Provisions like those of sections 43CA, 50C, .50CA,S.56 S.68 etc. - ADDITION SHOULD NOT BE MADE WITHOUT EVIDENCE OF UNDISCLOSED OR EXTRA CONSIDERATION - a point of view.

[DEV KUMAR KOTHARI]

Subject matter in this study are:

Provisions which deem certain amount as consideration accruing or fair market value or value of deemed income etc. based on valuation by stamp or registration authority or valued in specified manner etc.

Earlier tax authorities doubted and made additions based on some valuation made by departmental authority or view taken by tax authority himself or other authority like stamp and registration authority. The basis of addition was due to doubts about understatement of consideration or no consideration accruing as claimed by assessee.

For establishing such additions the tax authority was required to do a bit hard work to establish that in fact , there was consideration paid or received, in excess of consideration recorded in books of account of assessee. Usually due to lack of evidence and addition merely based on doubt or presumption or based on hearsay etc. were deleted by appellate authority and Courts.

To make work of tax authorities easy, deeming provisions have been inserted in the Income-tax Act, 1961 to  deem the valuation made by stamp or registration authorities as ‘consideration accruing’ / or investment made, if the amount recorded in books of account or disclosed in documents is less than the fair value adopted by registration and stamp authority. This is subject to some conditions and exceptions.

Scope of this article:

Without going into details of such popular provisions author has kept scope of this article to the theme that whether merely based on such provision and valuation by stamp authority or registration authority an addition should be made or can justifiably be made within the scope of imposing tax on income as per the CONSTITUTION OF INDIA ( in short COI).

In the COI, there is no definition of ‘income’. Therefore, income has to be considered in sense of real income of a particular year or period or over a period of time. Over a period of time is to be considered because capital expenses are allowed over a period of time. However, what should be taxed is real income.

Unrecorded consideration:

If consideration is not recorded in books of account or is not considered and the AO has a factual finding with evidence, then undisclosed consideration can be considered as income. However, without actual consideration assessment of deemed income is not authorized under the COI.

Higher valuation does not mean real income:

When a Registration authority put a higher value for any property registered it does not mean that the buyer has paid that amount and the seller has received such higher amount. Merely based on such valuation an income earned cannot be presumed.

Area wise  guidance rates are fixed by state governments, however, in reality we find that such rates are much higher than actual market value. Market value of particular property can vary for several reasons.

The actual consideration  also depends on bargain powers of parties. If a seller is in distress and if there are some disputes or uncertainties seller can agree to sell property at lower price. If a buyer is in need of particular property ( in particular area and of particular specifications) and there are not many suitable properties, he may have to pay a higher price.

Role of stamp authorities:

Role of stamp and / or registration authorities is to determine stamp  duty and registration fees payable on any registrable document which is presented for registration. These authorities have role to collect revenue by way of stamp duty and registration fees. Therefore, attempt is always to fix higher value and collect higher amount of revenue by way of stamp duty and registration fees.

Value fixed by stamp authorities is not real value, these are at best estimates. 

These aspects were considered by the honorable Supreme Court and the same have been recently referred to in a judgment by Madras High Court in the context of S.50C.

OBSERVATIONS OF HONORABLE MADRAS HIGH COURT in the following judgment:

2020 (10) TMI 517 - MADRAS HIGH COURT

THE COMMISSIONER OF INCOME TAX, CHENNAI. VERSUS SHRI VUMMUDI AMARENDRAN

T.C.A.No.329 of 2020

Dated: - 28 September 2020 

                      The only reason for the Assessing Officer to adopt higher value is based upon the guideline value fixed by the State Government. The question would be as to what is the effect of the guideline value fixed by the Government and the purpose behind fixing the same. This aspect was clearly explained in the case of J.Jayalalitha. It has been pointed out that the guideline value has relevance only in the context of Section 47A of the Indian Stamp Act (as amended by Tamil Nadu Act 24 of 1967) which provides for dealing with instruments of conveyance which are undervalued. The guideline value is a rate fixed by the authorities under the Stamp Act for the purpose of determining the true market value of the property disclosed in an instrument requiring payment of stamp duty. Thus the guideline value fixed is not final but only a prima facie rate prevailing in an area to ascertain the true or correct market value. It is open to the Registering Authority as well as the person seeking registration to prove the actual market value of the property. The authorities cannot regard the guideline valuation as the last word on the subject of market value but only a factor to be taken note of, if at all available in respect of an area in which the property transferred lies . It was further pointed out that this position is made clear in the explanation to Rule 3 of the Tamil Nadu Stamp (Prevention of Under valuation of Instruments) Rules, 1968; this explanation also will have to be read in conjunction with explanation to Section 47(A) of the Indian Stamp Act (as amended by the Tamil Nadu Act 24/1967). It was further pointed out that undue emphasis on the guideline value without referred to the setting in which it is to be viewed will obscure the issue for consideration. Further it was held that in any event, if for the purpose of the Stamp Act, guideline value alone is not a factor to determine the value of the property, its worth will not be any higher in the context of assessing the true market value of the properties in question to ascertain whether the transaction has resulted in any offense so as to give a pecuniary advantage to one party or other.

