Sec.50C and Sec.69B of IT Act 1961 - No Twins

Sec.50C and Sec.69B of IT Act 1961 - No Twins

Man proposes, God disposes (either ways). But luckily for the assessee the Department proposes, judiciary opposes. Our Income tax law provides for tackling the cases of undervalued as well as undisclosed Investments. It has one powerful weapon in its armoury which is popularly called ‘Deeming Fiction’ written all over it. Any unexplained expenditure or investment to the Income tax authority gets the verdict of taxable income. The explanation that the Assessing Officer looks for is whereabouts of the investment and whether the requisite taxation has happened. It is due to this fiction that many assessees have had to face the music with the tax department.

Sec.50C of the Act deals with a scenario where the assessee being the transferor of a capital asset being Land or Building or both receives or is entitled to receive a consideration which is lesser than the Value adopted by the Stamp valuation authority (this is the incumbent state Government Authority which administers stamp duty collection) for the purpose of arriving at the stamp duty liability on the transfer. In this situation the act requires the assessing officer (AO) to adopt the value assessable for the purpose of stamp duty. The applicability of this section has been restricted to non depreciable capital assets. For depreciable assets the provisions of Sec.50 will have to be followed since it is opined by the judiciary to have an overriding effect on Sec.50C (Panchiram Nahata vs. JCIT (127 TTJ 128). Again Sec.50 being a specific clause relating to computation of capital gains for assets forming part of a depreciable 'Block' should ideally override the generic clause in Sec.50C. Thus it goes without saying that for an assessee having business income, only Investment properties will be covered and not the Buildings included in the 'Block of assets'.

If the assessee feels that what he has received or entitled to receive is at par with the Fair value or in other words the value adopted for stamp duty is only higher than the fair market value, he is allowed to contest the case before the AO provided the assessable value is not disputed elsewhere in Indian Courts. The AO can then make reference to the Valuation officer(VO). But then a reference to VO does not always guarantee a justifiable value. Hence in Ravikant vs ITO case the ITAT, Delhi held that a VO cannot blindly do a weighted averaging on the rates fixed by the Stamp valuation authority and arrive at an amount detrimental to the assessee. Sub section (3) provides that where the valuation officer determines an amount higher than the value assessed by the stamp valuation authority, the assessed value only has to be reckoned for the purpose of computing capital gains.Thus, to be fair enough, Sec.50C is more of a conduit provision for computation of capital gains. The Bottom-line is that the consideration that is to be used for computation of capital gains as per Sec.48 of the Act is a fair market value and not any artificially low price. This is in contrast to Sec.55A which comes into picture only when the AO makes a reference to the VO on his own accord with a view to ascertain the Fair market value.

Though Sec.50C does not cover shares and other personal assets, the Income tax Notification No.23/2010 provides guidance on valuation of such assets and capital gains will be computed accordingly. Also Sec.50C does not clearly state if legal ownership is the criteria to tax the assessee. The words "Where the consideration received or accruing as a result of thetransfer by an assessee of a capital asset, being land or building or both......." seem to suggest that the assessee may or may not be the actual owner. But this may not be the case. The Madras High court in CIT vs Thiruvengadam Investments Pvt ltd dismissed the department's claim that since the property was taken only on power of attorney and it was never a capital asset for the assessee, Sec 50C is not attracted in this case (the assessee was a property promoter). Therefore it is also needless to say that if the assessee holds a capital asset being land or building by virtue of a transfer made to him that is exempted under Sec.47 of the Act, he will not be exigible under Sec.50C.

Now jumping to Sec.69B of the Income tax act. It is all about trapping stealthy assessees who do not fully disclose their ownedinvestments including bullions, jewels or other valuable articles in their books of accounts maintained for the purpose of any source of income and do not offer or offer no satisfactory explanation to the AO. Both these sections require ownership of the asset and apply accross the board. On plain reading, the following are the distinguishing features in these two provisions,

1. Sec.50C disregards the data reflected in the Books of accounts maintained by the assessees and focusses on the lease deed and the fair value of the consideration while Sec.69B is a charging provision which shows the stick upfront to the defrauding assessee who conceals the data in the Books of accounts.
2. Sec.50C covers only the transfer of land or building or both while Sec.69B apart from capital investments includes personal properties such as jewels, bullions and other valuable articles. Neither of them will cover stock in trade.
3. Sec.50C may be applied voluntarily by the assessee at the time of self assessment or by the AO at the time of regular assessment, whereas Sec.69B will be of use to the tax authority at the time of search and seizure i.e. when related documents and other evidences show that the assessee owns investments for more monies than what he has recorded.

