ORDER
K. Raviraja Pandian, J.
1. In all these cases, the constitutional validity of Section 50C of the IT Act, 1961 introduced by Finance Act, 2002 with effect from the asst. yr. 2003-04 is questioned.
2. The grounds of attack and argument made for and against are one and the same, though the transferred capital asset involved and the consideration received is different in each of the case, which is immaterial to decide the validity of the provision. Hence, Writ Petn. No. 4387 of 2003 is taken up as a typical case for the purpose of narration of facts:
The writ petitioner K.R. Palanisamy is an assessee on the file of the ITO, Tirupur. The assessee on 3rd June, 1981 purchased plot Nos. 9 and 10 from one S. Krishnamoorthy and S. Subramani and was in possession and enjoyment of the same. The assessee decided to sell the said property. Plot No. 9 was sold to one E. Vignesh Velavan on 15th July, 2002. He was able to get only a sale consideration of Rs. 3 lakhs due to recession. However, the guideline value for the said plot for the purpose of stamp duty was Rs. 9,89,140. Similarly, in respect of plot No. 10, it was sold to one A.K. Muthusamy on 26th Aug., 2002. The petitioner was able to get a sum of Rs. 3 lakhs as sale consideration, whereas the guideline value for the said property was Rs. 9,90,945. Thereafter the affidavit is silent and there is nothing stated about the further course of action taken by the AO. No cause of action for challenging the statutory provision has been stated. However, the petitioner has chosen to challenge Section 50C on the aforesaid facts. As the constitutional validity has been challenged, we are of the view that the facts of the other cases are not very material.
3. Mr. V. Ramachandran, Mr. Arvind Datar, learned senior counsel appearing for the petitioners/assessees spearheaded the argument, which was adopted and supplemented by Mr. Jayakumar, Mr. Balachandran, Mr. Vaideeswaran and other learned Counsel appearing in respect of their respective cases with reference to the transaction made therein on the following grounds.
4. It is contended that the power of Central legislature to levy tax on capital gains arises under Entry 82 List I of Sch. VII of the Constitution of India. Although the word 'income' has to be interpreted in a liberal sense, the amount sought to be taxed must bear a reasonable relation to the concept of income. It cannot be a fanciful or imaginary amount. The entry authorises the respondents to legislate enactment or provision for levy of tax on the income other than agricultural income. But under the impugned provision, an artificial or deemed income which never accrued or received or contracted by the assessee is sought to be taxed. Either in the Memorandum Explaining the Finance Bill, 2002 addressed by the Finance Minister or in the Circular No. 8 of 2002 dt. 27th Aug., 2002 (2002) 178 CTR (St) 9 explaining the provision by the Central Board of Direct Taxes (hereinafter referred to as 'CBDT'), nothing has been stated as to the kind of mischief sought to be cured or the object of the provision. Hence, the provision Section 50C is liable to be quashed on the ground of lack of legislative competence. In order to support this contention, reliance has been made in the case of State of Rajasthan v. Rajasthan Chemists Association : 2006(202)ELT217(SC) .
5. It is further contended that Section 50C levies capital gains tax in all cases where the full market value is more than the sale consideration. It fails to take note of genuine cases, where the sale consideration would be less than the full market value. For varied reasons, the assessee may be compelled to sell the capital assets for lower price than the market price. However, under the impugned provision, there is no remedy for the AO to grant the reliefs in genuine cases. Reliance has been made to the decisions of K.T. Moopil Nair v. State of Kerala : [1961]3SCR77 , State of Kerala v. Haji Kutty : [1969]1SCR645 and New Maneck Chowk Spinning & Weaving Mills v. Ahmedabad Municipality : [1967]2SCR679 .
6. The measure of tax must be on the income received on the transfer of capital assets. The full market value is a fictional value. Undue emphasis should not be placed on the full market value. Reliance has been made on R. Sai Bharathi v. J. Jayalalitha : 2004CriLJ286 and Sakthi & Co. v. C. Desigachary : (2006)2MLJ295 .
7. It is further elaborated that the guideline value is normally fixed for survey numbers or particular area. Within that area, the value of the property may differ widely depending upon the access to main road, width of road, facing the plot and other locational advantages and disadvantages. When examining the constitutional validity of a provision on the touchstone of fundamental rights, the effect of the provision assumes significance. If the provision has a burdensome effect on the fundamental rights of the petitioner, it has to be struck down. Reliance has been made on the judgment of the Supreme Court in R.C. Cooper v. Union of India : [1970]3SCR530 .
8. It is further contended that Section 50C is arbitrary in nature and a remedyless provision. No opportunity is provided to the aggrieved assessees to establish that the sale consideration was genuinely less than the market value. All the sales of properties are deemed to have understated the consideration if the fair market value is higher than the contracted value. Reliance has been made to support this contention in the case of Union of India v. A. Sanyasi Rao : [1996]219ITR330(SC) .
