Case Studies on Full Value of Consideration- Sec. 50C & Reference to Valuation Officer Sec. 55A

SECTION 50C – SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION IN CERTAIN CASES

Applicability of Section 50C

As per Sec 50C, where the consideration received or accruing as a result of the transfer of land and/or building is less than the value adopted or assessed or assessable by an authority of the state govt. for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration received or accruing as a result of such transfer for computing capital gain.

Also please note that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration

Sub section (2) of said section provides that where the assessee claims before any assessing officer that the value adopted or assessed by the authority exceeds the fair market value of the property as on the date of transfer and the value so adopted or assessed by the authority has not been disputed in any appeal or revision or no reference has been made before any other authority, court or a high court , the Assessing offer may refer the valuation of the capital asset to a valuation officer.

If the transaction falling u/s 50C then whether section 56(2) also get attract to such transaction?

Cases of transfer of immovable property for inadequate consideration are no longer covered by the provisions of sec. 56(2) i.e. taxability in the hands of buyer as deemed income. The transactions would fall squarely within the ambit of sec. 50C.

Some Practical Issues

Issue 1 – Section 50C has no application for determination of sale price of stock-in-trade/ Business assets.

1. Where there was no dispute as to fact that property owned by assessee was its inventory and as such forming part of its stock-in-trade, profit on sale of said stock-in-trade was assessable u/s 28 and AO could not make addition on ground that its sale consideration was understated. [Asst. CIT v. Excellent Land Developers (P.) Ltd. 1 ITR 563 (DELHI-ITA T) [2010]]
2. Where property is treated as business asset and not as capital asset, S 50C cannot be invoked. [CIT v. Thiruvengadam Investments (P.) Ltd320 ITR 345 (Mad.)[20 10]]

Issue 2 – Section 50C does not apply to transfer of “leasehold rights” as it is not “land or building”.

 Lease right in a plot of land cannot be included within scope of ‘land or building or both’ and, thus, in case of transfer of leasehold rights in land, provisions of section 50C cannot be invoked. [Atul G. Puranik vs. ITO [2011] 11 taxmann.com 92 (ITA T-Mum.)]

Issue 3 – Section 50C is applicable to depreciable assets

The harmonious interpretation of sec 50 and sec 50C, it is clear that there is no exclusion of applicability of one fiction in a case where other fiction is applicable. Thus, provisions of sec 50C can be applied to the transfer of depreciable capital assets covered by sec 50 and in computing the capital gain arising from the transfer by adopting the stamp duty valuation. [ITO v. United Marine Academy 9 ITR 639 (Mum. ITAT) (2011)]

Issue 4 – Legal fiction created by sec. 50C is limited to purposes of sec.48 alone and does not displace legal fiction created by sec. 69, 69A & 69B

The consideration, which is deemed by sec. 50C to have been received by the transferor, is for the limited purpose of computation of capital gain u/s 48 and for no other purpose. It cannot and does not mean that the said amount of consideration has been actually received by the assessee or actually paid by the transferee to him so as to be available in his hands for investments or for meeting the expenses. “Deemed consideration” u/s 50C for computation of capital gain u/s 48 is quite different from actual consideration or actual availability of money for the purpose of making investments or for meeting the expenses. Deemed consideration within the meaning of sec. 50C cannot and does not mean that the amount of deemed consideration has actually been paid by the transferee or actually received by the assessee. [Subash Chand v. ACIT 18 taxmann.com 149 (ITA T-Chandigarh) [2012]]

Issue 5 – Some other related issues

+    In absence of any material to effect that assessee had received any amount over and above value on which stamp duty was payable, Full value of consideration would be the value adopted for purpose of stamp valuation. [ITO v. Ms. Namita Singh 15 taxmann.com 19 (ITA T-D elhi) [2011]]

+    While computing capital gains u/s 45, FVC has to be taken as per circle rates prescribed by the State Government for the purpose of stamp valuation unless the AO has material in his possession to prove that the assessee had received higher amount than the circle rates.

