Finance Bill, 2020 proposed to amend Section 43CA, 50C and 56 of the IT Act to increase in the safe harbour limit from 105% to 110%. It becomes an utmost aspect of concern that many times, there is a significant variation in the value of the properties within same locality considering which, the Courts, have in many occasions held that if the margin between the value as given by the assessee and the Departmental valuer is less than 10%, then this difference is liable to be ignored, has some merit.

Author Dharan V Gandhi, Advocate in his opening remarks quotes "Everything is fair in love and war" is now modified to "everything is fair in love, war and tax evasion".  The Author examines various Judicial precedents and welcomes Finance Bill 2020,  however cautions that they were late to recognise this concept itself, the limit itself was set at a meagre figure of 5%; The Author stating that u/s  50C & 56(2)(x) the FMV has to be determined on the basis of one ad-hoc method which is prescribed in Rule 11UA of the Income-tax Rules, 1962, concludes that “Such method is an absurd and vague one and there is no safe harbour provision in such cases, which is the need of the hour, considering the fact that great damage is caused otherwise.”

Increase in safe harbour limits on property valuations, a welcome move!

"Everything is fair in love and war" is now modified to "everything is fair in love, war and tax evasion". Year after year, to tackle the menace of black money, the Legislature is inserting deeming fictions so as to cover up the short comings of the Department.

An assessee is in know of his affairs, however it is almost impossible for the Department to trace out the movement of black money between two or more assessees. As a result, in many cases, the Courts have held that mere fact that the consideration is less than the fair market value would not suffice to make an addition under the Income-tax Act, 1961 ('Act') unless the Department adduces evidence to demonstrate receipt of consideration over and above what has been disclosed [See CIT v A Raman & Co. - [TS-5052-SC-1967-O], CIT v Calcutta Discount Co. Ltd. - [TS-5033-SC-1973-O]. To overcome this onerous requirement, the Legislature has shifted the burden onto the assessees by enacting deeming fictions, whereby the difference between the consideration paid/ received and the fair market value is added as income in the hands of the assessees without anything more.

The above strategy is effectively used by the Department in real estate transactions, as it is commonly known that, such transactions are notorious for involvement of black money. To this effect, the Legislature has inserted various provisions in the Act since last several years like section 269C, 269UA, 52(2) etc. Presently, the sections in vogue are section 43CA, 50C and 56(2)(x). Brief background of these sections is given hereunder:

Brief background of section 50C, 43CA and 56(2)(x)

Section 50C of the Act was inserted by Finance Act, 2002, w.e.f 1.4.2002. Section 50C states that where the consideration received or accruing as a result of transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty (stamp duty value) in respect of such transfer, the value so adopted 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.

Similar provision was inserted in context of the sale of land or building or both but where such asset is held as stock-in-trade. Such provision was inserted under the chapter 'Profits and gains of business or profession' in the form of section 43CA. This section was inserted by Finance Act, 2013, w.e.f. 1.4.2014.

The above mentioned provisions i.e. section 50C and 43CA concerns with the income of the transferor of the asset. In so far as the recipient of the asset is concerned, the same is taken care by section 56(2)(x) of the Act. This section, which was inserted by Finance Act, 2017, taxes receipt of, inter alia, immovable property being land or building or both on or after 1.4.2017 either without consideration or for a consideration which is less than the stamp duty value of the property by at least Rs. 50,000/-. Further, this section taxes receipts by all person unlike its predecessor section 56(2)(vii) which taxed such receipts only in the hands of individual or HUF.

Thus, the above provisions, directly deems the difference between the stamp duty value and the actual consideration as the income of the person.

Difficulties with the stamp duty value or circle rates

The rates of the land or building prescribed in the Ready reckoner are generally based on the zone or the ward in which a particular property is situated. Certain adjustments are made for depreciation based on the life of the property. However, no distinction is made in respect of various factors like stage of construction, quality of construction, amenities or facilities provided, location and other physical peculiarities of a particular building situated in such zone / ward or other economic and business factors like distress selling, vastu compliance issues, etc. Further, such stamp duty values are based on past experience and are published for one year. Such circle rates are sometimes much higher than the fair market value of the property.

