Bombay High Court High Court

Mr.Krtikumari Rasilal Gandhi. vs Union Of India on 15 March, 2010

Bombay High Court
Mr.Krtikumari Rasilal Gandhi. vs Union Of India on 15 March, 2010
Bench: F.I. Rebello, A.A. Sayed
                                                                           
                                          1

             IN THE HIGH COURT OF JUDICUATURE AT MUMBAI




                                                   
                  ORDINARY ORIGINAL CIVIL JURISDICTION

                     WRIT PETITION NO.   1305    OF 2009




                                                  
     Bhatia Nagar Premises Co-operative  )
     Society Limited, a Society registered  )




                                      
     under the Maharashtra Co-operative  )
     Societies Act, 1960, having its office  )
                       
     at Bhatia Nagar, Shantilal Modi Road,)
     Kandivali (West), Mumbai-400 067. )
     Represented through its Secretary  )
                      
     Mr.Krtikumari Rasilal Gandhi.           )..   ...      Petitioner.

           Versus

     1)    Union of India,                 )
      

            rd
           3  Floor, Aykar Bhavan,         )
           Maharshi Karve Road, Mumbai.)
   



                                           )
     2)    Chief Commissioner of Income )
           Tax,                            )
           3rd Floor, Aykar Bhavan,        )





           Maharshi Karve Road, Mumbai.)
                                           )
     3)    The State of Maharashtra,       )
           Sachivalaya, Mumbai.            )
                                           )





     4)    Collector of Stamps, Borivli,  )
           Mumbai, MMRDA Building,  )
           1st Floor, Bandra Kurla Complex)
           Bandra (East), Mumbai.          )
                                           )
     5)    Sub-registrar, Borivli, Mumbai, )
           2nd Floor, Tehsildar Building,  )
           Natakwala Lane, Mumbai-         )
           400 092                         )...    ...      Respondents. 




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     Ms. Riddhi D. Shah for the Petitioner.
     Mr. D. J. Khambatta, Addl.Solicitor General with 
     Mr. Amfroz Shah for Respondent No.1.
     Mr. Suresh Kumar for Respondent No.2. 




                                                             
     Mr. N. Pandit, AGP for Respondent Nos.3,4 and 5.


                                              CORAM :          F. I. REBELLO & 




                                              
                                                               A. A. SAYED, JJ. 
                             ig               DATED  :   15TH MARCH, 2010
                           
      J U D G E M E N T ( Per F. I. Rebello, J.)

. :

1. The prayer clause (a) as amended seeks the following relief:

“(a) This Honourable Court be pleased to issue a writ of

certiorari or a writ in the nature of certiorari or any

other appropriate writ, order or directions under Article

226 of the Constitution of India, calling for the records

and proceedings of Demand Notice dated 23-10-2008

issued by the Respondent No.4 under the Stamp Act and

to quash and set aside the same being exhibit “A” hereto.

(aa) Section 50-C of the Income Tax Act, 1961 be held

and/or declared as ultra vires of the Articles of

Constitution of India.”

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2. A few facts may be set out. The petitioner is a Co-operative

Society, which is the owner of the land on which stands a building,

which they have allowed Ankur Realty Private Limited, Mumbai, to

develop and sell under the Development Agreement. The Agreement

was sought to be registered as required under the provisions of the

Bombay Stamp Act, 1958 (hereinafter referred to as “the Stamp

Act”). In terms of First Schedule entry 5(g-a) of the Stamp Act, the

agreement if relating to giving authority or power to a promoter or a

developer, by whatever name called, for construction on,

development of or, sale or transfer (in any manner whatsoever) of,

any immovable property, the duty chargeable is the same as is

leviable on a conveyance under clauses (b), (c) or (d), as the case

may be, of Article 25, on the market value of the property.

Respondent No.4 by Demand Notice dated 23rd October, 2008 called

on the Developer to pay an amount of Rs.15,50,030/- as stamp duty

as also a penalty in the sum of Rs.1,55,010/-. The Developer paid the

said amount along with penalty.

3. It is the case of the petitioner that though the demand was

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issued in the name of the Developer, the order adversely affects their

right and interest as valuation worked out has a direct nexus to

Section 50C of the Income Tax Act which adversely affects the

liability of the petitioner Society to the extent of Rs.1,91,90,568/- as

the consideration was raised from Rs.4,85,00,000/- to

Rs.15,50,00,000/- and as such the Capital Gain Tax will have to be

paid accordingly.