9. It is further contended that Sections 50C(2) and 50C(3) are unworkable provisions and Sub-section (2) will apply only when the assessee can establish that the value adopted by the stamp authorities is higher than the market value, but stamp duty is paid by the buyers. It is of no concern to the seller as to what is the actual value adopted. His only concern is that he has received the sale consideration. These two sub-sections do not provide for any remedy in cases where there is undervaluation or undisclosed consideration.
10. It is further contended that the property developers were excluded from the provision. The object of Section 50C is to check tax evasion by persons disclosing a lower value of the property transferred. Section 50C applies only where the land or building is a capital asset. But companies/firms which purchase large amounts of land, retain them as land banks and then sell them at a profit escape Section 50C as the asset is a trading asset/stock-in-trade. Any tax evasion by these persons will remain unchecked as there is no deeming provision that the difference between the guideline value and the sale price is to be included under the heading 'Profits and gains of business or profession'. The failure to cover such companies/firms is discrimination and violative of Article 14. If the object is to check tax evasion, then there is no justification to exclude such companies/firms which have the highest sales of such lands/buildings.
11. It is also further contended that Section 50C creates 'conclusive evidence' that any difference between guideline value and sale consideration is deemed consideration. Any presumption about attempts to evade tax is rebuttable and an opportunity must be given to the assessee to show cause that such presumption drawn is incorrect. In case of immovable property, there could be several bona fide considerations which may induce the seller to sell the property less than the market value. Hence, in the absence of any opportunity to the assessee, the provision is violative of principles of natural justice. Reliance has been made in the case of C.B. Gautam v. Union of India : [1993]199ITR530(SC) .
12. It is further contended that there are various 'special provisions' prescribing a particular percentage as the quantum of taxable profits like Sections 44AC, 44AD and 44BBB. In each of these sections, an opportunity is given to the assessee to show that the amount of profit is less than the prescribed percentage. But in the impugned provision, that opportunity is not given.
13. It is also contended that it is not possible to read down Section 50C as the provisions are beyond legislative competence/and violative of Articles 14 and 265 of the Constitution of India. Reliance has been made to support the contention to the case of Delhi Transport Corporation v. D.T.C. Mazdoor Congress : (1991)ILLJ395SC .
14. The learned Counsel appearing for the Revenue submitted that the provision Section 50C is inserted only to check black money and undervaluation of capital assets, thereby evasion of tax. The Central legislature has competence to enact the provision to arrest or check the leakage of revenue under Entry 82 List I of the Constitution of India. The Central legislature has power to choose person and transaction to levy tax which cannot be questioned. The classification made is reasonable. There is intelligible differentia in the classification made. The impugned provision is not discriminatory. The legislature is competent to remove the infirmities pointed out by the Court even retrospectively. The provision cannot be regarded as arbitrary. The assessee has been given ample opportunity to prove the bona fide of the transaction either before the authorities under the Stamp Act or before the AO. All the objections raised and arguments made are only imaginary. The provision conforms the constitutional requirements.
15. Before adverting to the rival contentions of the parties, we are of the view that it is apropos to refer the statutory provisions. Section 45 of the IT Act reads as follows:
Capital gains.-Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 53, 54 and 54B, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place.
Section 48 of the IT Act reads as follows:
48. Mode of computation-The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.
Section 50C of the IT Act reads as follows:
Special provision for full value of consideration in certain cases: (1) Where the consideration received or accruing as a result of the transfer by an 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 (hereafter in this section referred to as the: 'stamp valuation authority') for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of Section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.
(2) Without prejudice to the provisions of Sub-section (1), where:
(a) the assessee claims before any AO that the value adopted or assessed by the stamp valuation authority under Sub-section (1) exceeds the fair market value of the property as on the date of transfer;
(b) the value so adopted or assessed by the stamp valuation authority under Sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, Court or the High Court,
the AO may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of Sub-sections (2), (3), (4), (5) and (6) of Section 16A, Clause (i) of Sub-section (1) and Sub-sections (6) and (7) of Section 23A, Sub-section (5) of Section 24, Section 34AA, Section 35 and Section 37 of the WT Act, 1957 (27 of 1957), shall, with necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the AO under Sub-section (1) of Section 16A of that Act.
Explanation: For the purposes of this section, 'Valuation Officer' shall have the same meaning as in Clause (r) of Section 2 of the WT Act, 1957 (27 of 1957).
(3) Subject to the provisions contained in Sub-section (2), where the value ascertained under Sub-section (2) exceeds the value adopted or assessed by the stamp valuation authority referred to in Sub-section (1), the value so adopted or assessed by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer.