Thus, stamp duty value is a highly unrealistic value to be regarded as bench mark for the purpose of taxing notional income. Even the Apex Court in case of Jawajee Nagnatham vs. Revenue Divisional Officer, Adilabad (1994) 4 SCC 595, has held that basic valuation register maintained by Registry authority for collection of stamp duty has no statutory foundation to determine the market value of the property.

It may not be out of context to quote Viscount Simon from the case of Gold Coast Selection Trust Ltd. vs. Humphrey (Inspector of Taxes) (1949) 17 ITR (Supp.) 19 (HL) wherein he has held that "Valuation is an art, not an exact science. Mathematical certainty is not demanded, nor indeed is it possible". Thus, valuation is a subjective issue which cannot be quantified or narrowed down.

The above factors, many a times, explain the rationale behind the difference between the actual consideration and the stamp duty value. Even the Income-tax statute recognised the fact that there may be a margin of difference between the two values; which is discussed hereunder:

Old provisions under the Act

Section 52(2) of the Act, which was omitted by Finance Act, 1987, w.e.f. 1.4.1988, provided that where the fair market value of the property exceeded the full value of consideration received on sale of such property by not less than 15%, then such fair market value was to be taken as the full value of consideration.

Section 269C of the Act, which ceased to be effective w.e.f. 30.09.1986, gave power to the competent authority to initiate proceeding for acquisition of any property, where he had reason to believe that such immovable property was being transferred by a person to another for less than the fair market value. However, second proviso to section 269C(1) stated that such provision would not be attracted where the difference between the market value and the actual consideration was less than 15% of the actual consideration.

In the context of section 269UA of the Act which succeeded section 269C, the Apex Court in case of C. B. Gautam vs. UOI [TS-5047-SC-1992-O], held that the Departments stand made it clear that powers of compulsory purchase conferred under the provisions of Chapter XX-C are being used and intended to be used only in cases where there is a significant under-valuation of the property concerned, namely, of 15 per cent or more.

Thus, consistently, the Legislature had recognised a safe harbour of 15% in erstwhile provisions governing the transactions of immovable properties.

Judicial precedents

Considering the above provisions and judgments, in context of section 50C, the Tribunal, even without any specific provision to this effect, applied a safe harbour of 5-10% in many cases viz: John Fowler (I) (P.) Ltd. v. Dy. CIT [TS-6184-ITAT-2017(MUMBAI)-O], Rahul construction vs. DCIT [TS-5028-ITAT-2010(Pune)-O], Smt. Sita Bai Khetan vs. ITO [TS-6042-ITAT-2016(Jaipur)-O],  ITO vs. Bajaj Udyog [TS-8594-ITAT-2019(Jaipur)-O], ACIT v. S. Suvarna Rekha and ITO vs. LGW Ltd [TS-6249-ITAT-2015(Kolkata)-O] .

Amendment by Finance Act, 2018 w.e.f. AY 2019-20.

Though the provision of section 50C, 43CA, 56(2)(vii) [predecessor of section 56(2)(x)] are existing since long, for the first time the Legislature recognised the need for introducing the concept of safe harbour in the scheme of such sections. By Finance Act, 2018, the Legislature amended section 43CA, 50C and section 56(2)(x) to the effect that such addition of difference between the actual consideration and the stamp duty value will not be made where such difference is less than or equal to 5% of the actual consideration.
The rationale behind such amendment was given in Circular No. 8/2018 dated 26.12.2018. In para 16.2, it has been stated that "It has been pointed out that the variation between stamp duty value and actual consideration received can occur in respect of similar properties in the same area because of a variety of factors, including shape of the plot or location". Therefore, to minimise the hardship, the said amendment has been carried out.

The above was a welcome move; though the attempt was termed by many as a half-hearted one. The statute was generous enough till date to provide for a safe harbour of 15%, however, in the latest provisions, apart from the fact that they were late to recognise this concept itself, the limit itself was set at a meagre figure of 5%.

