UMA DUTT PALIWAL PROP.,PANIPAT vs. ADDL. CIT, PANIPAT

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER

2. As far as the issue of disallowance of Rs.54,477/- on account of interest free loans/advances is concerned, it is seen that during the assessment proceedings, the Assessing Officer noted that there was a debit balance of Rs. 4.50 lacs in the name of M/s Victory Enterprises. There were numerous debits in the form of cash and cheques in this account but there was no trade dealing/business transaction with the said concern. The Assessing Officer also noted that there was an opening debit balance of Rs. 1.00 lakh in the name of Panipat College of Textile Tech. Pvt. Ltd., with whom again there was no business dealing.

The assessee had claimed expenses of Rs. 11,42,875/- in respect of bank interest, however, no interest had been charged by the assessee from these two concerns on the amounts advanced to them. The Assessing Officer disallowed a sum of Rs. 54,477/- being interest calculated @12% on interest free advances.

3. On appeal, the Ld. CIT (A) while upholding the disallowance held that the assessee could not substantiate that the sum of Rs. 1.00 lakh was paid to Panipat College of Textile Tech. Pvt. Ltd. for business purposes. Regarding the loan of Rs. 4.5 lakhs to M/s Victory Enterprises, the Ld. CIT (A) observed that no evidence was brought on record to prove that the capital of the Proprietor was available for making the said interest free loan. Here also the assessee, as per the Ld. CIT (A), could not substantiate his claim that the interest free advance was for the purposes of the business of the assessee. Supporting his ground of appeal relating to the disallowance of interest, the Ld. AR submitted that as far as the loan to Panipat College of Textile Tech. Pvt. Ltd. was concerned, it was an investment in the shares of the company which was formed by a group of textile exporters with the object of providing Bachelor’s Degree in Textile Engineering. Since the assessee is a manufacturer and exporter of home furnishings, durries and mats, the investment was very much for commercial expediency and hence the disallowance of pro-rata interest was not legally tenable. He also drew our attention to pages 17 and 18 of the paper book which contain copy of the balance sheet and the profit/loss account to substantiate his stand that surplus funds were available with the assessee for making the interest free advance of Rs. 4.50 lacs to M/s Victory Enterprises. He also relied on the decision of the Hon'ble Apex Court in the case of Munjal Sales Corporation vs CIT 298 ITR 298 (S.C.).

4. Learned Departmental Representative, on the other hand, strongly supported the Assessing Officer’s order and that of the Ld. CIT (A). After going through the relevant records and hearing the rival contentions on this issue, it is seen that the main reason for disallowance of pro-rate interest by the lower authorities has been that as per them there was a failure on the part of the assessee to prove that the advances were made for commercial expediency. The Ld. CIT (A) also did not accept the contention of the assessee that he had sufficient funds at his disposal to advance the amount without taking recourse to borrowings. As far as the issue of the amount invested in Panipat College of Textile Tech. Pvt. Ltd. is concerned, it is seen that although the assessee has made a submission before the Ld. CIT (A) but he has not specifically adjudicated the issue at hand. The assessee being a manufacturer and an exporter of home furnishings has invested Rs.1.00 lac in a college being set up by the textile exporters to give Bachelor Degree in Textile Engineering. If one applies the principles of law enunciated by the Hon'ble Apex Court in the case of S.A. Builders Ltd. vs CIT 288 ITR 1(S.C.) it will be seen that the case of the assessee is covered by the ratio of the judgment of the Hon'ble Apex Court. As per the Hon'ble Apex Court, what is to be seen is the purpose for which the money is utilised. If the money is utilised in a way that makes commercial sense and helps in running the business of the assessee more efficiently, then it can be said that the interest paid in respect of the borrowed money has been incurred for the purposes of commercial expediency. Moreover, the Ld. AR has demonstrated that as per the Balance sheet, the assessee had a capital of Rs. 2.73 crores and the profit for the year was Rs. 16.94 lacs. These figures, in our opinion, were sufficient to meet the investment requirements as well as the amount given as advance to M/s Victory Enterprises. These facts were before the Ld. CIT (A) also but he has not specifically dealt with them in the impugned order. Therefore, on an overall view of the facts of the case and the judicial pronouncements referred to above, we direct the Assessing Officer to delete the disallowance of Rs.54,477/- on account of interest. Hence this ground of the assessee’s appeal is allowed.

5. Ground no. 2 relates to the disallowance of Rs.21,132/- on account of 1/5th of the telephone expenses by the Assessing Officer and confirmed by the Ld. CIT(A). The Ld. AR submitted that all the telephones were used for business purposes only.