4. By the present petition, the challenge is to Section 50C of the

Income Tax Act, 1961 as introduced by the Finance Act, 2002 with

effect from 1st April, 2003. The grounds raised are as under:

(A) Section 50C must have direct nexus and must emanate

from the provisions of Section 45, which is the charging

Section of the Act. It is, therefore, submitted that what

Section 45 brings under the levy is profits and gains

arrived or accrued and not the valuation of the Stamp

Valuation Authority as arbitrarily determined and fixed

under Section 50C of the Act.

(B) Section 50C does not start with a non-obstante clause

and therefore the same cannot be construed to operate

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without due obedience and confirmation with the other

provisions of the Act and in view of that Section 50C

cannot be read into Section 48 of the Act which

prescribes the procedure for computation of capital

gains of the Assessee. Section 48 stipulates the full value

of the consideration received or accruing as a result of

the transfer of the capital asset and not the valuation of

the Valuation Officer for the purpose of stamp duty

determined under any some other law.

(C) Section 54 to 54ED provides for exemption on Capital

Gain Tax of Assessee. The Assessees, who have been

assessed as per the valuation as prescribed under

Section 50C of the Act cannot invest the excess amount

of difference which is not received or receivable by

them but is assumed to have been received under the

said section and thereby the Petitioner as well as such

Assessee affected by Section 50C of the Act cannot even

avail of the benefit of exemption upon Capital Gain Tax

as available under Section 54 of the Act and as such

Section 50C is not in consonance with other provisions

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of the Act resulting into illegal and unreasonable

discrimination without any justification. Section 55A

provides for reference to the Valuation Officer for

ascertaining the fair market value of the capital asset.

Therefore, when there is a provision prescribing for

valuation to be assessed by the Valuation Officer, no

additional purpose will be served by introducing Section

50C of the Act. It is submitted that what can be checked

and controlled is evasion of tax and the remedy should

be proportionate and same cannot partake the nature of

confiscatory measure. Section 50C is a draconian

provision which is in absolute contrast to the objects and

purposes of the Income Tax Act, 1961.

(D) That the Income Tax Act, 1961 is a law made under

Entry 82, Schedule VII – List I of the Constitution of

India. As such considering Sections 4 and 5 of the Act,

which contemplate levy or tax upon all income and by

no stretch of imagination the meaning and scope of

`total income’ be substituted by “the Valuation assessed

by Stamp Valuation Authority for the purpose of stamp

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duty”. The meaning of `Income’, therefore, under

Section 50C is beyond what is stipulated under entry 82

List I of Seventh Schedule of the Constitution.

(E) Section 50C as introduced by the Finance Act does not

provide the rate of tax or manner of liability but in effect

substitutes the `valuation of the Stamp Valuation

Authority’ with the `total income’ of the Assessee while

assessing the liability of the income tax which amounts

to alteration of the subject matter of Income Tax Act

itself. That the subject matter of the Act is income other

than agricultural income and the relevant Finance Act

by introducing Section 50C seeks to change/ alter/

substitute the subject matter of the Act as what is

brought under the net of Income Tax is not all income

received or deemed to be received or accrues or arises or

is deemed to accrue or arise to the Assessee but the

Valuation of the Stamp Valuation Authority, which

evidently is beyond the provisions of the Constitution of

India.

(F) The right of the Assessee to put forward the assessment

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of his income is arbitrarily and unilaterally taken away

by enacting Section 50C without any reasonable

justification. Section 50-C, it is submitted, in effect alters

the very nature and concept of the `total income’ and

precisely adopts `the stamp duty valuation of the

instrument’ and not `computation of total income’ as the

basis or subject of the Tax under the Income tax Act,

which is patently ultra vires the Constitution of India

and the provisions of the income Tax Act.

(G) The Indian Stamp Act (or the Bombay Stamp Act, 1958)

is a fiscal statute whose main object is to make available

certain dues and to collect revenue and all its provisions

must be construed as having in view the protection of

revenue and prevention of evasion of the revenue that it

imposes.

(H) How can Section 50C have valid operation and

enforcement as what is implied by Section 50C is

adoption of valuation of property for the purpose of

stamp duty upon an instrument and has therefore no

direct, proximate and reasonable nexus with the `total

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income’ of the Assessee which is the subject matter of

charge of tax and as such Section 50C is ultra vires to

the provisions of the Indian Constitution.

(I) When there is no assessment of income but only the

stamp duty upon the instrument for the purpose of

revenue is what is determined by the Stamp Duty

Officer, how could Section 50C to that extent declare

such valuation as the income of the Assessee. It discloses

no reasonable classification or intelligible differentia to

justify the operation of Section 50C of the Act and is

therefore violative of Article 14 and Article 300A of the

Constitution of India. It is a direct infringement upon

the fundamental right to carry on any occupation or

trade as guaranteed under Article 19 of the Constitution

of India and in the process it violates Article 300A of the

Constitution of India.

