Tax Implications arising on agreement to sell and Sale Deed

At many places in India while purchasing any immovable property it is seen that an agreement to sell is entered and pursuant to which a sale deed is entered between the parties thereby handing over the title of the property. However the time limit between these two agreements can be of a considerable time. Due to such considerable time limit, there can be issues in relation to Income Tax Act, 1961 (Act) with respect to specific provisions such as sections 43CA, 50C and 56(2)(x) of the Act. Let us study these sections in brief and the impact of these two agreements in relation to income tax.

Section 43CA & 50C of the Act (applicable to the seller of the property)

Section 43CA & 50C of the Act provides that where the consideration received as a result of 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 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. In other words, full consideration mentioned in section 48 is to be replaced by the consideration on which value of the property was adopted for the purpose of payment of stamp duty.

For instance, say the sales consideration is Rs 5,00,000 and the stamp duty valuation is Rs 6,00,000 then the actual sales consideration for calculating the business income/ capital gains would be Rs 6,00,000.

Section 56(2)(x) of the Act (applicable to the buyer of the property)

Similarly to section 43CA & 50C of the Act, in case the stamp duty valuation is higher than the agreement value then the difference between the stamp duty value and agreement value is charged to income tax under the head ‘Income from other sources’ in the hands of the buyer.

Issue

The sale consideration is fixed at the point of time when agreement to sell is entered into, whereas there is, sometimes, considerable gap in parties agreeing to a transaction (i.e. agreement to sell) and the actual execution of the transaction (i.e. sale deed), and it is the value as on the date of execution of sale deed which is recognized by section 50C for the purpose of computing the capital gain because that is relevant for the purpose of computing stamp duty for registration of sale deed. The very comparison between the value as per sale deed and the value as per stamp duty valuation, accordingly, ceases to be devoid of a rational basis because these two values represent the values at two different points of time.

Let us take an example to understand the topic of our discussion better:

Date of agreement to sell: 01.12.2017

Sales consideration as per the agreement to sell: Rs 1,00,000

Stamp duty valuation on the date of agreement to sell: Rs 1,80,000

Date of sale deed: 01.03.2020

Sales consideration as per the sale deed: Rs NIL (as the sales consideration is mentioned & paid along with the agreement to sell)

Stamp duty valuation on the date of sale deed: Rs  5,00,000

Now the question arises is whether the valuation as per stamp duty authorities should be Rs 1,80,000 or Rs 5,00,000?

Opinion

Section 45 of the Act states that the capital gain is chargeable to tax in the year in which transfer takes place. The term ‘transfer’ has been defined u/s 2(47) of the Act which includes any transaction allowing the possession of the property as per the section 53A of the Transfer of Property Act, 1882.

A perusal of section 53A of the Transfer of Property Act, 1882 indicates that it provides a protection to transferee to retain his possession which was taken in part performance of the contract.

After an amendment in the Registration and Other Related Laws Amendment Act, 2001 it has been provided that contract accompanied by either of possession or executed in favour of a person in possession should be compulsorily registered u/s 17(1A) of the Registration Act, 1908.

If the agreement entered between the parties is not registered then the protection of possession or any benefit conferred by section 53A of the TPA would not be provided by the statue. The proviso appended to section 49 of the Indian Registration Act only postulates that such agreement could be tendered in evidence in a suit for specific performance.

In other words, validity of unregistered agreement has not been denied for the purpose of adducing it as evidence for obtaining the benefit flowing from such contract. But for the purpose of protecting the possession, unregistered contract could not be enforced. The ‘transfer’ within the meaning of section 2(47) would complete, if possession is protected.

Given the above basic understanding of section 45 r.w.s. 2(47) of the Act and section 53A of the TPA we now focus on sections 43CA, 50C and 56(2)(x) of the Act and its implications on agreement to sell and sale deed. We have only analysed section 50C in the article as the other sections have similar language used in the statue as used in section 50C of the Act.

Section 50C of the Act is a special provision for determining the full value of consideration in cases of transfer of immovable property. It provides that where the consideration agreed on transfer of land or building or both, is less than the value adopted or assessed or assessable by stamp valuation authority 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, and capital gains shall be computed on the basis of such consideration under section 48 of the Income-tax Act.

The scope of section 50C was extended w.e.f. A.Y. 2010-11 to the transaction which were executed through agreement to sell or power of attorney by inserting the word “assessable” alongwith words “the value so adopted or assessed”.

Further amendment have been made to section 50C vide Finance Act, 2016 w.e.f. 01.04.2017

The requisite amendments envisaged in the provisos to Sec. 50C are as follows:

(i). that, the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the property are not the same; and

(ii). that, part of the sale consideration as claimed by the assessee was received by the assessee by way of account payee cheques, on and before the date of the agreement for transfer.

Considering the above discussion and as per section 45 r.w.s 2(47), 50C it can be concluded in the above scenario (example taken) that the transfer will be done on 01.12.2017 and the stamp duty valuation of Rs 1,80,000 will be taken as sales consideration for computing the capital gains as the possession is obtained by the buyer during the agreement to sell and the sales consideration is paid through account payee cheques. Similarly for section 43CA of the Act the business income would be taxable at Rs 1,80,000.

Similarly for section 56(2)(x) of the  Act it can be concluded that the difference between the stamp duty valuation of Rs 80,000 (1,80,000 – 1,00,000) will be taxable in the hands of the buyer.

The above view is supported by the following decisions:

1. Amit Bansal v. ACIT, [2018] 100 taxmann.com 334 (Delhi – Trib.)

2. Dharamshibhai Sonani v. ACIT, [2016] 75 taxmann.com 141 (Ahmedabad – Trib.)

3. Kishore Hira Bhandari v. ITO, [2019] 107 taxmann.com 218 (Mumbai – Trib.)

4. Rahul G. Patel v. DCIT, [2018] 97 taxmann.com 598 (Ahmedabad – Trib.)

However one needs to take into consideration the recent decisions on the above subject and the facts of the case.

The above view is personal view of the author and should not be taken as a legal opinion.