Section 47A of the Indian Stamp Act, 1899 reads thus:
Instruments of conveyance etc., undervalued how to be dealt with.: (1) If the registering officer appointed under the Indian Registration Act, 1908 (Central Act XVI of 1908) while registering any instrument of conveyance, exchange, gift, release of benami right or settlement has reason to believe that the market value of the property of which is the subject matter of conveyance, exchange, gift, release of benami right or settlement, has not been truly set forth in the instrument he may, after registering such instrument, refer the same to the Collector for determination of the market value of such property and the proper duty payable thereon.
(2) On receipt of a reference under Sub-section (1), the Collector shall, after giving the parties a reasonable opportunity of being heard and after holding an enquiry in such manner as may be prescribed by rules made under this Act, determine the market value of the property which is the subject matter of conveyance, exchange, gift, release of benami right or settlement, and the duty as aforesaid. The difference, if any, in the amount of duty, shall be payable by the person liable to pay the duty.
(3) The Collector may, suo motu or otherwise, within five years from the date of registration of any instrument or conveyance, exchange, gift, release of benami right or settlement, not already referred to him under Sub-section (1), call for and examine the instrument for the purpose of satisfying himself as to the correctness of the market value of the property which is the subject matter of conveyance, exchange, gift, release of benami right or settlement, and the duty payable thereon and if after such examination, he has reason to believe that the market value of the property has not been truly set forth in the instrument, he may determine the market value of such property and the duty as aforesaid in accordance with the procedure provided for in Sub-section (2). The difference, if any, in the amount of duty, shall be payable by the persons liable to pay the duty:
Provided that nothing in this sub-section shall apply to any instrument registered before the date of commencement of the Indian Stamp (Tamil Nadu Amendment) Act, 1967.
(4) Every person liable to pay the difference in the amount of duty under Sub-section (2) or Sub-section (3) shall, pay such duty within such period as may be prescribed. On default of such payment, such amount of duty outstanding on the date of default shall be a charge on the property affected in such instrument. On any amount remaining unpaid after the date specified for its payment, the person liable to pay the duty shall pay, in addition to the amount due, interest at two per cent per month on such amount for the entire period of default.
(5) Any person aggrieved by an order of the Collector under Sub-section (2) or Sub-section (3) may appeal to such authority as may be prescribed in this behalf. All such appeals shall be preferred within such time, and shall be heard and disposed of in such manner, as may be prescribed by rules under this Act.
(6) The Chief Controlling Revenue Authority may, suo motu, call for and examine an order passed under Sub-section (2) or Sub-section (3) and if such order is prejudicial to the interest of Revenue, he may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may initiate proceedings to revise, modify or set aside such order and may pass such order thereon as he thinks fit.
(7) The Chief Controlling Revenue Authority shall not initiate proceedings against any order passed under Sub-section (2) or Sub-section (3) if,:
(a) the time of appeal against that order has not expired; or
(b) more than five years have expired after the passing of such order.
(8) No order under Sub-section (6) adversely affecting a person shall be passed unless that person has had a reasonable opportunity of being heard.
(9) In computing the period referred to in Clause (b) of Sub-section (7), the time during which proceedings before the Chief Controlling Revenue Authority remained stayed under the order of a Court shall be excluded.
(10) Any person aggrieved by an order of the authority prescribed under Sub-section (5) or the Chief Controlling Revenue Authority under Sub-section (6) may, within such time and in such manner, as may be prescribed by rules made under this Act, appeal to the High Court.
Sections 47A and 75 of the Indian Stamp Act, 1899 empower the State Government to make rules to carry out the purpose of the Act. Invoking the said power, the State Government framed the Rules called Tamil Nadu Stamp (Prevention of Undervaluation of Instruments) Rules, 1968. Rules 4 and 5 of the Tamil Nadu Stamp Rules, 1968, which are relevant, reads as follows:
4. Procedure on receipt of reference under Section 47A.: (1) On receipt of a reference under Sub-section (1) of Section 47A, from a registering officer, the Collector shall issue a notice in Form-I,
(a) to every person by whom, and
(b) to every person in whose favour the instrument has been executed,
informing him of the receipt of the reference and asking him to submit to him his representations, if any, in writing to show that the market value of the property has been truly set forth in the instrument, and also to produce all evidence that he has in support of his representation, within 21 days from the date of service of the notice.
(2) The Collector may, if he thinks fit, record a statement from any person to whom a notice under Sub-rule (1) has been issued.
(3) The Collector may for the purpose of his enquiry:
(a) call for any information or record from any public office, officer or authority under the Government or any local authority;
(b) examine and record statements from any member of the public, officer or authority under the Government or the local authority; and
(c) inspect the property after due notice to the parties concerned.
(4) After considering the representations, if any, received from the person to whom notice under Sub-rule (1) has been issued, and after examining the records and evidence before him, the Collector shall pass an order in writing provisionally determining the market value of the properties and the duty payable. The basis on which the provisional market value was arrived at shall be clearly indicated in the order.