(J) “Market value” is defined under the Bombay Stamp Act

under Section 2(na). The market value or the stamp

duty determined upon any instrument of transfer does

not connote the consideration received upon such

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transfer and therefore adopting the stamp duty

valuation as the income or consideration received by the

Assessee as declared under Section 50C of the Act is

wholly misconceived and the same is not in consonance

with the Scheme of the Income Tax Act. The Central

Enactment in terms of Section 50C is superior to the

State Act and providence of Central Enactment

depending upon the outcome under the State Act, must

be held as unconstitutional and ultra vires the provisions

of the Constitution of India.

5. Notice was issued to the Attorney General. Learned Additional

Solicitor General points out that the issue is covered by the Division

Bench Judgment of the Madras High Court in the case of K. R.

Palanisamy v/s Union of India, reported in (2009) 180 Taxman 253

(Madras). The Madras High Court, it is submitted, has held that

Section 50C is constitutionally valid and the various arguments

raised have been rejected. Placing reliance on Union of India & Anr.

v/s A. Sanyasi Rao & Ors., reported in AIR 1996 SC 1219, it is

pointed out that the valuation taken for the purpose of stamp

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valuation is only a measure for the purpose of levying tax and as

such the various contentions raised on that count must be rejected. It

is only a measure for levying tax and as such it will not alter the

nature and basis of levying the tax imposed as if is a tax on income.

6. On behalf of the petitioner, learned Counsel sought to bring to

our attention an unreported judgment of the Single Judge of the

Madras High Court in the case of N. Meenakshi v/s The Assistant

Commissioner of Income Tax (Writ Petition No. 851 of 2009 decided

on 11th September, 2009) where the order in respect of the valuation

done by the Valuation Officer under Section 50C(2) of the Income

Tax Act, 1961 and the assessment thereto was challenged. The

Assessing Officer had taken the value of the land determined for the

stamp duty purpose as the same value as no valuation report was

received from the Valuation Authority till the said date. The matter

was remanded. At the same time, the order notes that the petitioner

had also filed a petition challenging the vires of Section 50C which

was dismissed. The question of vires of the provision was left open.

7. In the instant case no reply has been filed on behalf of the

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Union of India. Learned Addl. Solicitor General, however, submits

that considering the stand of Union of India before the Madras High

Court in the case of K. R. Palanisamy (supra), he is adopting the said

contention and the petition can be disposed of on that basis as no

new facts are involved.

8.

On behalf of respondent No.4, reply has been filed by Eknath

Marutirao Navle, the Collector of Stamps, Borivali. It is set out that

demand has been issued by the Collector pursuant to an order passed

under Section 31 of the Bombay Stamp Act on a reference made by

the Developer under Section 31 of the Bombay Stamp Act for

determination of the stamp duty payable. Against that order, there is

a remedy available under Section 53 of the Stamp Act. On this count

itself the petition ought not to be entertained.

The stamp duty, it is set out, has been correctly levied under

Schedule 1 Article 5(g-a) at the rate of 1% on the market value. The

market value of the property in relation to any property which is the

subject of the instrument is the price of the property which such

property would have fetched if sold in open market or consideration

stated in the instrument, whichever is higher. After considering

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various aspects, it was held that the sum total of all the Development

Agreement comes to Rs.15 crores, on which the stamp duty of 1%

has been calculated and has been levied and accordingly demanded.

Thus the consideration to be received by the Society under the

Agreements in terms of money has been taken to be the market value

of the property.

9. For the purpose of discussion, we may gainfully reproduce

Sections 45, 48 and 50C of the Income Tax Act, which read as under:

“45. Capital gains.- (1) 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, 54D,

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.

48. Mode of Computation.- The income chargeable under the
had `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.

50C. Special provision for full value of consideration in certain

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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 authority,
court or the High 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.

(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

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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.”

10. A perusal therefore reveal that under Section 50C the value

adopted by Stamp Valuation Authority or assessed for the purpose of

Section 48, shall be deemed to be the full value of the consideration

received or accruing as a result of the transfer. Apart from that under

sub-section (2) where the assessee claims before any Assessing

Officer that the value adopted or assessed, exceeds the fair market

value of the property as on the date of transfer and the value so

adopted by the Stamp Valuation Authority has not been disputed by

any appeal or revision or no reference has been made before any

authority, Court or High Court, the Assessing Officer may refer the

valuation of the capital assets to the Valuation officer. Thus, even

though, if an appeal has not been preferred and in the instant case

reference was sought by the Developer and not the petitioner, the

petitioner has a remedy of calling on the Assessing Officer to appoint

the valuer for the purpose of determinating the fair market value. We

may also note that under Section 50C, the value so adopted or

assessed by any Authority of the state Government, referred to as the

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Stamp Valuation Authority is only a measure of tax and not the

subject matter of a tax. For that principle, we may gainfully refer to

the observation of the Supreme Court in A. Sanyasi Rao & Ors.

