Scope and impact of Provisions of Section 50C of the Act

[Anuj Bansal]

Section 50C was inserted in the Income Tax Act vide Finance Act of 2002 w.e.f. 01.04.2003 to provide that in lieu of consideration received by the transferor in the case of immovable properties the value determined by the State Government for the purpose of stamp duty purpose will be taken as full value of consideration received or accruing as a result of transfer.  The section was inserted in the Act with a view to deal with unaccounted income received by an assessee on understatement of consideration in transfer documents. In such cases stamp duty value will be substituted for the consideration specified in the document.

If we go in the history of the provisions inserted in the Income Tax Act from time to time to tackle the problem of understatement of consideration in the context of transfer of immovable properties, it can be recalled that Section 52 was inserted in the Act w.e.f. 01.04.1964, which was subsequently dropped w.e.f. 01.04.1988. The section provided that the Assessing Officer can adopt fair market value as sale consideration.  The Hon’ble Supreme Court in the case of K.P. Varghese v. ITO 1981 (9) TMI 1 - SUPREME Court had held that unless there is an evidence for understatement of consideration, addition cannot be made in accordance with the provisions of section 52 of the Income Tax Act.  Accordingly, the provisions had lost its effectiveness. Provisions of Chapter XXA (Sections269A to 269S) were inserted w.e.f. 15.11.1972,  which were subsequently replaced by provisions of Chapter XXC (Sections 269U to 269UO) w.e.f 1.10.1986 to provide for compulsory acquisition for the property by the government in transfer value in view of Competent Authority / Appropriate Authority was less than the market value.  These provisions also did not serve the desired purpose and accordingly, had been dropped w.e.f. 01.07.2002.  Thereafter provisions of Section 50C have been introduced w.e.f 01.04.2003.

It is stated in this regard that the earlier provisions had not proved effective primarily for the reason that same were arbitrary. It was held by the courts  that the determination of value was not on the basis of proper method and after taking into consideration all relevant factors.  Provisions of Section 50C were inserted with a view to check the menace of black money involved in the transactions of immovable properties and simultaneously simplify the method of determination of transfer value.  Accordingly, it has been provided that value as would be notified by the concerned state government for the purpose of stamp duty shall be adopted as consideration for transfer of immovable property and accordingly, capital gain in the case of seller of the property will be determined with reference to the above value.

It has further been provided in Section 50C of the Act that in a case where an assessee claims before the Assessing Officer that the value adopted for the purpose of stamp valuation exceeds the fair market value and he has not disputed the same in appeal or revision or reference before any Court in the context of determination of stamp valuation, the Assessing Officer would refer the matter of valuation of the property to the Valuation Officer. Therefore, an assessee has two fold remedy available to him to challenge the valuation on the basis of notified rates. He can challenge the value before the Stamp Authorities  as per provisions of relevant Stamp Act. Further, even if he has not disputed the value before Stamp Authorities he can dispute stamp valuation before the Assessing Officer that stamp duty valuation is not correct  the correct value in his case. This is a safe guard provided in the section to the assesses against adoption of higher value.

It has also been provided in the Section that in case on determination of fair market value by the Valuation Officer, it is held that the fair market value was more than the stamp duty valuation, even in such a case value to be adopted for the purpose of capital gain shall only be the amount determined for valuation purpose and not the higher value as is determined by the Valuation Officer.

Further, it has been provided in Section 155 (15) of the Act that in a case where an assessee has disputed stamp valuation before the Stamp Authorities and subsequently the value has been revised in any appeal or revision or reference, the order passed by the Assessing Officer adopting the stamp duty valuation shall be rectified under section 154 of the Act.  The period of four years for the purpose of rectification in such a case shall be reckoned from the end of the previous year in which the order revising the value is passed in appeal or revision or reference. It has also been held by the Madras High Court in the case of Rajini Venugopal v. CIT 2008 (8) TMI 794 - MADRAS HIGH COURT that the relief granted by the court in the challenge of stamp duty valuation made by the purchaser of the property will automatically apply to the assessee-seller and the capital gain computation will be adjusted in the case of seller.

In the light of simple language of Section 50C of the Act read with above referred safe guards, it appears that the provisions are reasonable and would serve the effective purpose. In fact this is not true. The section provides only as arbitrary basis. How, there can be same basis for valuing all the properties in an area irrespective of  location and other relevant factors.  Purpose and effect of Stamp valuation is different. It does not have major financial impact. Adopting the same value for the purpose of taxation of capital gain and also for the purpose of attributing under hand payment by the buyer is illogical and unreasonable. The provision has no exception  and accordingly, section appears to be applicable even in the cases of compulsory acquisition, open auction, tender sales, transfer between close relatives and also in the cases where specific basis has been provided in other sections of the Act. No acceptable margin has also been provided for the difference in the actual sale consideration and the notified value.

