Applicability of section 50C & 56(2)(x) where agreement to sale was done before the date of its applicability

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Applicability of section 50C & 56(2)(x) where agreement to sale was done before the date of its applicability

Issue of applicability of section 50C & 56(2)(x) is always a hot & burning topic. In normal course, section 50C & 56(2)(x) triggers simultaneously making two contracting parties to pay the tax on the same amount.

It’s applicability is questionable on number of occasions. More particularly, the following are few of the instances where the taxpayers often questins its applicability:

  1. Distress sale
  2. Sale if there is an encumbrances in the property
  3. Sale of mortgaged assets
  4. Sale if there is some disputes in the property
  5. Sale if the property is surrounded by bad elements
  6. Sale done pursuant to the court order
  7. Sale if the agreement to sale is done prior to incorporation of section 50C

Of course, judiciary will come out with apt interpretation as to the applicability of section 50C in all such cases. Here is one issue which I will discuss with regard to applicability of section 50C in case Sale if the agreement to sale is done prior to incorporation of section 50C in the legislature i.e., assessee has entered in to an agreement to sale prior to section 50C enactment and the sale deed is done after the 50C has been enacted.

It may be recalled that section 50C was introduced w.e.f. 1st April, 2003. There may be instances wherein there were reasons for the delay in the execution of the registry. Such reason could be

  1. Disputes as to the terms and conditions
  2. Non sanction by the local authorities
  3. Illegal sanction
  4. Disputes amongst seller,
  5. Delay in getting the NOC from regulating authorities

and so on.

Ideally, in such situations provisions of s. 50C should not be applied as it was not available in the statute book at the time when the transaction was initially agreed for. The transaction was proposed without considering section 50C or 56 by the either parties.

There is one interesting case wherein Vishakhapatnam have held that Sec. 50C cannot be applied to the sale agreement entered into before introduction of said section i.e., before 1st April, 2003 especially when delay in registration of sale deed is sufficiently explained and there is no suppression of actual consideration. ITAT observed as under:

“Both the parties to the sale deed have confirmed that they have entered into a sale agreement in August, 2001, i.e., the submission of the vendors that the sale agreement was misplaced was also confirmed by the buyer of the property by way of an affidavit executed by its managing director. The parties could have entered into a sale agreement is supported by the fact that the vendors have received part-payment of the total consideration way back in August, 2001 itself. The details of said receipts are also mentioned in the sale deed. Under the Contract Act, by virtue of sale agreement, the buyer of the property gets a pre-emptive right over the property. In view of such pre-emptive right only, the advocates for the buyer have issued a public caution notice cautioning the public about the existence of agreement of sale. This fact also supports the existence of a sale agreement. In view of the foregoing, there is no reason to suspect about the existence of sale agreement. The parties have sufficiently explained the causes for the delay in registering the sale deed. From the submissions of the assessees, which are also supported by the caution notice issued by the buyers, the vendors were under an obligation to obtain urban land clearance permission and were also under an obligation to settle certain disputes. The assessees have filed a copy of the proceedings of the special officer and competent authority of Urban Land Ceiling Act in support of their contentions in this regard. The assessees have submitted that certain persons claimed themselves to be the legal heirs of PVR (from whom the assessees have inherited the property) and those persons also claimed right over the property and the settling of their claims has also caused delay. The said explanation is supported by the fact that the persons belonging to Masetty family were also included as vendors and further another lady named Smt. AC has given a deed of confirmation about the receipt of money way back in August, 2001 itself to relinquish her interest in the property. From the foregoing it is amply clear that the delay in registering the sale deed has occurred for genuine causes and for the reasons beyond the control of the assessee.

(Paras 8.4 & 8.5)

The average cost as per the sale agreement was more than the market value fixed by the Jt. Sub-Registrar at the time the sale agreement was entered into. From these details, it is noticed that there is no understatement or suppression of actual consideration. It may be noted that the Revenue has also not brought any other material to show that there was suppression of actual consideration. The periods of the impugned transactions have fallen in the transition phase of law, i.e., the sale agreement was entered before the introduction of s. 50C and the registration was completed after the introduction of said section. The provisions of s. 50C cannot be applied to the sale agreement as the said section was not available in the statute book at the time the transaction was initially entered into. Even otherwise, there is no suppression of actual consideration. Consequently, since the final registration of the sale is only in fulfilment of the contractual obligation, the logical conclusion is that the provisions which do not apply at the time of entering into the transaction initially would not also apply at the time the transaction is completed.—K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC), CIT vs. Nirmal Textiles (1996) 136 CTR (Guj) 148 : (1997) 224 ITR 378 (Guj), Neville De Noranha vs. Asstt. CIT (2008) 115 TTJ (Kol) 390 : (2008) 5 DTR (Kol)(Trib) 389 and CIT vs. Laxman Singh (1985) 49 CTR (Raj) 50 : (1986) 159 ITR 983 (Raj) relied on.