5. Principles for determination of market value.: The Collector shall, as far as possible, have also regard to the following points in arriving, at the provisional market value,:
(a) In the case of lands:
(i) classification of the land as dry, manavai, wet and the like;
(ii) classification under various tarams in the settlement register and accounts;
(iii) the rate of revenue assessment for each classification;
(iv) other factors which influence the valuation of the land in question;
(v) points, if any, mentioned by the parties to the instrument or any other person which requires special consideration;
(vi) value of adjacent lands or lands in the vicinity;
(vii) average yield from the land, nearness to road and market, distance from village site, level of land, transport facilities, facilities available for irrigation such as tank, wells and pump sets;
(viii) the nature of crops raised on the land; and
(ix) the use of land, domestic, commercial, industrial or agricultural purposes and also the appreciation in value when an agricultural land is being converted to a residential, commercial or an industrial land.
(b) In the case of house sites:
(i) the general value of house sites in the locality;
(ii) nearness to roads, railway station, bus route;
(iii) nearness to market, shops and the like;
(iv) amenities available in the place like public offices, hospitals and educational institutions;
(v) development activities, industrial improvements in the vicinity;
(vi) land tax valuation of sites with reference to taxation records of the local authorities concerned;
(vii) any other features having a special bearing on the valuation of the site; and
(viii) any special feature of the case represented by the parties.
(c) In the case of buildings:
(i) type and structure;
(ii) locality in which constructed;
(iii) plinth area;
(iv) year of construction;
(v) kind of materials used;
(vi) rate of depreciation;
(vii) fluctuation in rates;
(viii) any other features that have bearing on the value;
(ix) property tax with reference to taxation records of local authority concerned;
(x) the purpose for which the building is being used and the income if any, by way of rent per annum secured on the building; and
(xi) any special feature of the case represented by the parties.
(d) Properties other than lands, house sites and buildings:
(i) the nature and condition of the property;
(ii) purpose for which the property is being put to use; and
(iii) any other special features having a bearing on the valuation of the property.
16. Section 48 of the IT Act provides for mode of computation of capital gains. Section 50C has been introduced from 1st April, 2003 by the Finance Act, 2002. The conspectus of the provision is that it is a special provision for full value of consideration in certain cases. It applies to all cases of transfer of capital assets. If the consideration received or accruing as a result of the transfer by an assessee, of land or building or both, is less than the value adopted or assessed by the State authority for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration received and capital gains shall be computed accordingly under Section 48 of the IT Act. The section further provided that where the assessee claims that the value adopted or assessed for stamp duty exceeds the fair market value of the property as on the date of transfer or he has not disputed the value so adopted or assessed in any appeal or revision or reference before any authority or Court, the AO may refer the valuation of the asset to the Valuation Officer in accordance with Section 16A of the WT Act. If the fair market value determined by the, Valuation Officer is less than the value adopted for stamp duty purpose, the AO may take such fair market value to be the full value of consideration. If the fair market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty, the AO shall adopt the fair market value assessed for stamp duty purpose.
Point No. 1 : Whether the Central legislature is competent to enact Section 50C of the IT Act
17. Let us consider the legislative competence of the Parliament in inserting the provision Section 50C in the IT Act. It is obvious from the reading of the above provision and rather it is not disputed that the same is inserted to prevent large scale undervaluation of the real value of the property in the sale deed so as to defraud Revenue the Government legitimately entitled to by pumping in black money. The impugned provision has been incorporated to check such evasion of tax by undervaluing the real properties. Article 246 of the Constitution of India gives exclusive power to the Parliament to make law in respect of the matters enumerated in List I of Seventh Schedule(Union List). Entry 82 List I of Seventh Schedule empowers the Parliament to levy tax on income other than agricultural income. The legislative competence of the Parliament in enacting statute or inserting provision for arresting leakage of income has been considered by the apex Court in several cases. The uniform opinion in all those cases is that the entries in the legislative list should be construed more liberally and in their widest amplitude and not in a narrow or restricted sense. Each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended by it. The expression 'income' as defined in the IT Act under Section 2(24) cannot be read back into Entry 82 of List 1 of the Seventh Schedule to the Constitution. Even the said definition is an inclusive one and has been expanding from time to time. Several items have been brought within the definition from time to time by various amending Acts. The said definition cannot therefore be read as exhaustive of the meaning of the expression 'income' occurring in Entry 82 of List I of the Seventh Schedule. The said Entry should be widely and liberally construed so as to enable a legislature to provide by law for the prevention of evasion of income-tax. Tax could be evaded by breaking the law or could be avoided in terms of the law. When there is a factual avoidance of tax in terms of law, the legislature steps into amend the IT law to catch such an income within the net of taxation. [See Punjab Distilling Industries v. CIT AIR 1965 SC 1862 (Constitution Bench), Balaji v. CIT : [1961]43ITR393(SC) (Constitution Bench), Bhagwan Dass Jain v. Union of India : [1981]128ITR315(SC) , Asstt. Director of Inspection (Inv.) v. A.B. Shanthi : [2002]254ITR258(SC) and Union of India v. A. Sanyasi Rao : [1996]219ITR330(SC) .