However, the assessee could not submit any evidence either before the Assessing Officer or the Ld. CIT (A) to justify his contention. However, looking into the quantum of disallowance as well as a specific prayer of the assessee that the quantum of disallowance may be fixed at 1/10th, we feel that it would serve the interest of justice if the disallowance is restricted to 1/10th of the total telephone expenses. Hence, this ground of the assessee’s appeal is also allowed.

6. The third ground of the assessee’s appeal pertains to addition of Rs.20,32,177/-. It is seen that the assessee had declared short term capital gains of Rs.1,19,570/- on account of sale of land in the computation of his income. During the assessment proceedings, the assessee was required to furnish the details of land sold. As per details submitted by the assessee, a plot which was purchased on 12.5.2006 for an amount of Rs. 16,16,800/- was sold on 21.8.2007 for Rs. 19,20,000/-. On examination of the sale deed of this plot, the AO noted that the circle rate of the property was at Rs.39,52,177/-. The assessee was, therefore, asked to show cause as to why the sale value of the property should not be taken at Rs.39,52,177/- as per section 50C of the Act against Rs. 19,20,000/- taken by him. The reply of the assessee was considered by the AO but the same was not found tenable for the reasons discussed in paras 3.1 to 3.8 of the assessment order, which are reproduced below:-

“3.1 The reply of the assessee as detailed above has been considered. The assessee took his time to file the reply in spite of number of opportunities and there after came with the reply stating “the deal of property was started on 18th Jan. 2007. However it was concluded in the month of Aug.2007”. It is further mentioned that circle rate of land in the relevant area was increased from Rs. 1 700 to Rs.6000 w.e.f. 01.04.2007 causing a sharp increase of 253%. Since the deal was started in Jan.2007, our sale price was reasonable qua circle rate in the month of Jan.2007.

3.2 The assessee along with the reply filed a photocopy of a so claimed “Ikranama" between the assessee and the purchasers. Though there are three purchasers but the so claimed “Ikramama” is signed by only one person and not by all the purchasers. Further there is no name & address of the witness on the so claimed “Ikramama”. Generally in all such Ikramama of the property deals there is always an advance amount with the clause that if the purchaser fails to make the full payment and to get the deal registered by a specific date than the advance amount will be forfeited and if the seller fails to honour Ikramama but without an advance there is a mention of penalty of Rs. 1 lakh in case of cancellation of deal which is not according to the general practice for such deals.

3.3 The consideration payments by each of the three purchaser for each share and the registry in the name of three persons clearly show that there were three purchasers and the so claimed ‘Ikramama” signed by only one purchaser has no authenticity. In view of the above it is evident that the so claimed “Ikramama” is concocted and an after thought of the assessee. Even otherwise for the purpose of sale consideration the date of execution of the sale deed is relevant and not the date of Ikramama. As such the contention of the assessee that the deal of the property was started on 18th Jan. 2007 is not acceptable specially when there is no mention in the sale deed about the so claimed Ikramama dated 18.01.2007.”

7. Based on this reasoning, the Assessing Officer took the value of sales consideration at Rs. 39,52,177/- for the purposes of section 50C of the Act as against Rs. 19,20,000/- declared by the assessee and an addition of Rs. 20,32,177/- was made under the head Capital Gain’. On appeal, the Ld. CIT (A) confirmed the addition.

Meters and Building thereon was sold for a consideration of Rs. 19,20,000/- vide Sale Deed dated 21/08/2007 to Sh. Pawan Kumar, Ashish kumar & Girish Kumar. The Sale consideration was received by Cheque No. 959006 dated. 18.08.2007, Ch. No. 235157 dated 20.08.2007, and Ch. No. 891885 dated 20.08.2007 each amounting to Rs. 6,40,000/-. He submitted that the deal of Property was started on 18th January, 2007. However, it was concluded in the month of August, 2007. It is further mentioned that Circle Rate of Land in the relevant area was increased from Rs. 1700 to Rs.6000 w.e.f. 01.04.2007 causing a sharp increase of 253%. Since, the deal was started in February 2007; Sale price was reasonable qua Circle Rate in the month of February 2007. It was further submitted that Sale Consideration was only Rs. 19,20,000/- and there was no consideration over & above the Sale price mentioned in the Sale Deed. Hence, there is no suppression of Sale Consideration at our end. Moreover, there is no evidence to prove that the Sale Consideration was more than as mentioned in Sale Deed. He further submitted that it is to be appreciated that a steep hike in Circle rate i.e. Rs.1700 as on 31.03.2007 & Rs.6000 as on April 2007 cannot be a basis for increasing the Sale Consideration. He also drew our attention to the written submissions made before the AO and the Ld. CIT (A).