Since the provisions were felt by the assesses to be arbitrary and not reasonable for the purpose of determination of capital gain constitutional validity of section 50C was challenged before the Madras High Court in the case of K.R. Palanisamy v. UOI 2008 (8) TMI 27 - High Court of MadrasThe Hon’ble High Court, however, found that the arbitrariness of the section is protected by recourse to the remedies available to an assessee in the section of challenging the determination of stamp valuation before the registering authorities or before the Assessing Officer.  Again the issue of constitutional validity was raised in the case of Bhatia Nagar Premises Co-operative Societies Limited  V. UOI 2010 (3) TMI 813 - Bombay High Court The Bombay High Court again did not found the contentions acceptable and the petition was dismissed following the decision of Madras High Court referred above.  Accordingly, the High Courts have held that provisions of section 50C are constitutionally valid and accordingly, the same can be applied to adopt stamp valuation for the purpose of determination of capital gain.

It is stated that though Madras and Bombay High Courts have upheld the constitutional validity of section 50C of the Act, it is an apparent fact that transferor –assesses were not challenging earlier stamp duty valuation as impact was not substantial but now in view of the fact that same value is to be adopted for the purpose of capital gain, it has become necessary for the assesses to challenge the stamp duty valuation either before the Stamp Authorities or before the Assessing Officer.  Therefore, the assesses have to forcibly litigate the determination of stamp valuation though, as is well known, litigation is not an easy affair and it involves cost, time and efforts.  Therefore, in short it can be said that even if provisions of Section 50C provide safeguard to assesses in the form of right to challenge stamp duty valuation, the honest assesses have to incur extra cost of litigation or pay extra tax which is not payable.

Further, the provisions of Section 50C had also raised many controversies.  Two of the controversies i.e. relating to applicability of the provisions in the cases where registration of the document has not been done or same is not required and applicability of provisions in the cases of stock-in-trade have been resolved by amending the provisions of Section 50C of the Act and by inserting provisions of Section 43CA of the Act.   There are, however, still number of other controversies in regard to provisions of Section 50C of the Act, which are being discussed hereinafter.

Whether the Assessing Officer is bound to refer the matter to Valuation Officer where an assessee claims that stamp valuation is not the correct value in his case?

It has been held in by the Madras High Court in the case of N. Meenakshi v. ACIT 2009 (9) TMI 59 - MADRAS HIGH COURT that once the assessee applies to AO for making reference to DVO u/s. 50C, “may” becomes “shall”. Therefore, if assessee applies, AO shall make reference to DVO. It is not optional for AO to make reference to DVO. It was held that right to assessee u/s. 50C is a valuable statutory right available to protect his interest against arbitrariness which may creep in while fixing the value of capital gain and it is the safeguard given to the assessee. It has also been observed by the High Court  that the said right is more effective in cases where the parties to the document have not taken any steps to defend or to initiate proceedings under Stamp law. Again the same view has been taken by the Hon’ble Madras High Court in the case of S. Muthuraja v. Commissioner of Income Tax 2013 (8) TMI 40 - MADRAS HIGH COURT

Whether valuation can be challenged by an assessee before the Assessing Officer even though same was challenged before the Stamp Authorities and his plea has been rejected?

In Jitendra Mohan Saxena 2007 (7) TMI 361 - ITAT LUCKNOW-B, it was held that both the remedies u/s. 50C are alternative. If guideline value has been challenged before the stamp valuation authority, same cannot be again challenged before the AO. In other words, assessee can challenge the guideline value before AO only if he has not challenged the same before stamp valuation authority. To the same effect is the decision  in the case of Mohd. Shoib v. Dy. CIT 2008 (11) TMI 300 - ITAT LUCKNOW-B.

Whether the AO is bound to accept value determined by the DVO if it less than the stamp duty valuation?

The Assessing Officer is bound to accept the value determined by the DVO and he cannot adopt the stamp valuation in case the value determined by the DVO is less than the stamp duty valuation [CIT v. Dr. Indra Swaroop Bhatnagar 2013 (2) TMI 456 - ALLAHABAD HIGH COURT]

Whether value determined by the DVO can be challenged?