18. The Constitution Bench of the apex Court in R.K. Garg v. Union of India : [1982]133ITR239(SC) observed as follows:
Another rule of equal importance is that laws relating to economic activities should be viewed with greater, latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or strait-jacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the legislature. The Court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Doud where Frankfurter, J. said in his inimitable style:
In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The legislature after all has the affirmative responsibility. The Courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the Judges have been overruled by events-self limitation can be seen to be the path to judicial wisdom and institutional prestige and stability.The Court must always remember that 'legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry'; 'that exact wisdom and nice adaptation of remedy are not always possible' and that 'judgment is largely a prophecy based on meagre and uninterrupted experience'. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what may one call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The Courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Reig Refining Company, be converted into Tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues.
19. Even the special provision, which provides for collection of income-tax on profits and gains from trading in goods specified under Sections 44AC and 206C of the IT Act on a presumptive basis have been upheld by the Supreme Court in the case of Union of India and Anr. v. A. Sanyasi Rao and Ors. (supra).
20. Even in the case of K.P. Varghese v. ITO : [1981]131ITR597(SC) , Section 52(2) of the IT Act has not been struck down on this ground. But it was only directed to be read down by giving certain direction.
21. In the case of State of Rajasthan v. Rajasthan Chemists Association (supra) relied on by the learned Counsel to contend that the impugned provision is hit by legislative competence, the question with reference to Section 4A of the Rajasthan Sales-tax Act as to whether the maximum retail price (MRP) which would be chargeable by a retailer when he sells the goods to consumer can provide a basis for the wholesaler to levy tax, was considered. While considering the issue with reference to the definition to the terms 'turnover', 'taxable turnover' and 'taxable event', the Supreme Court has held that the MRP which a wholesaler could charge in respect of scheduled formulations is fixed by control order. In respect of scheduled formulations wholesaler is required to leave at least 16 per cent margin in the MRP for the retailers and he is entitled to retain not more than 8 per cent profit on the purchase price. There being statutory interdiction against the wholesalers to charge MRP from its buyer, the maximum retail price fixed on the packet has no rational connection with the taxable sale effected by the wholesalers and which becomes subject matter of charge as a first point tax. In such event, there exists no nexus between the measure of levy and subject of levy. We are of the view that the above judgment no way advance the case of the petitioner as to the legislative competence of the Central legislature to frame the provision impugned.
22. For the foregoing reasons, and in the light of the judgments of the apex Court referred to above, we are of the considered view that the provision impugned is validly enacted and not hit by legislative incompetence of Central legislature.
Point No. 2 : Whether the impugned provision is arbitrary because of adoption of guideline value, violative of Article 14, principles of natural justice and no opportunity is given
23. It is contended that the section fixes the guideline value as full value against the declared value and fails to take note of the genuine cases where the sale consideration would be less than the fair market value as determined by the authorities under the Stamp Act on the premise that for varied reasons a person may compel to sell the capital goods for lower price than the market value and the guideline value cannot form basis for determination of the full value and no opportunity is given to the assessee to establish the real sale consideration.
24. Every safeguard has been provided under the provisions of the Stamp Act to the petitioner to establish before the authorities as to the real value for which the capital asset has been transferred. As per the provision Section 47A of the Stamp Act, if the registering authority has reason to believe that the market value of the property, which is the subject matter of transfer, has not been truly set forth in the instrument, he would after registering such instrument, refer the same to the Collector for determination of the market value of such property. On receipt of the reference, the Collector shall, after giving the parties a reasonable opportunity of being heard and after holding an enquiry in such manner as may be prescribed by rules made under the Stamp Act determine the market value of the property.
25. Rule 4 of the Tamil Nadu Stamp (Prevention of Undervaluation of Instruments) Rules, 1968 provides the procedure on receipt of reference of the instrument under Section 47A. As per Rule 4, on receipt of a reference under Sub-section (1) of Section 47A, from a registering officer, the Collector shall issue a notice in Form I, to every person by whom, and to every person in whose favour the instrument has been executed, informing him of the receipt of the reference and asking him to submit to him his representations, if any, in writing to show that the market value of the property has been truly set forth in the instrument, and also to produce all evidence that he has in support of his representation, within 21 days from the date of service of the notice. Further, if necessary, the Collector may record a statement from persons to whom a notice under Sub-rule (1) has been issued, which included the assessee, the transferor. The Collector may even inspect the property after due notice to the parties concerned. After considering the representations, received from the person to whom notice under Sub-rule (1) has been issued, and after examining the records and evidence before him, the Collector would pass an order in writing provisionally determining the market value of the properties and the duty payable thereon. Rule 5 of the Rules provides for principles for determination of market value, which has been already extracted supra.