These submissions are being reproduced herein under for a ready reference:

“1. The addition suggested is erroneous since section 50-C must have direct nexus, additionally it must emerge from the provisions of section 45 being the charging section which calls for the levy on profit and gains arrived / accrued and not the Stamp Valuation Authority's valuation.

Duty affixing upon the instrument of transfer which do not connote the consideration received and hence the chargeability is misconceived.

10. U/s 50C(2) the rights of assesses and duty of revenue are prescribed wherein the provision commences as "without prejudice to the where " Meaning thereby the provision is an isolated code wherein the matter shall can be referred to the valuation officer "where the value adopted/assessed, undisputed which presently is being prayed to be invoked before determining the conditions and too considering the logistics relatable to the place and timing of property under valuation.”

9. Ld. DR, on the other hand, supported the orders of the authorities below.

Section 50C is a special provision for (1) determining the full value of consideration in cases of transfer of immovable property, being land or building or both;

Section 50C provides that where the (2) consideration declared to be received or accruing as a result of transfer of land or building or both is less than the value adopted or assessed by the Stamp

Valuation Authorities for the purpose of payment of stamp duty in respect of transfer, then value so adopted or assessed by them shall be deemed to be the full value of consideration;

It is also provided that where the assessee (3) claims that the value adopted or assessed for stamp duty purposes is more than the fair market value of the property as on the date of transfer and he has not disputed this value before the appellate authorities or the Court under Stamp Duty Act then the Assessing

Officer may refer the valuation of such property under transfer to the Valuation Officer in accordance with Section 55Aof the Income-tax Act, 1961. If the fair market value so determined by the Valuation Officer is less than the value adopted for stamp duty purposes the Assessing Officer may take such fair market value to be the full value of consideration. On the other hand, if the fair market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty purposes the Assessing

Officer shall adopt such fair market value determined by the Stamp Valuation Authorities as full value of consideration and he shall not adopt the valuation done by the Valuation Officer as full value consideration;

The insertion of Section 50C is made effective (4) from 1-4-2003 and, accordingly, would be applicable for the assessment year 2003-04 and the subsequent years.

Earlier there used to be a provision in Section 52 of the Income-tax Act, 1961 which enabled the Assessing

Officer to refer the property under transfer to the Valuation Officer for determining market value.

However, in K.P. Varghese vs. ITO (1981) 131 ITR 597

(Supreme Court), it was held that Section 52(2) cannot be applied to genuine transaction unless there are evidences to show that consideration declared in the sale deed is understated. In other words unless the revenue was able to show that something over and above the sale consideration had passed hands between the transferee and the transferor, Section 52(2) could not be invoked. It became almost a herculean task for the Assessing Officer to collect evidence to show the exchange of additional money for consideration was other than apparent sale consideration. Accordingly, it was considered to insert a deeming provision by way of Section 50C for substituting apparent sale consideration by valuation done by SVA subject to certain conditions.

SECTION 50C OF THE I.T. ACT

“50C. Special provision for full value of consideration in certain cases:

Where the consideration received or accruing as (1) 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 or assessed or assessable 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 or assessed or assessable 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.

Without prejudice to the provisions of sub- (2) section (1), where - the assessee claims before any Assessing a) Officer that the value adopted or assessed or assessed or assessable 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 or assessed or assessable 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 Assessing Officer may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of subsections (2), (3), (4), (5) and (6) of Section 16A, clause (i) of sub-section (1) and sub- sections (6) and (7) of Section 23A, subsection (5) of Section 24, Section 34AA, Section 35 and Section 37 of the Wealth-tax 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 Assessing Officer under subsection (1) of Section 16Aof that Act. Explanation1. - For the purposes of this section ‘Valuation Officer’ shall have the same meaning as in clause (r) of Section 2 of the Wealth-tax Act, 1957 (27 of 1957).

Explanation 2 - For the purposes of this section, the expression ‘assessable’ means the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed if it were referred to such authority for the purposes of the payment of stamp duty.

(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.”