There may be a couple of questions; one purely from an accountant's perspective as to how the excess mentioned in Sec.69B is viewed i.e. whether as a valuation or quantitative difference or both. The words "the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income" do seem to create an ambiguity. This could be a valid doubt. Consider the scenario of IFRS (International Financial Reporting Standards) where the subject capital investment is an Investment Property which is to be accounted as per IAS-40. The standard gives an option for subsequent measurements to be at Fair value. This recorded amount is very less likely to be same as the amount originally expended (i.e. cost). In periods of falling property prices,will the law accept the explanation offered by the accountant as above?. But having said these, the main purpose of this provision is to provide remedy to the department in case of undisclosed investments. Hence valuation differences as argued above should hardly matter. To affirm this, there are a couple of interesting High court decisions which are of respite to the assessee,

1. Dr. Prakash Tiwari v. CIT [1984] 148 ITR 474 (MP): Where accounts are not at all maintained, additions made as unexplained investments would not be sustainable under section 69B. (But care is required that for the purpose of getting taxed under Sec.69 (unexplained investments) there is no requirement for Books of accounts to have been maintained by the assessee).

2. Smt. Amar Kumari Surana v. CIT [1996] 89 Taxman 544 (Raj.). Merely on the basis of fair market value no addition can be made under section 69B, but if on the basis of sufficient material on record some reasonable inference can be drawn that the assessee has invested more amount in purchase of plot than that shown in account books, then only the addition under section 69B can be made. The burden is on the revenue to prove that real investment exceeded the investment shown in account books of the assessee.

Secondly, is there any passage between the provisions of Sec.50C and Sec.69B of the act?. On plain reading there did seem to be a trap for the assessee. While Sec.50C explores the gap between the fair value of the consideration and actual amount received or receivable from the transfer of the Land or building, Sec.69B seems menacing to tax this gap in the hands of the purchaser. This is because the purchaser might have recorded the investments at his cost whereas the AO might consider the value adopted by stamp valuation  authority on the date of purchase. But thankfully Tribunal (ITAT) has dismissed the department's appeal in the above regard in ITO v. Harley Street Pharmaceuticals Ltd.,  The Hon’ble Allahabad High Court In Dinesh Kumar Mittal v. ITO {1992)193 ITR 770 (All.) also held that there is no law to the effect that the value determined for the purposes of stamp duty is the actual consideration passed between the parties to the sale. Thus law is quite clear on to what extent deeming provisions can be applied.The burden is again on the Revenue to prove that the assessee has undisclosed investments.

Also, protection is made judicially available to the assessee if he is put to hardship when the department ruthlessly turns down the explanation offered by the assessee as unacceptable and hence the undisclosed investments are to be taxed. In CIT v. Daya Chand Jain Vaidya case the Allahabad Court shifted the onus on to the department saying that if the assessee's explanation that the investments were in fact held by his wife and sons is not sustainable, then the department has to prove with material evidencesthat the investments were owned only by the assessee himself. Having said this, it is noteworthy that sec.69B per se uses the phrases like "is found to be the owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article......" (as opposed to the word 'reasons to believe') which is very conclusive that there is no room for any taxation based on a mere suspicion.

Though the department may not be able to take advantage as above, there is a possibility the other way around i.e when it comes to know about the purchaser of the investment having expended lesser than the market value (no coverage by Sec.69B) it may be alerted to verify the records of the seller to ensure that the provisions of Sec.50C has been complied with. Accordingly there may be a reassessment under Sec.147 of the Income tax act, if necessary and if possible as income escaping assessment within the prescribed time limits. 

The provisions of Sec.50C and Sec.69B do sound harsh on paper due to the phrases used, but our judiciary has invested enough time in the past to produce significant decisions which will safeguard the interest of the assessees. Hope this would substantiate the proverbial remarks in the prefacing paragraph.