In the High Court of Judicature at Madras Dated :- 05.08.2008 Coram : The Honourable Mr.Justice K.RAVIRAJA PANDIAN and The Honourable Mr.Justice P.P.S.JANARTHANA RAJA W.P.Nos.4387 of 2003, 7040, 7041, 35903 and 39699 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 and 5514 of 2003 and connected M.P.Nos.1 of 2007 and 1 of 2008 K.R.Palanisamy ..Petitioner in W.P.4387/03 B.Sivaprakash (HUF) ..Petitioner in WP 6229/2007 S.Subramanian ..Petitioner in WP 7040/2005 S.Elumalai ..Petitioner in WP 7041/2005 Mrs. Mohmudunisa Begum ..Petitioner in WP 15662/2007 Estate of late E.Sundaresan rep. by Mr.Shankar ..Petitioner in WP 35903/2005 C.Parthiban ..Petitioner in WP 39699/2005 A.Sheik Mohideen ..Petitioner in WP 24755/2007 K.M.M.Sithi Fousia Beevi ..Petitioner in WP 24756/2007 Shri Yogesh B.Sanghvi ..Petitioner in WP 25873/2007 Smt.Saraswathy Shanmugam ..Petitioner in WP 31875/2007 Ms. Rajini Venugopal ..Petitioner in WP 37861/2007 Ms. Kumudini Venugopal ..Petitioner in WP 37862/2007 Smt. Sulochana Ramani ..Petitioner in WP 1719 of 2008 and 1720/2008 https://hcservices.ecourts.gov.in/hcservices/ M/s. M.I.L.Industries Ltd., rep. by Managing Director, Shri Rajiv Sreedhar, 25-A,Sidco Industrial Estate, Ambattur, Chennai -98. ..Petitioner in WP 1800 of 2008 and 1801/2008 D.Kamalam ..Petitioner in WP 2338/2008 Mrs. Radharani Rajkumar ..Petitioner in WP 2339/2008 M/s.Data Software Research company, Private Ltd., Kasturi Towers', No.6 Smith Road, Chennai -2. ..Petitioner in WP 3880/2008 Smt.N.Umayal Achi ..Petitioner in WP 3937/2008 Versus The Union of India, rep.by the Secretary, Finance Department, North Block, Middle New Delhi ... ISt Respondent in W.P.Nos.4387/03, 6229/07, 7040, 7041/05, 15662/07, 35903, 39699/05, 24755, 24756, 25873, 31875, 37861, 37862/07, 2338, 2339, 3880 and 3937/08. The Chief Commissioner of Income-tax Income Tax Building, Nungambakkam High Road, Chennai – 600 034. .. 2nd respondent in W.P.No.4387/03, 6229/07, 7040, 7041/05, 35903, 39699/05, 3880 and 3937/08 The Income Tax Officer Tirupur. .. 3rd Respondent in W.P.4387/03 The Income Tax Officer, Business Ward VII (i), Chennai - 34. .. 3rd Respondent in WP.6229/07 The Income Tax Officer, Ward V (3), Chennai. .. 3rd Respondent in WP.7040, 7041, 35903/05 https://hcservices.ecourts.gov.in/hcservices/ The Commissioner of Income, Tax X, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai - 34. The Assistant Commissioner of Income Tax, Business Range, XV, New Block, Income Tax Dept,.No.121, Mahatma Gandhi Road, Nungambakkam, Chennai - 34. ..Respondent 2 & 3 in WP.15662/07 The Assistant Commissioner of Income Tax, Range XIV, Nungambakkam High Road, Chennai - 34. . .3rd Respondent in WP.39699/05 The Chief Commissioner of Income Tax (Appeals) - I, Race Course Road, Coimbatore. The Income Tax Officer, Ward III (3) Race Court Road, Coimbatore. ..Respondents 2 & 3 in WP.24755 & 24756/07 The Income Tax Officer, Ward II (2), 121, Uthamar Gandhi Salai, Chennai - 34. ..2nd Respondent in WP.25873/07. The Income Tax Officer, Salary Ward I(2), 63, Race course Road, Coimbatore - 641018. ..2nd Respondent in WP.31875/07. The Income Tax officer Ward II(3), King Complex 347, Dr. Nanjappa Road, Coimbatore-641 018 .. 2nd Respondent in W.P.No.37861/07, 37862/07 The Income Tax Officer, Business Ward II (4) 121, Nungambakkam High Road, Chennai-34. .. Ist Respondent in W.P.Nos 1719 & https://hcservices.ecourts.gov.in/hcservices/ 1720/08 Union of India, Ministry of Finance, Rep by Its Secretary Dept.,of Revenue, Central Secretariat, North Block, New Delhi 110 001. Central Board of Directors, rep by its Secretary, Central Secretariat, North Block, Ministry of Finance, New Delhi 110 001. ..Respondents 2 & 3 in WP.No.1719 & 1720,1800 & 1801/08 Deputy commissioner of Income Tax, company Circle IV(3) Chennai-34. .. 