Bombay H.C : Section 50C of the Income-tax Act not ultra vires of the Articles of Constitution of India.

High Court Of Bombay

Bhatia Nagar Premises Co-Operative Society Ltd. Vs. Union Of India

Section : 50C

F.I. Rebello And A.A. Sayed, JJ.

Writ Petition No. 1305 Of 2009

March  15, 2010

JUDGMENT

F.I. Rebello, J. – The prayer clause (a) as amended seeks the following relief :

“(a) This Hon’ble Court be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or directions under Article 226 of the Constitution of India, calling for the records and proceedings of Demand Notice dated 23-10-2008 issued by the Respondent No. 4 under the Stamp Act and to quash and set aside the same being exhibit “A” hereto.

(b) Section 50C of the Income-tax Act, 1961 be held and/or declared as ultra vires of the Articles of Constitution of India.”

2. A few facts may be set out. The petitioner is a Co-operative Society, which is the owner of the land on which stands a building, which they have allowed Ankur Realty Private Limited, Mumbai, to develop and sell under the Development Agreement. The Agreement was sought to be registered as required under the provisions of the Bombay Stamp Act, 1958 (hereinafter referred to as “the Stamp Act”). In terms of First Schedule entry 5(ga) of the Stamp Act, the agreement if relating to giving authority or power to a promoter or a developer, by whatever name called, for construction on, development of or, sale or transfer (in any manner whatsoever) of, any immovable property, the duty chargeable is the same as is leviable on a conveyance under clause (b), (c) or (d ), as the case may be, of Article 25, on the market value of the property. Respondent No. 4 by Demand Notice dated 23-10-2008 called on the Developer to pay an amount of Rs. 15,50,030 as stamp duty as also a penalty in the sum of Rs. 1,55,010. The Developer paid the said amount along with penalty.

3. It is the case of the petitioner that though the demand was issued in the name of the Developer, the order adversely affects their right and interest as valuation worked out has a direct nexus to section 50C of the Income-tax Act which adversely affects the liability of the petitioner Society to the extent of Rs. 1,91,90,568 as the consideration was raised from Rs. 4,85,00,000 to Rs. 15,50,00,000 and as such the Capital Gain Tax will have to be paid accordingly.

4. By the present petition, the challenge is to section 50C of the Income-tax Act, 1961 as introduced by the Finance Act, 2002 with effect from 1-4-2003. The grounds raised are as under :

(A) Section 50C must have direct nexus and must emanate from the provisions of section 45, which is the charging section of the Act. It is, therefore, submitted that what section 45 brings under the levy is profits and gains arrived or accrued and not the valuation of the Stamp Valuation Authority as arbitrarily determined and fixed under section 50C of the Act.

(B) Section 50C does not start with a non obstante clause and, therefore, the same cannot be construed to operate without due obedience and confirmation with the other provisions of the Act and in view of that section 50C cannot be read into section 48 of the Act which prescribes the procedure for computation of capital gains of the assessee. Section 48 stipulates the full value of the consideration received or accruing as a result of the transfer of the capital asset and not the valuation of the Valuation Officer for the purpose of stamp duty determined under any some other law.

(C) Sections 54 to 54ED provides for exemption on Capital Gain Tax of assessee. The assessees, who have been assessed as per the valuation as prescribed under section 50C of the Act cannot invest the excess amount of difference which is not received or receivable by them but is assumed to have been received under the said section and thereby the petitioner as well as such assessee affected by section 50C of the Act cannot even avail of the benefit of exemption upon Capital Gain Tax as available under section 54 of the Act and as such section 50C is not in consonance with other provisions of the Act resulting into illegal and unreasonable discrimination without any justification. Section 55A provides for reference to the Valuation Officer for ascertaining the fair market value of the capital asset. Therefore, when there is a provision prescribing for valuation to be assessed by the Valuation Officer, no additional purpose will be served by introducing section 50C of the Act. It is submitted that what can be checked and controlled is evasion of tax and the remedy should be proportionate and same cannot partake the nature of confiscatory measure. Section 50C is a draconian provision which is in absolute contrast to the objects and purposes of the Income-tax Act, 1961.