In an array of decisions in respect to section 55A and 142A, it has been held that Report of the DVO is not sacrosanct. It is only estimation. It has been held in Santosh Kumar Dalmia 1993 (5) TMI 10 - CALCUTTA High Court that valuation is only a matter of opinion and valuation differs from valuer to valuer, depending on the facts and circumstances of each case. The valuer's report is after all a statistical hypothesis that leaves wide room for error on either side. [Bhola Nath Majumdar 1996 (7) TMI 138 - GAUHATI High Court; Kamalam Rajendran 1998 (4) TMI 12 - MADRAS High Court; Abdul Mazid 1989 (2) TMI 98 - MADHYA PRADESH High Court]. Therefore assessee can give report of AVO and can also challenge the valuation on merit. This view further finds support by a direct decision in Waqf Alal Aulad 2009 (12) TMI 671 - ITAT DELHI wherein the DVO had given deduction of 33% on account of encumbrances in tenancy while computing Market Value u/s. 50C. Matter was remanded back to AO to allow proper time to assessee to rebut the DVO’s report.  See also Ravi Kant 2007 (7) TMI 350 - ITAT DELHI-I, where the DVO made the valuation at Circle rates, which are not indicative of market rates. It was held that such an approach will render exercise u/s. 50C(2) a meaningless ritual and an empty formality. In such a case, the DVO’s report should be based on consideration stated in the registration documents for comparable transactions, as also factors such as inputs from other sources about the market rates. Further, It has been held in the cases of ITO vs United Marine Academy [2011 (4) TMI 15 - ITAT MUMBAI], Mrs. Sosamma Paulose vs JCIT [2003 (2) TMI 161 - ITAT COCHIN], CIT vs Raman Kumar Suri [2012 (12) TMI 421 - BOMBAY HIGH COURT] and  Arya Texturisers & Twister C/o. JBF Industries Limited Versus Income tax Officer  [2013 (8) TMI 625 - ITAT MUMBAI ITA No. 6906/Mum/2011 dated - July 10, 2013] that valuation done by the government approved valuer cannot be brushed aside, as it has been done by a qualified person.

Further, one can argue that if there is an acceptable margin, say upto 15% in the actual consideration and valuation of DVO, same shall be ignored and no addition shall be made. [Rahul Construction 2012 (6) TMI 319 - ITAT PUNE]. Reliance is further placed on C.B. Gautham 1992 (11) TMI 1 - SUPREME Court.

Whether addition under sections 68, 69 or 69B of the Act can be made in the case of buyer on the basis of value adopted in the case of seller in terms of Section 50C of the Act?

This issue had arisen in number of cases as the Assessing Officers had adopted same value in the case of buyers also and have alleged that there were unexplained investments made by the buyers.  It has, however, been held by the Courts / Tribunals that Section 50C is a deeming provision and as per the well settled legal position, deeming provisions can be applied only for the limited purpose for which same have been inserted in the Act.  Therefore, provisions of Section 50C cannot be applied for the purpose of alleging unexplained investments by the buyers. In this regard reference can be made to the decisions in the cases of CIT v. Chandani Bhuchar 2010 (1) TMI 502 - Punjab and Haryana High Court; CIT v. Smt. Shweta Bhuchar 2010 (2) TMI 1049 - PUNJAB AND HARYANA HIGH COURT; CIT v. Kishan Kumar & Others 2008 (2) TMI 412 - RAJASTHAN HIGH COURT (Raj); Sangam Tower 2009 (3) TMI 614 - ITAT JAIPUR-B; ITO v. Fitwell Logic System P. Ltd. 2009 (12) TMI 706 - ITAT DELHI; SIT v. Smt. Anshu Jain 2009 (2) TMI 515 - ITAT JAIPUR; Optic Disc Mfg. 11 DTR 264 (Chd.); CIT v. Khoobsurat Resorts (P) Ltd., 2012 (11) TMI 590 (Del.)(HC) dated 05.11.2012; ITO v. Harley Street Pharma. Ltd. 2010 (3) TMI 886 - ITAT AHMEDABAD; Dy. CIT v. Vallabhbhai 2012 (12) TMI 337 ITAT (Ahd.) dated 07.09.2012; Dy. CIT v. Virjibhai Kalyanbhai Kukadia 2012 (10) TMI 791 - ITAT AHMEDABAD; DCIT v. Nihalsons Real Estate Developers 2012 (9) TMI 231 ITAT (Del.). Asstt. Commissioner of Income Tax v.Shri Dhanpat J Ranka 2013 (5) TMI 743 ITAT( Ahd)ITA No.365/ Ahd/2013 dated: 30/04/2013 and Pinki Mukundbhai Jariwal Versus ACIT, Circle 9, Surat 2013 (6) TMI 463 - ITAT AHMEDABAD ITA No. 229/Ahd/2010, Dated: 14/06/2013.

