2013 (5) TMI 551 - AT - Income Tax

Valuation of flats sold - assessee, a company in the business of construction of property sold flats to its directors and principal shareholders - sale to a related party - assessee for the purpose of accounting follows project completion method - whether Assessing authority has competence to disturb the sale consideration as reflected in the assessee s regular books of account maintained in respect of the transactions of the business carried on by him during the relevant year - Held that - On going through the facts of case there is the vast difference between the stamp valuation as per the Stamp Duty Authorities and the price at which the sales have been made. As such, though in agreement in principle with the AO that the assessee s declared sale rate is artificial and totally unexplained, so that it cannot find acceptance, yet cannot, in the absence of complete details, also accede to the AO s estimation thereof, and the matter is indeterminate and requires a composite review. True, genuine and bona fide transactions, even if made below par, the fair market valuation would not have any tax implication, being only undertaken in the normal course of business and in its interest. The caveat in the foregoing proposition, however, is extremely important, and it is this which remains to be satisfied in the facts and circumstances of the case. The transaction is between related parties, being only to the directors and principal share-holders of the assessee-company, and the difference in values is significant. Under the circumstances, therefore, it is fit and proper to, while setting aside the impugned order, restore the assessment back to the file of the AO to make a fresh assessment of the profit qua the three flats constructed from 2001 to 2005, and sold during the relevant previous year, by taking all the relevant facts and circumstances of the case into account, per a speaking order, and after allowing the assessee a proper opportunity of hearing. The assessed sale consideration for the flats on the first five floors, though, stands confirmed. Revenue s appeal is partly allowed and partly allowed for statistical purposes.

Issues Involved:
1. Valuation of flats sold by the assessee to its directors and principal shareholders.
2. Legal competence of the assessing authority to disturb the sale consideration reflected in the assessee's books.
3. Applicability of the fair market value (FMV) and the burden of proof regarding the understatement of consideration.
4. Relevance of the Stamp Act valuation in determining the sale consideration.
5. Assessment of profit from the sale of flats constructed during the relevant period.

Detailed Analysis:

1. Valuation of Flats Sold to Directors and Principal Shareholders:
The core issue in the appeal is the valuation of flats sold by the assessee, a construction company, to its directors and principal shareholders. The Assessing Officer (AO) found discrepancies between the sale values declared by the assessee and the market valuation as per the stamp duty authorities. The AO adopted the stamp duty valuation for the additional three floors constructed, resulting in a significant increase in the assessed income.

2. Legal Competence of the Assessing Authority:
The primary facts of the case are undisputed. The legal question centers around whether the AO can disturb the sale consideration reflected in the assessee's regular books of account. The AO adopted a higher sale consideration based on the stamp duty valuation, while the assessee argued that the transaction was carried out at market value as per prevailing rates in the neighborhood.

3. Applicability of FMV and Burden of Proof:
The assessee relied on the Supreme Court decision in K.P. Varghese vs. ITO, which clarified that the AO must show not only that the FMV exceeded the declared consideration but also that the consideration was understated and that the assessee received more than declared. The CIT(A) upheld this view, stating that the AO had not discharged the burden of proving understatement of consideration and had merely adopted the stamp duty valuation without concrete evidence.

4. Relevance of Stamp Act Valuation:
The AO adopted the stamp duty valuation for the additional three floors as the sale consideration, while for the first five floors, a uniform sale consideration was assumed. The CIT(A) found no material evidence to suggest that the assessee received any amount higher than the declared consideration. The Tribunal noted that the AO's adoption of stamp duty valuation was not unreasonable but required a more detailed examination of facts.

5. Assessment of Profit from Sale of Flats:
The Tribunal observed a significant difference between the stamp valuation and the declared sale prices. The assessee argued that the sale prices were in line with market rates, but no supporting data was provided. The Tribunal found the AO's estimation of sale consideration for the first five floors reasonable but required a composite review for the additional three floors due to lack of clarity and proper details.

Decision:
The Tribunal partly allowed the Revenue's appeal, confirming the assessed sale consideration for the first five floors but remanding the assessment of profit for the additional three floors back to the AO for a fresh assessment. The AO is directed to make a detailed examination of all relevant facts and circumstances and issue a speaking order after providing the assessee a proper opportunity of hearing.

Conclusion:
The Tribunal's judgment emphasizes the need for concrete evidence to support claims of understatement of consideration and the importance of a detailed factual analysis in determining the appropriate sale consideration for related party transactions. The decision underscores the balance between adhering to fair market valuations and recognizing genuine transactions carried out in the normal course of business.

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