-There should be a transfer of capital asset, being land or building or both; -There should be a transfer of such capital asset by way of registration with the Stamp Duty Authorities; -Stamp duty is sought to be imposed by the Stamp Valuation Authorities at certain value of the capital asset which is different than the sale consideration shown in the documents of transfer sought to be registered; -Where valuation done by the Stamp Valuation authorities for levying Stamp duty is less than the sale consideration shown by the assessee in the sale deed Section 50C cannot be invoked; -Where valuation done by the Stamp Valuation Authorities for levying stamp duty is more than the sale consideration shown by the transferor in the sale deed then such higher valuation will be considered as full value of consideration and, accordingly, such full value of consideration being valuation done by the Stamp Valuation Authorities will be substituted for apparent consideration; -The capital gains under Section 48 shall be computed accordingly on the basis of such higher full value of consideration and not on the basis of apparent consideration shown in the sale deed; -If the assessee, being transferor, claims before the Assessing Officer that fair market value of the property under transfer is less than the valuation done by the Stamp Valuation Authorities then the Assessing Officer may refer the property to the Valuation Officer for determining its fair market value as on the date of the transfer; -Such reference would be made in accordance with Section 55A; -On receipt of valuation report from the Valuation Officer, the Assessing Officer has to compare the fair market value as determined by the Valuation Officer with the valuation done by the Stamp Valuation Authorities under the Stamp Duty Act and with the apparent sale consideration shown by the assessee in the sale deed; -Where valuation done by the Valuation Officer is more than the valuation done by the Stamp Valuation Authorities (SVA) then valuation done by the SVA would be taken as full value of consideration and capital gains will be calculated accordingly; -If valuation done by the Valuation Officer is less than the valuation done by the SVA then valuation done by the Valuation Officer would be adopted as full value of consideration as against the apparent consideration shown by the assessee or the valuation done by the SVA and capital gains be calculated accordingly; -If valuation done by the Valuation Officer is less than the valuation done by the SVA as well as sale consideration shown by the assessee in the sale deed then apparent consideration shown in the sale deed would alone be accepted as full value of consideration and capital gains be calculated accordingly, i.e. as shown by the assessee; -With effectfrom1.10.2009, applicable for the assessment year 2010-11 the Finance Act, 2009 (No.2) has enabled the assessing officer to find out Stamp Duty Value assessable by the SVA in cases where agreements to sale were executed, consideration changed hands and possession of the property was handed over to the buyer but without getting the transfer registered with the SVA.

In such situation the stamp duty valuation assessable would also be treated as full value of consideration; -Use of the word ‘shall’ in Section 50C makes it mandatory for the assessing Officer to adopt the valuation done by the SVA in place of apparent consideration, if necessary conditions under Section 50C are satisfied. The Assessing Officer has no discretion.

another objection is that the sale deed executed in July 2001 does not make any reference to the agreement. Thus, as per the Assessing Officer, and as confirmed by the Ld. CIT (A), the agreement was bogus and an afterthought. However, both the AO and the Ld. CIT (A), while adopting the value as per the Stamp

Valuation Aothority have somehow overlooked the provisions of section 50C (2) which requires that the AO should refer the issue of Valuation to the DVO where the assessee has raised a specific objection/plea to the effect. Therefore, without going into the allegation of the Department regarding the Ïkrarnama’ being bogus, if the facts of the case are examined in the light of the legal provisions, it is seen that as per section 50C(2)(b) of the Act, if the assessee, being transferor, claims before the Assessing

Officer that the fair market value of the property under transfer is less than the valuation done by the Stamp Valuation Authorities, then the Assessing Officer may refer the property to the Valuation

Officer for determining the Fair Market Value as on the date of transfer. The conditions for making reference u/s 55A of the Act are that (1) valuation done by the Stamp Valuation Authority is more than the apparent sale consideration; (2) the assessee makes a claim before the Assessing Officer that fair market value of the property under transfer is less than the valuation done by Stamp Valuation Authority. If these two conditions are satisfied, the Assessing Officer is bound to make a reference to the Valuation Officer. A perusal of the submissions dated

28.10.2010 filed before the Assessing Officer shows that in para

(j) of the reply, the AR of the assessee has submitted as under:-

“(j) u/s 50C(2) the rights of the assessee an duty of revenue are prescribed wherein the provision commences as “without prejudice to the…..where….”meaning thereby the provision is an isolated code wherein the matter can be referred to the Valuation Officer “where the value adopted/assessed, undisputed which presently is being prayed to be invoked before determining the conditions and considering the logistics relatable to the place and timing of the property under valuation.”