1st Respondent in WP.1800 and 1801/08 The Income Tax Officer, Ward III(2),Coimbatore 641 018 ..2nd respondent in WP.No.2338/08 The Income Tax Officer, Business ward XIV (1) Nungambakkam, Chennai 600 034. ..2nd respondent in WP.No.2339/08 The Income Tax officer, (OSD) Company circle 1(4) No.121, Nungambakkam High Road, Chennai-34. ..3rd respondent in WP.No.3880/08 The Income Tax Officer, Business Ward XV (3), Chennai. ..3rd respondent in WP.No.3937/08 Petitions presented under Article 226 of the constitution of India to issue a writ of (1) Declaration, declaring as ultra vires the Constitution of India, invalid and unconstitutional the provisions of Section 50C of the Income Tax Act 1961 introduced by the finance Act 2002 and effective from the assessment year (a) 2003-04 (WP.Nos.4387/03, 6229, 7040, 7041, 15662 and 35903/05, 24755, 24756, 25873, 31875, 37861, 37862 and 3880/08 and 3937/08) https://hcservices.ecourts.gov.in/hcservices/ (b) 2004-2005 (WP.No.39699/05) © 2003-2004 making any transfer taking place on or after 1.4.2002 fall within its ambit in so far as the petitioner is concerned (WP.2338/08) (2) Certiorari, calling for the records in (a) No. AACPR 6782 J dated 28.12.2007 (WP.No.1719/08) (b)AAACM4380Q dated 31.12.2007 (WP.1800/08) of the 1st respondent relating to the Assessment year 2005-06 quash the same. (3) Declaration, striking down the provisions of Sec. 50 C(1) of the Income Tax Act, 1961 as ultra vires, being violative of Articles 19 (1)(f), 19 (1)(g) and 265 of the constitution of India and declare the provisions of section 50 C(1) of the Income Tax Act, 1961 introduced by the Finance Act, 2002 w.e.f. 1.4.2003 as unconstitutional and illegal (WP.1720/08) 4. Declaration, declaring the provision of Sec.50 C(1) of the Income Tax Act 1961, Ultrawires Articles 19(1) (f), 19(1) (g) and 265 of the constitution of India and strike down the said provision contained in Sec.50 C(1) of the Income Tax Act 1961 (W.P.NO.1801/08) 5. Declaration, declaring the provision of Section 50 C of the Income Tax Act 1961, introduced by the Finance Act 2002, as ultrawires of the Constitution of India, Null and void and unconstitutional in so far as the petitioner is concerned. (W.P.2339/08) For Petitioner in W.P.No.4387 of 2003: Mr.Chandran Karuppiah For Petitioner in W.P.Nos.25873 and : Mr.N.Devanathan 15662 of 2007 For Petitioner in W.P.Nos.1719, 1720, 1800 and 1801 of 2008 :Mr.V.Ramachandran,Sr. Counsel for M/s.Dr.Anita Sumanth For Petitioner in W.P.No.3880 of 2008: Mr.K.J.Chandran For Petitioner in W.P.Nos.24755 of : Mr.Venkatanarayanan 2007 and 3937 of 2008 for M/s.Subbaraya Aiyar For Petitioner in W.P.No.2339 of 2008: Mr.Arvind P.Datar Sr.Counsel for M/s.V.S.Jayakumar https://hcservices.ecourts.gov.in/hcservices/ For Petitioner in W.P.No.2338 of 2008: Mr.V.S.Jayakumar For Petitioner in W.P.Nos.7040, 7041 : Mr.K.Vaitheeswaran and 35903 of 2005 For Petitioner inW.P.No.39699 of 2005: Mr.N.L.Rajah For Petitioner in W.P.Nos.37861, : Mr.J.Balachandar 37862 and 31875 of 2007 For Petitioner in W.P.No.6229 of 2007: Mr.S.Raveekumar For Respondent – Income-tax Dept. : Mr.N.Muralikumaran, in all W.Ps Sr.Standing Counsel and Mrs.Pushya Sitaraman Sr.Standing Counsel on behalf of Income-tax Dept. COMMON ORDER (Order of the Court was delivered by K.RAVIRAJA PANDIAN, J.) In all these cases, the constitutional validity of Section 50C of the Income-tax Act, 1961 introduced by Finance Act 2002 with effect from the assessment year 2003-2004 is questioned. 2. The grounds of attack and argument made for and against are one and the same, though the transferred capital asset involved and the consideration received is different in each of the case, which is immaterial to decide the validity of the provision. Hence, Writ Petition No.4387 of 2003 is taken up as a typical case for the purpose of narration of facts: The writ petitioner K.R.Palanisamy is an assessee on the file of the Income-tax Officer, Tirupur. The assessee on 3.6.1981 purchased plot Nos.9 and 10 from one S.Krishnamoorthy and S.Subramani and was in possession and enjoyment of the same. The assessee decided to sell the said property. Plot No.9 was sold to one E.Vignesh Velavan on 15.7.2002. He was able to get only a sale consideration of Rs.3 lakhs due to recession. However, the guideline value for the said plot for the purpose of stamp duty was Rs.9,89,140/-. Similarly, in respect of Plot No.10, it was sold to one A.K.Muthusamy on 26.8.2002. The petitioner was able to get a sum of Rs.3 lakhs as sale consideration, whereas the guideline value for the said property was Rs.9,90,945/-. Thereafter the affidavit is silent and there is nothing stated about the further course of action taken by the assessing officer. No cause of action https://hcservices.ecourts.gov.in/hcservices/ for challenging the statutory provision has been stated. However, the petitioner has chosen to challenge Section 50C on the aforesaid facts. As the constitutional validity has been challenged, we are of the view that the facts of the other cases are not very material. 