituting actual sale consideration in agreement to sell by the value arrived at by the Departmental Valuation Officer. It was also held that there is no necessity to compute the fair market value. Section 50C was introduced by the Finance Act, 2002, with effect from April 1, 2003, wherein the AO is empowered to substitute the value adopted by the stamp valuation authority for the purpose of section 48 to be the full value of consideration received or accruing as a result of transfer for the purpose of computing gain. However, the said provision is only with reference to computation of capital gain and being a deeming provision will strictly apply for the purpose of computing capital gain alone. The settled law in this regard is that deeming provisions are to be strictly construed and will not extend to areas other than the same is deemed to apply. The deeming provision presumes an unreal thing as the real thing. Therefore, the provisions of section 50C cannot be imported while computing profits and gains of business or profession. In such a situation only the income accruing to the assessee can be taxed u/s 28. Since there is no finding that the consideration received by the assessee on sale of stock-in-trade is over and above the stated consideration, the AO is not justified in making any addition by estimating the fair market value. The decision of Hanemp Properties P. Ltd. v. Asst. CIT 2006 (3) TMI 212 - ITAT DELHI-A is a decision with reference to the determination of the purchase price and not the sale price and, therefore, has no application nor can it lead to the invocation of section 142A. Secondly, for comparison with the fair market value of an asset there are specific sections like section 50C or section 55A which have no application whatsoever to the determination of sale price to stock-in-trade. Reference is made to the decision in the case of Inderlok Hotels P. Ltd. v. ITO. 2009 (2) TMI 235 - ITAT BOMBAY-I . The issue is no more res integra. The sanctity of the sale price vis-a-vis its fair market value is covered in favour of the assessee.

Summary

Issues:
1. Undervaluation of sale price of property based on rent capitalisation method.

Analysis:
The case involves an appeal by the Revenue against the order of the Commissioner of Income-tax (Appeals) concerning the assessment year 2005-06 under section 143(3) of the Income-tax Act, 1961. The Revenue contested the deletion of an addition of Rs. 2,00,00,000 on account of undervaluation of the sale price of a property using the rent capitalisation method. The assessee, engaged in real estate business, declared an income of Rs. 19,43,380 and sold a property originally purchased for Rs. 80 lakhs for Rs. 100 lakhs. The Assessing Officer raised concerns about undervaluation based on rental income and fair market value estimations. The Commissioner of Income-tax (Appeals) ruled in favor of the assessee, emphasizing the lack of concrete evidence supporting the Revenue's estimation and the inapplicability of substituting fair market value for actual sale consideration without basis.

The Tribunal considered key dates and facts related to the property transaction, highlighting the Assessing Officer's addition to the sale price based on a Valuation Officer's report in another case. The Commissioner of Income-tax (Appeals) rejected the Assessing Officer's approach, noting the absence of provisions for referencing the Valuation Officer in stock-in-trade sale proceeds determination. The Tribunal referred to legal precedents emphasizing the necessity of concrete basis for substituting fair market value for sale consideration and the strict interpretation of deeming provisions like section 50C in computing capital gains.

The Tribunal further discussed the settled legal position favoring the sanctity of sale price over fair market value in various decisions, including those of the Delhi High Court. It distinguished a previous case related to purchase price determination and highlighted the inapplicability of certain sections to stock-in-trade sale price determination. Ultimately, the Tribunal dismissed the Revenue's appeal, upholding the Commissioner of Income-tax (Appeals)'s decision in favor of the assessee.

In conclusion, the Tribunal's detailed analysis focused on the lack of concrete evidence supporting the Revenue's estimation of undervaluation, the legal principles governing sale price determination for stock-in-trade, and the strict interpretation of deeming provisions in tax law. The decision reaffirmed the importance of substantiated valuation methods and the sanctity of actual sale consideration in assessing taxable income from business transactions.