(Paras 8.8 & 8.10)

Here is the copy of the complete Order:

  1. SIVA PARVATHI & ORS. vs. INCOME TAX OFFICER

ITAT, VISAKHAPATNAM BENCH

Sunil Kumar Yadav, J.M. & B.R. Baskaran, A.M.

ITA Nos. 665 to 667/Vizag/2008; Asst. yr. 2005-06

21st October, 2009

(2009) 28 CCH 0604 VishakapatnamTrib

(2010) 129 TTJ 0463 : (2010) 37 DTR 0124 : (2011) 7 ITR 0468

Legislation Referred to

Section 45, 48, 49(1)(iii)(a), 50C, 54, 55(2)

Case pertains to

Asst. Year 2005-06

Decision in favour of:

Assessee

ORDER

BY THE BENCH :

*Also see ITO vs. M. Siva Parvathi & Ors. (ITA Nos. 678 to 680/Vizag/2008; Asst. yr. 2005-06)

NOTE

In the case of Dy. CIT vs. Manjula J. Shah (2009) 126 TTJ (Mumbai)(SB) 145 : (2009) 30 DTR (Mumbai)(SB)(Trib) 601, the Special Bench of the Tribunal has held that for the purpose of computing long-term capital gain arising from the transfer of a capital asset which had become property of the assessee under gift, the first year in which the capital asset was held by the assessee has to be determined to work out the indexed cost of acquisition as envisaged in Expln. (iii) to s. 48 after taking into account the period for which the said capital asset was held by the previous owner i.e. indexed cost of acquisition of such capital asset has to be computed with reference to the year in which the previous owner first held the asset.

ORDER

These cross-appeals are directed against the orders passed by the learned CIT(A)-I, Visakhapatnam in the hands of each of the assessees mentioned above and they relate to the asst. yr. 2005-06. Since most of the issues agitated in these appeals are common in nature, we find it convenient to dispose them of by this consolidated order.

  1. The common issues relate to the computation of long-term capital gains arising on sale of a house property. The facts relating thereto are stated in brief. These three assessees along with another person named Smt. K. Venkata Lakshmi inherited a house property located in D. No. 15-3-23, Venkateswara Nagar, Century Club Road, Maharanipeta, Visakhapatnam on the demise of Shri P. Venkateswara Rao on 5th March, 1990. The said property was sold jointly on 11th Oct., 2004 to a company named M/s Banjara Hospital (P) Ltd. The executants of the sale deed and the amounts received by them are listed below :
Sl. No. Name Amount
1. Smt. P. Padmavathi 51,50,313
2. Smt. K. Venkatalakshmi 37,50,313
3. Smt. C. Kasturibai 51,50,313
4. Smt. N. Sivaparvathi 51,50,313
5. Smt. M. Varalakshmi 14,66,667
6. Smt. M. Satyavathi 14,66,667
7. Smt. S. Seetaramalakshmi 14,66,667
8. Smt. K. Lakshmi Soujanya 14,00,000

Smt. P. Padmavathi is the wife of Shri P. Venkateswara Rao. Smt. Venkatalakshmi, Smt. Ch. Kasturibai and Smt. N. Sivaparvathi are his daughters. The last mentioned person Smt. K. Lakshmi Soujanya is the daughter of Smt. K. Venkatalakshmi and since she was a major at the time of executing the sale deed, she was also included as a vendor for safer course. According to the assessees herein, the remaining three persons viz., Smt. M. Varalakshmi, Smt. M. Satyavathi and Smt. S. Seetaramalakshmi also claimed themselves as daughters of Sri P. Venkateswara Rao, born through his concubine named Smt. Achanta Rajeswari (hereinafter called “Masetty family”). According to the assessees herein, these three persons were included as vendors in order to settle, clear and discharge all claims fully and to convey the property free from encumbrances.

  1. Since these assessees did not offer long-term capital gains on sale of said property, the AO issued notice under s. 148 of the Act. In response thereto, these assessees worked out the long-term capital loss at Rs. 34,83,401 and filed return of income admitting 1/4th share thereof in their respective hands at Rs. 8,70,850. In a note attached to their respective return of income, they claimed that they are eligible for deduction under s. 54 of the Act in respect of investment made by each of them in purchase/construction of residential house(s). These assessees initially adopted cost inflation index pertaining to the financial year 1989-90 for the purpose of arriving at the indexed cost of asset. Later they filed a revised statement, wherein they revised the capital gain workings by adopting the cost inflation index rate of 100 as on 1st April, 1981 and accordingly arrived at the long-term capital loss at Rs. 1,18,40,887 in the place of Rs. 34,83,401.
  2. However, the AO recomputed the capital gains by making following adjustments :

(a) Against the sale consideration of Rs. 2,71,01,250 disclosed by the assessees, the AO, by invoking the provisions of s. 50C, adopted the market value of the property as shown in the sale deed amounting to Rs. 3,73,69,350.