(supra) which was a judgment arising from the judgment of the

Andhra Pradesh High Court. Before the Andhra Pradesh High Court

there was a challenge to the Constitutional validity of Sections 44AC

and 206C of the Income Tax Act. After considering various

contentions, the learned Division Bench of the Andhra Pradesh High

Court was pleased to hold that Section 44AC is an adjunct to Section

206C. Tax was to be computed based on the purchase price. Both the

Assessee and the Revenue Authority preferred appeal to the

Honourable Supreme Court independently. There were some

petitions under Article 32 of the Constitution of India. While

considering the appeal in the matter of levying tax on purchase price,

this is what the Honourable Supreme Court observed:

“. . . . . In this context, we should bear in mind that there is a
clear distinction between the subject matter of a tax and the
standard by which the amount of tax is measured. Having
regard to the past difficulties in making a normal assessment
and collection in the case of certain categories of assessees, for
convenience sake, the legislature has chosen to make
appropriate provision for collection of tax at an anterior stage
by adopting the purchase price as the measure of tax. In our

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view, this is permissible and the standard by which the amount

of tax is measured, being the purchase price, will not in any
way alter the nature and basis of levy viz. that the tax imposed
is a tax on income. It cannot be labeled as a tax on purchase of
goods.”

It is, therefore, clear that the valuation rule of the Stamp Act is for

the purpose of computation of income which is only a standard of

measure for imposing tax.

11. With that we will now consider the various arguments

advanced at the Bar. It may be mentioned that the petition as earlier

filed, apart from the bald averments that Section 50C of the Income

Tax Act be declared as ultra vires, no grounds to that effect were

raised which have been subsequently pleaded by way of an

amendment. Additional prayer clause has also been included to

challenge the demand notice dated 23rd October, 2008 issued by

respondent No.4 under the Stamp Act and to set aside and quash the

same.

12. In so far as prayer clause (a), as now substituted by the

amendment is concerned, we are clearly of the opinion that as the

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Developer had sought a reference on which the Competent

Authority under the Stamp Act had given the valuation and pursuant

thereto paid the duty as also the penalty imposed, that challenge will

not be available to the petitioner in this petition as there is no longer

a demand notice to be complied with.

13.

We shall therefore confine ourselves to consider prayer clause

(aa) by which it is prayed that Section 50C of the Income Tax Act be

declared as ultra vires the Constitution of India. Learned Counsel on

behalf of the petitioner had sought to draw our attention to the

judgment of the Supreme Court in Commissioner of Income Tax,

Bombay City-I v/s Khatau Makanji Spinning and Weaving Co. Ltd.,

1960 Vol. XL Income Tax Reports page 189, to the following

observations, namely, that under Section 3 of the Income Tax Act,

income tax is a tax on the income of the previous year and it would

not cover something which is not the income of the previous year, or

made fictionally so. Section 45 provides for the mode of computation

of income chargeable under the head `Capital Gains’. Section 50C is

a measure provided to bridge the gap as it was found that assessees

were not correctly declaring the full value of the consideration or in

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other words resorting to the practice of undervaluation. The Madras

High Court in K. R. Palanisamy (supra) has noted that the legislative

history reveals that prior to the insertion of the impugned provision,

section 52(2) was there in the statute which was also meant to check

the avoidance of capital gain tax. After the deletion of the said

proviso, Chapter XX-A was introduced empowering the government

to acquire immovable property in specific cases. Thereafter, Chapter

XX-C was introduced. All these provisions were directed only to

check and prevent the evasion of tax by undervaluing the

consideration of the transfer of capital assets.

14. We may now deal with the contention as formulated under

grounds (A), (B), (E), (F), (G), (H), (I) and (J) of paragraph 4

above. Section 45 treats income under the head as deemed income of

the previous year in which the transfer took place. Section 50C is a

special provision for providing the measure of tax for assessing the

income under the head capital gain. Consequently it must be read

with Section 45. The submission that what Section 45 brings under

the levy is profits and gains arrived or accrued and not the valuation

of the Stamp Valuation Authority as arbitrarily determined and fixed

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under Section 50C of the Act is also misplaced. As noted, Section 50C

is only a standard of measure for computation of the tax which is

chargeable under Sections 4 and 5 of the Income Tax Act. The tax is

only computed in the manner laid down under those provisions

referred to earlier.

