2014 (6) TMI 13 - HC - Income Tax

Reference made to valuation officer u/s 50C(2) of the Act Claim of exemption u/s 54EC of the Act - Sale consideration received is fully invested in bonds notified - Held that - The valuation by the departmental valuation officer contemplated u/s 50C is required to avoid miscarriage of justice - The legislature did not intend that the capital gain should be fixed merely on the basis of the valuation to be made by the District Sub Registrar for the purpose of stamp duty - The legislature has taken care to provide adequate machinery to give a fair treatment to the citizen/taxpayer - There is no reason why the machinery provided by the legislature should not be used and the benefit thereof should be refused - Even in a case where no such prayer is made by the learned advocate representing the assessee who may not have been properly instructed in law the AO discharging a quasi-judicial function has the bounden duty to act fairly and to give a fair treatment by giving him an option to follow the course provided by law thus the order is set aside and the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this appeal are:

(a) Whether the Tribunal erred in law by holding that the appellant's reliance on the deeds of conveyance, which recited that the agreed consideration represented the highest prevailing market price, was insufficient to dispute the stamp duty valuation and to invoke reference to the departmental valuation officer under sub-section (2) of Section 50C of the Income-tax Act, 1961;

(b) Whether, upon a proper interpretation of the Income-tax Act, 1961, the entire capital gain would be exempt if the sale consideration received is fully invested in bonds notified under Section 54EC, and whether the Tribunal was justified in law in taking a contrary view.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of reliance on deeds of conveyance and necessity of reference to departmental valuation officer under Section 50C(2)

Relevant legal framework and precedents: Section 50C of the Income-tax Act, 1961, provides that where a capital asset, being land or building, is transferred, and the consideration received or accruing as a result of such transfer is less than the value adopted or assessed or assessable by any authority of the State Government for the purpose of payment of stamp duty, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration received or accruing as a result of such transfer. Sub-section (2) of Section 50C allows the Assessing Officer to refer the valuation to a departmental valuation officer if the assessee disputes the valuation made by the stamp valuation authority, subject to conditions specified in clauses (a) and (b).

Court's interpretation and reasoning: The Court examined the recital in the deeds of conveyance, which explicitly stated that the vendor agreed to sell the land at the highest prevailing market price of Rs. 5,00,000 per deed, aggregating Rs. 10 lakhs. The Court observed that this recital constituted the assessee's case that the sale consideration represented the fair market value and that the valuation of Rs. 35 lakhs made by the District Sub-Registrar for stamp duty purposes was not the fair market value of the property.

The Court reasoned that the assessee could not be deemed to have accepted the higher stamp duty valuation as the fair market value merely because the purchaser paid the stamp duty; the stamp duty liability is on the purchaser and the assessee had no role in fixing or accepting that valuation. Therefore, the assessee's contention that the stamp duty valuation was excessive and not reflective of the fair market value was a legitimate dispute.

The Court further held that in such a situation, the Assessing Officer should have exercised the statutory discretion under Section 50C(2) to refer the matter to the departmental valuation officer to determine the fair market value, rather than mechanically adopting the stamp duty valuation. The Court emphasized that the legislative intent was to provide a fair mechanism for valuation and to avoid miscarriage of justice by relying solely on the stamp duty valuation.

Key evidence and findings: The deeds of conveyance containing the recital of the highest prevailing market price, the District Sub-Registrar's valuation of Rs. 35 lakhs, and the absence of any indication that the assessee accepted the higher valuation were central to the Court's findings.

Application of law to facts: The Court applied Section 50C(2) and found that the conditions for reference to the departmental valuation officer were met, particularly clause (b) relating to the dispute of valuation, since the assessee had challenged the valuation through the deeds. The Court found the Tribunal's and lower authorities' rejection of the assessee's claim to be arbitrary and perverse.

Treatment of competing arguments: The revenue argued that no prayer for reference to the valuation officer was made before the Assessing Officer or CIT(A), and that the conditions of Section 50C(2) were not satisfied. The Court rejected this, holding that the Assessing Officer has a quasi-judicial duty to act fairly and should have given the assessee an option to have the valuation determined by the departmental valuation officer, even if the assessee's legal representatives were not fully instructed.

Conclusions: The Court concluded that the matter should be remanded to the Assessing Officer with directions to refer the valuation to the departmental valuation officer in accordance with law and to conduct the assessment afresh based on such valuation.

Issue (b): Interpretation of Section 54EC regarding exemption of capital gains on investment in specified bonds

Relevant legal framework and precedents: Section 54EC of the Income-tax Act provides exemption from capital gains tax if the capital gains are invested in specified bonds notified by the Central Government within a prescribed period.

Court's interpretation and reasoning: The Court noted that the Tribunal had taken the view that the entire capital gain would not be exempt merely by investing the sale consideration in Section 54EC bonds. The Court, however, did not elaborate extensively on this issue in the judgment, as the primary focus was on the valuation dispute under Section 50C.

Key evidence and findings: The assessee had sold the land for Rs. 10 lakhs and invested the proceeds in Section 54EC bonds, claiming exemption. The revenue and authorities had computed capital gains based on the higher stamp duty valuation of Rs. 35 lakhs.

Application of law to facts: Since the Court found that the valuation must be determined by the departmental valuation officer, the question of exemption under Section 54EC would depend on the capital gains computed on such valuation. The Court implicitly recognized that if the sale consideration as per the deeds is accepted, the exemption claim under Section 54EC would be valid.

Treatment of competing arguments: The Tribunal's contrary view was noted but not expressly overruled; the Court's decision to remit the matter implied that the exemption issue would be reconsidered after correct valuation.

Conclusions: The Court did not make a final determination on this issue but indicated that the exemption claim under Section 54EC should be considered afresh after proper valuation.

3. SIGNIFICANT HOLDINGS

"If the case of the assessee was that the price offered by the buyer was the highest prevailing price in the market, then it is difficult to accept the proposition that the assessee had accepted that the price fixed by the District Sub-Registrar was the fair market value of the property. No such inference can be made as against the assessee because he had nothing to do in the matter. Stamp duty was payable by the purchaser. It was for the purchaser to either accept it or dispute it. The assessee could not, on the basis of the price fixed by the Sub-Registrar, have claimed anything more than the agreed consideration of a sum of Rs. 10 lakhs which, according to the assessee, was the highest prevailing market price."

"In a case of this nature the Assessing Officer should, in fairness, have given an option to the assessee to have the valuation made by the departmental valuation officer contemplated under Section 50C. As a matter of course, in all such cases the Assessing Officer should give an option to the assessee to have the valuation made by the departmental valuation officer."

"The legislature did not intend that the capital gain should be fixed merely on the basis of the valuation to be made by the District Sub Registrar for the purpose of stamp duty. The legislature has taken care to provide adequate machinery to give a fair treatment to the citizen/taxpayer. There is no reason why the machinery provided by the legislature should not be used and the benefit thereof should be refused."

Final determinations:

- The Tribunal and lower authorities erred in law in refusing to refer the valuation to the departmental valuation officer under Section 50C(2) despite the assessee's valid challenge to the stamp duty valuation.

- The matter is remanded to the Assessing Officer with directions to refer the valuation to the departmental valuation officer and to reassess the capital gains accordingly.

- The question of exemption under Section 54EC is to be considered afresh after proper valuation is determined.

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