1. This appeal of the assessee is directed against the order dt. 6th March, 2007 of the CIT(A)-XIV, Kolkata pertaining to asst. yr. 2003-04.
In this appeal by the assessee, the following grounds are raised: 1. The learned CIT(A) erred in upholding the order of the AO passed under Section 143(3) substituting the value adopted by the stamp valuation authorities as the full value of consideration received of Rs. 3,34,42,244 as against Rs. 2,34,00,000 recorded in the record of sale.
2. That the CIT(A) failed to appreciate that during the course of assessment, appellant had challenged the value adopted by the stamp duty authorities and the AO was informed of fair market value adopted under Section 50C where the Department had a right to pre-emptive purchase in lieu of the purchaser.
2. The brief facts leading to this appeal filed by the assessee, as narrated at the time of hearing and also borne out by records are that the assessee individual owned a property No. 63/2/C The Mall, Kanpur, U.P., measuring 1863.10 metres, along with 7 others, which they wanted to transfer to M/s KAN Constructions & Colonizers (P) Ltd., for an apparent consideration of Rs. 2,34,00,000, by an agreement dt. 20th Sept., 2001, which was registered on 28th Nov., 2001. The implementation of the said agreement required "No Objection Certificate" (NOC) from the Appropriate Authority under the IT Act, 1961, in terms of Section 269UC(1), contained in Chapter XX-C of the Act, and accordingly, before registration of the agreement deed, vide case No. RK-126, the assessee and others filed application in Form No.37-1 duly filled in, under Chapter XX-C, before the Appropriate Authority, Lucknow. NOC to the transferors for execution of the instrument in favour of the transferee was granted by the Appropriate Authority vide its order dt. 3rd April, 2002, after obtaining a valuation report from the DVO. which presumably did not say that the sale consideration as mentioned in the agreement for sale was understood. The property was also partly Nozul (leasehold) and to a greater extent freehold at the time, when the agreement for sale was drawn up. However, before the NOC was granted by the Appropriate Authority, the entire property had been got converted as freehold land which point was presumably within the knowledge of the DVO at the time when he prepared his valuation report for the purpose of submitting the same to the Appropriate Authority. On account of the aforesaid transfer of the property, the assessee, having 25 per cent ownership of the property, offered long-term capital gain on the aforesaid sale of the property at Rs. 12,06,169.
3. Finance Act, 2002 introduced a new section viz. Section 50C, w.e.f.
1st April, 2003, which reads as below: Where the consideration received or accruing as a result of the transfer by the assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (stamp valuation authority) for the purpose of payment of stamp duty in respect of such transfer, the value as adopted or assessed shall, for the purpose of Section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.
4. In the instant case, the property under consideration was agreed upon between the transacting parties to be transferred for a total consideration of Rs. 2,34,00,000 under the agreement dt. 20th Sept., 2001. This amount of proposed consideration was mentioned in the application filed on 28th Nov., 2001 by the assessee and others before the Appropriate Authority in terms of the requirement under Chapter XX-C (as existing at the relevant time). The said authority got the property valued by the DVO at Rs. 2,49,34,000 and on that basis, sanction (permission) was granted on 3rd April, 2002 by the Appropriate Authority to execute the transfer of the property (land). In the assessment order passed under Section 143(3) on 31st March, 2005, however, the consideration amount for the transfer was considered by applying the provisions of Section 50C of the Act, at the deemed amount of Rs. 3,34,42,244 being the value adopted by the stamp duty valuation authority, to which the assessee vehemently objects. However, it is required to be mentioned that before making the assessment, the AO, once more (a reference to the DVO had already been made by the Departmental authorities during the course of the proceedings under Chapter XX-C of the Act) made a fresh reference to the DVO for valuing the property at the time of its sale and that the DVO determined the fair market value (FMV) of the property (50 per cent undivided land and building) at Rs. 3.73 crores. Finally, in the assessment order passed on 31st March, 2006, the AO took the full value of consideration of the property sold at Rs. 3,34,42,244 by applying the provisions of Section 50C and computed capital gains on that basis.