It may, however, be added in this context that there are provisions of Section 56 (2)(vii) of the Act, inserted vide Finance (No.2) Act, 2009 w.e.f. 01.10.2009 wherein it has been provided that in a case where an immovable property has been acquired by an individual or a HUF from a non-relative, either without consideration or for a consideration less than stamp duty value, the difference will be considered to be income of the assessee under the head “Income from other sources”. In view of above provision inserted in the Income Tax Act, the same impact has been brought in the case of buyers also and in case stamp duty valuation is higher than actual consideration, the difference will become chargeable as income under the above section.

Whether provisions of Section 50C of the Act are applicable in the cases of transfer of capital assets referred to in the provisions of sections 45(2)/(3)/(4)/(5) and section 50B of the Act?

Provisions of section 45(2)/(3)/(4)/(5), section 50 and section 50B of the Act specifically provides the basis to be adopted for taking value in case of transfers referred to above sections. Transfers and the basis provided in respect thereof in above sections are as under:-

SECTION	NATURE OF TRANSFER	VALUE TO BE ADOPTED
45(2)	Conversion of capital asset to stock-in-trade.	Fair market value of the asset on the date of conversion.
45(3)	Transfer of a capital asset by a person to a firm or AOP in which he is a partner / member.	Amount recorded in the books of account of the firm or AOP.
45(4)	Transfer of a capital asset by a firm or AOP to its partner / member.	Fair market value of the asset on the date of transfer.
45(5)	Compulsory acquisition of a capital asset under any law.	Consideration as is determined or approved by the Central Government or RBI or as may be enhanced by any Court, Tribunal or other authority.
50	Transfer of block of asset.	Actual sale consideration.
50B	Slump sale of business.	Actual sale consideration as is received on transfer of the business.

Since, the basis provided in above referred sections are different, a controversy has arisen to the effect whether consideration as specifically mentioned in above sections should be adopted or consideration as per provisions of Section 50C of the Act should be adopted. It is a well settled legal position that the specific provision overrides the general provision. An issue, however, has arisen in this context that which provision is the specific provision and which is the general provision.  In the decision in Carlton Hotel P. Ltd. 2008 (11) TMI 295 - ITAT LUCKNOW-A it has been held by the Tribunal that in a case where partner transfer an asset to the firm as his contribution, stamp valuation of which property was Rs. 45 lacs whereas value recorded in books was Rs. 30 lacs, provisions of Section 50C will override section 45(3) of the Act. In the case of ACIT v. Roger Pereira Communication P. Ltd. 2009 (8) TMI 849 - ITAT MUMBAI wherein subject matter was  depreciable asset to which provisions of Section 50 are applicable, it has been held that section 50C cannot be applied as Section 50C is a special provision for computation of capital gain for depreciable asset.  Same is the view taken by Kolkatta Bench of ITAT in the case of Panchiram Nahata v. JCIT  2009 (11) TMI 817 - ITAT KOLKATA. It has, however, been held by Special Bench of Mumbai in the case of ITO Vs. United Marine Academy 2011 (4) TMI 15 - ITAT MUMBAI that Section 50C is applicable in case of depreciation asset covered by Section 50 also.  

Whether value as per Section 50C can be adopted in the cases where price had already been agreed at the time of agreement / MOU whereas transfer has taken place at a later stage?

It is the common knowledge that many times agreements for transfer of property are entered into much earlier then the actual transfer of the property. In the case of purchase of a flat from a builder this is the common position.  Similarly, when a property is handed over to the builder for the purpose of construction and sharing a portion, sale deeds are executed only at the later stage when the property is ready. In such circumstances, there can be wide gap between the consideration and even between the stamp duty valuation at the time of entering into the agreement and at the time of execution and registration of sale deed. This issue has come up for consideration before the Mumbai Bench of ITAT in the case of ACIT v. Manubhai A Sheth (Larger HUF) 2012 (9) TMI 682 ITAT Mum. dated 04.07.2012.  It has been held by the Hon’ble Bench of the Tribunal that in such circumstances provisions of Section 50C cannot be applied to substitute the price at the later stage when actual transfer has taken place if the price had already been agreed upon at the time of agreement / MOU. In the case of Smt. Meera Somasekaran v. ITO 2010 (1) TMI 983 - ITAT CHENNAI, however, it has been held in the facts where the property had been handed over to the developer for constructing and sale deeds were executed on completion of the construction that Section 50C will be applicable at the time of execution of the sale deeds as the transfer was not complete in the facts of the case at the time of agreement with the developer.

