2007 (3) TMI 317 - AT - Income Tax

Addition on Long-term capital gain - consideration received on sale of land - Valuation estimated u/s 55A - applicability of section 50C - HELD THAT - It is a trite law that the legal fiction cannot be extended beyond the purpose for which it is enacted. Section 50C embodies the legal fiction by which the value assessed by the stamp duty authorities is considered as the full value of consideration for the property transferred. It does not go beyond the cases in which the subject transferred property has not become the subject-matter of registration and the question of valuation for stamp duty purposes has not arisen. By no stretch of imagination, the legal fiction confined to restricted operation can be widened to include within its sweep all the cases where 'such property' has not been valued by the State authorities for stamp duty purposes. The Hon'ble Supreme Court in the case of CIT v. Amarchand N. Shroff 1962 (10) TMI 51 - SUPREME COURT has held that 'legal fiction are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond the legitimate field'. It is wholly irrelevant to consider the assessed value of another property for stamp duty purposes as full value of consideration by making reference to the Valuation Officer u/s 55A. Unless the property transferred has been registered by sale deed and for that purpose the value has been assessed and stamp duty has been paid by the parties, section 50C cannot come into operation. In such a situation, the position existing prior to section 50C would apply and the onus would be upon the revenue to establish that sale consideration declared by the assessee was understated with some clinching evidence. The relevant judgments discussed above viz., K.P. Varghese 1981 (9) TMI 1 - SUPREME COURT and Shivakami Co. (P.) Ltd. 1986 (3) TMI 2 - SUPREME COURT would come into operation and govern the determination of full value of consideration. It is noticed that the assessee transferred the property in question by executing an agreement which was not registered with the registering authority. In such a case, section 50C could not have come into operation and the resultant application of section 55A by which the Assessing Officer got the property valued and adopted the report of the Valuation Officer as the sole basis for making the impugned addition was wholly invalid. As the Assessing Officer has not embarked upon making enquiries from the purchaser about the actual sale consideration, and has not brought on record any other material worth the name to show that the sale consideration declared by the assessee was understated, in my considered opinion the addition was wrongly made and sustained. I, therefore, order for the deletion of the addition. In the result, the appeal is allowed.

Summary

Issues Involved: Applicability of Section 50C of the Income Tax Act, 1961, and the validity of the addition of Rs. 1,07,122 on account of long-term capital gain.

Detailed Analysis:

1. Applicability of Section 50C:

The core issue in this case revolves around the applicability of Section 50C of the Income Tax Act, 1961. The assessee argued that Section 50C is not applicable as the sale was made through an unregistered agreement. The Assessing Officer (AO) had referred the matter to the Assistant Valuation Officer under Section 55A, who estimated the value of the plot at Rs. 1,43,122 against the sale consideration of Rs. 36,000 declared by the assessee. The differential amount of Rs. 1,07,122 was added to the assessee's income as long-term capital gain.

2. Interpretation of Section 50C:

Section 50C was inserted by the Finance Act, 2002, effective from April 1, 2003. It provides that if the consideration received or accruing as a result of the transfer of a capital asset (land or building) is less than the value adopted or assessed by any authority of a State Government for stamp duty purposes, the value so adopted or assessed shall be deemed to be the full value of the consideration received for the purposes of Section 48. The Memorandum explaining the provisions of the Finance Bill, 2002, clarifies that this section was introduced to determine the full value of consideration in cases of transfer of immovable property.

3. Legal Precedents and Burden of Proof:

Prior to the insertion of Section 50C, the declared sale consideration was accepted unless the revenue could prove understatement. The Supreme Court in K.P. Varghese v. ITO [1981] 131 ITR 597 held that the burden lies on the revenue to show understatement of consideration. Similar views were upheld in CIT v. Shivakami Co. (P.) Ltd. [1986] 159 ITR 71 (SC). The introduction of Section 50C shifted this burden by deeming the stamp duty value as the full value of consideration unless contested by the assessee.

4. Scope and Limitations of Section 50C:

Section 50C applies only if the property transferred has been assessed for stamp duty purposes. The legal fiction created by this section is limited to cases where the property in question has been valued by the State authorities for stamp duty purposes. The Supreme Court in CIT v. Amarchand N. Shroff [1963] 48 ITR 59 and CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711 emphasized that legal fictions are limited to their specific purposes and should not be extended beyond their legitimate field.

5. Assessment of the Present Case:

In this case, the property was transferred through an unregistered agreement, and thus, Section 50C could not be invoked. The AO's reliance on the Valuation Officer's report under Section 55A was deemed invalid. The AO did not conduct any further inquiries or present evidence to prove that the declared sale consideration was understated.

Conclusion:

The addition of Rs. 1,07,122 was held to be invalid as Section 50C was not applicable due to the unregistered nature of the transfer agreement. The AO failed to provide any substantial evidence of understatement of consideration. Consequently, the appeal was allowed, and the addition was ordered to be deleted.

Final Judgment:

The appeal was allowed, and the addition of Rs. 1,07,122 on account of long-term capital gain was deleted. The judgment was pronounced in the open court immediately after the conclusion of the hearing on March 2, 2007.