Can Assessing Officer invoke Provisions of Section 55A to determine the Fair Market Value of the Capital Asset sold when he did not find the Consideration to have been Understated - Held No
Thus the Assessing Officer proceeded on the erroneous basis that as the assessee and the purchaser are interconnected and the property was sold at an undervalue he had the jurisdiction to invoke the provisions of section 55A or even otherwise to determine the fair market value. As held by the Supreme Court it then is a distinction between undervaluation and understatement of the value. The Assessing Officer did not find the consideration to have been understated. He, therefore, was not entitled to determine the fair market value.
1. According to the appellant, the following substantial questions of law arise:-
i) Whether on the facts and in the circumstances of the case, the Hon’ble ITAT is right in deleting the addition by holding that the transaction with a related party was not in terms of provisions of Section 40A(2)(b) of the Income Tax Act whereas the provisions of this Section were clearly applicable to the facts of the case?
ii) Whether on the facts and in the circumstances of the case, the Hon’ble ITAT is right in holding that reference made under section 55A of the Income Tax Act was bad in law whereas the Assessing Officer in the surrounding circumstances, had rightly invoked the provisions of this section to determine the fair market value of the capital asset sold?
iii) Whether on the facts and in the circumstances of the case, the Hon’ble ITAT is right in holding that the Hon’ble Supreme Court’s decision rendered in the case of McDowell & Co. Ltd. v. CTO 154 ITR 148 is not applicable on the facts of the case?
iv) Whether on the facts and in the circumstances of the case, the Hon’ble ITAT is perverse in not deciding the specific ground of appeal taken by the appellant at Ground No.2 which is regarding passing of appellate order by the learned CIT(A) without affording an opportunity of being heard to the Assessing Officer which was specifically requested for in the ITNS-51 submitted to the CIT(A)?
2. The respondent-assessee filed its return of income declaring income from other sources at ` 37,13,113/- after claiming exemptions in the sum of about ` 13.50 crores under section 10-B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’)
3. The case was selected for compulsory scrutiny pursuant to which notices under section 143(2) and 142(1) of the Act were issued. A reference was made to the Transfer Pricing Officer (TPO) in view of an international transaction between the assessee and one of its associate enterprises which exceeded ` 5 crores
4. During the course of the assessment proceedings the Assessing Officer noticed that M/s Quark Media House (India) Pvt. Ltd. i.e. the assessee by a sale deed dated 29.04.2005 transferred to M/s Quark City India Pvt. Ltd. land admeasuring 24000 sq. yards in the industrial area of Mohali together with the building constructed thereon for a consideration of ` 25.10 crores
5. The building comprised of a built up area of 13520.27 sq. meters complete with infrastructure and modern facilities permanently embedded including HVAC system, electrical installation, networking equipment, office equipment, drinking water plant, water treatment plant and a swimming pool
6. By a letter dated 22.10.2009 the Assessing Officer made a reference to the District Valuation Officer (DVO) under section 55-A of the Act to ascertain the fair market value of the land and the building. The D.V.O. by his report forwarded under cover of a letter dated 31.12.2009 estimated the value of the property at ` 70.08 crores
7. Assessing Officer accordingly for the purpose of capital gains valued the property at ` 70,08,70,000/- after considering in detail the nature of the property and other expenses of sale. The Assessing Officer also dealt with the issue of the two entities being closely related in detail. For the purpose of this appeal it is sufficient to note that the assessee is a fully owned subsidiary of M/s Quark Media House SARL, Switzerland and M/s Quark City India Pvt. Ltd. i.e. the vendee is a 100% subsidiary of another foreign company, namely, F.E. Holdings Mauritius Ltd. The two foreign companies are part of Quark group, the holding company of which is Quark Inc. USA
8. The question that falls for consideration is whether for the purpose of calculating the capital gains arising on account of the said transaction, the sale price ought to be taken as ` 25 crores as mentioned in the sale deed or ` 70 crores which is the value of the property arrived at by the Assessing Officer. The answer to this question also requires a consideration as to whether the Assessing Officer rightly made a reference to the D.V.O. under section 55A to ascertain the fair market value of the property
9. The Assessing Officer after noting the contentions on behalf of the assessee observed that a good case had been made out on behalf of the assessee that the full consideration received by the assessee for the sale of the property is the value stated in the sale deed. He, however, observed that the assessee had failed to address the real issue that because the assessee and the purchaser are related parties with common Directors and management, the sale transaction was not carried out at the market price