(b) The AO disallowed the following deductions claimed by the assessee :

(i) Amount said to have been paid to M/s Sai Srinivasa Enterprises. Rs. 5,00,000
(ii) Amount paid to A. Chittamma and others Rs. 17,40,000
(iii) Other expenses Rs. 20,00,000
(iv) Cost of improvement Rs. 2,00,000
(v) Paid to Masetty family Rs. 44,00,000

(c) The assessees claimed the constructed area of the building at 18,000 sq. ft of ground floor and 18,000 sq. ft of first floor. However, the AO restricted the constructed portion to 2,000 sq. ft in ground floor and 1,000 sq. ft in 1st floor.

(d) The market value as on 1st April, 1981 was adopted at Rs. 600 per sq. yd. by the assessees. However, the AO restricted the same to Rs. 150 per sq. yd.

(e) The AO granted indexation benefit only from the year in which the property devolved upon these assessees i.e., financial year 1989-90 as against their claim of 1st April, 1981.

Accordingly, the AO arrived at the long-term capital gains at Rs. 3,24,76,210. The AO allocated the capital gains in proportion to the sale consideration received by each of these three assessees, i.e., the AO treated the Masetty family also as one of the co-owners of the property.

  1. Aggrieved by the order of the AO, these assessees carried the matter in appeal before the learned CIT(A). The first appellate authority gave a finding that Smt. P. Padmavati, Smt. K. Venkata Lakshmi, Smt. Kasturi Bai and Smt. M. Siva Parvathi are the legal heirs and the co-owners and hence the capital gains has to be allocated between them equally. Since the Revenue has not objected to the said decision of the learned CIT(A), the issue whether the “Masetty family” are one of the co-owners or not does not require any consideration.

5.1 The learned CIT(A) confirmed the order of the AO on the following issues :

(a) Applicability of s. 50C on the impugned transfer of assets.

(b) Disallowance of expenses claimed by the assessee as described in para 4(b) supra.

(c) Restriction of constructed area of the building to 2,000 sq. ft. in ground floor and 1,000 sq. ft in 1st floor.

(d) Adoption of FMV as on 1st April, 1981 at Rs. 150 per sq. yd. as against Rs. 600 per sq. yd. claimed by the assessee.

5.2 With regard to the indexation benefit the learned CIT(A) held that the assessees are entitled to the indexation benefit w.e.f. 1st April, 1981 and not from the financial year 1989-90 as decided by the AO.

  1. Aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us contesting the decision of the learned CIT(A) in allowing indexation benefit w.e.f. 1st April, 1981. The assessee is in appeal before us contesting the decision of the learned CIT(A) in confirming the order of the AO as listed out in para 5.1 above. The assessee, Smt. Ch. Kasturi Bai claimed exemption under s. 54 in respect of purchase of a second flat which was disallowed by the AO. Since the learned CIT(A) has confirmed the order the AO on this issue, she is contesting the rejection of exemption under s. 54 for the second house before us.
  2. The first issue agitated by the assessees relates to the applicability of provisions of s. 50C of the Act to the transfer of impugned property. For the sake of convenience, we extract the s. 50C(1) below :

“50C (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 s. 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.”

This section provides for adoption of value assessed/determined by the stamp valuation authority for the purpose of payment of stamp duty (hereinafter “stamp duty value”), if the sale consideration disclosed in the sale deed is less than the stamp duty value. Sec. 50C was inserted by the Finance Act, 2002 w.e.f. 1st April, 2003. In the instant case, the sale deed was registered with the registration authorities on 11th Oct., 2004. As per the conveyance deed, the vendors have received a sum of Rs. 2,71,01,250 as sale consideration, as against the value of Rs. 3,73,69,350 adopted for the purpose of payment of stamp duty. Accordingly the AO has invoked the provisions of s. 50C and the same was also confirmed by learned CIT(A).

7.1 The submissions of the learned Authorised Representative are that the parties to the sale deed initially entered into an agreement to sell the impugned property for a consideration of Rs 2.71 crores, way back in August, 2001. However, due to disputes created by the persons who also claimed themselves to be the heirs of Shri P. Venkateshwara Rao coupled with the non-availability of urban land clearance certificate, the sale could not be completed immediately at that time. After settling all disputes, the vendors could get the sale deed registered only in October, 2004. At the time of entering into an agreement of sale, s. 50C was not in the statute book. In any case, at the time of entering into the agreement, the stamp duty value stood at Rs. 3,800 per sq. yd., whereas the sale value determined by the parties to the sale agreement was more than Rs. 3,800 per sq. yd. This fact clearly proves that the value agreed to by the parties is fair consideration and there is no intention to suppress the same. The stamp duty value is increased periodically by the State Government and consequently, at the time of actual execution of sale deed in October, 2004, the stamp duty value stood at about Rs. 6,000 per sq. yd. According to learned Authorised Representative, since the sale agreement between the parties was entered into prior to the insertion of s. 50C, the impugned transfer is not hit by the provisions of s. 50C of the Act.

