The Hindu Business Line : Understatement in real-estate deals

Income-tax law has been grappling with the problem of “on-money” deals in real-estate transactions. The “on-money” in such transactions is estimated to be around 15 per cent of unaccounted money in the country. There was Section 52 in the I-T Act to deal with understatement of consideration for sale of property w.e.f April 1, 1964. The Section underwent several changes and the Supreme Court’s ruling in the K. C. Verghese (131 ITR 597 SC) case rendered the Section unworkable. Then came Chapter XXA providing for acquisition of immovable property to counter tax evasion. This was in operation between 1972 and 1986. This Chapter gave way to Chapter XXC in 1986. But this Chapter, too, was given up, as it was not serving the intended purpose.

Kalyana Sundaram case

The problem of tackling the menace of black money in real-estate transactions is highlighted in the CIT vs P. V. Kalyana Sundaram (294 ITR 49 SC) case. Kalyana Sundaram purchased land in Fairlands, Salem, in October 1998 for Rs 4.10 lakh. A search by the I-T Department brought out certain notes on loose sheets allegedly in the handwriting of Kalyana Sundaram. He could not explain the notings. The vendor of the property gave a sworn statement to the effect that the real sale consideration was Rs 34.85 lakh, though the sale deed showed only Rs 4.10 lakh. The balance amount was received in cash.

The vendor subsequently retracted the statement. But once again he deposed in November 2000 that the real sale consideration was Rs 34.85 lakh. The assessing officer (AO) took the sale consideration as Rs 34.85 lakh and added Rs 30.75 lakh as undisclosed income. On appeal, the CIT (A), the Income-Tax Appellate Tribunal (ITAT) and the Madras High Court accepted Kalyana Sundaram’s version.

It was pointed out in the appeal that for purposes of registration, the guideline figure was Rs 400 per sq.ft. The adoption of the sale figure at Rs 34.85 lakh would give a rate of Rs 800 per sq.ft. and this was unrealistic. The Revenue also pointed out that the vendor had paid tax of Rs 1,84,000 on the basis of the revised figures adopted by the Department. Kalyana Sundaram argued that the vendor feared harassment and acquiesced to the proposals of the I-T department.

The I-T department went in appeal before the Supreme Court. Reliance was placed on the tax returns and statements of the vendor admitting higher sale consideration. It was pointed out by the Revenue that Kalyana Sundaram offered no explanation for the notings in the loose sheets.

Statements recorded during the course of the assessment proceedings were taken into consideration along with evidences found at the time of search. Just one retraction by the seller cannot wash away all the truth brought out by the search and sworn statements in this case. Surprisingly, the Supreme Court brushed aside all arguments on the subject and dismissed the appeal on the ground that no substantial question of law arose.

The court observed: “The fact as to the actual sale price of the property, the implication of the contradictory statements made by the vendor or whether reliance could be placed on the loose sheets recovered in the course of the raid are all questions of fact. We therefore find no infirmity in the order of the High Court. Accordingly, we dismiss the appeal.”

A perusal of the High Court and Supreme Court judgments make strange reading. Notings by the purchaser should have been taken as documentary evidence. It was noticed by both the High Court and the Supreme Court that the guideline value was Rs 400 per sq.ft. The admitted price was Rs 100. The judiciary chose to ignore this aspect of the case. The High Court thought that the matter required further investigation. In that case, it should have been sent back to facilitate such investigation. This was not done.

Star Builders case

A somewhat similar case was decided against the Revenue by the Gujarat High Court in CIT vs Star Builders (294 ITR 338). Addition was made in the assessment towards unexplained investment and understatement of cost of construction. The assessment was supported by a valuation report from the Departmental Valuation Cell. The court dismissed the departmental appeal on the ground that no reference can be made to any valuation officer to find out the cost of construction.

Section 50(C) was inserted in the Act w.e.f. April 1, 2003. It is now provided that the stamp duty valuation should be considered as representing the full value of sale consideration in respect of transfers of immovable property. Provision is also made for reference to the valuation officer.

Section 142A has also undergone retrospective amendment w.e.f. November 15, 1972, enabling the assessing officer to take into account estimates made by the valuation officer in framing the assessment.

It is a pity that these amendments were not brought to the notice of the High Court and the Supreme Court in the afore-discussed cases.

(The author is a former Chief Commissioner of Income-Tax.)

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