10. In other words according to him the price mentioned in the sale deed was not the market value and this was in view of the relationship between the parties. He disbelieved the assessee’s contention that the transaction was a bona fide one having been entered into as per the bargain negotiated keeping in view all the market circumstances prevalent at the relevant time. According to him, this is a case where the business substance of the matter should be considered over the form. He held that the transaction was not entered into at the market rate but was so arranged and structured that the assessee had no tax liability on account thereof and was therefore a colourable device to avoid the tax liability
11. The Commissioner of Income Tax (Appeals) held that the expression “full value of consideration” used in Section 48 cannot be construed as having a reference to the market value of the asset transferred; that the question of market value does not arise; that what is to be seen is the consideration actually arrived at between the parties for the transaction and that the adequacy or inadequacy of the price bargained between the parties is not relevant
12. The CIT(A) concluded that the Assessing Officer had erred in considering the fair market value for the purpose of computing the capital gain and that the Assessing Officer had not shown that the assessee had received any consideration other than that mentioned in the sale deed. The CIT(A) further held that the Assessing Officer had unnecessarily emphasized that the price was below the market price as the vendee and the assessee were closely related as this issue is not relevant for the purpose of computing the capital gain
13. The CIT(A) further held as follows:
The only factor on the basis of which the Assessing Officer made the assessment was that the assessee sold the assets below the market price and that this factor was inapplicable for the purpose of computation of capital gain under section 48 of the Act. The Assessing Officer failed to establish that the assessee had received any consideration other than that stated in the sale deed. In the absence thereof the conclusion that the assessee had structured the transaction to avoid income tax or to minimize it is without basis and justification.
14. The Tribunal agreeing with the CIT(A) observed as follows:
The full value of consideration is the full sale price actually paid and cannot be construed as having a reference to the market value of the asset/property transferred. What is to be determined is the consideration bargained for and not the market value in the case of sale while computing the capital gains. The Assessing Officer has no authority to substitute the fair market value of consideration actually paid unless it is demonstrated that the assessee had received more than what was declared by him. In the present case it was not the case of the Assessing Officer that the assessee had received any consideration more than what was mentioned in the sale deed. Therefore, there was no necessity for computing the fair market value and the Assessing Officer accordingly could not have referred the matter to the D.V.O
15. Revenue moved to High Court and the matter was decided against the Revenue and in favour of the Assessee
Arguments by Revenue
Ms. Dugga, the learned counsel appearing on behalf of the appellant-revenue, contended that for the purpose of computing the capital gains the Assessing Officer is entitled to ignore the consideration stated in the sale deed if he is satisfied that the same is far less than the fair value or the market value thereof. She further submitted that for the purpose of determining the actual consideration it was always open to the Assessing Officer to refer the matter under section 55A to the D.V.O. She further submitted that even if section 48 does not permit the reference to the D.V.O. under section 55A, the respondent’s case is covered by Section 50C. The Assessing Officer could have arrived at the true valuation of the property under section 50C. The submission that the Stamp Authority is bound by the circle rate is erroneous. The circle rates are only indicative and not determinative.
Arguments by Assessee
Mrs. Suri, the learned senior counsel appearing on behalf of the respondent on the other hand submitted as follows:-
i) The reference to the D.V.O. under section 55A in the present case was without jurisdiction. It is only where the provisions of Chapter-IV require determination of the fair market value, can the reference be made to the D.V.O. Section 48 requires determination of the full value of the consideration received or accruing and not the determination of the fair market value.
ii) The full value of consideration received or accruing is the actual amount bargained for between the parties and not the fair market value of the asset that is transferred.
iii) The value of the asset/transaction can be computed under section 50C only at the instance of the assessee by the authorities under the Indian Stamp Act. If the valuation under the Indian Stamp Act is higher then that would be the valuation under section 50C. In the case before us the transaction value is more than the circle rate and the rate assessed by the Stamp Valuation Authority.
iv) In any event there is no finding in the present case that the assessee received any consideration than that shown in the sale deed
The first and the main question concerns the ambit and the meaning of the words “full value of the consideration received or accruing as a result of the transfer of the capital asset”. On behalf of the assessee it is contended that these words and especially the words “full value of the consideration received or accruing” refer to the consideration arrived at between the parties and not the fair market value thereof. The judgment undoubtedly holds that the expression “full value of the consideration” cannot be construed as the market value but as the price bargained for by the parties to the sale.
