|COURT:||P&H High Court|
|CORAM:||Deepak Sibal J, S. J. Vazifdar CJ|
|SECTION(S):||45, 48, 55A|
|CATCH WORDS:||capital gains, monetary consideration|
|DATE:||January 24, 2017 (Date of pronouncement)|
|DATE:||January 27, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 45/48: The AO is not bound to accept the consideration stated in the sale deed. In a case where property is sold between arm’s length parties at a gross undervaluation, the onus is on the assessee to explain and if there is no explanation, the AO is entitled to draw an inference. The presumption against the value being understated (not undervalued) is greater where parties are connected or related. However, if the AO does not allege that the assessee received more consideration than is stated in the sale deed, he cannot made an addition to the stated consideration (George Henderson 66 ITR 622 (SC) & Gillanders Arbuthnot 87 ITR 407 (SC) explained)|
The assessee by a sale deed dated 29.04.2005 transferred to M/s Quark City India Pvt. Ltd. land admeasuring 24000 sq. yards in the industrial area of Mohali together with the building constructed thereon for a consideration of Rs. 25.10 crores. The building comprised of a built up area of 13520.27 sq. meters complete with infrastructure and modern facilities permanently embedded including HVAC system, electrical installation, networking equipment, office equipment, drinking water plant, water treatment plant and a swimming pool. The market value of the property sold by the assessee to M/s Quark City India Pvt. Ltd. was about 70 crores and that the assessee and the vendee M/s Quark City India Pvt. Ltd. are inter-connected group companies. The Assessing Officer made a reference to the District Valuation Officer (DVO) under section 55-A of the Act to ascertain the fair market value of the land and the building. The D.V.O. estimated the value of the property at Rs. 70.08 crores. The Assessing Officer accordingly for the purpose of capital gains valued the property at Rs. 70,08,70,000/- after considering in detail the nature of the property and other expenses of sale. He disbelieved the assessee’s contention that the transaction was a bona fide one having been entered into as per the bargain negotiated keeping in view all the market circumstances prevalent at the relevant time. According to him, this is a case where the business substance of the matter should be considered over the form. He held that the transaction was not entered into at the market rate but was so arranged and structured that the assessee had no tax liability on account thereof and was therefore a colourable device to avoid the tax liability. The CIT(A) held that the expression “full value of consideration” used in Section 48 cannot be construed as having a reference to the market value of the asset transferred; that the question of market value does not arise; that what is to be seen is the consideration actually arrived at between the parties for the transaction and that the adequacy or inadequacy of the price bargained between the parties is not relevant. The CIT(A) concluded that the Assessing Officer had erred in considering the fair market value for the purpose of computing the capital gain and that the Assessing Officer had not shown that the assessee had received any consideration other than that mentioned in the sale deed. The CIT(A) further held that the Assessing Officer had unnecessarily emphasized that the price was below the market price as the vendee and the assessee were closely related as this issue is not relevant for the purpose of computing the capital gain. The Tribunal agreed with the CIT(A). On appeal by the department to the High Court HELD dismissing the appeal:
(i) The judgments in CIT v. George Henderson & Co. Ltd. (1967)66 ITR 622, Commissioner of Income Tax, Calcutta v. Gillanders Arbuthnot & Co. (1973) 87 ITR 407 undoubtedly hold that the expression “full value of the consideration” cannot be construed as the market value but as the price bargained for by the parties to the sale. It is necessary for the Assessing Officer to ascertain as to what was the price bargained for by the parties to the sale. The judgment, however, does not support the further submission of the assessee that the price stated in the sale-deed must irrespective of anything also be considered to be the sale price for the purpose of computing the capital gain. In our view this absolute proposition is not well founded. The Assessing Officer must determine whether the price stated in the agreement for sale is in fact the price bargained for by the parties thereto. In other words, the full value of the consideration is neither the market value nor necessarily the price stated in the document for sale but the price actually arrived at between the parties to the transaction. If therefore it is found that the price actually arrived upon between the parties is not the price reflected in the document, it is the price bargained for by the parties to sale that must be considered for determining the capital gain under section 48. The Supreme Court did not hold that inferences cannot be drawn by the Assessing Officer from the facts established. In fact in paragraph-5 the Supreme Court observed that there was no inferential finding that the shares were sold at the market price of ` 620/- per share. This read with the operative part of the order in paragraph-6 remanding the matter to record a finding as to the actual price received makes it clear that the finding can be based on inferences as well. In paragraph-6 the assessee is given an opportunity to explain the unusual nature of the transaction. It cannot be suggested that even if there was no explanation by the assessee, the Assessing Officer was bound not to draw an adverse inference.