3. Mr.V.Ramachandran, Mr.Arvind Datar, learned Senior Counsels appearing for the petitioners/assessees spearheaded the argument, which was adopted and supplemented by Mr.Jayakumar, Mr.Balachandran, Mr.Vaideeswaran and other learned counsels appearing in respect of their respective cases with reference to the transaction made therein on the following grounds: 4. It is contended that the power of Central Legislature to levy tax on capital gains arises under Entry 82 List I of Schedule VII of the Constitution of India. Although the word "income" has to be interpreted in a liberal sense, the amount sought to be taxed must bear a reasonable relation to the concept of income. It cannot be a fanciful or imaginary amount. The entry authorises the respondents to legislate 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 by the assessee is sought to be taxed. Either in the memorandum explaining the Finance Bill 2002 addressed by the Finance Minister or in the Circular No.8 of 2002 dated 27.8.2002 explaining the provision by the Central Board of Direct Taxes, (hereinafter referred to as "CBDT"), nothing has been stated as to the kind of mischief sought to be cured or the object of the provision. Hence, the provision Section 50C is liable to be quashed on the ground of lack of legislative competence. In order to support this contention, reliance has been made in the case of STATE OF RAJASTHAN VS. RAJASTHAN CHEMISTS ASSOCIATION, (2006) 6 SCC 773. 5. It is further contended that Section 50C levies capital gains tax in all cases where the full market value is more than the sale consideration. It fails to take note of genuine cases, where the sale consideration would be less than the full market value. For varied reasons, the assessee may be compelled to sell the capital assets for lower price than the market price. However, under the impugned provision, there is no remedy for the assessing officer to grant the reliefs in genuine cases. Reliance has been made to the decisions of K.T.MOOPIL NAIR VS. STATE OF KERALA, AIR 1961 SC 552, STATE OF KERALA VS. HAJI KUTTY, AIR 1969 SC 378 and NEW MANECK CHOWK SPINNING AND WEAVING MILLS VS. AHMEDABAD MUNICIPALITY, AIR 1967 SC 1801. 6.The measure of tax must be on the income received on the https://hcservices.ecourts.gov.in/hcservices/ transfer of capital assets. The full market value is a fictional value. Undue emphasis should not be placed on the full market value. Reliance has been made on R.SAI BHARATHI VS. J.JAYALALITHA, (2004) 2 SCC 9 and SAKTHI & CO. VS. C.DESIGACHARY, 2006 (2) CTC 433. 7. It is further elaborated that the guideline value is normally fixed for survey numbers or particular area. Within that area, the value of the property may differ widely depending upon the access to main road, width of road, facing the plot and other locational advantages and disadvantages. When examining the constitutional validity of a provision on the touchstone of fundamental rights, the effect of the provision assumes significance. If the provision has a burdensome effect on the fundamental rights of the petitioner, it has to be struck down. Reliance has been made on the judgment of the Supreme Court in R.C.COOPER V. UNION OF INDIA, AIR 1970 SC 564. 8. It is further contended that Section 50C is arbitrary in nature and a remedy-less provision. No opportunity is provided to the aggrieved assessees to establish that the sale consideration was genuinely less than the market value. All the sales of properties are deemed to have understated the consideration if the fair market value is higher than the contracted value. Reliance has been made to support this contention in the case of UNION OF INDIA VS. A.SANYASI RAO, (1996) 3 SCC 465. 9. It is further contended that Sections 50C(2) and 50C(3) are unworkable provisions and sub-section (2) will apply only when the assessee can establish that the value adopted by the stamp authorities is higher than the market value, but stamp duty is paid by the buyers. It is of no concern to the seller as to what is the actual value adopted. His only concern is that he has received the sale consideration. These two sub-sections do not provide for any remedy in cases where there is under-valuation or undisclosed consideration. 