26. After so arriving the provisional market value, the Collector shall communicate the copy of his order provisionally determining the market value of the properties, to all the persons and further call upon the parties to lodge their objection, if any, to such determination of the market value within a specified time. The Collector shall also hear the parties on their objections on a specified dale. Thereafter the Collector would consider the representations in writing and those urged at the time of hearing and evidence available with him and pass an order within three months from the date of first notice determining the market value of the properties and the duty payable on the instrument and communicate the order so passed.
27. As per Sub-section (5) of Section 47A, any person aggrieved by an order of the Collector may appeal to Chief Controlling Revenue Authority. As against the appellate order, a remedy of further appeal is also available under Sub-section 10 of Section 47A to the High Court.
28. Sub-sections (2) and (3) of Section 50C provide further safeguard to the assessee, in the sense that if the assessee claims before the AO that the value adopted by the stamp duty authorities exceeds the fair market value and the value so adopted or assessed for the purpose of stamp duty has not been disputed in any appeal or revision before any authority, the AO could refer the valuation of the capital asset to the DVO. On such reference, if the value determined by the Valuation Officer is more than the value adopted or assessed by the Stamp duty authority, the AO shall adopt the market value as determined by the Stamp duty authority. Thus, a complete full proof safeguard has been given to the assessee to establish before the authorities concerned the real value. Thus, what is stated in Section 50C as a real value cannot be regarded as a notional or artificial value and such real value is determinable only after hearing the assessee as per the statutory provisions stated supra. There is no indication either in the provisions of Section 50C of IT Act or Section 47A of the Stamp Act or Rules made thereunder about the adoption of the guideline value. Hence, the contention that the Section 50C is arbitrary and violative of Article 14 cannot be accepted. Incidentally, we can refer the recent judgment of the Supreme Court in the case of Government of Andhra Pradesh v. Smt. P. Laxmi Devi : AIR2008SC1640 , in which even the onerous condition of deposit of fifty per cent of the deficit duty for filing the appeal to the Collector is also upheld.
29. The reliance of the learned Counsel for the petitioner in the case of R. Sai Bharathi v. J. Jayalalitha (supra) and the Full Bench decision of this Court in the case of Sakthi & Co. v. C. Desigachary (supra), in our view, would not in any way advance the case of the petitioner. In the judgment of the Supreme Court referred to above, while considering the issue as to whether the land purchased has been undervalued or not, the Supreme Court observed that the guideline value has relevance only in the context of Section 47A of the Indian Stamp Act (as amended by T.N. Act 24 of 1967) which provides for dealing with instruments of conveyance which are undervalued. Guideline value will only afford a prima facie basis to ascertain the true or correct market value. Guideline value is not sacrosanct, 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. In the Full Bench decision of this Court referred above, the question that arose for consideration was, which is the criteria that has to be taken into account by the Rent Controller for fixing the fair rent i.e., whether the guideline value as contained in the revenue records or the market value. While answering the issue, the Full Bench of this Court has held that the guideline value is fixed for locality and not for particular survey number. But market value for a survey number is result of bargain between parties. The guideline value maintained in basic valuation register by the Revenue Department or municipality cannot form basis for determination of the market value and held that the determination of the market value based on guideline value is illegal. The value determinable under Section 50C, which is under consideration, is the value adopted or assessed by the Stamp Act authorities for the purpose of Section 48 and deemed to be the full value of consideration received or accruing as a result of transfer. The principle for determining the market value of the assets such as land and building has been stated in detail in Rule 5 of the Tamil Nadu Rules. Hence, the question of guideline value forming basis for determination of the full value does not arise at all and the contention that the impugned provision is arbitrary in nature falls to the ground as not sustainable.
Point No. 3 : Whether the impugned provision is discriminatory
30. We are not able to subscribe our view to the contention of the petitioner that the capital assets, and trading assets/stock-in-trade are one and the same and Section 50C applies only to capital assets and not applicable to trading assets, or stock-in-trade and thereby the provision is discriminatory in nature. The capital assets and trading assets/stock-in-trade are treated differently under the scheme of the Act. They cannot be compared on par with each other by considering them as a class of assets. The discrimination on the ground of valid classification which answers the test of intelligible differentia does not attract wrath of Article 14 of the Constitution of India. The principles of valid classification are long settled by a catena of decisions of the Supreme Court. The principles are that those grouped together in one class must possess a common characteristic which distinguishes them from those excluded from the group; and this characteristic or intelligible differentia must have a rational nexus with the object sought to be achieved by the enactment. The Supreme Court in The Special Courts Bill 1978, In re : [1979]2SCR476 stated the proposition as follows:.2. The State, in the exercise of its Governmental power, has of necessity to make laws operating differently on different groups or classes of persons within its territory to attain particular ends in giving effect to its policies, and it must possess for that purpose large powers of distinguishing and classifying persons or things to be subjected to such laws.