8. Thus, the Assessing Officer could not have based his conclusion solely based on the guideline value which has been held to be only a prima facie rate prevailing in the area to ascertain the true or correct market value and it is not the last word on the subject of market value but only a factor to be taken note of. As pointed out earlier, the genuinity of the transaction done by the assessee was not doubted and the receipt of advance was through banking channel by way of a demand draft.

9. Therefore, in our considered view the Assessing Officer could not have based his finding solely relying upon the guideline value especially when the Assessing Officer is not a person who is computing stamp duty under the provisions of Indian Stamp Act on the Deed of conveyance.

 

From a judgment of the Supreme Court in relation to provisions relating to corruption we find following relevant observations about guideline valuation fixed by stamp authorities:

Supreme Court of India

R. SAI BHARATHI VERSUS J. JAYALALITHA & ORS. [2003 (11) TMI 615 - SUPREME COURT]

JUDGMENT RAJENDRA BABU, J. :

These two sets of criminal appeals arise out of two criminal cases filed against Respondents Nos. 1 to 6 and the fall out thereof unfolding against currents and cross currents of political vicissitudes. Facts leading to these appeals are as under:

Xxxx

The guideline value has relevance only in the context of Section 47-A of the Indian Stamp Act (as amended by TN Act 24 of 1967) which provides for dealing with instruments of conveyance which are undervalued. The guideline value is a rate fixed by authorities under the Stamp Act for purposes of determining the true market value of the property disclosed in an instrument requiring payment of stamp duty. Thus the guideline value fixed is not final but only a prima facie rate prevailing in an area. It is open to the registering authority as well as the person seeking registration to prove the actual market value of property. The authorities cannot regard the guideline valuation as the last word on the subject of market value. This position is made clear in the explanation to Rule 3 of Prevention of Undervaluation of Instruments Rules. The said explanation reads as follows :-

"Explanation.-the "Guidelines Register" supplied to the officers is intended merely to assist them to ascertain prima facie, whether the market value has been truly set forth in the instruments. The entries made therein regarding the value of properties cannot be a substitute for market price. Such entries will not foreclose the enquiry of the Collector under section 47-A of the Act or fetter the discretion of the authorities concerned to satisfy themselves on the reasonableness or otherwise of the value expressed in the documents."

This explanation also will have to be read in conjunction with explanation to Section 47-A of the Indian Stamp Act (as amended by TN Act 24 of 1967) which reads :-

"Explanation.- For the purpose of this Act, market value of any property shall be estimated to be the price which, in the opinion of the Collector or the Chief Controlling Revenue Authority or the High Court, as the case may be, such property would have fetched or would fetch, if sold in the open market on the date of execution of the instrument of conveyance, exchange gift, release of benami right or settlement."

This scheme of the enactment and Rules contemplate that guideline value will only afford a prima facie basis to ascertain the true or correct market value undue emphasis on the guideline value without reference to the setting in which it is to be viewed will obscure the issue for consideration. It is clear, therefore, that guideline value is not sacrosanct as urged on behalf of the appellants, but only a factor to be taken note of if at all available in respect of an area in which the property transferred lies. In any event, therefore, if for the purpose of Stamp Act guideline value alone is not a factor to determine the value of property, its worth will not be any higher in the context of assessing the true market value of properties in question to ascertain whether the transaction has resulted in any offence so as to give a pecuniary advantage to one party or the other.

 

Un quote:

Honorable Madras High Court has referred to the above judgment of the Supreme Court in context of S.50C which deems valuation made by stamp authority as ‘consideration accruing’.

Such valuation cannot be a basis to determine ‘real income’ of vendor and buyer both.

Even statutory provisions are in fact based on some presumptions that the parties to transaction has undisclosed income. This is great insult of citizens of our country. If a citizen has earned income in reality, he can be taxed but one should not be taxed based on deemed income that is based on presumptions.