It is necessary for the Assessing Officer to ascertain as to what was the price bargained for by the parties to the sale. The judgment, however, does not support Mrs. Suri’s further submission that the price stated in the sale-deed must irrespective of anything also be considered to be the sale price for the purpose of computing the capital gain. In our view this absolute proposition is not well founded. The Assessing Officer must determine whether the price stated in the agreement for sale is infact the price bargained for by the parties thereto. In other words, the full value of the consideration is neither the market value nor necessarily the price stated in the document for sale but the price actually arrived at between the parties to the transaction. If therefore it is found that the price actually arrived upon between the parties is not the price reflected in the document, it is the price bargained for by the parties to sale that must be considered for determining the capital gain under section 48. The Supreme Court did not hold that inferences cannot be drawn by the Assessing Officer from the facts established. In fact in paragraph-5 the Supreme Court observed that there was no inferential finding that the shares were sold at the market price of ` 620/- per share. This read with the operative part of the order in paragraph-6 remanding the matter to record a finding as to the actual price received makes it clear that the finding can be based on inferences as well. In paragraph-6 the assessee is given an opportunity to explain the unusual nature of the transaction. It cannot be suggested that even if there was no explanation by the assessee, the Assessing Officer was bound not to draw an adverse inference.
Even on principle we see no reason to denude the Assessing Officer the right to draw an inference especially an irresistible inference. Take for instance a case where the property worth crores of rupees is sold for merely ` 1 lakh and there is no explanation for the same despite the parties being at arms length. The Assessing Officer is not bound to accept the statement in the sale deed unless he can prove that additional consideration was paid. The initial burden to prove the same is undoubtedly on the Department. But in such a case the onus clearly shift upon the assessee. If the assessee is unable to offer an explanation, the Department must be taken to have discharged the burden. The judgment certainly does not hold that the price mentioned in the document is sacrosanct and that the same must be considered to be the price bargained between the parties to the transaction. That would indeed result in an absurdity for the parties could then by merely stating an incorrect price in the sale deed avoid the tax on capital gains altogether.
We are entirely in agreement with the observations of the Division Bench in so far as they pertain to the issue under consideration. The reliance upon the judgment of the Supreme Court in George Henderson & Co. Ltd. case (supra) is also well founded. The language of Section 12B(2) of the 1922 Act is similar to that of Section 48 of the 1961 Act. The issue is, therefore, covered by the judgment of the Supreme Court.
We do not read the observations in paragraph-7 to mean that the consideration referred to in the sale deed cannot be questioned at all. The judgment if read as a whole does not indicate such an absolute or blanket rule. There is nothing in the judgment to indicate that the revenue had contended that the full value of consideration received or accruing was other than what was mentioned in the sale deed. It is probably in that view of the matter that the Division Bench held that the expression “full value of consideration” refers only to the consideration referred to in the sale deed. If, however, that is what was meant, we respectfully disagree. The full value of consideration referred to in Sections 45 and 48 of the Act refers to the full value actually received or accruing and not what the parties merely state or declare in the sale deed as was paid or payable and received or accruing. Such a view would as we mentioned earlier enable a party to avoid the liability to tax on account of capital gains by merely stating the incorrect price to be the consideration for sale or transfer of the asset. That could not have been the intention of the legislature.
We must, therefore, proceed on the basis that it is not the case of the revenue that the assessee received any amount other than what was mentioned in the sale agreement. In this view of the matter and in view of the judgments referred to earlier especially the judgments of the Supreme Court it must follow that there was no occasion for the Assessing Officer to determine the fair market value. The Assessing Officer was only concerned with the amounts actually received by the assessee. The amount actually received was admittedly the amount mentioned in the sale agreement. It follows then that the reference to the DVO under section 55A was without jurisdiction. Section 55A opens with the words “with a view to ascertaining the fair market value of a capital asset for the purposes of this Chapter, the Assessing Officer may refer the valuation of capital asset to a Valuation Officer”. However, in view of the judgments of the Supreme Court, what falls for determination under section 48 is not the fair market value of the capital asset but the full value of the consideration received or accruing as a result of the transfer of the capital asset.
Thus the Assessing Officer proceeded on the erroneous basis that as the assessee and the purchaser are interconnected and the property was sold at an undervalue he had the jurisdiction to invoke the provisions of section 55A or even otherwise to determine the fair market value. As held by the Supreme Court it then is a distinction between undervaluation and understatement of the value. The Assessing Officer did not find the consideration to have been understated. He, therefore, was not entitled to determine the fair market value. In the circumstances, question (ii) is answered in the affirmative in favour of the assessee.
Cases Referred to
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