3. The constitutional command to the State to afford equal protection of its laws sets a goal not attainable by the invention and application of a precise formula. Therefore, classification need not be constituted by an exact or scientific exclusion or inclusion of persons or things. The Courts should not insist on delusive exactness or apply doctrinaire tests for determining the validity of classification in any given case. Classification is justified if it is not palpably arbitrary.
6. The law can make and set apart the classes according to the needs and exigencies of the society and as suggested by experience. It can recognise even degree of evil, but the classification should never be arbitrary, artificial or evasive.
7. The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be founded on intelligible differentia which distinguishes those that are grouped together from others, and (2) that that differentia must have a rational relation to the object sought to be achieved by the Act.
31. It is well-settled that the latitude for classification in a taxing statute is much greater and, in order to tax something, it is not necessary to tax everything. These basic postulates have to be borne in mind while determining the constitutional validity of a taxing provision challenged on the ground of discrimination. The apex Court in P.M. Ashwathanarayana Settee v. State of Karnataka : AIR1989SC100 , held thus:
It is for the State to decide what economic and social policy it should pursue and what discriminations advance those social and economic policies. In view of the inherent complexity of these fiscal adjustments, Courts give larger discretion to the legislature in the matter of its preferences of economic and social policies and effectuate the chosen system in all possible and reasonable ways.
32. In Federation of Hotel & Restaurant Association of India v. Union of India : [1989]178ITR97(SC) , it was said as under (at p. 122):.The test could only be one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience..A reasonable classification is one which includes all who are similarly situated and none who are not. In order to ascertain whether persons are similarly placed, one must look beyond the classification and to the purposes of the law.
33. The Supreme Court has held in Kerala Hotel & Restaurant Association v. State of Kerala : [1990]1SCR516 at pp. 264 and 267 as under:
The scope for classification permitted in taxation is greater and unless the classification made can be termed to be palpably arbitrary, it must be left to the legislative wisdom to choose the yardstick for classification, in the background of the fiscal policy of the State to promote economic equality as well....Thus, it is clear that the test applicable for striking down a taxing provision on this ground is one of palpable arbitrariness applied in the context of the felt needs of the times and societal exigencies informed by experience, and the Courts should not interfere with the legislative wisdom of making the classification unless the classification is found to be invalid by this test.
34. It is useful to refer also to the decision of the Supreme Court in ITO v. N. Takin Roy Rymbai : [1976]103ITR82(SC) , wherein a similar question relating to the validity of classification in another clause of Section 10 of the IT Act, 1961, arose for consideration. The Supreme Court, while upholding the validity of the classification, summarised the principles applied, as under (at p. 89):.it must be remembered that the State has, in view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion in the matter of classification for taxation purposes. Given legislative competence, the legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. Nor is the mere fact that a tax falls more heavily on some in the same category, by itself a ground to render the law invalid. It is only when, within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a violation of Article 14. [See East India Tobacco Co. v. State of Andhra Pradesh : [1963]1SCR404 ; Vivian Joseph Ferreira v. Municipal Corporation of Greater Bombay : [1972]2SCR257 ; Jaipur Hosiery Mills v. State of Rajasthan : [1997]1SCR396 .
35. The Supreme Court in the case of Seema Silk & Sarees and Anr. v. Directorate of Enforcement and Ors. (2008) 4 Supreme 419, held thus:
A discrimination on the ground of valid classification which answers the test of intelligible differentia does not attract the wrath of Article 14 of the Constitution of India. Hardship, by itself, may not be a ground for holding the said provision to be unconstitutional. In Ajoy Kumar Banerjee v. Union of India : (1984)ILLJ368SC , this Court held:50. Differentiation is not always discriminatory. If there is a rational nexus on the basis of which differentiation has been made with the object sought to be achieved by particular provision, then such differentiation is not discriminatory and does not violate the principles of Article 14 of the Constitution. This principle is too well-settled now to be reiterated by reference to cases. There is intelligible basis for differentiation. Whether the same result or better result could have been achieved and better basis of differentiation evolved is within the domain of legislature and must be left to the wisdom of the legislature. Had it been held that the scheme of 1980 was within the authority given by the Act, we would have rejected the challenge to the Act and the scheme under Article 14 of the Constitution.
