Adhering to Valid Claims in ITR for LTCG on Immovable Property Sales: A Case Study

Smt. Chitra Bhaskaran Vs ITO (ITAT Chennai)

Tax Payers should adhere to valid claims when reporting Long term Capital gain (LTCG) on sale of immovable property in their Income tax Return – A case study

1. Introduction:-

1.1 When a person sells immovable property, the transaction may result in either a profit or a loss. To determine this, two factors are necessary: the Selling Price and the Cost Price. In terms of income tax, the resulting profit or loss is referred to as capital gain or capital loss. This is calculated as the difference between the sale consideration of the property and its cost price, including any improvements made to it. According to Section 45(1) of the Income Tax Act, any profits or gains from the transfer of a capital asset in the previous year are subject to income tax under the “Capital gains” category, unless exceptions are specified in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G, and 54H. These gains are considered part of the income for the year in which the transfer occurred. Furthermore, if an immovable property has been held for more than 24 months, any gain or loss from its transfer is classified as Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL), respectively.

2. Full value of Consideration :-

2.1 Regarding the sale consideration, the sale value is generally based on the amount recorded in the registered sale deed. However, disputes may arise if the sale value assessed by the Stamp Valuation Authority (SVA) exceeds the value recorded in the sale deed. In such cases, the taxpayer must use the value determined by the SVA, commonly known as the 50C value. Section 50C of the Income Tax Act requires that if the SVA’s assessed value exceeds the sale price recorded in the sale deed, the SVA’s value must be adopted.

2.2 If the taxpayer disagrees with the SVA’s valuation, he can request the Assessing Officer to refer his  case for a valuation  under section 50C(2) read with 55A of the Income Tax Act to estimate the fair market value (FMV) of the property as of the sale date. If the FMV estimated by the valuation officer exceeds the SVA’s assessed value, the SVA’s value will be considered the full consideration. Additionally, the Act specifies that if the value assessed by the SVA does not exceed 110% of the consideration received or accruing from the transfer, then the consideration received or accruing will be deemed the full value for the purposes of Section 48 of the I.T Act.

3. Expenses on Transfer:-

3.1 Furthermore, the Act allows taxpayers to deduct expenses that are wholly and exclusively incurred in connection with the transfer of the property as per section 48(i) of the I.T Act. This means taxpayers can claim incidental expenses related to the sale, such as registration fees, stamp duty, brokerage, and other related costs, against the sale consideration

4. Cost of acquisition:-

4.1 According to section 48(ii), the income subject to tax under “Capital gains” is calculated by subtracting the cost of acquisition and any improvements from the total consideration received or accrued from the transfer of the capital asset. Typically, the property’s cost is based on the value recorded in the purchase deed. However, if the property was inherited or received through a settlement, the cost should be based on the original cost to the previous owner, as stipulated in section 49(1) of the Income Tax Act. Additionally, the Income Tax Act permits adjustment for inflation, as outlined in the third proviso to section 48. For example, if a property was bought in the financial year 2015-16 and sold in 2022-23, its cost can be adjusted for inflation using the relevant Cost Inflation Index. Specifically, the cost can be adjusted by multiplying it by the ratio of the Cost Inflation Index for the year of sale (2022-23) to the Cost Inflation Index for the year of purchase (2015-16). The indexation formula is:Cost of indexation = (Index for the year of sale / Index for the year of purchase) x cost.

5. Cost of Improvement:-

5.1 Likewise, with reference to third proviso to section 48 of the I.T Act, a taxpayer can also adjust the cost of any improvements made to the property for inflation. This is done by indexing the cost of the improvements as follows:

Indexed cost of improvement = cost of improvement × (Cost Inflation Index for the year of transfer / Cost Inflation Index for the year of improvement).