10. It is further contended that the property developers were excluded from the provision. The object of Section 50C is to check tax evasion by persons disclosing a lower value of the property transferred. Section 50C applies only where the land or building is a capital asset. But companies/firms which purchase large amounts of land, retain them as land banks and then sell them at a profit escape Section 50C as the asset is a trading asset/stock-in-trade. Any tax evasion by these persons will remain unchecked as there is no deeming provision that the difference between the guideline value and the sale price is to be included under the heading "Profits and gains of business or profession". The failure to https://hcservices.ecourts.gov.in/hcservices/ cover such companies/firms is discrimination and violative of Article 14. If the object is to check tax evasion, then there is no justification to exclude such companies/firms which have the highest sales of such lands/buildings. 11. It is also further contended that Section 50C creates "conclusive evidence" that any difference between guideline value and sale consideration is deemed consideration. Any presumption about attempts to evade tax are rebuttable and an opportunity must be given to the assessee to show cause that such presumption drawn is incorrect. In case of immovable property, there could be several bona fide considerations which may induce the seller to sell the property less than the market value. Hence, in the absence of any opportunity to the assessee, the provision is violative of principles of natural justice. Reliance has been made in the case of C.B.GAUTAM VS. UNION OF INDIA, (1993) 1 SCC 78= 199 ITR 530. 12. It is further contended that there are various "special provisions" prescribing a particular percentage as the quantum of taxable profits like Sections 44AC, 44AD and 44BBB. In each of these Sections, an opportunity is given to the assessee to show that the amount of profit is less than the prescribed percentage. But in the impugned provision, that opportunity is not given. 13. It is also contended that it is not possible to read down Section 50C as the provisions are beyond legislative competence and violative of Articles 14 and 265 of the Constitution of India. Reliance has been made to support the contention to the case of DELHI TRANSPORT CORPORATION VS. D.T.C.MAZDOOR CONGRESS, AIR 1991 SC 101. 14. The learned counsel appearing for the revenue submitted that the provision Section 50(c) is inserted only to check black money and under valuation of capital assets, thereby evasion of tax. The Central Legislature has competence to enact the provision to arrest or check the leakage of revenue under Entry 82 List I of the Constitution of India. The Central Legislature has power to chose person and transaction to levy tax which cannot be questioned. The classification made is reasonable. There is intelligible differentia in the classification made. The impugned provision is not discriminatory. The Legislature is competent to remove the infirmities pointed out by the Court even retrospectively. The provision cannot be regarded as arbitrary. The assessee has been given ample opportunity to prove the bonafide of the transaction either before the authorities under the Stamp Act or before the assessing officer. All the objections raised and argument made are only imaginary. The provision conforms the constitutional requirements. https://hcservices.ecourts.gov.in/hcservices/ 15. Before adverting to the rival contentions of the parties, we are of the view that it is apropos to refer the statutory provisions. Section 45 of the Income-tax Act reads as follows: "Capital gains.--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, 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." Section 48 of the Income-tax Act reads as follows: 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." Section 50C of the Income-tax Act reads as follows: "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 other authority, court or the High https://hcservices.ecourts.gov.in/hcservices/ 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. Explanation.