Introduction: Ascertaining the nature of asset is crucial, whether it be a ‘capital asset’ or ‘not a capital asset’, it should be clearly understood by the nature of activity performed by the owner and accounting treatment of the said asset in the books of the assesse. This issue has become quite complex especially when it comes to sale of Immovable Property being land and Building.
Here, I have tried to explain the applicability of two provisions of the Income Tax Act which is related to Immovable property being Land and building. However both these section i.e. Section 50C & 43CA of the Income Tax Act dealt with Immovable property being Land and building but it’s differ from the point of view of taxability of income and reporting under correct head of income.
Sec 50C deals with immovable property as a “capital asset,” while Sec 43CA applies to property treated as “stock in trade.” The accounting treatment, activities of the owner, and nature of income upon sale differ under these sections. Sec 50C mandates capital gain taxation, while Sec 43CA taxes business income. Various deductions and considerations affect profit/gain computation. Exclusions apply to both sections, protecting certain transactions.
Before discussing the issue, let’s get clarity on the definition of asset
“Capital asset “means
- property of any kind whether or not connected with his business or profession
But doesn’t include
- Stock in Trade, consumable stores or raw materials used for the purpose of business or profession.
“Business” includes
Any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
Tabulated Summary of Sec 43CA & Sec 50C of the Income Tax Act
|
Particulars |
Sec 50C | Sec 43CA |
| Applicability | Immovable property being land and building in the nature of “capital asset” | Immovable property being land and building in the nature of “Stock in trade” |
| Accounting treatment under Books | Recorded in books under the head “Fixed assets” | Recorded in Books under the head “Current assets” as Stock in Trade. |
| Activities of the Owner | Under this, assessee is usually not engaged in real estate activities with respect to such Immovable property being land and building. | Under this assessee must be engaged in the nature of ‘Real estate activities’ as Trader of Real estate developer. Business activities must be there to prove the contention of the assessee. (like assessee can have RERA registration for projects undertaken, or conversion of land u/s 143 for selling thereon in units) |
| Nature of income in case of sale of Immovable property | Any profit or gain arising from the transfer of Immovable property being Land and building as Capital asset will be taxable under the head “Capital Gain” | Any profit or gain arising from the transfer of Immovable property being Land and building as Stock in Trade will be taxable under the head “Business income” |
| Deduction allowed for computation of profit/gain | i. Cost of acquisition
ii. Cost of Improvement iii. Exp on transfer *Indexation benefit will be provided in case of Long term Capital Gain. |
Purchase Cost + Brokerage paid + Plotting expenses + other Incidental business expenses incurred. |
| Sale Consideration | Sale consideration should not be less than the stamp duty value determined by the Government or 110% of the stamp duty value | Sale consideration should not be less than the stamp duty value determined by the Government or 110% of the stamp duty value |
| Exclusion | Sec 50C do not apply in the following cases:
· Transfer of leasehold rights in a building, since leasehold rights in plot of land is not land or building. · Transfer of development rights with respect to land owned by the owner. (Voltas Ltd. v. ITO [2016] 74 ) |
Sec 43CA do not apply in the following cases: · Transfer of 100% shares of the company where immovable property is the only asset. (Irfan Abdul Kader Fazlani v. ACIT [(2013)) · Rights which are attached to or incidental to or connected with land or building or both don’t come within the scope of Sec 43CA. |
Important Judgement relevant for the above subject
a) Kan Construction & colonizers (p) Ltd. (70 DTR 169) Allahabad HC:
Assessee Company, a Real Estate Developer, had some plot of land which was shown as stock in trade. During the previous year assessee sold some plot of land for a consideration of INR 80 lakh and offered the income under Business Head. The AO had treated the said plot of land as capital assets and thereby applying the provisions of section 50C, had taken stamp duty value as sale consideration for calculating capital gains. Appellate authorities had deleted the addition made by the AO, against the department preferred an appeal before High Court. Hon’ble High Court held that if the asset is held as stock in trade, the profits and gains from the sales is liable to be taxed as profits and gains from business and not as capital gains. Section 50C has no application where transfer of immovable property is on account of sale of stock.
b) Commissioner Of Income Tax I vs M/S.Thiruvengadam Investments … on 1 December, 2009
It is not in dispute that the activity of the assessee is property promoter. The amounts so paid were shown under the head ‘loans and advances’ in the balance sheet and not under the head ‘fixed assets’. Later on, the property was sold to M/s. MRF Limited for a sum of Rs.5 Crores by a deed of conveyance, in which, the assessee represented the owner in the capacity of the power of attorney. The Tribunal also, taking note of the facts stated above, has come to the conclusion that invocation of Section 50C of the Act is not warranted as the property was never held by the assessee as capital asset and as per the accounts also, the amount given to the owner of the property has been shown as loans and advances thereby the property has been treated as business asset and not as capital asset. The invocation of Section 50C of the Act as can be seen from the provisions of the Act can be made in order to find out the true value of the capital asset. In the very facts and circumstances of the case, the property in the hands of the assessee was treated as business asset and not as capital asset, there is no question of invoking the provisions of Section 50C of the Act, which is, as already stated, pertaining to determining the full value of the capital asset.
c) Interlok Hotels (P) Ltd Vs. ITO
Contention of the assesse can be rejected only if discrepancy is found in the purchase value or Sale value by the assesse or if accounts are defective or not reliable. Where The Assessing Officer neither found any defects in the books of account nor has rejected the same. As already held, provisions of section 50C is not applicable to cases where income is computed under the heads “Profits & Gains under business or Profession”
Conclusion: Sec 50C & 43CA hold crucial implications for the taxation of immovable property sales. Distinguishing between capital asset and stock in trade is pivotal, determining the applicable section. This analysis clarifies the intricate tax aspects of these provisions, aiding taxpayers and professionals in accurate tax reporting and compliance.
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