Amendment proposed by Finance Bill, 2020.

Vide clause 22, 27 and clause 29, the Finance Bill, 2020 proposes to increase the tolerance limit of 5% to 10% under section 43CA, 50C and 56(2)(x) respectively. In para 123 of the speech of the Hon'ble Finance Minister, it has been stated that the said move is to minimise the hardships. Further, the Explanatory Memorandum justifies the proposed action on the ground that representations have been received to increase such limit and therefore, this proposal.

This again is a welcome move though one may always argue that earlier the limit was 15% under the erstwhile provisions dealing with the tax evasion in context of the immovable property transactions.
Issues

The first and foremost issue that may arise is whether such amendment is retrospective in nature or not. The rationale behind the proposed amendment as well as the amendment carried out by Finance Act, 2018, as already brought out earlier, is to remove hardship. In such scenario, the provision should be treated as retrospective in nature. Reliance can be placed on the judgment of the Apex Court in case of Allied Motors (P.) Ltd. vs. CIT [224 ITR 677] = [TS-7-SC-1997-O], where the Court held that amendment which is remedial in nature, designed to eliminate unintended consequences which may cause undue hardship to the assessee should to treated as retrospective in nature. Further, such proposed amendment should be held to be effective from the day the respective sections are brought into the statute book.
It may be noted that recently, the Mumbai Bench of the ITAT in case of Welfare Properties (P.) Ltd. vs. DCIT [TS-5631-HC-2010(Punjab)-O], in context of section 43CA, has refused to provide a tolerance limit of 15% in a period when the amendment was not applicable; indirectly holding the amendment to be prospective in nature. With utmost respect the said judgment has not dealt with the issue in detail and has not considered the judgment of the Apex Court in case of Allied Motors (supra).
The proposed amendment as well as the earlier amendment has highlighted and addressed a genuine issue. However, the larger controversy of taxing notional income without anything to demonstrate receipt or payment of anything more, still remains. Plain language of the impugned sections suggest that the sections are attracted automatically once there is a difference between the stamp duty value and actual consideration and such difference is more than the tolerance limit as specified earlier. The purpose of impugned sections is, evidently, to tackle the menace of black money, however without proving the involvement of black money, the mere difference between the two values attract the provisions of the impugned sections. The purpose howsoever laudable, does harm many genuine transactions. The Supreme Court in the celebrated judgment of K. P. Varghese vs. ITO [131 ITR 597] = [TS-11-SC-1981-O], while dealing with the provisions of section 52(2) had held that Department has to be prove understatement of the consideration to tax the transaction at the fair market value. This, condition should still, in my humble opinion, apply.

Though the constitutional validity of section 50C has been upheld, however, in context of predecessor sections of section 56(2)(x), the Courts have applied the concept of purposive interpretation and held that if the transaction is not for evading tax, then provisions of section 56(2)(vii) should not be applied (See ACIT vs. Subodh Menon -[175 ITD 449 (Mum)] = [TS-9239-ITAT-2018(Mumbai)-O] and Vaani Estates (P.) Ltd. vs. ITO - [172 ITD 629 (Chennai)] = [TS-8579-ITAT-2018(Chennai)-O].

Interestingly, similar provisions are also present in case of other assets like shares and securities. Section 50CA which is similar to section 50C applies to transfer of a capital asset being share of a company other than quoted shares and it treats the fair market value of such shares as full value of consideration in place of actual consideration received where such consideration is less than the fair market value. Further, section 56(2)(x) also taxes receipt of shares either without consideration or for a value which is less than the fair market value. In both the sections, the fair market value has to be determined on the basis of one ad-hoc method which is prescribed in Rule 11UA of the Income-tax Rules, 1962. Such method is an absurd and vague one. However, it is astonishing to note that there is no safe harbour provision in such cases, which is the need of the hour, considering the fact that great damage is caused otherwise.
Thus, the proposed amendment is a welcome move, though much overhaul is need to make the deeming fictions less draconian.