2010 (6) TMI 770 - AT - Income Tax

Capital gain computation - addition u/s 50C - Aggregate difference between the apparent sale consideration and the market value - as per DR AO has to make a comparison between the apparent consideration and the value adopted or assessed for stamp duty purposes and that there is no reference in the sale deed, of the details of advance payments made by the vendees - HELD THAT - As decided in K.P. Verghese Vs. ITO, 1981 (9) TMI 1 - SUPREME COURT 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.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. 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. 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. Whether there was any under statement of actual consideration at the time when the sale agreements were entered into ? - 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- -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. As held 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. Appeal of the assessee allowed for statistical purposes.

Issues Involved:
1. Whether the CIT(A) was correct in confirming the addition of Rs. 15,54,000/- made by the AO under section 50C of the Income Tax Act.

Detailed Analysis:

Issue 1: Applicability of Section 50C
The primary issue revolves around the applicability of Section 50C of the Income Tax Act, which mandates that if the sale consideration of a property is less than the value adopted for stamp duty purposes, the latter value should be considered for computing capital gains. The assessee, a partnership firm, declared capital gains based on the apparent sale consideration, which was lower than the stamp duty valuation, leading to an addition of Rs. 15,54,000/- by the AO.

Facts of the Case:
The assessee entered into sale agreements for two properties on 27.03.2003, with the sale deeds executed on 30.06.2005. The delay in execution was due to reasons beyond the assessee's control. The sale consideration agreed upon was Rs. 29,31,000/- and Rs. 30,70,000/-, whereas the stamp duty valuation was Rs. 36,98,500/- and Rs. 38,56,500/-, respectively. The AO invoked Section 50C and added the difference to the assessee's income, which was upheld by the CIT(A).

Assessee's Argument:
The assessee argued that the sale agreements were bona fide and the consideration agreed upon was within the market value at the time of the agreement. They submitted additional evidence, including a certificate from the Joint Sub Registrar, Visakhapatnam, indicating the market value as Rs. 5,000/- per sq. yard on the date of the agreement. The assessee relied on the Supreme Court's decision in K.P. Varghese Vs. ITO (1981) and the Madras High Court's decision in K.R. Palani Swamy Vs Union of India (2008), arguing that Section 50C should not apply to bona fide transactions without the intention to defraud revenue.

Revenue's Argument:
The Revenue contended that as per Section 50C, the AO is required to compare the apparent consideration with the stamp duty valuation. They argued that the provisions of Section 50C, being a legal fiction, are applicable to the transactions in question and should be upheld.

Tribunal's Observations:
The Tribunal noted that the assessee entered into a sale agreement in March 2003 and executed the sale deed in June 2005. The Tribunal referred to the Supreme Court's decision in K.P. Varghese, which emphasized that a literal interpretation of tax provisions should be avoided if it leads to unreasonable results. The Tribunal also considered the Madras High Court's observations on the purpose of Section 50C, which aims to prevent under-valuation of property to evade tax.

Conclusion:
The Tribunal concluded that the provisions of Section 50C should be applied based on the market conditions prevailing at the time of the sale agreement, not the date of the sale deed. They directed the AO to re-compute the capital gains considering the market value as on the date of the sale agreement, supported by the certificate from the Joint Sub Registrar. Consequently, the order of the CIT(A) was reversed, and the appeal was allowed for statistical purposes.

Final Judgment:
The appeal of the assessee was treated as allowed for statistical purposes, with the AO directed to re-compute the capital gains based on the market value at the time of the sale agreement.

Pronouncement:
The judgment was pronounced on 22nd June, 2010.

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