180 TAXMAN 253 (MAD.) HIGH COURT OF MADRAS K.R. Palanisamy v. Union of India K. RAVIRAJA PANDIAN AND P.P.S. JANARTHANA RAJA, JJ. W.P. NOS. 4387 OF 2003, 7040, 7041, 15662, 35903 AND 35699 OF 2005, 6229, 15662, 24755, 24756, 25873, 31875, 37861 AND 37862 OF 2007, 1719, 1720, 1800, 1801, 2338, 2339, 3880 AND 3937 OF 2008 AND M.P. NO. 1 OF 2008 IN W.P. NO. 1801 OF 2008, W.P. M.P. NOS. 5513 & 5514 OF 2003 AND M.P. NO. 1 OF 2007 AUGUST 5, 2008 Section 50C of the Income-tax Act, 1961 - Capital gains - Full value of consideration in certain cases - Whether section 50C is constitutionally valid and is not hit by legislative incompetence of Central Legislature - Held, yes - Whether section 50C is discriminatory because it applies only to capital assets and is not applicable to trading assets or stock-in-trade - Held, no FACTS The assessees filed the instant petitions challenging the constitutional validity of section 50C on the grounds that the power of the Central Legislature to levy tax on capital gains arises under Entry 82 List I of Schedule VII of the Constitution which authorises the Legislature to legislate on enactment or provision for levy of tax on the income other than agricultural income, but under the impugned provision, an artificial or deemed income, which never accrued or received or contracted for by the assessee, is sought to be taxed and, hence, the provision of section 50C is liable to be quashed on the ground of lack of legislative competence; that section 50C is arbitrary in nature and is a remedyless provision, as under this provision no opportunity is provided to the aggrieved assessees to establish that the sale consideration is genuinely less than the market value and all the sales of properties are deemed to have understated the consideration if the fair market value is higher than the contracted value; that the property developers have been excluded from the provision and failure to cover such companies/firms is discriminatory and violative of article 14; and that section 50C creates ‘conclusive evidence’ that any difference between guideline value and sale consideration is deemed consideration and, hence, in the absence of any opportunity to the assessees, the provision is violative of principles of natural justice. HELD Section 48 provides for mode of computation of capital gains. Section 50C has been introduced from 1-4-2003 by the Finance Act, 2002. The conspectus of the provision is that it is a special provision for full value of consideration in certain cases. It applies to all cases of transfer of capital assets. If the consideration received or accrued as a result of the transfer by an assessee, of land or building or both, is less than the value adopted or assessed by the State authority for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration received and capital gains shall be computed, accordingly, under section 48. The section further provides that where the assessee claims that the value adopted or assessed for stamp duty exceeds the fair market value of the property as on the date of transfer or he has not disputed the value so adopted or assessed in any appeal or revision or reference before any authority or Court, the Assessing Officer may refer the valuation of the asset to the Valuation Officer in accordance with section 16A of the Wealth-tax Act. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purpose, the Assessing Officer may take such fair market value to be the full value of consideration. If the fair market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty, the Assessing Officer shall adopt the fair market value assessed for stamp duty purpose. [Para 16] POINT NO. 1 : WHETHER CENTRAL LEGISLATURE IS COMPETENT TO ENACT SECTION 50C : It is obvious from the reading of the provision of section 50C; rather it is not disputed that the same is inserted to prevent large scale undervaluation of the real value of the property in the sale deed so as to defraud revenue, the Government legitimately entitled to, by pumping in black money. The impugned provision has been incorporated to check such evasion of tax by undervaluing the real properties. Article 246 of the Constitution of India gives an exclusive power to the Parliament to make law in respect of the matters enumerated in List I of VII Schedule (Union List). Entry 82 List I of VII Schedule empowers the Parliament to levy tax on income other than agricultural income. The legislative competence of the Parliament in enacting statute or inserting provision for arresting leakage of income has been considered by the Apex Court in several cases. The uniform opinion in all those cases is that the entries in the legislative list should be construed more liberally and in their widest amplitude and not in a narrow or restricted sense. Each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended by it. The expression ‘income’ as defined in the Income-tax Act under section 2(24) cannot be read back into Entry 82 of List I of the VII Schedule to the Constitution. Even the said definition is an inclusive one and has been expanded from time-to-time. Several items have been brought within the definition from time-to-time by the various amending Acts. The said definition cannot, therefore, be read as exhaustive of the meaning of the expression ‘income’ occurring in Entry 82 of List I of the VII Schedule. The said Entry should be widely and liberally construed so as to enable the Legislature to provide by law for the prevention of evasion of income-tax. Tax can be evaded by breaking the law or can be