(D) That the Income-tax Act, 1961 is a law made under Entry 82, Schedule VII-List I of the Constitution of India. As such considering sections 4 and 5 of the Act, which contemplate levy or tax upon all income and by no stretch of imagination the meaning and scope of ‘total income’ be substituted by ‘the Valuation assessed by Stamp Valuation Authority for the purpose of stamp duty’. The meaning of ‘Income’, therefore, under section 50C is beyond what is stipulated under Entry 82, List I of Seventh Schedule of the Constitution.

(E) Section 50C as introduced by the Finance Act does not provide the rate of tax or manner of liability but in effect substitutes the ‘valuation of the Stamp Valuation Authority’ with the ‘total income’ of the assessee while assessing the liability of the income-tax which amounts to alteration of the subject-matter of Income-tax Act itself. That the subject-matter of the Act is income other than agricultural income and the relevant Finance Act by introducing section 50C seeks to change/alter/substitute the subject-matter of the Act as what is brought under the net of income-tax is not all income received or deemed to be received or accrues or arises or is deemed to accrue or arise to the assessee but the Valuation of the Stamp Valuation Authority, which evidently is beyond the provisions of the Constitution of India.

(F) The right of the assessee to put forward the assessment of his income is arbitrarily and unilaterally taken away by enacting section 50C without any reasonable justification. Section 50C, it is submitted, in effect alters the very nature and concept of the ‘total income’ and precisely adopts ‘the stamp duty valuation of the instrument’ and not ‘computation of total income’ as the basis or subject of the tax under the Income-tax Act, which is patently ultra vires the Constitution of India and the provisions of the Income-tax Act.

(G) The Indian Stamp Act (or the Bombay Stamp Act, 1958) is a fiscal statute whose main object is to make available certain dues and to collect revenue and all its provisions must be construed as having in view the protection of revenue and prevention of evasion of the revenue that it imposes.

(H) How can section 50C have valid operation and enforcement as what is implied by section 50C is adoption of valuation of property for the purpose of stamp duty upon an instrument and has therefore no direct, proximate and reasonable nexus with the ‘total income’ of the assessee which is the subject-matter of charge of tax and as such section 50C is ultra vires to the provisions of the Indian Constitution.

(I) When there is no assessment of income but only the stamp duty upon the instrument for the purpose of revenue is what is determined by the Stamp Duty Officer, how could section 50C to that extent declare such valuation as the income of the assessee. It discloses no reasonable classification or intelligible differentia to justify the operation of section 50C of the Act and is therefore violative of Article 14 and Article 300A of the Constitution of India. It is a direct infringement upon the fundamental right to carry on any occupation or trade as guaranteed under Article 19 of the Constitution of India and in the process it violates Article 300A of the Constitution of India.

(J) “Market value” is defined under the Bombay Stamp Act under section 2(na). The market value or the stamp duty determined upon any instrument of transfer does not connote the consideration received upon such transfer and therefore adopting the stamp duty valuation as the income or consideration received by the assessee as declared under section 50C of the Act is wholly misconceived and the same is not in consonance with the Scheme of the Income-tax Act. The Central Enactment in terms of section 50C is superior to the State Act and providence of Central Enactment depending upon the outcome under the State Act, must be held as unconstitutional and ultra vires the provisions of the Constitution of India.

5. Notice was issued to the Attorney General. Learned Additional Solicitor General points out that the issue is covered by the Division Bench Judgment of the Madras High Court in the case of K.R. Palanisamy v. Union of India [2009] 180 Taxman 253 . The Madras High Court, it is submitted, has held that section 50C is constitutionally valid and the various arguments raised have been rejected. Placing reliance on Union of India v. A. Sanyasi Rao [1996] 219 ITR 3301(SC), it is pointed out that the valuation taken for the purpose of stamp valuation is only a measure for the purpose of levying tax and as such the various contentions raised on that count must be rejected. It is only a measure for levying tax and as such it will not alter the nature and basis of levying the tax imposed as if is a tax on income.

