2017 (1) TMI 1290 - HC - Income Tax

Computation of capital gain - Reference made u/s 55A - transaction with a related party - actual consideration (full value of consideration) versus fair market value - Held that - The price to be considered is the consideration received or accruing as a result of the transfer and not necessarily the price that the assessee states that it received or which has accrued to it. - The amount actually received was admittedly the amount mentioned in the sale agreement. - Apex Court in the case of K.P. Varghese case 1981 (9) TMI 1 - SUPREME Court has held that, Capital gains was intended to tax the gains of an assessee, not what an assessee might have gained. What is not gained cannot be computed as gained. Thus the Assessing Officer proceeded on the erroneous basis that as the assessee and the purchaser are interconnected and the property was sold at an undervalue he had the jurisdiction to invoke the provisions of section 55A or even otherwise to determine the fair market value. As held by the Supreme Court it then is a distinction between undervaluation and understatement of the value. The Assessing Officer did not find the consideration to have been understated. He, therefore, was not entitled to determine the fair market value. Applicability of Section 50C - Held that - The reliance upon Section 50C is of no assistance to the Revenue either. Mrs. Dugga s submission that the Assessing Officer s can be supported under section 50C is not well founded. Even assuming that the Assessing Officer was entitled to invoke Section 50C to have the fair market value determined, it would make no difference. In view of sub section (3) the rate adopted, assessed or assessable by the Stamp authority would prevail. It is common ground that in this case the consideration stated in the sale document is even higher than the valuation by the Stamp authority. The judgment of the Supreme Court in Ms. McDowell & Co. Ltd. v. Commercial Tax Officer, (1985 (4) TMI 64 - SUPREME Court) does not warrant a different view of the matter. The view that we have taken in respect of question (ii) cannot be altered in view of the judgment in McDowell s case (supra). The ratio of the judgment of the Supreme Court referred to earlier is that for the purpose of Section 48, the full value of the consideration received by or accruing to the assessee must be taken into consideration for the purpose of computing the capital gain and that the market price of the property is not relevant for this purpose. The authorities under the Act cannot possibly take a different view of the matter. As we noted earlier it is not the case of the Revenue that the actual consideration is higher than that stated in the sale deed. The Assessing Officer was, therefore, bound to consider the actual consideration. Decided against the revenue.

Issues Involved:
1. Applicability of Section 40A(2)(b) of the Income Tax Act.
2. Validity of reference made under Section 55A of the Income Tax Act.
3. Applicability of the Supreme Court’s decision in McDowell & Co. Ltd. v. CTO.
4. Procedural fairness regarding the opportunity of being heard to the Assessing Officer.

Detailed Analysis:

1. Applicability of Section 40A(2)(b) of the Income Tax Act:
This issue was not argued before the court, and thus, no judgment was delivered on it.

2. Validity of Reference Made Under Section 55A of the Income Tax Act:
The primary question was whether the Assessing Officer (AO) rightly invoked Section 55A to determine the fair market value of the capital asset sold by the assessee. The AO made a reference to the District Valuation Officer (DVO) to ascertain the fair market value, which was determined to be ?70.08 crores, significantly higher than the sale consideration of ?25.10 crores mentioned in the sale deed.

The court examined whether the AO was justified in using Section 55A for this purpose. It was held that Section 55A is not applicable for determining the full value of consideration under Section 48, which refers to the actual consideration received or accruing from the transfer of the capital asset, not its fair market value. The court emphasized that the AO must consider the actual price bargained for by the parties, not the market value unless it is proven that the consideration stated in the sale deed is understated.

The court cited several precedents, including the Supreme Court’s rulings in Commissioner of Income Tax v. George Henderson and Co. Ltd. and Commissioner of Income Tax v. Gillanders Arbuthnot & Co., which clarified that the "full value of consideration" refers to the actual sale price agreed upon by the parties, not the market value. It was noted that there was no finding that the assessee received any consideration other than what was mentioned in the sale deed.

The court concluded that the AO’s reference to the DVO under Section 55A was without jurisdiction, as the section applies only when the fair market value needs to be determined for purposes other than computing capital gains under Section 48. The court also dismissed the applicability of Section 50C in this context, as the sale consideration was higher than the valuation by the Stamp Authority.

3. Applicability of the Supreme Court’s Decision in McDowell & Co. Ltd. v. CTO:
The court addressed whether the principles laid down in McDowell & Co. Ltd. v. CTO applied to the present case. The Supreme Court in McDowell’s case emphasized that tax planning within the legal framework is permissible, but tax evasion through colorable devices is not.

The court reaffirmed that for computing capital gains under Section 48, the actual consideration received or accruing to the assessee must be considered, not the market value. The judgment in McDowell’s case does not alter this principle. The court noted that it was not the case of the Revenue that the actual consideration was higher than what was stated in the sale deed, and thus, the AO was bound to consider the actual consideration.

4. Procedural Fairness Regarding the Opportunity of Being Heard to the Assessing Officer:
This issue was not argued before the court, and thus, no judgment was delivered on it.

Conclusion:
The court dismissed the appeal, affirming that the AO’s reference to the DVO under Section 55A was without jurisdiction and that the actual consideration received or accruing to the assessee must be considered for computing capital gains under Section 48. The principles laid down in McDowell’s case do not alter this position. The appeal was dismissed in favor of the assessee.

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