5. On behalf of the assessee, three-fold arguments have been made against adoption of the full value of the property at Rs. 3,34,42,244, which are as follow: 5.1 Firstly, it has been argued that for all practical purposes, the property was transferred on 20th Sept., 2001, when the agreement for sale was executed. It has been contended that instead of drawing up an agreement for sale, the property could have, very well, been transferred on that very date or immediately thereafter, had the legal requirements of getting the sanction (permission) of the Appropriate Authority in terms of Chapter XX-C of the IT Act, 1961, not been there. Thus, the assessee was debarred from entering into the transaction (of actual sale of the property) under a legal compulsion. At that point of time, there was no question of applicability of Section 50C of the Act. It has been reiterated that the assessee duly received the sanction (permission) on 3rd April, 2002 i.e. in the next financial year and that almost immediately thereafter, the actual sale of the property was executed at the same price for which both the agreements had been drawn up and the sanction had also been obtained from the Appropriate Authority. The assessee, thus, contends that hence the actual sale of the property should relate back to the date of the agreement being 20th Sept., 2001. For this proposition, reliance has been placed on the decision of Hon'ble Rajasthan High Court in the case of Assam Roller Flour Mills v. CIT holding that subsequent events having bearing on the earlier event would relate back to the said earlier event.
5.2 The second argument of the assessee on this issue is that even the transaction for sale of the property, which was a capital asset in the hands of the assessee, took place in May, 2002, whereas the new Section 50C was inserted in the statute book w.e.f. 1st April, 2003. Thus, the day on which the actual transaction of sale took place, Section 50C was not there in the statute book. On behalf of the assessee, reliance has been placed on the following judgments in support of his contention that in the case of transaction of a capital asset, the law as on the date of the transfer of the capital asset would be applicable: held that the position as to whether the capital asset transferred was a short-term or a long-term capital asset, would he determined on the basis of the law prevailing on the date of the actual transfer (irrespective of the assessment year).
(ii) CIT v. Laxman Singh -In this case, it was held that since "gold ornaments and jewellery" were included within the definition of "capital asset" only w.e.f. 1st April, 1973, sale of gold ornaments and jewellery during the previous year relevant to asst. yr. 1973-74 (i.e. prior to 1st April, 1973) would not attract any capital gains.
this case, the Hon'ble Supreme Court held,-"It is well-settled that the main test for determining the taxable event is that on the happening of which the charge is affixed...The taxable event is that which on its occurrence creates or attracts the liability to tax.
5.3 The learned Counsel for the assessee also wanted to rely on the discussions made by Kanga & Palkhiwala at p. 190 (last para) of their famous treatise on Income-tax Laws. (Vol. 1) to the effect that in case of capital gains tax, it is the law which was there at the time of transfer which should be followed.
6. On the other hand, the learned Departmental Representative has relied on the following judgments (some of which are found to be nonexistent) in support of his contention that the law prevailing on the first day of the assessment year should be taken into consideration: the law in force as on 1st April of the assessment year would be applicable for allow ability of expenses.CIT v. Venkateswara Hatcheries (P) Ltd. having no direct relevance with the issue under consideration.
7. The learned Counsel for the assessee in his rejoinder submitted that though for normal business transactions, the law as on the first day of the relevant assessment year may be applicable, the position would, however, be different in case of transactions relating to capital gains. It has been reiterated that as held by the Hon'ble Gujarat and Rajasthan High Courts in the decisions as mentioned above, in case of capital gains, the law as prevalent on the date of the transaction (transfer of the capital asset) would have to be taken into consideration. The learned Departmental Representative also admitted during the course of the hearing of the appeal that the aforesaid decisions of the Gujarat and Rajasthan High Courts would help the assessee's case. It has also been submitted by the learned Counsel for the assessee that even if there be some conflicting judgments on this issue, the ones which are favourable to the assessee, should be followed, as has been laid down by the apex Court in the case of CIT v.Vegetable Products Ltd. .
7.1 As the third limb of argument, the learned Counsel for the assessee has relied on the principle of substantial justice required to be meted out by the judicial authorities. It has been argued that in this case, the consideration amount mentioned in the agreement for transfer of the asset under discussion, was approved by the Appropriate Authority on the basis of a valuation of the property made by the DVO at the figure of Rs. 2,49,34,000, which was within the permissible limit of 15 per cent of the apparent value of consideration as mentioned in the agreement. Had the Appropriate Authority granted the sanction (permission) during the relevant financial year itself the transaction could have been completed before the end of the financial year and therefore, the assessee's case would, in no case, have come under the mischief of the newly introduced Section 50C of the IT Act 1961. Hence, it has been submitted that so far as the adequacy of the apparent consideration amount is concerned, there was no doubt with the Appropriate Authority, which is nothing but a wing of the IT Department. It has been pointed out that simply because of the delay in granting the sanction by the said authority, the actual process of sale of the asset got somewhat delayed and the question of operability of Section 50C crept in. The learned Counsel for the assessee has submitted in this connection that the very purpose of the erstwhile Chapter XX-C and Section 50C of the IT Act 1961 was the same, viz.
prevention of undervaluation of assets in the matter of their transfers and underpayment of capital gains tax thereby and Section 50C was meant to replace the erstwhile Chapter XX-C. However, due to certain factors beyond the control of the assessee, an overlapping period of 3 (three) months viz. from 1st April, 2002 to 30th June, 2002 (from which date Chapter XX-C lost its operation) came in the picture during which period, both the provisions remained in force.