CIT (A) have not specifically given their finding on the issue but the same was pleaded before us during the course of hearing of this appeal. It has been held by the Mumbai Bench of ITAT in Kalpataru Industries vs ITO in that it is mandatory on the part of the Assessing Officer to make reference to Valuation Officer as per provisions of section 50C where the assessee contended that valuation as done by Stamp Valuation

Authority was not acceptable to him. Similarly, it was held by Lucknow ‘B’ Bench of the ITAT in Mohd. Shoaib vs DCIT 29 DTR

306 that clauses (a) and (b) of sub-section (2) of section 50C are in continuation to each other and therefore, conditions laid down in both the clauses are required to be satisfied together. The Assessing Officer has to refer the valuation to the DVO for determining the fair market value if the property under transfer is less than valuation made by the Stamp Valuation Authority and further that he has not disputed the addition before

Appellate Authorities under Stamp Duty Act. Again the Mumbai

Bench of the ITAT has held in Ajmal Fragrances & Fashions (P)

Ltd. vs CIT 34 SOT 57 (Mum) that if the assessee objects to the stamp duty valuation, the Assessing Officer is bound to refer the matter to the valuation officer. A similar view was taken by the ‘G’ Bench of ITAT Delhi in the case of Sarwan Kumar vs ITO in . On going through all these judicial precedents we find that it is now an established proposition of law that where an assessee had claimed before the AO that value of land and building assessed by stamp valuation authority exceeded fair market value of property, then in terms of section 50C (2) (a) the AO ought to have referred the matter to valuation officer instead of straightaway deeming the value adopted by the stamp valuation authority as full value of consideration. Similar are the facts in the cited case of Pune bench in the matter of K.K.

Nag Ltd. vs. ACIT (52 SOT 381 Pune) wherein the AO applying provisions of section 50C, adopted stamp duty value of land and building as total sale consideration for the purpose of computing the capital gain. The assessee raised the objection that since it had claimed that the value assessed by the stamp valuation authority exceeded the fair market value, the AO ought to have referred the matter to the valuation officer to ascertain the valuation. The Tribunal has held as under :-

“Section 50C prescribes for adoption of full value of consideration in certain cases. It is provided that where the consideration received or accrued as a result of the transfer of a capital asset being land or building or both is less than the value adopted by an authority of the State Government for the purposes of payment of stamp duty in respect of such transfer, then the value so adopted by the State Government authority shall be deemed to be the full value of consideration received or accruing as a result of such transfer. The said provisions of sub-section (1) of section 50C are further circumscribed by sub-section (2) of section 50C. In terms of clause (a) of sub-section (2) of section 50C, it is provided that where an assessee claims before the Assessing Officer 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, then the Assessing Officer may refer valuation of the capital asset to the Valuation Officer. In instant case, factually it is evident that the assessee had claimed in the return of income itself that the value adopted by the stamp valuation authority exceeded the fair market value as on the date of transfer as provided in section 50C(2)(a). Under these circumstances, the Assessing Officer ought to have referred the matter to the Valuation Officer instead of straightaway deeming the value adopted by the stamp valuation authority as the full value of consideration. The point made out by the revenue that it is only discretionary on the part of the Assessing Officer to refer the matter to the Valuation Officer, is quite untenable. The discretion vested in the Assessing Officer in such a situation is required to be used in a judicious manner. Section 50C is a deeming provision and ostensibly involve creation of an additional tax liability on the assessee and, therefore, notwithstanding the presence of the expression ‘may’ in section 50C (2)(a), the Assessing Officer in this case ought to have referred the matter to the Valuation Officer for ascertaining the value of the capital asset in question. Therefore, the order of the Commissioner (Appeals) is to be set aside and the Assessing Officer is to be directed to adopt the course mentioned in section 50C(2)(a) and thereafter, proceed to determine capital gain on sale of land and building.” 14. The Delhi Bench of the Tribunal in the case of ITO vs. Smt.

Manju Rani Jain (supra) has expressed a similar view wherein the action of Ld. CIT (A) has been upheld. The Ld. CIT (A) on finding that AO had worked out capital gain by adopting market value of property for stamp duty purposes, had directed AO to refer properties to valuation sale of the department for purpose of valuation of properties and thereafter to adopt valuation for working out the capital gains in view of the provisions of section 50C(2) of the Act. The Pune Bench of the Tribunal in the case of K.K. Nag Ltd. vs. ACIT (supra) after detailed discussion of the provisions laid down u/s 50C of the Act has held that the discretion granted in such a situation is required to use in a judicious manner. Section 50C is a deeming provision and ostensibly involves creation of an additional tax liability on the assessee and, therefore, notwithstanding the presence of the expression ‘may’ in section 50C (2)(a), the AO in this case ought to have referred the matter to the valuation officer for ascertaining the value of the capital asset in question. The order of the Commissioner (Appeals) was thus held to be set aside and the AO was directed to adopt the course mentioned in section 50C (2)(a) and thereafter proceed to determine capital gain on sale of land and building.

2016.