(ii) Even on principle we see no reason to denude the Assessing Officer the right to draw an inference especially an irresistible inference. Take for instance a case where the property worth crores of rupees is sold for merely Rs 1 lakh and there is no explanation for the same despite the parties being at arms length. The Assessing Officer is not bound to accept the statement in the sale deed unless he can prove that additional consideration was paid. The initial burden to prove the same is undoubtedly on the Department. But in such a case the onus clearly shift upon the assessee. If the assessee is unable to offer an explanation, the Department must be taken to have discharged the burden. The judgment certainly does not hold that the price mentioned in the document is sacrosanct and that the same must be considered to be the price bargained between the parties to the transaction. That would indeed result in an absurdity for the parties could then by merely stating an incorrect price in the sale deed avoid the tax on capital gains altogether.
(iii) We do not read the observations in paragraph-7 of Commissioner of Income Tax v. Smt. Nilofer I.Singh 2008 SCC (Delhi) 1522 to mean that the consideration referred to in the sale deed cannot be questioned at all. The judgment if read as a whole does not indicate such an absolute or blanket rule. There is nothing in the judgment to indicate that the revenue had contended that the full value of consideration received or accruing was other than what was mentioned in the sale deed. It is probably in that view of the matter that the Division Bench held that the expression “full value of consideration” refers only to the consideration referred to in the sale deed. If, however, that is what was meant, we respectfully disagree. The full value of consideration referred to in Sections 45 and 48 of the Act refers to the full value actually received or accruing and not what the parties merely state or declare in the sale deed as was paid or payable and received or accruing. Such a view would as we mentioned earlier enable a party to avoid the liability to tax on account of capital gains by merely stating the incorrect price to be the consideration for sale or transfer of the asset. That could not have been the intention of the legislature.
(iii) The judgment in Dev Kumar Jain v. Income Tax Officer (2009) 309 ITR 240 (Delhi) proceeded on the basis that there was nothing on record to show that the assessee received a consideration for the sale of the property in excess of that which was shown in the sale-deed. The Division Bench did not take into consideration the effect of the District Valuation Officer having valued the market price at ten times the amount stated in the document. Inferences on that basis were not even suggested. We do not read the judgment as having held that the amount mentioned in the sale document is sacrosanct and is the only basis on which the capital gain is to be computed.
(iv) The price to be considered is the consideration received or accruing as a result of the transfer and not necessarily the price that the assessee states that it received or which has accrued to it. At the cost of repetition a view to the contrary would lead to the absurdity of enabling an assessee to avoid capital gains merely by stating that an incorrect price as having been received by it or accruing to it.
(v) In the case of related parties, there is yet another aspect. The presumption against the value being understated (not undervalued) is greater where parties are connected or related. Their relationship is a factor which could justify a price lower than the market price. Where parties are strangers there must be some explanation for an undervaluation.
(vi) The matter, however, does not end there. In view of the facts of this case the assessee must succeed. Mrs. Suri submitted that there was no finding that the assessee received any consideration other than that shown in the sale agreement. This is correct. The assessment order does not proceed on the basis that the assessee received any amount in addition to what is stated in the sale deed. It proceeds only on the basis that the assessee and the purchaser being related parties, the property was sold at a very low price. The CIT(A) also noted that the Assessing Officer had not shown that the assessee had received any consideration other than the consideration mentioned in the sale agreement. The CIT(A) further noted that the Assessing Officer had unnecessarily emphasized that the assessee and the purchaser were related parties and therefore, the vendee was in a position to exercise influence in the decision of the assessee and hence the assessee sold the property at the price below the market price. The Tribunal also noted this aspect in paragraph-9. The Tribunal observed that it was not the case of the Assessing Officer that the assessee received a consideration more than what was mentioned in the sale deed and that the Assessing Officer had therefore, erred in considering the fair market value.
(vii) We must, therefore, proceed on the basis that it is not the case of the revenue that the assessee received any amount other than what was mentioned in the sale agreement. In this view of the matter and in view of the judgments referred to earlier especially the judgments of the Supreme Court it must follow that there was no occasion for the Assessing Officer to determine the fair market value. The Assessing Officer was only concerned with the amounts actually received by the assessee. The amount actually received was admittedly the amount mentioned in the sale agreement.
(viii) It follows then that the reference to the DVO under section 55A was without jurisdiction. Section 55A opens with the words “with a view to ascertaining the fair market value of a capital asset for the purposes of this Chapter, the Assessing Officer may refer the valuation of capital asset to a Valuation Officer”. However, in view of the judgments of the Supreme Court, what falls for determination under section 48 is not the fair market value of the capital asset but the full value of the consideration received or accruing as a result of the transfer of the capital asset. Section 55A is not redundant on account of this view. It would apply to the provisions of Chapter IV which require the determination of the fair market value of capital assets. Some of these provisions have been noted by the Delhi High Court in Smt. Nilofer I. Singh case (see paragraph-8 quoted above). This is made expressly clear from the judgment of the Supreme Court in Smt. Amiya Bala Paul v. Commissioner of Income Tax (2003) 262 ITR 407.