7.2 The learned Authorised Representative invited our attention to the decision of Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) wherein the Hon’ble Court held that the provisions of the Act should be interpreted keeping in mind the mischief sought to be rectified by the amendment and accordingly held that bona fide transactions should be kept out of the provisions of then existing s. 52. Sec. 52 that stood at the relevant point of time provided for adoption of FMV on certain occasions for the purpose of computation of capital gain. He also invited our attention to the decision of the Hon’ble Madras High Court in the case of K.R. Palanisamy & Ors. vs. Union of India & Ors. (2008) 219 CTR (Mad) 323 : (2008) 13 DTR (Mad) 121 : (2008) 306 ITR 61 (Mad), wherein the Madras High Court has stated that the object of introduction of s. 50C was to prevent large scale, under-valuation of the real value of the property in the sale deed so as to defraud Revenue. Accordingly, learned Authorised Representative submitted that the objective of s. 52 which existed earlier and s. 50C which was introduced now is similar. Thus by placing reliance on the decision of Hon’ble apex Court, learned Authorised Representative contended that in the instant case, the transaction being bona fide one and further since there was no intention to defraud Revenue, the provisions of s. 50C should not be made applicable to the impugned transaction of the transfer of house property.

7.3 The learned Authorised Representative also placed reliance on the decision of Kolkata Bench of Tribunal in the case of Neville De Noranha vs. Asstt. CIT (2008) 115 TTJ (Kol) 390 : (2008) 5 DTR (Kol)(Trib) 389. In that case the assessee therein applied for no objection certificate under Chapter XX-C of the Act before the ‘Appropriate Authority’. However, the Appropriate Authority granted NOC only in April, 2002 and thereafter sale deed was executed in May, 2002 for a consideration of Rs. 2.34 crores. However, by that time s. 50C had came into operation. The stamp duty value was determined at Rs. 3.34 crores. The AO adopted the stamp duty value for the purpose of computation of capital gains by applying the provisions of s. 50C. In those peculiar circumstances the Hon’ble Tribunal held that only the provisions of Chapter XX-C would be applicable to the said transfer and the provisions of s. 50C introduced later are not applicable. The Hon’ble Tribunal also held that, in the interest of substantial justice also, the assessee should not be made to suffer simply because of delay on the part of the Appropriate Authority in granting sanction under the Chapter XX-C. By placing reliance on the ratio of the said decision, learned Authorised Representative contended that, in the instant case also, the delay in getting the transfer registered was for the reasons beyond the control of the assessee and hence in the interest of substantial justice, the assessee should not be subjected to the provisions of s. 50C of the Act. The learned Authorised Representative, by placing reliance on the following case law, submitted that if there is a change in law after a transaction is entered into, then the character of the transaction would be the deciding factor for the purpose of taxation and that character will not be affected by the law that was introduced subsequently. Accordingly the taxability of the said transaction shall be decided on the basis of the character of the transaction :

(a) CIT vs. Nirmal Textiles (1996) 136 CTR (Guj) 148 : (1997) 224 ITR 378 (Guj);

(b) CIT vs. Laxman Singh (1985) 49 CTR (Raj) 50 : (1986) 159 ITR 983 (Raj).

According to learned Authorised Representative, s. 50C only takes care of a situation where the sale agreement and its execution happen simultaneously, i.e., without much delay, However, the legislature did not visualize a situation where there is time gap between the date of sale agreement and the date of actual registration of the sale. In that case, it is not clear that for the purpose of s. 50C, which date would be relevant for adoption of the FMV i.e., whether the stamp duty value as on the date of entering into the sale agreement or as on the date of registration. In view of this, it is not possible to apply s. 50C and consequently, the computation of capital gains as per s. 48 fails. Accordingly learned Authorised Representative, by placing his reliance upon the decision of Hon’ble Supreme Court in the case of CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC), contended that if computation fails, the capital gains is not assessable to tax. Learned Authorised Representative also submitted that FMV cannot be substituted in the absence of corresponding charging section and in this regard, he relied upon following case laws :

(a) CIT vs. Gillanders Arbuthnot & Co. 1973 CTR (SC) 136 : (1973) 87 ITR 407 (SC);

(b) CIT vs. Texspin Engg. & Mfg. Works (2003) 180 CTR (Bom) 497 : (2003) 263 ITR 345 (Bom).

7.4 The learned Departmental Representative on the other hand submitted that the Hon’ble Madras High Court in the case of K.R. Palanisamy & Ors. (supra) has upheld the constitutional validity of s. 50C of the Act. He further submitted that the assessees have failed to submit a copy of sale agreement before the tax authorities under the pretext that the same had been misplaced and accordingly contended that no credence should be attached to the sale agreement. According to learned Departmental Representative, the decision of Hon’ble Supreme Court in the case of K.P. Varghese (supra) was rendered in the context of then existing s. 52 of the Act and not on s. 50C, now under consideration. In any case, the Hon’ble apex Court has held that, under then existing s. 52, the burden of proving suppression of actual consideration lies upon the Revenue, whereas under s. 50C of the act the burden of proof is placed upon the assessee. He further submitted that the Hon’ble Madras High Court in the case of Ambattur Clothing Co. Ltd. vs. Asstt. CIT (2009) 221 CTR (Mad) 196 : (2008) 16 DTR (Mad) 142 has held that s. 50C provides sufficient opportunity to the assessee to contest his case before IT authorities, in addition to that opportunity provided for under Stamp Act. Accordingly, the High Court in that case approved the adoption of the value determined for the purposes of payment of stamp duty for the purpose of computation of capital gains. However, in the instant case, these assessees have failed to avail the opportunities provided for in s. 50C as well as those provided under relevant Stamp Act and hence they should not object to the application of s. 50C at this stage.