In any case, it has been pointed out that the amount of apparent consideration as mentioned by the assessee in the agreement for sale of the property was not only approved by the Appropriate Authority by granting sanction for the transaction, but also strictly adhered to by the assessee and others in the final sale transaction. In view of this factual position, it has finally been submitted that it would be gross injustice to the assessee if his case be considered to be subject to the provisions of the newly introduced Section 50C and the amount of consideration actually received by him and as also considered by the Departmental authority to be adequate, be substituted by a highly exaggerated figure adopted by the stamp duty valuation authority solely for their own purposes. On the other hand, taking into consideration, the facts of the case as narrated above, it has been submitted that for the sake of meting out substantial justice, the amount of consideration as per the agreement be accepted without any interference. from the angle of Section 50C. 7.2 The learned Counsel for the assessee has further argued that when a valuation report prepared by the DVO for determining the FMV of the property at the time of its sale was already on record, making a further reference to the DVO by the AO for the same purpose was unjustified redundant and in that way illegal too. It has also been pointed out that whereas what the assessee sold away was only 'land', in the latter valuation report dt. 24th March, 2006 the DVO also included the value of constructed area at Rs. 1,85,000.
However, at the same time, in their valuation, the stamp duty valuation authority had included an amount of Rs. 54,02,187 towards value of the constructed area. The learned Counsel for the assessee has thus argued that firstly the huge discrepancy in the estimations of the value of the constructed area as done by the DVO (at the stage of the assessment) and by the stamp duty valuation authority reflects the lack of reality in the matter of such estimations and secondly since both the authorities included the value of the constructed area also in their valuations (ultimately, the valuation as done by the stamp duty valuation authority included the value of the constructed area also), whereas the assessee only sold 'land', such valuations have no sanctity at all and should, therefore, be discarded.
8. On a proper appreciation of the facts of the case, we find much substance in the arguments made on behalf of the assessee. This is a peculiar case where the assessee, for reasons not attributable to him, suffered actions by the Department on the same ground of inadequacy of consideration for transfer of capital asset from two different angles, viz. acquisition proceedings by the Appropriate Authority and then again the application of the deeming provisions of Section 50C of the Act. Section 50C came into effect from 1st April, 2003. Hence, it would cover in a general manner the entire 'previous year' 1st April, 2002 to 31st March, 2003. The legislature certainly did not want that both the penal provisions should exist side by side. However, due to some misunderstanding somewhere, there was an overlapping period for three months, viz. from 1st April. 2002 to 30th June, 2002 and due to the misfortune of the present assessee, his case became target of both the provisions and that too not because of any fault on his part but on account of the delay on the part of Appropriate Authority to grant NOC to the proposed sale agreement. It is also a fact that ultimately, the sale was carried on at the price as mentioned in the agreement for sale in respect of which NOC had been granted by the Appropriate Authority.
We also find that even the ultimate sale of the property also took place in May, 2002, when the provisions of Chapter XX-C were still operative. Hence, in our considered view, during the overlapping period, only the earlier restrictive provisions of Chapter XX-C would be applicable and not the provisions of Section 50C introduced later.
Furthermore, this is the case of transfer of a capital asset which is not a continuous process like a business. Hence, the law actually existing on the date of transfer of the capital asset should be taken into consideration. The learned Counsel for the assessee has aptly placed reliance on various case law as mentioned above in support of his contention in this regard. From this angle also as well as from the angle of avoidance of double jeopardy, we hold that the assessee's case should be considered to be coming within the mischief of Chapter XX-C alone and not of Section 50C of the IT Act, 1961.
9. The other contention on behalf of the assessee that from the angle of substantial justice also, the assessee's point must be upheld also deserves mention in this connection. The assessee should not be made to suffer simply because of delay on the part of the Appropriate Authority in granting the sanction under Chapter XX-C. It is required to be kept in mind in this connection that Appropriate Authority is also nothing but a wing of the IT Department and one wing of the Department, viz.