– For the purposes of this section, “Valuation Officer” shall have the same meaning as in clause (r) of section 2 of the Wealth-tax Act, 1957 (27 of 1957). (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." Section 47-A of the Indian Stamp Act, 1899 reads thus: "Instruments of conveyance etc., undervalued how to be dealt with. - (1) If the registering officer appointed under the Indian Registration Act, 1908 (Central Act XVI of 1908) while registering any instrument of conveyance, exchange, gift, release of benemi right or settlement has reason to believe that the market value of the property of which is the subject matter of conveyance, exchange, gift, release of benami right or settlement, has not been truly set forth in the instrument he may, after registering such instrument, refer the same to the Collector for determination of the market value of such property and the proper duty payable thereon. (2) On receipt of a reference under sub-section (1), 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 rules made under this Act, determine the market value of the property which is the subject matter of conveyance, exchange, gift, release of benami right or settlement, and the duty as aforesaid. The difference, if any, in the amount of duty, shall be payable by the person liable to pay the duty. https://hcservices.ecourts.gov.in/hcservices/ (3) The Collector may, suo motu or otherwise, within five years from the date of registration of any instrument or conveyance, exchange, gift, release of benami right or settlement, not already referred to him under sub-section (1), call for and examine the instrument for the purpose of satisfying himself as to the correctness of the market value of the property which is the subject matter of conveyance, exchange, gift, release of benami right or settlement, and the duty payable thereon and if after such examination, he has reason to believe that the market value of the property has not been truly set forth in the instrument, he may determine the market value of such property and the duty as aforesaid in accordance with the procedure provided for in sub-section (2). The difference, if any, in the amount of duty,shall be payable by the persons liable to pay the duty: Provided that nothing in this sub-section shall apply to any instrument registered before the date of commencement of the Indian Stamp (Tamil Nadu Amendment) Act, 1967. (4) Every person liable to pay the difference in the amount of duty under sub-section (2) or sub-section (3) shall, pay such duty within such period as may be prescribed. On default of such payment, such amount of duty outstanding on the date of default shall be a charge on the property affected in such instrument. On any amount remaining unpaid after the date specified for its payment, the person liable to pay the duty shall pay, in addition to the amount due, interest at two per cent per month on such amount for the entire period of default. (5) Any person aggrieved by an order of the Collector under sub-section (2) or sub-section (3) may appeal to such authority as may be prescribed in this behalf. All such appeals shall be preferred within such time, and shall be heard and disposed of in such manner, as maybe prescribed by rules under this Act. (6) The Chief Controlling Revenue Authority may, suo motu, call for and examine an order passed under sub-section (2) or sub-section (3) and if such order is prejudicial to the interest of revenue, he may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may initiate proceedings to revise, modify or set aside such order and may pass such order thereon as he thinks fit. (7) The Chief Controlling Revenue Authority shall not initiate proceedings against any order passed under sub-section (2) or sub-section (3) if, - https://hcservices.ecourts.gov.in/hcservices/ (a) the time of appeal against that order has not expired; or (b) more than five years have expired after the passing such order. (8) No order under sub-section (6) adversely affecting a person shall be passed unless that person has had a reasonable opportunity of being heard. (9) In computing the period referred to in clause (b) of sub-section (7), the time during which proceedings before the Chief Controlling Revenue Authority remained stayed under the order of a Court shall be excluded. (10) Any person aggrieved by an order of the authority prescribed under sub-section (5) or the Chief Controlling Revenue Authority under sub-section (6) may, within such time and in such manner,as may be prescribed by rules made under this Act, appeal to the High Court." Sections 47A and 75 of the Indian Stamp act, 1899 empower the State Government to make rules to carry out the purpose of the Act. Invoking the said power, the State Government framed the Rules called Tamil Nadu Stamp (Prevention of Undervaluation of Instruments) Rules,1968. Rules 4 and 5 of the Tamil Nadu Stamp Rules, 1968,which are relevant, reads