  1. We have heard the rival contentions on this issue and carefully perused the record. Before adjudicating the issue whether the provisions of s. 50C shall apply to the impugned transfer of property, we consider it appropriate to discuss various judicial pronouncements on legal points, which are applicable to the said issue. The Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO (supra) has observed that while interpreting a provision, strictly literal reading of section should not be adopted if it leads to manifestly unreasonable and absurd consequences. However attempt should be made to discover the intent of the legislature from the language used by it. The Hon’ble apex Court rendered the said decision in the context of then existing s. 52(2) of the Act, which provided that where a capital asset is transferred and if in the opinion of the ITO, the FMV of that asset exceeds the full value of the consideration declared by the assessee by an amount of not less than 15 per cent of the value so declared, then the full value of the consideration shall be taken to be its FMV on the date of its transfer. The Revenue took the stand that in order to invoke the provisions of s. 52(2), it is enough if it is shown that the FMV exceeded the disclosed value by 15 per cent. However, the Hon’ble Supreme Court held that a fair and reasonable construction of s. 52(2) would be to read into it a condition that it would apply only where the consideration for the transfer is understated and hence it would have no application in the case of a bona fide transaction where the full value of the consideration for the transfer is correctly declared by the assessee. For the sake of convenience, we extract below the relevant observations of the Hon’ble apex Court on the rule of interpretation and the logical conclusion :

“5. Now, on these provisions the question arises as to what is the true interpretation of s. 52, sub-s.(2). The argument of the Revenue was, and this argument found favour with the majority Judges of the Full Bench, that on a plain and natural construction of the language of s. 52, sub-s. (2), the only condition for attracting the applicability of that provision was that the FMV of the capital asset transferred by the assessee as on the date of the transfer exceeded the full value of the consideration declared by the assessee in respect of the transfer by an amount of not less than 15 per cent of the value so declared. Once the ITO is satisfied that this condition exists, he can proceed to invoke the provision in s. 52, sub-s. (2), and take the FMV of the capital asset transferred by the assessee as on the date of the transfer as representing the full value of the consideration for the transfer of the capital asset and compute the capital gains on that basis. No more is necessary to be proved, contended the Revenue. To introduce any further condition such as under-statement of consideration in respect of the transfer would be to read into the statutory provision something which is not there; indeed, it would amount to rewriting the section. This argument was based on a strictly literal reading of s. 52, sub-s, (2), but we do not think such a construction can be accepted. It ignores several vital considerations which must always be borne in mind when we are interpreting a statutory provision. The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be ‘drafted with divine prescience and perfect clarity’. We can do no better than repeat the famous words of Judge Learned Hand when he said :

‘…it is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing: be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary, but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning’.

We must not adopt a strictly literal interpretation of s. 52, sub-s. (2), but we must construe its language having regard to the object and purpose which the legislature had in view in enacting that provision and in the context of the setting in which it occurs. We cannot ignore the context and the collocation of the provisions in which s. 52, sub-s. (2) appears, because, as pointed out by Judge Learned Hand in the most felicitous language :

‘… the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create.’

Keeping these observations in mind we may now approach the construction of s. 52, sub-s. (2).