6. On behalf of the petitioner, learned Counsel sought to bring to our attention an unreported judgment of the Single Judge of the Madras High Court in the case of N. Meenakshi v. Asstt. CIT [Writ Petition No. 851 of 2009, dated 11-9-2009] where the order in respect of the valuation done by the Valuation Officer under section 50C(2) of the Income-tax Act, 1961 and the assessment thereto was challenged. The Assessing Officer had taken the value of the land determined for the stamp duty purpose as the same value as no valuation report was received from the Valuation Authority till the said date. The matter was remanded. At the same time, the order notes that the petitioner had also filed a petition challenging the vires of section 50C which was dismissed. The question of vires of the provision was left open.

7. In the instant case no reply has been filed on behalf of the Union of India. Learned Addl. Solicitor General, however, submits that considering the stand of Union of India before the Madras High Court in the case of K.R. Palanisamy (supra), he is adopting the said contention and the petition can be disposed of on that basis as no new facts are involved.

8. On behalf of respondent No. 4, reply has been filed by Eknath Marutirao Navle, the Collector of Stamps, Borivali. It is set out that demand has been issued by the Collector pursuant to an order passed under section 31 of the Bombay Stamp Act on a reference made by the Developer under section 31 of the Bombay Stamp Act for determination of the stamp duty payable. Against that order, there is a remedy available under section 53 of the Stamp Act. On this count itself the petition ought not to be entertained.

The stamp duty, it is set out, has been correctly levied under Schedule 1 Article 5(ga) at the rate of 1 per cent on the market value. The market value of the property in relation to any property which is the subject of the instrument is the price of the property which such property would have fetched if sold in open market or consideration stated in the instrument, whichever is higher. After considering various aspects, it was held that the sum total of all the Development Agreement comes to Rs. 15 crores, on which the stamp duty of 1 per cent has been calculated and has been levied and accordingly demanded. Thus the consideration to be received by the Society under the Agreements in terms of money has been taken to be the market value of the property.

9. For the purpose of discussion, we may gainfully reproduce sections 45, 48 and 50C of the Income-tax Act, which read as under :

“45. Capital gains.—(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54 and 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head ‘Capital Gains’, and shall be deemed to be the income of the previous year in which the transfer took place.

48. Mode of Computation.—The income chargeable under the head ‘Capital Gains’ shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the capital asset and the cost of any improvement thereto.

50C. Special provision for full value of consideration in certain cases.— (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the ‘stamp valuation authority’) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

(2) Without prejudice to the provisions of sub-section (1), where—

(a) the assessee claims before any 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;

(b) the value so adopted or assessed by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any 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 sub-sections (2), (3), (4), (5) and (6) of section 16A, clause (I) of sub-section (1) and sub-sections (6) and (7) of section 23A, sub-section (5) of section 24, section 34AA, section 35 and section 37 of the 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 sub-section (1) of section 16A of that Act.

(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.”

10. A perusal therefore reveal that under section 50C the value adopted by Stamp Valuation Authority or assessed for the purpose of section 48, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. Apart from that under sub-section (2) where the assessee claims before any Assessing Officer that the value adopted or assessed, exceeds the fair market value of the property as on the date of transfer and the value so adopted by the Stamp Valuation Authority has not been disputed by any appeal or revision or no reference has been made before any authority, Court or High Court, the Assessing Officer may refer the valuation of the capital assets to the Valuation Officer. Thus, even though, if an appeal has not been preferred and in the instant case reference was sought by the Developer and not the petitioner, the petitioner has a remedy of calling on the Assessing Officer to appoint the valuer for the purpose of determinating the fair market value. We may also note that under section 50C, the value so adopted or assessed by any Authority of the State Government, referred to as the Stamp Valuation Authority is only a measure of tax and not the subject-matter of a tax. For that principle, we may gainfully refer to the observation of the Supreme Court in A. Sanyasi Rao’s case (supra) which was a judgment arising from the judgment of the Andhra Pradesh High Court. Before the Andhra Pradesh High Court there was a challenge to the Constitutional validity of sections 44AC and 206C of the Income-tax Act. After considering various contentions, the learned Division Bench of the Andhra Pradesh High Court was pleased to hold that section 44AC is an adjunct to section 206C. Tax was to be computed based on the purchase price. Both the assessee and the Revenue Authority preferred appeal to the Hon’ble Supreme Court independently. There were some petitions under Article 32 of the Constitution of India. While considering the appeal in the matter of levying tax on purchase price, this is what the Hon’ble Supreme Court observed:

