Links and references:
ITO v. Venu Proteins Industries (2010) 36 (II) ITCL 243 (Ahd 'B'-Trib).
Rekhaben Rajendra Shah v. Asst. CIT in I.T.A. No. 3069/Ahd/2008 dated 9-4-2010
Section 50C and 56 (1) (vii) of the Income Tax Act, 1961.
Section 50C a brief discussion:
Section 50C provides that in case of land and / or buildings sold by assessee; capital gains shall be computed by taking valuation for stamp duty purposes as full value of consideration for computing capital gains in hands of vendor. This is subject to certain exceptions and disputes about valuation. When section 50C is applied, the A.O. is not required to establish as to whether the vendor has actually received any amount as consideration in excess of consideration disclosed by him. By legal fiction the amount of difference is also added and considered as forming part of capital gains. For example suppose land and building is sold for Rs.100 lakh however, the stamp authorities has valued it at Rs.150 lakh, then for the purpose of computation of capital gains in hands of vendor Rs.150 lakh may be considered as full value of consideration accruing on transfer of the asset. If assessee disputes this and stamp appeal / revision authority reduces it to Say Rs.125 lakh then capital gains will be revised on that basis. In case on dispute and reference the DVO value property at lower amount than stamp authority, then such lower amount shall be considered as consideration.
In absence of S.50C the AO was required to establish that the assessee has actually received any amount over and above the disclosed consideration before making any addition. Addition made merely on the basis of valuation report etc. could not be sustainable if assessee disputed the addition.
About this write-up:
In this write-up we need not to go in full details of S.50C because we are mainly concerned with whether section 50C can be applied by way of implication so as to ascertain the amount of investment made by the buyer, to justify corresponding addition in hands of buyer also?
On reading of provisions of S. 50C it is clear that it is applicable only for the purpose of computation of capital gains in hands of vendor by deeming valuation under stamp law as consideration accruing to the vendor. It is not applicable for ascertaining the consideration paid or actual cost of assessee. Therefore, the fiction created by S. 50C has limited application for computation of capital gains in hands of vendor.
Therefore, the AO of buyer cannot make a corresponding addition in hands of buyer. In case the AO factually find out and establish with convincing evidence that the buyer has made extra payment then only he can make addition in hands of buyer for such sum as undisclosed investment and not otherwise.
Disputes by revenue:
However, revenue authorities are raising disputed in assessment of buyers also. In many cases in original assessment additions have been made whereas in other cases proceedings for reassessment/ revision etc. have been initiated. The Tribunals have however decided many matters in favor of assessee that S. 50C is not applicable while assessing buyer of immovable property. The author has also appeared before CIT(A) in one case cases in which learned AO made reassessment in hands of buyer to make addition of differential amount. Learned CIT(A) held that S. 50C cannot be applied in hands of buyer and deleted the addition. In that case the revenue has accepted the order of CIT(A) though the amount involved was substantial and filing of appeal before ITAT was not exempted as per Boards Circular.
Recent decision of ITAT:
In case of ITO v. Venu Proteins Industries (2010) 36 (II) ITCL 243 (Ahd 'B'-Trib) the matter of addition in hands of buyer for assessment year 2006-07 came for consideration before the ITAT, Ahmedabad Bench. The learned CIT(A) gas deleted the addition, therefore the revenue preferred appeal before the ITAT. The assessee had also filed appeal by Cross Objections, however the same was withdrawn, may be because the appeal filed by revenue was contested and there was no other substantial issue to prosecute the Cross Objections.
Analysis of facts:
a. The assessee had purchased a plot of land measuring 96.18 sq. mtrs. and a building measuring 572.5 sq. mtrs. at a cost of Rs. 21,00,000/-
b. Assessee paid stamp duty amounting to Rs. 1,76,400 on the basis of consideration.
c. The stamp authorities valued property at Rs. 28,93,000 and charged an additional stamp duty of Rs. 66,612.
d. Having got this information the assessing officer of buyer reopened the assessment under section 148 and also issued show-cause notice (SCN).
e. Assessee submitted that the section 50C is not applicable in the case of the assessee. However, the AO rejected the contention of the assessee and concluded that the assessee has undervalued the property by an amount of Rs. 7,93,000 and made the addition to his income.
f. Before the learned Commissioner of Income-tax (Appeals) assessee raised contentions that :
i. section 50C of the Income Tax Act is not applicable in the case of assessee as a buyer of immovable property.
ii. The section 50C apply only in hands of the seller of the assets for charging capital gain on the basis of valuation made by the stamp duty authorities.
iii. The Finance Act,2009, provides the provisions with effect from 1-10-2009 to charge such differential value of the property as gift received by the purchaser on the property under the head of "Income from other sources" and this provision is not applicable to the assessment year under appeal, i.e., 2006-07.
iv. That addition may be deleted.
The learned Commissioner (Appeals) considering the explanation of the assessee deleted the entire addition. By giving the findings in paragraphs 2.3 and 2.4 which are reproduced below with highlights by way of underlining provided by author :
"2.3 The matter has been considered in the light of the legal position as it existed at the relevant point, I think the addition made is not justified. Applicability of section 50C is prima facie incorrect as it pertains to charging of capital gains which is to be considered in the hands of the seller. In the instant case, the assessing officer was dealing with the purchaser of the property. Notwithstanding that the addition could well have been made in case had the assessing officer been in possession of any other information which could indicate that the declared sale price was not the actual sale price. The higher registration value in itself does not prove the fact that the transaction has taken place at a figure different from that recorded by the appellant's books. On the other hand, the deeming provision introduced by section 56 as rightly pointed out by the authorised representative, are applicable from 1-10-2009 and, therefore, it is to be assumed that prior to this such a difference between the value as per documents and value as per stamp duty authorities is not to be treated as a gift and hence not to be treated as income.