the AO cannot take advantage of the delay on the part of the other wing in hitting the assessee. Again the valuation of the stamp duty has been made in respect of the entire property only including even the structure on the land. The assessee, while computing the capital gains on transfer of the property (land) has taken into consideration only the scrap value of the structure, which was the appropriate thing to do. Hence, evaluating the structure as an existing one and having substantial value (as has been done by the stamp duty valuation authority) and including the same within the deemed consideration of the property transferred by the assessee does not seem to the correct thing to do. This has lead to a situation where the correlation between the property sold by the assessee and that considered by the stamp duty valuation authority gets missing. On this basis also, the application of the valuation as adopted by the stamp duty valuation authority to the present case becomes inappropriate. Ultimately, therefore, considering all the different angles as discussed by us above, we are of the view that the adoption of the valuation as considered by the stamp duty valuation authority for the purpose of computation of the capital gains in the instant case, is improper and hence, requires to be rejected. On the other hand, we direct that the amount of consideration as mentioned in the agreement of sale, which was ultimately approved by the Appropriate Authority by granting NOC to the assessee and others and also acted upon in the final sale ' transaction, should alone be taken into consideration for computation of capital gains. In other words, the computation of capital gains as shown by the assessee is being directed to be taken into account.
The AO erred and CIT(A) wrongly confirmed action of the AO in having referred valuation of the property at 63/2/C The Mall, Kanpur for valuing cost of acquisition at the fair market value as on 1st April, 1981 although the appellant had already furnished approved valuer (report in) respect of valuation.
11. The additional ground being purely legal in character and the decision on the said ground not requiring any material outside the materials already on record, the same has been admitted and is being deliberated upon as below.
11.1 It has been argued before us in this connection by the learned Counsel for the assessee that the prerequisite conditions for referring the valuation of a property to the DVO. as per the provisions of Section 55A of the Act in the matter of computation of capital gains on transfer of assets, are as follow: (a) in a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, if the AO is of the opinion that the value so claimed is less than its fair market value; (i) that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than such percentage of the value of the asset as so claimed or by more than such amount as may be prescribed in this behalf; or (ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do.
11.2 In the instant case, it has been argued that since at the assessment stage, a valuation report prepared by a registered valuer was furnished by the assessee in support of the claim of the value of the asset (land) transferred by the assessee as on 1st April, 1981, only the Clause (a) as mentioned above can be applicable.
However, it has been argued that it is the contention of the AO that the valuation of the asset as on 1st April, 1981, instead of being undervalued by the registered valuer was rather overvalued by him.
That is why a reference was made to the DVO, who actually valued the property at a lesser figure and the said valuation made by the DVO was finally accepted by the AO. No other relevant circumstances have also been cited by the AO in the assessment order which may be said to justify reference being made to the DVO in this matter. In this connection, reliance has been placed on behalf of the assessee to the judgment of the Gujarat High Court in the case of M.V. Shah, Official Liquidator, Anant Mills Ltd. v. U.J. Matain and Anr. (1994) 117 CTR (Guj) 170 : (1994) 209 1TR 568 (Guj) holding that under similar facts and circumstances, reference to the DVO was not in accordance with law and had to be quashed. It has been argued that in view of the clear legal position as narrated above and also the abovementioned judgment of the Gujarat High Court, the reference as made by the AO to the DVO in the matter of valuation of the asset (land) as on 1st April, 1981 be declared as illegal and hence, the valuation as made by the DVO in this regard he ordered to be inapplicable.
12. We have examined the facts of the case and also considered the legal position. We find that actually the AO considered the valuation as made by the registered valuer of the asset (land) transferred, as on 1st April, 1981 to be exaggerated and that is why he referred the valuation to the DVO, who actually made a lower valuation, which was again accepted by the AO and acted upon in the matter of computation of the capital gains on the transfer of the asset (land) under consideration. Hence, the provisions, of Section 55A in the matter of making reference to DVO were not satisfied.
13. The learned Departmental Representative has argued that the reference was made under Section 50C and not under Section 55A. His argument, however, cannot be accepted. A reference under Section 50C can be made only, in respect of the valuation of the asset at the time of its transfer which has given rise to the occasion for levy of capital gains tax. Such reference cannot be made for the purpose of evaluating the asset as on 1st April, 1981. The stamp duty valuation authority is, in no way concerned with valuation of the property on such date. Hence, we are of the considered opinion that there is no provision in the IT Act, 1961, which can justify reference of the valuation as on 1st April, 1981 in the instant case, especially when a valuation report prepared by a registered valuer had already been filed by the assessee.
14. Hence, ultimately, we hold the reference to the DVO as made by the AO on this matter to be illegal which cannot be taken into account in computing the capital gains on the transfer of the asset (land) under consideration. We, therefore, direct that as the assessee actually filed a valuation report duly prepared by a registered valuer, which could not be disputed by the AO in a proper manner, the valuation of the asset (land) as on 1st April, 1981, as done by the registered valuer, is alone required to be taken into consideration in computation of the capital gains on the transfer of the asset (land) under consideration. We order accordingly.