“…In this context, we should bear in mind that there is a clear distinction between the subject-matter of a tax and the standard by which the amount of tax is measured. Having regard to the past difficulties in making a normal assessment and collection in the case of certain categories of assessees, for convenience, sake, the legislature has chosen to make appropriate provision for collection of tax at an anterior stage by adopting the purchase price as the measure of tax. In our view, this is permissible and the standard by which the amount of tax is measured, being the purchase price, will not in any way alter the nature and basis of levy viz., that the tax imposed is a tax on income. It cannot be labelled as a tax on purchase of goods.”

It is, therefore, clear that the valuation rule of the Stamp Act is for the purpose of computation of income which is only a standard of measure for imposing tax.

11. With that we will now consider the various arguments advanced at the Bar. It may be mentioned that the petition as earlier filed, apart from the bald averments that section 50C of the Income-tax Act be declared as ultra vires, no grounds to that effect were raised which have been subsequently pleaded by way of an amendment. Additional prayer clause has also been included to challenge the demand notice dated 23-10-2008 issued by respondent No. 4 under the Stamp Act and to set aside and quash the same.

12. Insofar as prayer clause (a), as now substituted by the amendment is concerned, we are clearly of the opinion that as the Developer had sought a reference on which the Competent Authority under the Stamp Act had given the valuation and pursuant thereto paid the duty as also the penalty imposed, that challenge will not be available to the petitioner in this petition as there is no longer a demand notice to be complied with.

13. We shall therefore confine ourselves to consider prayer clause (aa) by which it is prayed that section 50C of the Income-tax Act be declared as ultra vires the Constitution of India. Learned Counsel on behalf of the petitioner had sought to draw our attention to the judgment of the Supreme Court in CIT v. Khatau Makanji Spg. & Wvg. Co. Ltd. [1960] 40 ITR 189, to the following observations, namely, that under section 3 of the Income-tax Act, income-tax is a tax on the income of the previous year and it would not cover something which is not the income of the previous year, or made fictionally so. Section 45 provides for the mode of computation of income chargeable under the head ‘Capital Gains’. Section 50C is a measure provided to bridge the gap as it was found that assessees were not correctly declaring the full value of the consideration or in other words resorting to the practice of undervaluation. The Madras High Court in K.R. Palanisamy case (supra) has noted that the legislative history reveals that prior to the insertion of the impugned provision, section 52(2) was there in the statute which was also meant to check the avoidance of capital gain tax. After the deletion of the said proviso, Chapter XX-A was introduced empowering the Government to acquire immovable property in specific cases. Thereafter, Chapter XX-C was introduced. All these provisions were directed only to check and prevent the evasion of tax by undervaluing the consideration of the transfer of capital assets.

14. We may now deal with the contention as formulated under grounds (A), (B), (E), (F), (G), (H), (I) and (J) of paragraph 4 above. Section 45 treats income under the head as deemed income of the previous year in which the transfer took place. Section 50C is a special provision for providing the measure of tax for assessing the income under the head capital gain. Consequently it must be read with section 45. The submission that what section 45 brings under the levy is profits and gains arrived or accrued and not the valuation of the Stamp Valuation Authority as arbitrarily determined and fixed under section 50C of the Act is also misplaced. As noted, section 50C is only a standard of measure for computation of the tax which is chargeable under sections 4 and 5 of the Income-tax Act. The tax is only computed in the manner laid down under those provisions referred to earlier.