Whether provisions of Section 50C are applicable in the case of transfer of lease hold rights?

It has been held by the Tribunal Benches  in the cases of Dy. CIT v. Tejinder Singh 2012 (3) TMI 47 - ITAT, KOLKATA and ITO v. Shri Pethabhai Babubhai Patel 2012 (10) TMI 428 (Mum.) dated 13.06.2012 that provisions of section 50C are not applicable in cases of sale of lease hold rights. Same is the view taken by ITAT, Delhi Bench in the cases of ACIT, New Delhi Versus Shrikishan Dass (2013) 6 TMI 428 - ITAT DELHI ITA No: 915/Del/2012 dated: 07/06/2013 and

Income Tax Officer-II Versus M/s Pashupati Electrodes Pvt. Ltd. (2013) 8 TMI 413 - ITAT DELHI I.T.A.No.3892/Del/2010 dated August 8, 2013

Whether deeming provisions of Section 50C are applicable for the purpose of investment in terms of Sections 54,54B,54D,54EC,54F,54G,54GA and 54GB of the Act?

In the case of Gyan Chand Batra, 2010 (8) TMI 528 - ITAT JAIPUR actual sale consideration of the property was Rs. 10 lacs whereas the value as per section 50C of the Act was determined at Rs. 19 lacs.  Accordingly, a question had arisen whether the assessee had to make investment of actual sale consideration or the deemed value of Rs. 19 lacs for the purpose of claiming exemption for capital gain under section 54F of the Act. The Hon’ble Bench of the Tribunal held that fiction of section 50C cannot be extended to section 54F and only the actual sale consideration is to be invested. In this regard it was noted that words used in section 54F are ‘net consideration’ which can mean only the actual consideration received. Accordingly, in the sections 54F and 54GB where net consideration is required to be invested above interpretation will hold the field. The issue, however, becomes more important in respect of other sections referred above, where capital gain is required to be invested. In view of deeming provisions of section 50C of the Act amount of capital gain will become higher and in certain cases amount of capital gain taking the stamp duty valuation may be even higher than sale consideration. In this situation, issue will be how much amount needs to be invested to claim exemption for the amount of capital gain.

Whether provisions of Section 50C can be applied in the case of auction sale?

In the cases where property has been sold in open auction after due publicity, it would not be appropriate to adopt a notional value in terms of section 50C of the Act for the reason that there can be no allegation for understatement of consideration. In such circumstances, provisions of Section 50C cannot be applied.  Similarly, in the cases of compulsory acquisition of a property, the consideration as is received by the owner of the property from Government authorities can only be considered as consideration of the property and not a deeming value as per section 50C of the Act.

Whether penalty u/s. 271(1)(c) can be levied on the basis of addition made u/s. 50C of the Act?

It has been held in cases of ACIT vs N. Meenakshi 2009 (9) TMI 59 - MADRAS HIGH COURT, Prakash Chand Nahar 2007 (6) TMI 245 - ITAT JODHPUR and Balkrishna Waghere & Others, July/ Aug, 2010, BCAJ, 3 (Pune) that penalty cannot be levied in cases where addition has been made on the basis of provisions of Section 50C of the Act as there is no ‘concealment or furnishing of inaccurate particulars’. This View has also been upheld by the Hon’ble Calcutta High Court in the case of Commissioner OF Income Tax  v. Madan Theatres Ltd (2013) 6 TMI 96 - ITA No. 62 of 2013 Dated May 14, 2013.

In conclusion, it can be said that provisions of section 50C of the Act in practice are not as simple as they appear to be. The provisions are going to result in lot of litigation and in many cases same will result in payment of undue tax by assesses as it would not be possible for all  the assesses to dispute the stamp duty valuation for various reasons. It is necessary that detailed guidelines should be issued by the CBDT in regards to implementation of provisions of section 50C of the Act and in the cases where an assessee is able to satisfy the Assessing Officer that value adopted by him is correct same should be accepted by the AO. Further, in the cases which are covered by other specific provisions of the Act, deeming provisions of section 50C should not be applicable. Similarly, in a case of transfer of an asset between close relatives these provisions should not be applicable.

V.P.GUPTA

ADVOCATE