avoided in terms of the law. When there is a factual avoidance of tax in terms of law, the Legislature steps in to amend the income-tax law, to catch such an income within the net of taxation. [Para 17] For the foregoing reasons and in the light of the judgment of the Apex Court in R.K. Garg v. UOI  4 SCC 675, the impugned provision is validly enacted and is not hit by legislative incompetence of the Central Legislature. [Para 22] POINT NO. 2 : WHETHER IMPUGNED PROVISION IS ARBITRARY BECAUSE OF ADOPTION OF GUIDELINE VALUE AND IS VIOLATIVE OF ARTICLE 14 AND PRINCIPLES OF NATURAL JUSTICE : Every safeguard has been provided under the provisions of the Stamp Act to the petitioner to establish before the authorities as to the real value for which the capital asset has been transferred. As per the provision of section 47A of the Stamp Act, if the registering authority has ‘reason to believe’ that the market value of the property, which is the subject-matter of transfer, has not been truly set forth in the instrument, he would, after registering such instrument, refer the same to the Collector for determination of the market value of such property. On receipt of the reference, the Collector shall, after giving the parties a reasonable opportunity of being heard and after holding an enquiry in such manner as may be prescribed by the rules made under the Stamp Act, determine the market value of the property. [Para 24] As per sub-section (5) of section 47A, any person aggrieved by an order of the Collector may appeal to the chief controlling revenue authority. As against the appellate order, a remedy of further appeal is also available under sub-section (10) of section 47A to the High Court. [Para 27] Sub-sections (2) and (3) of section 50C provide further safeguard to the assessee, in the sense that if the assessee claims before the Assessing Officer that the value adopted by the stamp duty authorities exceeds the fair market value and the value so adopted or assessed for the purpose of stamp duty has not been disputed in any appeal or revision before any authority, the Assessing Officer can refer the valuation of the capital asset to the departmental Valuation Officer. On such reference, if the value determined by the Valuation Officer is more than the value adopted or assessed by the stamp duty authority, the Assessing Officer shall adopt the market value as determined by the stamp duty authority. Thus, a complete foolproof safeguard has been given to the assessee to establish before the authorities concerned the real value. Thus, what is stated in section 50C as a real value cannot be regarded as a notional or artificial value and such real value is determinable only after hearing the assessee as per the statutory provisions. There is no indication either in the provisions of section 50C of the Income-tax Act or section 47A of the Indian Stamp Act or rules made thereunder about the adoption of the guideline value. Hence, the contention, that section 50C is arbitrary and violative of article 14, cannot be accepted. [Para 28] POINT NO. 3 : WHETHER IMPUGNED PROVISION IS DISCRIMINATORY : The capital assets and trading assets/stock-in-trade are treated differently under the scheme of the Act. They cannot be compared at par with each other by considering them as a class of assets. The discrimination on the ground of valid classification which answers the test of intelligible differentia does not attract wrath of article 14. The principles of valid classification are long settled by a catena of decisions of the Supreme Court. The principles are that those grouped together in one class must possess a common characteristic which distinguishes them from those excluded from the group and this characteristic or intelligible differentia must have a rational nexus with the object sought to be achieved by the enactment. [Para 30] It is well-settled that the latitude for classification in a taxing statute is much greater and in order to tax something it is not necessary to tax everything. These basic postulates have to be borne in mind while determining the constitutional validity of a taxing provision challenged on the ground of discrimination. [Para 31] The capital assets are classified as a class by themselves and cannot be compared or equated with the trading asset or stock-in-trade under the scheme of the Act. It is also recognised by the Supreme Court while determining the purpose or object of the legislation that it is permissible to look into the circumstances, which prevailed at the time when the law was passed and which necessitated the passing of that law. It is a well-established and well-settled proposition of law that the latitude for classification in a taxing statute should be much greater and in order to tax something, it is not necessary to tax everything. In order to see whether classification in particular taxing provision is valid, the Court must look beyond the ostensible classification and to the purpose of the law and apply the test of ‘palpable arbitrariness’ in the context of needs of the times and societal exigencies through experience to determine the reasonableness of the classification. [Para 36] The legislative history reveals that prior to the insertion of the impugned provision, section 52(2) was there in the statute, which was the subject-matter of K.P. Varghese v. ITO  131 ITR 597/7 Taxman 13 (SC), which is also one to check the avoidance of capital gains tax. After the deletion of the said provision, Chapter XX-A was introduced empowering the Government to acquire immovable property in specific cases. Thereafter, Chapter XX-C was introduced. Thus, all these provisions are directed only to check and prevent the evasion of tax by undervaluing the consideration of the transfer of capital assets. Thus, there exists intelligible differentia between the categories of assets, which have a rational nexus with the object of plucking the leakage of income from the capital asset by undervaluation of the document. [Para 38] For the above reasoning, the contention that the impugned provision is discriminatory also cannot be accepted. [Para 39] POINT NO. 4 : WHETHER IT IS NECESSARY TO READ DOWN SECTION 50C : As the provision of section 50C is constitutionally valid and is not hit by legislative incompetence, the contention as to reading down of the provision has to be rejected and there is no such necessity as well. [Para 40] A supplementary contention had been made by the assessee that neither the memorandum explaining the Finance Bill, 2002 nor the Circular of the CBDT, dated 27-8-2002 explained the object of the provision impugned and, hence, the provision had to be struck down. The said contention had been raised only for rejection. [Para 41] The intention of the Legislature can very well be gathered from the language employed in the provision of the Act itself, particularly, where the language is plain and unambiguous. In a taxing statute, it is not possible to assume any intention or governing purpose of statute other than what is stated in the plain language. Hardship and equity have no role to play in determining the validity of the provision. It is obvious that the provision has been introduced only to check the undervaluation, thereby evading tax payable to the Government and also curtail black money. The Finance Minister’s speech is neither a law nor a provision contained in the Act. A provision can be rendered inoperative only when it is found to be violative of the constitutional mandate. The provision cannot be rendered inoperative on the ground of the speech of the Finance Minister or the administrative instructions issued by the Central Board of Direct Taxes which has not explained the reason for incorporation of the provision when the object is evident from the provision itself. [Para 42] Likewise, the marginal note of the section and title of the Chapter cannot take away the effect of the provisions of the Act and they cannot render those provisions legislatively incompetent, if they are otherwise within the legislative competence of the Central Legislature. [Para 43] For the foregoing reasons, all the writ petitions were to be dismissed. [Para 44] CASE REVIEW R.K. Garg v. UOI  4 SCC 675 and UOI v. A. Sanyasi Rao  219 ITR 330/85 Taxman 321 (SC), followed. [Paras 18 & 19] K.P. Varghese v. ITO  131 ITR 597/7 Taxman 13 (SC); State of Rajasthan v. Rajasthan Chemists Association  6 SCC 773; R. Sai Bharathi v. J. Jayalalitha  2 SCC 9; Sakthi & Co. v. C. Desigachary 2006 (2) CTC 433; and C.B. Gautam v. UOI  199 ITR 530/ 65 Taxman 440 (SC), distinguished. [Paras 28, 29 & 38, 40] CASES REFERRED TO State of Rajasthan v. Rajasthan Chemists Association  6 SCC 773 [Para 4], Kunnathat Thathunni Moopil Nair v. State of Kerala AIR 1961 SC 552 [Para 5], State of Kerala v. Haji K. Haji K. Kutty Naha AIR 1969 SC 378 [Para 5], New Manek Chowk Spinning & Weaving Mills Co. Ltd. v. Municipal Corporation of the City of Ahmedabad AIR 1967 SC 1801 [Para 5], R. Sai Bharathi v. J. Jayalalitha  2 SCC 9 [Para 6], Sakthi & Co. v. C. Desigachary 2006 (2) CTC 433 [Para 6], Rustom Cavasjee Cooper v. Union of India AIR 1970 SC 564 [Para 7], Union of India v. A. Sanyasi Rao  219 ITR 330/85 Taxman 321 (SC) [Para 8], C.B. Gautam v. Union of India  199 ITR 530/ 65 Taxman 440 (SC) [Para 11], Delhi Transport Corporation v. D.T.C. Mazdoor Congress AIR 1991 SC 101 [Para 13], Punjab Distilling Industries v. CIT AIR 1965 SC 1862 [Para 17], Balaji v. ITO AIR 1962 SC 123 [Para 17], Bhagwan Dass Jain v. Union of India  128 ITR 315 (SC) [Para 17], Asstt. Director of Inspection Investigation v. Kum. A.B. Shanthi AIR 2002 SC 2188 [Para 17], R.K. Garg v. Union of India  4 SCC 675 [Para 18], K.P. Varghese v. ITO  131 ITR 597/7 Taxman 13 (SC) [Para 20], Government of Andhra Pradesh v. (Smt.) P. Laxmi Devi  4 SCC 720 [Para 28], Sakthi & Co. v. C. Desigachary 2006 (2) CTC 433 [Para 29], Special Courts Bill 1978, In re 1979 AIR SC 478 [Para 30], P.M. Ashwathanarayana Settee v. State of Karnataka  Suppl. 1 SCC 696, 723 [Para 31], Federation of Hotel & Restaurant Association of India v. Union of India  178 ITR 97/46 Taxman 47 (SC) [Para 32], Kerala Hotel & Restaurant Association v. State of Kerala AIR 1990 SC 913/ 77 STC 253 [Para 33], ITO v. N. Takin Roy Rymbai  103 ITR 82 (SC) [Para 34], Seema Silk & Sarees v. Directorate of Enforcement 2008 (4) Supreme 419 [Para 35], Ajoy Kumar Banerjee v. Union of India  3 SCC 127 [Para 35], Hotel & Restaurant Association of India v. Union of India  178 ITR 97 (SC) [Para 36], Sakhawat Ali v. State of Orissa AIR 1955 SC 166 [Para 37], Delhi Transport Corporation v. D.T.C. Mazdoor Congress AIR 1991 SC 101 [Para 40], CIT v. I.V.MR.P. Firm Muar AIR 1965 SC 1216 [Para 42], B.K. Industries v. Union of India  Supp. (3) SCC 621 [Para 42] and Tara Prasad Singh v. Union of India  4 SCC 179 [Para 43]. Chandran Karuppiah, N. Devanathan, V. Ramachandran, Dr. Anita Sumanth, K.J. Chandran, Venkatanarayanan, Subbaraya Aiyar, Arvind P. Datar, V.S. Jayakumar, K. Vaitheeswaran, N.L. Rajah, J. Balachandar, S. Raveendran for the Petitioner. N. Muralikumaran and Mrs. Pushya Sitaraman for the Respondent.