+    Adoption of the DVO’s report without providing opportunity of being heard is also against the principles of natural justice. [ADIT v. Ranjay Gulati -TIOL -528 (ITAT-Delhi)(201 1)]

+    Value adopted or assessed by any authority of the State Government for purpose of payment of stamp duty in respect of land or building at the time of execution of the transfer deed, cannot be taken as sale consideration received for the purpose of section 48. [CIT v. Smt. Shweta Bhuchar 192 Taxman 67 (P&H) [2010]]

+    The deeming fiction of Sec. 50-C could not be applied for ascertaining the undisclosed investment of assessee under Sec. 69-B. Further, in absence of any evidence for applying S 69B, difference b/w value for purpose of stamp duty and value shown in sale deed cannot be added in the income of assessee. [ITO v. Fit well Logic System (P.) Ltd. 1 ITR (TRIB.) 286 (Delhi) [2010] and CIT-II Vs Harley Street Pharmaceuticals Ltd TIOL-391-(Ahm) (2011)]

+    Where the assessee objects to stamp duty valuation, the AO is required to call for report of DVO, and even if the valuation report is received after the assessment, the value determined may be rectified u/s 154. [Mrs. Nandita Khosla v. ITO Taxman 344 (ITA T-Mum.)[20 11] and Kanai Lal Sharma Vs ACIT TIOL-324-ITAT-(Kol) (2011)]

Some recent case laws on Section 50C are as under:

1. Brokerage paid by purchaser cannot be taken into account for Section 50C – ITO Vs Smt. Rajani Manhar Bhagat (ITAT Ahmedabad)

2. 50C Addition without reference to Valuation Officer not justified – Jayashree Kothari Vs ITO (ITAT Hyderabad)

3. Section 50C cannot be avoided merely for sufficiency of exemption u/s 54EC – Jagdish C. Dhabalia Vs ITO (Bombay High Court)

4. Stamp duty value considered as full value of consideration if amount received via bank – Jagdish Dhanajirao Jadhav Vs ITO (ITAT Pune)

5. No Section 54F exemption on Sale value enhanced under Section 50C – Sunil Miglani Vs DCIT (ITAT Delhi)

6. Agriculture land situated beyond 8 kms is not Capital Asset & Section 50C not applies – DCIT Vs Shri Ravjibhai Manibhai Patel (ITAT Ahmedabad)

7. Section 50C cannot be invoked if sale has not taken place – Shri Vinod Kumar Chugh Vs ITO (ITAT Delhi)

8. In case of Encumbered Property, Stamp Duty value cannot be adopted as Sale Value – Sir Mohd. Yusuf Trust, Nhava House Vs ACIT (ITAT Mumbai)

SECTION 55A – REFERENCE TO VALUATION OFFICER

Applicability of Section 55A of the Act

With a view to ascertaining the FMV of a capital asset for the purposes of this Chapter, the AO may refer the valuation of capital asset to a Valuation Officer—

(a)  In a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, if the AO is of opinion that the value so claimed is at variance with its fair market value.” (amendment by Finance Act, 2012)

(b)   In any other case, if the AO is of opinion—

(i)    that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than such percentage of the value of the asset as so claimed or by more than such amount as may be prescribed in this behalf ; or

(ii)   that having regard to the nature of the asset and other relevant circumstances, it is necessary to do so,

Where any such reference is made, the provisions of sub-sec. (2), (3), (4), (5) and (6) of sec. 16A, clauses (ha) and (i) of sub-sec. (1) and sub-sec. (3A) and (4) of sec. 23, sub-sec. (5) of sec. 24, sec. 34AA, sec. 35 and sec. 37 of the Wealth-tax Act, 1957 (27 of 1957), shall with the necessary modifications, apply in relation to such reference as they apply in relation to a reference made by the AO under sub-sec. (1) of sec. 1 6A of that Act.

Some Practical Issues

1. Where valuation report of approved valuer submitted by assessee suffered from grave infirmity, in as much as it did not take into account a number of items used by assessee for construction of property, AO can adopt the value determined by DVO. [Krishan Kumar Jhamb v. ITO 179 Taxman 141 (P& H) [2009]]
2. Where there is nothing on record, to show that the assessee received consideration for the sale of the property in excess of which has been shown in the agreement to sell. Thus the actual sale consideration recorded in the agreement to sell and received by the assessee could not be substituted by the value as adopted by the District Valuation Officer u/s 55A for the purpose of computing the capital gains chargeable to tax. [Dev Kumar Jain V ITO 309 ITR 0240 (Del) [2009] see also CIT v Smt. Niofer I. Singh 309 ITR 0233 (Del) [2009]].

(Source – Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains  written by CA Agarwal Sanjay ‘Voice of CA’ & Team)

Republished with Amendments