36. We have already observed that the capital assets are classified as class by themselves and cannot be compared or equated with the trading asset or stock-in-trade under the scheme of the Act. It is also recognised by the Supreme Court while determining the purpose or object of the legislation that it is permissible to look into the circumstances, which prevailed at the time when the law was passed and which necessitated the passing of that law. It is a well established and well-settled proposition of law that the latitude for classification in taxing statute should be much greater and in order to tax something, it is necessary to tax everything. In order to see whether classification in particular taxing provision is valid, the Court must look beyond the ostensible classification and to the purpose of the law and apply the test of 'palpable arbitrariness' in the context of felt needs of the times and societal exigencies informed by experience to determine the reasonableness of the classification, [vide Federation of Hotel & Restaurant Association of India v. Union of India (supra) and Kerala Hotel & Restaurant Association v. State of Kerala (supra)].
37. In Sakhawat Ali v. State of Orissa : [1955]1SCR1004 , the Supreme Court held that the legislation enacted for the achievement of a particular object or purpose need not be all embracing. It is for the legislature to determine what categories it would embrace within the scope of legislation and merely because certain categories which would stand on the same footing as those which are covered by the legislation are left out would not render the legislation which has been enacted in any manner discriminatory and violative of Article 14.
38. The legislative history reveals that prior to the insertion of the impugned provision, Section 52(2) was there in the statute, which was the subject matter of K.P. Varghese v. ITO (supra), which is also one to check the avoidance of capital gains tax. After the deletion of the said provision, Chapter XX-A was introduced empowering the Government to acquire immovable property in specific cases. Thereafter Chapter XX-C was introduced. Thus, all these provisions are directed only to check and prevent the evasion of tax by undervaluing the consideration of the transfer of capital assets. Thus, there exist intelligible differentia between the categories of assets, which had a rational nexus with the object of plucking the leakage of income from the capital asset by undervaluation of the document.
39. For the above reasoning, the contention that the impugned provision is discriminatory also cannot be accepted.
Point No. 4 : Whether it is necessary to read down Section 50C
40. It is contended that the provision cannot even be read down as the same is beyond the legislative competence and violative of Articles 14 and 265 of the Constitution of India. Much reliance has been made to the decision of the Supreme Court in the case of Delhi Transport Corporation v. D.T.C. Mazdoor Congress : (1991)ILLJ395SC . Here again, we are not able to accept the contention of the learned Counsel for the petitioner. While answering the contention of the petitioner that the impugned provision is arbitrary in nature, which gives unguided power to levy tax on a fictitious consideration, a detailed discussion has been made as to how provisions under the Stamp Act and the IT Act have given opportunity to the assessees as well to dislodge the value assessed or adopted by the authorities under the Stamp Act with necessary material on record and negatived the contention. In K.P. Varghese v. ITO (supra) and C.B. Gautam v. Union of India (supra), as there was no provision giving opportunity to the assessees, to rebut the presumption made under the then existing provision Section 50(2) of the IT Act, it was directed to be read down by giving an opportunity to the assessees and also casting upon the burden of proof of undervaluation. However, as discussed in point No. 2, sufficient opportunity has been given to the assessee to rebut the presumption as to the full market value of the capital asset arrived at by the authorities under the Stamp Act and further on point No. 1, as we concluded that the provision is constitutionally valid and not hit by legislative incompetence, the contention as to reading down of the provision has to be rejected and there is no such necessity as well. As the provision impugned is held to be valid, Varghese case and Gautam's case are not applicable.
41. A supplementary contention has been made on behalf of the petitioner that neither the memorandum explaining the Finance Bill, 2002 nor the circular of CBDT dt. 27th Aug., 2002 explained the object of the provision impugned and hence the provision has to be struck down. The said contention has been raised only for rejection.
42. The intention of the legislature can very well be gathered from the language employed in the provision of the Act itself, particularly, where the language is plain and unambiguous. In taxing statute, it is not possible to assume any intention or governing purpose of statute more than what is stated in the plain language. Hardship and equity has no role to play in determining the validity of the provision, vide CIT v. V.M.R.P. Firm Muar : [1965]56ITR67(SC) and Seema Silk & Sarees and Anr. v. Directorate of Enforcement and Ors. (supra). It is obvious that the provision has been introduced only to check the undervaluation thereby evading tax payable to the Government and also curtail black money. The Finance Minister's speech is neither a law nor a provision contained in the Act. A provision can be rendered inoperative only when it is found to be violative of the constitutional mandate. The provision cannot be rendered inoperative on the ground of the speech of the Finance Minister or the administrative instructions issued by the CBDT has not explained the reason for incorporation of the provision when the object is evident from the provision itself. Useful reference can be had to the judgment of the Supreme Court in the case of B.K. Industries v. Union of India : 1993(65)ELT465(SC) .
43. Likewise, the marginal note of the section and title of the Chapter cannot take away the effect of the provisions of the Act and they cannot render those provisions legislatively incompetent if they are otherwise within the legislative incompetence of the legislature, vide Tara Parasad Singh v. Union of India : [1980]3SCR1042 .
For the foregoing reasons, all the writ petitions are liable to be dismissed and accordingly they are dismissed. No costs.