15.

Section 45 itself notes the provision of Section 54 to 54EB.

Therefore, the income received by way of capital gain would be

subject to the provisions of Sections 54 to 54EB. The income is

deemed to have been received and that is the point of time on which

the income has to be assessed. It therefore, cannot be the case that

the assessee would not be entitled to the benefit of exemption. It also

cannot be said that such a classification would be arbitrary or

unreasonable and/or discriminatory. Section 50C has been

specifically introduced with a view to prevent evasion of tax and

under valuation of the transaction. It is in that context that Section

45, Section 48 and Section 50C must be read. The classification,

therefore, is in respect of an identifiable group of assessees. Both

classes have to pay capital gains tax. Insofar as Section 50C is

concerned, it pertains to a class of capital assets being land or

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building. We therefore do not find that the classification as being

unreasonable and consequently discriminatory considering the object

being, to tax the income arising from capital gains. Those grounds

enumerated earlier, therefore, have no merit and are consequently

rejected.

16.

We may next deal with the argument that the Income Tax Act

is a law made under Entry 82, Schedule VII – List I of the

Constitution of India and consequently the valuation assessed by the

Stamp Valuation Authority is illegal as such a provision would be

beyond the field of legislation under Entry 82 List I of 7th Schedule

and as such beyond the competency of Parliament. In our opinion,

this argument has to be rejected. Similar contention was raised in the

case of A. Sanyasi Rao & Anr (supra) by contending that the tax

levied there was on the purchase price and not the tax on income. In

that case, as we have noted earlier, what was under consideration

was Section 44AC of the Income Tax Act which was a special

provision for computing profits and gains from the business of

trading of certain goods. The measure there was the purchase price.

Argument sought to be contended was that the Parliament would not

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have competence to legislate as it would be beyond Entry 82 of List

1. After considering the various judgments and noting that purchase

price were only a standard of measure, the Honourable Supreme

Court was pleased to hold that it was within legislative competence,

by observing that the charge for the levy of income accrued or arose

as laid down by the charging sections 4 and 5 and not by virtue of

Section 44AC or Section 206C. In our opinion, the ratio of that

judgment would clearly apply to the facts of the present case. A

similar argument was advanced also before the Andhra Pradesh High

Court. After considering the test for interpretation of taxing statute

the Honourable Court noted that the tax was within legislative

competence.

17. Thus the two contentions raised before us, namely, (1) that

Section 50C is beyond the legislative competence and (2) that it is

violative of Article 14 of the Constitution of India, in our opinion are

devoid of merits.

18. We have not referred to any judgments on the rules of

interpretation as in our opinion the judgment of the Supreme Court

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in A. Sanyasi Rao (supra) and the judgment of the Madras High

Court in K. R. Palanisamy v/s Union of India, (2009) 180 Taxman

253 (Mad) has made reference to the judgments on the rules of

interpretation.

19. Our attention was also invited to another judgment of the

learned single Judge of the Madras High Court in N. Meenakshi v/s

The Assistant Commissioner of Income Tax, 2009 LawSuit (Mad)

1653. That petition was directed against the Assessment Order of

respondent. In that case reference has been made to the Valuation

Officer. However, before the report was received, the assessment was

done by taking the value of the land as determined for stamp duty.

The petitioner had filed the petition challenging the vires of Section

50C of the Act which was dismissed. The assessee approached the

Supreme Court which rejected the Special Leave Petition and

directed the petitioner to approach the authority by keeping open the

question of vires of the provisions. This judgment, in our opinion,

could be of no assistance as the only issue left open for consideration

was the vires of the act.

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20. It is not the case of the petitioner that the valuation could not

have been done under the provisions of the Bombay Stamp Act, 1958

and/or that the Collector acted contrary to law in levying stamp duty

under Schedule I Article 5(ga). Even otherwise as noted earlier, in

the process of assessment it will be open to the assessee to invoke the

provisions of Section 66 by asking on the Assessing Officer to refer

the matter to the Valuation Office and that would be within the

jurisdiction of the Valuation Officer. We are in agreement with the

view taken by the Madras High Court in K. R. Palanisamy (supra).

21. For the aforesaid reasons, there is no merit in this writ petition.

Rule accordingly discharged. There shall be no order as to costs.

Sd/-

(F.I. REBELLO,J.)

Sd/-

(A. A. SAYED, J.)

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