2.4 Hence, considering all the aspects, the addition of Rs. 7,93,000 is deleted."
Counter contentions before the ITAT:
a. As per Departmental representative the assessing officer was justified in rejecting the claim of the assessee because there was a huge difference in the sale consideration noted by the assessing officer and in the sale deed declared by the assessee .That the assessing officer has rightly made the addition in the matter.
b. Learned counsel for the assessee reiterated the submissions made before the lower authorities and again submitted that section 50C of the Income Tax Act is not applicable in the case of the purchaser and relied upon the order of the Income Tax Appellate Tribunal, Mumbai Bench, in the case of Inderlok Hotels Pvt. Ltd. v. ITO (2009) 27 (II) ITCL 364 (Mum-Trib) : (2009) 318 ITR (AT) 234 (Mum-Trib) wherein it was held that "section 50C is applicable only for the purpose of determining the sale consideration for computation of capital gains and it cannot be applied for determining the income under other heads".
Tribunals findings analyzed:
a. On consideration of the rival submissions Tribunal took view that the learned Commissioner (Appeals) was justified in deleting the addition.
b. That identical issue was considered by the Income Tax Appellate Tribunal, Ahmedabad "B" Bench in the case of Rekhaben Rajendra Shah v. Asst. CIT in I.T.A. No. 3069/Ahd/2008 dated 9-4-2010 (an appeal by assessee because the CIT(A) has confirmed the addition) in which it was held in paragraph 5 as under ( highlights and catch words provided by author by underlining for analysis purpose):
"5. We have considered the rival submissions and the material available on record. It is not in dispute that the properties under consideration have been purchased by the assessee through registered sale deeds. The assessee claimed that she has paid actual consideration which is recorded in the sale deeds. The additional stamp duty was imposed upon the assessee as per the rate prescribed by Jantri. The Stamp Valuation Authority adopted such valuation as per the Jantri which is notional value for the purpose of determining the stamp duty payable. The assessing officer has not brought any evidence on record that the assessee in fact had paid more consideration as against the consideration recorded in sale deeds. No material is brought on record to prove that the assessee had invested more than what had been shown in the sale deeds. It was, therefore, an inference of the assessing officer that the assessee paid more consideration as against the consideration shown in the sale deeds. The learned Commissioner (Appeals) noted that even if section 50C of the Income Tax Act is not invoked by the assessing officer but the assessing officer has applied its principle. We do not agree with the findings of the learned Commissioner (Appeals) because the Income Tax Appellate Tribunal, Ahmedabad Bench in the cases Jalaram and Co. and Richa Naresh Jain (supra) have held that the provisions of section 50C of the Income Tax Act are not applicable in the hands of the purchaser. It would, therefore, show that there is no foundation for making the above additions against the assessee. In the absence of any factual foundation in favour of the revenue, we do not find it to be a fit case for sustaining the additions in the hands of the assessee. We accordingly set aside the orders of the authorities below and delete both the additions. As a result, ground Nos. 1 and 2 of the appeal of the assessee are allowed".
On consideration of the above facts and the decisions relied upon by learned counsel for the assessee, Tribunal held that the issue is covered in favour of the assessee and against the revenue by the orders of the Income Tax Appellate Tribunal, Ahmedabad Bench (supra). Accordingly, finding no infirmity in the order of the learned Commissioner (Appeals) allowing appeal of assessee the Tribunal confirmed the order of the CIT(A) and dismissed the appeal of the revenue.
Remarks of the author:
The Honorable Tribunal has rightly held that section 50C cannot be applied in hands of buyer. The addition cannot be made in hands of buyer, for undisclosed income even if the valuation made by the stamp authorities is higher than the consideration actually paid. The AO can make an addition only if he can prove that the buyer has made undisclosed investment.
So far application of section 56 in hands of buyer is concerned, it is to be noted that vide the Finance Act ,2010 clause (b0 of S.56(1)(vii) was amended w.e.f. 01.10.2009 and the provision as stands now is that S. 56 is applicable in relation to immovable property in hands of buyers being individual or HUF only if the property is received without any consideration. Thus even on or after 01.10.2009, the additions cannot be made in hands of buyer, merely because the consideration paid is less than the stamp duty valuation of property. Only in case an immovable property is received without any consideration then S. 56 can be invoked if the transferor is not a relative of transferee.
Therefore, as of now also an addition cannot be made in hands of buyer merely because the stamp authorities have determined higher valuation for the purpose of levy of stamp duty.
The Tribunal ,as noted above noticed the provision made by the Finance Act,2009, which provides the provisions with effect from 1-10-2009 to charge such differential value of the property as gift received by the purchaser on the property under the head of "Income from other sources" and this provision is not applicable to the assessment year under appeal, i.e., 2006-07. However, in view of subsequent amendment vide the Finance Act, 2010 the earlier amendment became inoperative. Therefore, when an immovable property is paid and some consideration is paid by the buyer, then the provisions of section 56 are not applicable. The AO can make an addition only if he is able to prove that the buyer has paid over and above the consideration declared by him in the deed.