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6. An individual taxpayer filed a belated Return of Income (ROI) on March 31, 2009, for the Assessment Year (AY) 2007-08, declaring a total income of Rs. 43,49,439. During the previous year 2006-07, the taxpayer sold a jointly held immovable property for Rs. 6.00 crore and reported Long Term Capital Gain (LTCG) under the head capital gain. The taxpayer’s case was selected for scrutiny and consequently, the scrutiny assessment u/s 143(3) was completed on the following lines.

6.1 Sale Consideration of Rs. 4.50 Crores (Tax Payer’s share 75%):-

6.2 In calculating the Long Term Capital Gain (LTCG), the taxpayer made the following adjustments to the sale consideration:

a. The taxpayer claimed Rs. 1,00,00,000 as payment to a confirming party (her husband).

b. The taxpayer also claimed Rs. 69,00,000 towards settling a bank loan.

6.3 These adjustments significantly reduced the sale value of the property to the extent of Rs.2.81 crores from the actual consideration of Rs.4.50 crores. Concerning the Rs. 1 crore payment to the confirming party, the taxpayer argued that the property sold was inherited from her husband through a settlement deed in 2001. Her husband, a renowned doctor, had purchased the land in the 1970s and used it to establish a multi-specialty hospital, which was run by a separate corporate entity. The land was subsequently settled in favor of his wife (the taxpayer) and his daughter in a 75% to 25% ratio, respectively. At the time of sale, the buyer required her husband to be included as a confirming party in the sale deed to ensure he had no further claims on the property, which led to the Rs. 1 crore payment. The taxpayer argued that this amount should be deductible from the sale consideration as it was an expense incurred exclusively for the sale. However, the Assessing Officer (AO), while completing the scrutiny assessment disagreed, stating that since the taxpayer was the absolute owner of the property due to the settlement deed, the payment to her husband was not necessary and was considered an application of sale proceeds, leading to the rejection of this claim made under section 48 (i) of the I.T Act.

6.4 Regarding the Rs. 69 lakh adjustment for the bank loan, the taxpayer contended that this amount was necessary to clear the outstanding loan against the property to complete the transfer. The taxpayer argued that this expense should be deducted from the sale consideration as it was incurred solely for the transfer of the property. However, the AO rejected this claim as well, considering it an application of the sale proceeds rather than an expense incurred for the transfer as outline in section 48 (i) of the I.T Act.

6.5 Cost of the Property Claimed at Rs. 45,00,000/-:-

6.6 In calculating the capital gain, the taxpayer claimed a cost of Rs. 45,00,000/- for the property, representing 10% of the sale consideration (75% of the taxpayer’s share). The taxpayer also applied indexation and claimed the cost of indexation at Rs.2.40 crores However, the property was inherited through a settlement deed, so the cost should have been based on the previous owner’s cost as per section 49 (1) of the Income Tax Act.. But the AO, after verifying with the Sub Registrar, found that the property’s guide line value as of April 1, 1981 (when it was acquired by the husband) was Rs. 25,000 per ground. The AO adopted this value and determined the cost of the property at Rs1,26,000/- after indexation the cost of indexation of the property worked out by the AO was Rs.6.55 lakhs only as against cost of indexation claimed by the taxpayer at Rs. 2.40 crores.

Aggrieved the tax payer/appellant had gone on appeal before the Commissioner of Income tax (Appeals)

6.7 CIT (A) Decision:-

a. The CIT(A) upheld the disallowance of Rs. 1 crore, stating that the taxpayer and her daughter held full title to the property and were entitled to receive the full sale consideration. Hence, rejected the taxpayer’s claim.

b. The CIT(A) accepted the claim of Rs. 69 lakh for the bank loan payment, noting that the charge existed before the property transfer. In this regard CIT (A) placed reliance on Supreme Court decision in the case of RM Arunachalam vs CIT[1]

c. The CIT(A) directed the AO to adopt 200% of the guideline value as the property’s cost.

6.8 Aggrieved by the CIT (A) order, the taxpayer appellant had challenged only one issue before the Tribunal pertaining to claim of Rs. 1.00 crore alleged to be paid to her husband as a confirming party as the CIT (A) has rejected the taxpayers claim.