  1. The primary objection against the literal construction of s. 52, sub-s. (2), is that it leads to manifestly unreasonable and absurd consequences. It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision but it can certainly help to fix its meaning. It is a well recognized rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided. There are many situations where the construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature. Take, for example, a case where A agrees to sell his property to B for a certain price and before the sale is completed pursuant to the agreement and it is quite well-known that sometimes the completion of the sale may take place even a couple of years after the date of the agreement the market price shoots up with the result that the market price prevailing on the date of sale exceeds the agreed price, at which the property is sold, by more than 15 per cent of such agreed price. This is not at all an uncommon case in an economy of rising prices and in fact we would find in a large number of cases where the sale is completed more than a year or two after the date of the agreement that the market price prevailing on the date of the sale is very much more than the price at which the property is sold under the agreement. Can it be contended with any degree of fairness and justice that in such cases, where there is clearly no understatement of consideration in respect of the transfer and the transaction is perfectly honest and bona fide and, in fact, in fulfilment of a contractual obligation, the assessee, who has sold the property, should be liable to pay tax on capital gains which have not accrued or arisen to him ? It would indeed be most harsh and inequitable to tax the assessee on income, which has neither arisen to him nor is received by him, merely because he has carried out the contractual obligation undertaken by him. It is difficult to conceive of any rational reason why the legislature should have thought it fit to impose liability to tax on an assessee who is bound by law to carry out his contractual obligation to sell the property at the agreed price and honestly carried out such a contractual obligation. It would indeed be strange if obedience to the law should attract the levy of tax on income, which has neither arisen to the assessee nor has been received by him. If we may take another illustration, let us consider a case where A sells his property to B with a stipulation that after sometime which may be a couple of years or more, he shall resell property to A for the same price. Could it be contended in such a case that when B transfers the property to A for the same price at which he originally purchased it, he should be liable to pay tax on the basis as if he has received the market value of the property as on the date of resale, if, in the meanwhile, the market price has shot up and exceeds the agreed price by more than 15 per cent ? Many other similar situations can be contemplated where it would be absurd and unreasonable to apply s. 52, sub-s. (2), according to its strict literal construction. We must, therefore, eschew literalness in the interpretation of s. 52, sub-s. (2), and try to arrive at an interpretation which avoids this absurdity and mischief and makes the provision rational and sensible, unless of course, our hands are tied and we cannot find any escape from the tyranny of the literal interpretation. It is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even ‘do some violence’ to it, so as to achieve the obvious intention of the legislature and produce a rational construction; vide Luke vs. IRC (1963) AC 557 : (1964) 54 ITR 692 (HL). The Court may also in such a case read into the statutory provision a condition which, though not expressed, is implicit as constituting the basic assumption underlying the statutory provision. We think that, having regard to this well recognized rule of interpretation, a fair and reasonable construction of s. 52, sub-s. (2), would be to read into it a condition that it would apply only where the consideration for the transfer is understated or, in other words, the assessee has actually received a larger consideration for the transfer than what is declared in the instrument of transfer and it would have no application in the case of a bona fide transaction where the full value of the consideration for the transfer is correctly declared by the assessee. There are several important considerations which incline us to accept this construction of s. 52, sub-s. (2).”

The Hon’ble Supreme Court also observed that while interpreting a section it would be legitimate to consider what was the mischief and defect, which was sought to be remedied by an enactment. In that connection the Speech made by the Finance Minister while moving the amendment is extremely relevant as it throws a considerable light on the objectives and purpose of enactment. However, as pointed out by learned Authorised Representative the purpose of introduction of s. 50C was not mentioned by the Finance Minister at the time of moving amendment. It was also not explained in the Notes on Clauses and Explanatory Memorandum attached to the relevant Finance Bill. However, the Hon’ble Madras High Court in the case of K.R. Palanisamy & Ors. (supra), while upholding the constitutional validity of s. 50C, had an occasion to spell out the objective of introducing s. 50C. The relevant observations are extracted below :

“17. Let us consider the legislative competence of the Parliament in inserting the provision of s. 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.

……………..

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 in to amend the IT law to catch such an income within the net of taxation.”

Hence the object of introduction of s. 50C is to prevent undervaluation of the real value of the property in the sale deed to avoid payment of tax or duty which the Government is entitled to, which, in our opinion, is akin to the objective of introduction of s. 52, which was existing earlier.

8.1 The next legal issue that was pressed into service by the learned Authorised Representative was that if there is a change of law between the dates when the transaction was entered into and the transaction was actually completed, then the subsequent amendment will not change the character of the transaction and consequently the law that existed at the time of entering into the transaction will prevail over the amendments subsequently made. The case law relied upon by learned Authorised Representative are discussed in brief.

(a) CIT vs. Nirmal Textiles (supra). In this case the assessee was following Samvat year as his accounting year, which ends on the Diwali day of every year. During the period between 26th Dec., 1973 and 25th March, 1974, he sold certain plots and the said transaction was assessable in the asst. yr. 1975-76. On the date of transfer, the IT Act provided for treatment of immovable property, which was held for less than 24 months, as short-term capital asset. Subsequently, consequent to an amendment made the Finance Act, 1973 w.e.f. 1st April, 1974, the period of holding upto which the capital asset would remain as short-term capital asset was extended to 60 months instead of 24 months. The plots were held by the assessee therein for more than 24 months but less than 60 months. While the assessee claimed the gain on sale of plots as long-term, the AO treated the same as short-term. The Hon’ble Gujarat High Court held that the question whether the said transfer is of long-term capital asset or short-term capital asset will have to be determined as on the date of taxable event i.e., the date of transfer as per the law existing on the date.

(b) CIT vs. Laxman Singh (supra). In this case the assessee sold certain jewellery between 29th March, 1972 to 31st March, 1972. On those dates, the definition of ‘capital asset’, for the purpose of assessing the capital gain, did not include jewellery. However, w.e.f. 1st April, 1973 jewellery articles were included in the definition of capital asset. The Hon’ble Rajasthan High Court held that no capital gain occurs as a result of sale of jewellery which was sold before 1st April, 1973, for the reason that whatever substantive rights that had occurred to the assessee prior to 1st April, 1973 could not be taken away.

8.2 The Kolkatta Bench of the Tribunal in the case of Neville De Noranha (supra), has held that, in the interest of substantial justice, the assessee should not be made to suffer simply because of the delay on the part of the Appropriate Authority in granting sanction under Chapter XX-C of the Act.

8.3 Keeping in mind the legal propositions cited above, let us analyse the facts of the instant case. These assessees along with other legal heirs, entered into an agreement in August, 2001 for sale of impugned property. However, the actual registration of sale could be completed only in October, 2004 for certain reasons. At the time of entering into the agreement, s. 50C was not in the statute book and the same was introduced only w.e.f. 1st April, 2003. By the time the sale was registered; the said provision had come into operation. Now based on these facts and the legal propositions discussed earlier, let us adjudicate the question, viz., whether the provisions of s. 50C would apply to the impugned transfer of the capital asset.

8.4 The contention of the learned Departmental Representative is that the sale agreement should not be taken cognizance of, as the assessees have failed to furnish a copy of the same to the tax authorities. The plea of the parties is that the sale agreement could not be produced as the same was misplaced. Now, based on material on record, we shall find out whether there really existed a sale agreement or not. There cannot be any dispute that only the parties to the sale deed could have entered into an agreement for sale. In this case, both the parties to the sale deed have confirmed that they have entered into a sale agreement in August, 2001, i.e., the submission of the vendors that the sale agreement was misplaced was also confirmed by the buyer of the property by way of an affidavit executed by its managing director. The parties could have entered into a sale agreement is supported by the fact that the vendors have received part-payment of the total consideration way back in August, 2001 itself. The details of said receipts are also mentioned in the sale deed. Under the Contract Act, by virtue of sale agreement, the buyer of the property gets a pre-emptive right over the property. In view of such pre-emptive right only, the advocates for the buyer have issued a public caution notice cautioning the public about the existence of agreement of sale. This fact also supports the existence of a sale agreement. In view of the foregoing, there is no reason to suspect about the existence of sale agreement.

8.5 In our opinion, the parties have sufficiently explained the causes for the delay in registering the sale deed. From the submission of the assessees, which is also supported by the caution notice issued by the buyer, the vendors were under an obligation to obtain urban land clearance permission and were also under an obligation to settle certain disputes. The assessees have filed a copy of the proceedings of the Special Officer and Competent Authority of Urban Land Ceiling Act at pp. 27 to 29 of the paper book compiled by them in support of their contentions in this regard. The assessees have submitted that certain persons claimed themselves to be the legal heirs of Shri P. Venkateshwara Rao (from whom the assessees have inherited the property) and those persons also claimed right over the property and the settling of their claims has also caused delay. The said explanation is supported by the fact that the persons belonging to Masetty family were also included as vendors and further another lady named Achanta Chittamma has given a deed of confirmation about the receipt of money way back in August, 2001 itself to relinquish her interest in the property. In addition to the above we also notice from the recital of the sale deed that M/s Sai Srinivasa Enterprises represented by Mr. Rama Raju had also claimed right over the property and the buyer has effected a payment of Rs. 20 lakhs to the said concern in order to settle its claim and the said payment was adjusted towards sale consideration paid to the vendors. From the foregoing it is amply clear that the delay in registering the sale deed has occurred for genuine causes and for the reasons beyond the control of the assessee.

8.6 In the case of K.P. Varghese (supra) the Hon’ble apex Court contemplated a situation, by way of an example, where the completion of sale took place after a couple of years after the date of agreement. In this connection it is pertinent to extract the relevant observations of the Hon’ble Supreme Court, at the cost of repetition, as the said example contemplated by the Hon’ble apex Court is squarely applicable to the facts of the present case :

“There are many situations where the construction suggested on behalf of the Revenue would lead to a wholly unreasonable result which could never have been intended by the legislature. Take, for example, a case where A agrees to sell his property to B for a certain price and before the sale is completed pursuant to the agreement and it is quite well known that sometimes the completion of the sale may take place even a couple of years after the date of the agreement-the market price shoots up with the result that the market price prevailing on the date of sale exceeds the agreed price, at which the property is sold, by more than 15 per cent of such agreed price. This is not at all an uncommon case in an economy of rising prices and in fact we would find a large number of cases where the sale is completed more than a year or two after the date of the agreement that the market price prevailing on the date of the sale is very much more than the price at which the property is sold under the agreement. Can it be contended with any degree of fairness and justice that in such cases, where there is clearly no understatement of consideration in respect of the transfer and the transaction is perfectly honest and bona fide and, in fact, in fulfilment of a contractual obligation, the assessee, who has sold the property, should be liable to pay tax on capital gains which have not accrued or arisen to him ? It would indeed be most harsh and inequitable to tax the assessee on income, which has neither arisen to him nor is received by him, merely because he has carried out the contractual obligation undertaken by him. It is difficult to conceive of any rational reason why the legislature should have thought it fit to impose liability to tax on an assessee who is bound by law to carry out his contractual obligation to sell the property at the agreed price and honestly carried out such a contractual obligation. It would indeed be strange if obedience to the law should attract the levy of tax on income, which has neither arisen to the assessee nor has been received by him.”

8.7 In the instant case also, the assessees herein have fulfilled a contractual obligation in October, 2004, which they are bound by law to carry out as per the sale agreement entered in August, 2001. We have already stated that the delay in carrying out the contractual obligations has occurred for genuine causes and for reasons beyond the control of the assessees.

8.8 Now the next question that requires to be addressed is whether there was any understatement of actual consideration at the time of entering into the sale agreement. The Hon’ble apex Court in the case of K.P. Varghese (supra) has held that the provision of s. 52(2) that was existing at the relevant point of time was not applicable to an honest and bona fide transaction where the consideration received by the assessee was correctly declared or disclosed by him and there was no concealment or suppression of the consideration. The Hon’ble Supreme Court, after considering the Speech of the Finance Minister, has understood that the object of introduction of s. 52(2) was to curtail those transactions of sale of property, where the actual consideration received was understated in the sale deed. However, the object of introduction of s. 50C was not mentioned in the relevant Finance Bill or in the Speech of the Finance Minister. As observed earlier, the Hon’ble Madras High Court in the case of K.R. Palanisamy & Ors. (supra) has stated that the provision of s. 50C was inserted in the IT Act to prevent large scale undervaluation of real value of property in the sale deed, so as to defraud revenue which the Government is legitimately entitled to, by pumping in black money. Thus we can see that the purpose of introduction of s. 52(2) earlier and s. 50C w.e.f. 1st April, 2003 is same. The assessee has placed a copy of the certificate issued by the Jt. Registrar, Visakhapatnam at page No. 30 of the paper book filed by the assessee. According to the said certificate, the market value of the property located at Century Club Road, as per the guidelines register maintained by him is Rs. 3,300 w.e.f. 26th June, 2000 and Rs. 3,800 w.e.f. 9th Feb., 2001. As pointed out by learned Authorised Representative, the sale value agreed to by the parties, as per the sale agreement entered into in August, 2001, was Rs. 2,71,01,250 and the average cost works out to Rs. 4,500 per sq. yd. including the value of building. Thus, we notice that the average cost as per the sale agreement was more than the market value fixed by the Jt. Sub-Registrar at the time the sale agreement was entered into. From these details, it is noticed that there is no understatement or suppression of actual consideration. It may be noted that the Revenue has also not brought any other material to show that there was suppression of actual consideration.

8.9 In the case of Neville De Noranha vs. Asstt. CIT (supra), the provisions of Chapter XX-C and the provisions of s. 50C overlapped each other for a period of 3 months from 1st April, 2002 to 30th June, 2002. The assessee therein was granted no objection certificate under Chapter XX-C only in April, 2002 and by the time the provisions of s. 50C had come into operation. The Hon’ble Kolkata Tribunal held that only the Chapter XX-C shall apply to that transaction. The Hon’ble Tribunal also held that in the interest of substantial justice the assessee should not be made to suffer simply because of delay on the part of Appropriate Authority in granting sanction under Chapter XX-C, who was also a part of Department. In the instant case, the delay has occurred not only due to the delay in getting urban land clearance permission, but also due to rival claims from other persons. Hence, from the angle of substantive justice also, the assessees should not be made to suffer for the delay.

8.10 The periods of the impugned transactions have fallen in the transition phase of law, i.e., the sale agreement was entered before the introduction of s. 50C and the registration was completed after the introduction of said section. As pointed out by Hon’ble apex Court in the case of K.P. Varghese (supra), the assessees have only fulfilled the contractual obligation imposed upon them by virtue of the sale agreement. The ratio of the decisions in the cases of Nirmal Textiles (supra) and Laxman Singh (supra) is that the character of the transaction vis-a-vis IT Act should be determined on the basis of the law that prevailed on the date the transaction was initially entered into. However actual computation of income and income-tax would be made as per the law existing on the 1st April of the relevant assessment year. If we look at the impugned transactions from the point of view of this legal proposition, we notice that the provisions of s. 50C cannot be applied to the sale agreement as the said section was not available in the statute book at that time. Even otherwise, as stated earlier, there is no suppression of actual consideration. Consequently, since the final registration of the sale is only in fulfilment of the contractual obligation, the logical conclusion is that the provisions which do not apply at the time of entering into the transaction initially would not also at the time the transaction is completed. In view of the above, we are unable to agree with the arguments of learned Authorised Representative that the computation provisions fail in the facts and circumstances of the case. In our opinion, the final argument of the learned Authorised Representative that the FMV cannot be substituted in the absence of charging section is not relevant under the peculiar facts and circumstances of the case.

8.11 In view of the foregoing discussions and on consideration of the facts and circumstances of the case and legal propositions discussed in the preceding paras, we are led to the logical conclusion that the provisions of s. 50C should not be made applicable to these assessees and we order accordingly.

  1. The next common ground of the assessees relates to disallowance of payment made to Masetty family and A. Chittamma. The AO treate

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