15. Section 45 itself notes the provision of sections 54 to 54EB. Therefore, the income received by way of capital gain would be subject to the provisions of sections 54 to 54EB. The income is deemed to have been received and that is the point of time on which the income has to be assessed. It therefore, cannot be the case that the assessee would not be entitled to the benefit of exemption. It also cannot be said that such a classification would be arbitrary or unreasonable and/or discriminatory. Section 50C has been specifically introduced with a view to prevent evasion of tax and under valuation of the transaction. It is in that context that section 45, section 48 and section 50C must be read. The classification, therefore, is in respect of an identifiable group of assessees. Both classes have to pay capital gains tax. Insofar as section 50C is concerned, it pertains to a class of capital assets being land or building. We therefore do not find that the classification as being unreasonable and consequently discriminatory considering the object being, to tax the income arising from capital gains. Those grounds enumerated earlier, therefore, have no merit and are consequently rejected.

16. We may next deal with the argument that the Income-tax Act is a law made under Entry 82, Schedule VII-List I of the Constitution of India and consequently the valuation assessed by the Stamp Valuation Authority is illegal as such a provision would be beyond the field of legislation under Entry 82 List I of 7th Schedule and as such beyond the competency of Parliament. In our opinion, this argument has to be rejected. Similar contention was raised in the case of A. Sanyasi Rao (supra) by contending that the tax levied there was on the purchase price and not the tax on income. In that case, as we have noted earlier, what was under consideration was section 44AC of the Income-tax Act which was a special provision for computing profits and gains from the business of trading of certain goods. The measure there was the purchase price. Argument sought to be contended was that the Parliament would not have competence to legislate as it would be beyond Entry 82 of List I. After considering the various judgments and noting that purchase price were only a standard of measure, the Hon’ble Supreme Court was pleased to hold that it was within legislative competence, by observing that the charge for the levy of income accrued or arose as laid down by the charging sections 4 and 5 and not by virtue of section 44AC or section 206C. In our opinion, the ratio of that judgment would clearly apply to the facts of the present case. A similar argument was advanced also before the Andhra Pradesh High Court. After considering the test for interpretation of taxing statute the Hon’ble Court noted that the tax was within legislative competence.

17. Thus the two contentions raised before us, namely, (1) that section 50C is beyond the legislative competence and (2) that it is violative of Article 14 of the Constitution of India, in our opinion are devoid of merits.

18. We have not referred to any judgments on the rules of interpretation as in our opinion the judgment of the Supreme Court in A. Sanyasi Rao’s case (supra) and the judgment of the Madras High Court in K.R. Palanisamy v. Union of India [2009] 180 Taxman 253 has made reference to the judgments on the rules of interpretation.

19. Our attention was also invited to another judgment of the learned Single Judge of the Madras High Court in N. Meenakshi’s case (supra). That petition was directed against the assessment order of respondent. In that case reference has been made to the Valuation Officer. However, before the report was received, the assessment was done by taking the value of the land as determined for stamp duty. The petitioner had filed the petition challenging the vires of section 50C of the Act which was dismissed. The assessee approached the Supreme Court which rejected the Special Leave Petition and directed the petitioner to approach the authority by keeping open the question of vires of the provisions. This judgment, in our opinion, could be of no assistance as the only issue left open for consideration was the vires of the act.

20. It is not the case of the petitioner that the valuation could not have been done under the provisions of the Bombay Stamp Act, 1958 and/or that the Collector acted contrary to law in levying stamp duty under Schedule I Article 5(ga). Even otherwise as noted earlier, in the process of assessment it will be open to the assessee to invoke the provisions of section 66 by asking on the Assessing Officer to refer the matter to the Valuation Office and that would be within the jurisdiction of the Valuation Officer. We are in agreement with the view taken by the Madras High Court in K.R. Palanisamy’s case (supra).

21. For the aforesaid reasons, there is no merit in this writ petition. Rule accordingly discharged. There shall be no order as to costs.

[Citation : 334 ITR 145]

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