6.9 ITAT Decision:-

6.10 The ITAT rejected the appellant’s claim regarding the Rs. 1 crore payment to her husband. The Tribunal[2] held that the payment was merely an application of income and that taxpayer’s husband, having no rights over the property at the time of sale, did not need to be a confirming party. The Tribunal concluded that this attempt to reduce capital gains was inappropriate and agreed with the CIT(A)’s decision to uphold the AO’s order. Consequently, the appeal by the taxpayer was dismissed.

7. Key Takeaways:-

7.1 Taxpayers can claim any liability associated with the property at the time of sale under Section 48 of the Income Tax Act when computing Long Term Capital Gains (LTCG). It is crucial that the liability should exists before the property transfer.

7.2 Taxpayers cannot claim deductions for payments made to a third party as a confirming party to the sale when they are the absolute owner of the property

[1] 227 ITR 222

[2] Chitra Baskaran vs ITO,ITAT Chennai vide ITA No. 1678/chny/2012 dated 20.11.2019

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals) –VI, Chennai, dated 09.02.2012 and pertains to assessment year 2007-08.

2. Sh. N. Devanathan, the Ld.counsel for the assessee, submitted that the only issue arises for consideration is disallowance of Rs. 1 Crore paid to the husband of the assessee, Dr.K. Chockalingam being the confirming party in the sale deed executed by the assessee. According to the Ld. counsel, the original owner of the property was Dr.K. Chockalingam, who is none other than the husband of the assessee. By settlement deed dated 24.12.2001, Dr. Chockalingam settled the property in favour of his wife Smt. Chitra Chockalingam and Dr.Deepa Chockalingam. According to the Ld. counsel, Smt. Chitra Chockalingam and Dr.Deepa Chockalingam executed sale deed in respect of the property at Luz Church Road, Mylapore, Chennai. In the sale deed, Dr. Chockalingam was referred as confirming party. The assessee claimed that a sum of Rs. 1 Crore was paid to Dr. Chockalingam. According to the Ld. counsel, unless the assessee paid Rs. 1 Crore, the sale cannot be completed. Hence, according to the Ld. counsel, it has to be allowed. On a query from the Bench, after the execution of settlement deed on 24.12.2001 by Dr. Chockalingam in favour of the assessee and his daughter, Dr. Deepa Chockalingam, what is the title or right remains in favour of Dr. Chockalingam for payment of any amount for sale of property? The Ld.counsel submitted that but for the payment of Rs. 1 Crore, the property would not have been sold at all.

3. On the contrary, Shri AR.V. Sreenivasan, the Ld. Departmental Representative, submitted that after execution of settlement deed on 24.12.2001 by Dr. Chockalingam, the assessee’s husband, he has no right whatsoever over the property at Luz Church Road, Mylapore, Chennai. After the settlement deed dated 24.12.2001, the assessee and her daughter executed the sale deed during the year under consideration. Therefore, according to the Ld. D.R., on the date of sale of the property by the assessee and her daughter, Dr. Chockalingam, being the assessee’s husband, had no title or right over the said property. Therefore, according to the Ld. D.R., it is only an application of income accrued to the assessee. By referring to the name of Dr. Chockalingam as confirming party, the assessee is making an attempt to reduce the capital gain. Therefore, according to the Ld. D.R., the CIT(Appeals) has rightly confirmed the order of the Assessing Officer.

4. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that Dr. Chockalingam was the original owner of the property. On 24.12.2001, Dr. Chockalingam executed a settlement deed in respect of the property at Luz Church Road, Mylapore, Chennai, in favour of his wife, the assessee herein and his daughter Dr.Deepa Chockalingam. Therefore, by virtue of settlement deed dated 24.12.2001, the assessee and her daughter became the absolute owner of the property.

5. On execution of settlement deed in favour of the assessee and her daughter Dr.Deepa Chockalingam, Dr. Chockalingam has no right or title whatsoever over the property. