Matter before Chandigarh Income Tax Appellate Tribunal
In the case of ACIT v Mohinder Singh (Seller) and Malkit Singh (Buyer) v ITO –ITA Nos 665, 666 and 474 dated18.1.2018
i) An amount of Rs. 2,46,30000/- was seized u/s 132 A from the custody of Shri Mohinder Singh (seller). He explained that the entire amount was received as consideration on the sale of his agricultural land to Shri Malkiat Singh, however, the sale deed was executed at circle rate i.e. at Rs. 42,37,500/-. Further that the deal was settled in the office of Sh. Jagdev Singh, Prop. J.P. Property dealer. That prior to the execution of sale deed, an agreement to sell was also entered into and that Sh. Jagdev Singh was also witness to that agreement.
ii) The aforesaid contention of Shri Mohinder Singh, the seller was further corroborated with the statement of Shri Jagdev Singh Property Dealer and assessee’s son Jasvir Singh who stood as a witness to the sale deeds.
iii) Shri Malkiat Singh, buyer, though purchased the land at a low rate of Rs. 600 to Rs. 800/- per square yard, but immediately sold it at a much higher rate ranging between Rs. 3,000/- to Rs. 13,000/- per square yard in the form of residential/commercial plots without carrying out any further development activity.
ITAT Observations and findings
On the basis of given facts the ITAT held that the amount seized from Sh. Mohinder Singh was received by him from Sh. Malkiat Singh in respect of the sale transaction of his land which included the amount received over and above the consideration mentioned in the sale deed. As soon as the inquiries were initiated by the AO in purchaser’s case the seller is given to have expired so no cross examination took place in this case.
The Tribunal went on to discuss the legality of transaction and consequent additions made both in the hands of the seller and purchaser in the light of the question before them whether any evidence can be admitted to prove that any amount was paid or received relating to the transfer of immovable property outside the written and registered sale deed of that property? To this they answered in NO considering the provisions of the transfer of Property Act (IV of 1982), Indian Evidence Act 1872 and Indian Registration Act, 1908. It held that the sale consideration disclosed in the sale deed cannot be varied and has to be accepted and it cannot be contradicted by adducing any oral evidence.
The second and the most important question that they put up to them as to why the parties to the transactions chose to get it registered at a lower rate than actually agreed to? The answer to this, obviously, is to avoid payment of higher stamp duty, in other words, to defraud the state exchequer. And thereafter the Tribunal went on to write the following further observations:
“ The seller as well as the purchaser connived with each other to falsely represent to the concerned public authority / land revenue officer entrusted with the work of registration and collection of stamp duty about the sale consideration at a far less amount than that was actually agreed to. In our view, It is not fraud or misrepresentation to that that public officer in person, rather the same is with the ‘State’ as the said officers being its employee act on behalf of the ‘State’. The aforesaid act of misrepresentation regarding the sale consideration has not caused any personal loss to the aforesaid official, but financial loss to the State Exchequer. The income tax authorities being revenue officials are also the public authorities appointed for the collection of income tax revenue for the state exchequer. The question before us is when a person commits fraud with the State or the Govt. at one stage misrepresenting to an employee/ public authority of one department of the ‘State’ and gets wrongful benefit, can he be allowed to take a different stand before another employee/public authority of the other department of the ‘State’ or the ‘Govt.’ to say that he had falsely represented about the actual consideration of the transaction before the first public authority and that now the second public authority should not believe that false representation and whether can be allowed to take the benefit of his own wrong. Interestingly, both the authorities herein referred to are revenue authorities, the first being land revenue authority and the second income tax revenue authority. In our view, in such circumstances, both seller and purchaser are estopped from their act and conduct to take such a self-contradictory plea. Not only the earlier but the later authorities also are the public officers appointed for the collection of taxes contributing to the public exchequer (may be of the State or of the Union) and a person having represented the factum of the transaction in a particular manner at one stage to a public officer and getting a wrongful benefit, in our view, is estopped to deny the same to the subsequent public authority, both authorities being employee and representative of the government. The principle of estoppel in the light of the provisions of section 115 of the Evidence Act gets attracted in such a case. Even otherwise, recognizing such a transaction will amount to overriding the provisions of Transfer of Property Act and Indian Registration Act. In view of the above discussion, it can be safely held that not only legally but also ethically and morally, the parties to a registered document are not allowed to deny the terms of the document until and unless the very validity or execution of such a document is disputed. Admittedly, the tax authorities are not bound by the technicalities of the Evidence Act, but, the general principles of evidence are applicable to income-tax proceedings. Reference can be made to the decision of the Hon’ble Supreme Court in the case of Chuharmal vs Commissioner Of Income-Tax, 1988 AIR 1384, 1988 SCR (3) 788 : (1988) 172 ITR 250 (SC). The Hon’ble Supreme Court while holding so referred to and approved the observations made by the Hon’ble Bombay High Court in the case of J.S.Parker v. V.B. Palekar, 94 ITR 616 holding that what was meant by saying that the Evidence Act did not apply to proceedings under the Income Tax Act was that the rigour of the rules of evidence contained in the Evidence Act, was not applicable but that does not mean that when the taxing authorities were desirous in invoking the principles of the Evidence Act in proceedings before them, they were prevented from doing so. The Hon’ble Supreme Court further observed that salutary principle of common law jurisprudence embedded in the Evidence Act could be applied to the taxation proceedings.”
Given that the sale consideration as per registered document is final the next obvious question was what will be the nature of the extra amount received for the purpose of charge of income tax? And the bench held that the extra money over and above the sale consideration cannot be taken as for the sale of property/land and further shall be taxed as income from other sources and that it partake the character of taxable gift.
Importantly therefore the bench held that the nature of receipt of the income over and above the registered sale consideration in the hands of seller Mohinder Singh will not fall under the head ‘Capital Gains’ but‘ income from other sources’. Likewise in the case of purchaser the bench held that the assessee, Sh. Malkiat Singh will also be not entitled to claim the said amount paid over and above the consideration mentioned in the deed as cost of acquisition of land or otherwise.
Interestingly the Tribunal initiated a further inquiry in this case to ascertain the sources of Sh. Malkiat Singh, meaning therefore that it can open up a Pandora box for second transactions between him and the buyers of residential and commercial plots. The Tribunal held a gut field that after purchasing the part of the land through first sale deed, immediately sold the same at a higher rate to other persons and that the amount received by Sh. Malkiat Singh on such a further sale can be well assumed to be source of the amount paid by him on the occasion of subsequent purchase of land from Shri Mohinder Singh, unless it is established that he had spent the said amount for some other purpose.
In this case the seller was an Agriculturist and all said and done exempted from the purview of Income tax. Yet he entered into an arrangement for under reporting of sale consideration only to benefit the purchaser from stamp duty. In other words the benefit of duty savings is earned by the purchaser. By under reporting sale consideration actually the seller did not gain anything as the entire capital gain value in his case is exempted from tax. In the penalty proceedings the seller’s contention was that he was under bona-fide belief that since the entire amount received by him was on account of consideration for the sale of land, the land being an agricultural rural land falling outside the purview of the definition of a capital asset, the income from the sale of land was exempt from taxation, hence, non-offering of the said income for taxation cannot be said to be a deliberate act on the part of assessee. On this plea the penalty has been deleted by the Tribunal but on quantum the Tribunal declined to give relief even to the exempted agriculturist in this case.
Though this transaction had no income tax effect in the hands of the seller yet since this very act of under reporting sale consideration is against public policy, morality and ethics the Tribunal did not provide any relief to the seller. Thus a loss of revenue would not necessary means loss of income tax but even causing any other loss to the state exchequer.
At the same time this decision draws notice to some contradictions. For instance in this decision on one hand the Tribunal has ruled that the sale consideration cannot be varied and at the same time it has held a view that the amount received by Sh. Malkiat Singh on resale of land can be assumed to be source of amount paid by him to Shri Mohinder Singh (seller) on a later date. If that is the case and if it is so proven on inquiries by the Assessing Officer in Malkiat case the balance of convenience may tilt in favour of the seller in their next appeal before the High Court against the decision of the Tribunal. On the contrary this case did not required further inquiries to be made to ascertain the sources of buyer as he would be able to go scot free if such inquiries reveal that he financed his purchases out of his sales only. The higher amount paid on original purchase of land and higher value realized from his customers will offset against each other and he too would escape tax altogether. This order of further inquiry in sources of buyer will bring complexity to the case and may adversely hit the revenue’s cause.
This judgment also through some important questions. One is that the circle rates are to be increased upwards from time to time on some rationale basis to narrow the gap between market rates and registry value. And since in this case there is a gap of five times it would be definitely unjustifiable to tax the parties especially the seller for the inaction of the state to set market driven circle rates. And the second most significant subject is whether there is a need to reintroduce the deeming provisions of erstwhile section 52 to tax under reported consideration since it is by far again most unjustifiable to tax one person only because of seizure while leaving similar land sale transactions at circle rates in other cases untapped. And I hope the High Court in this case will provide some guidance.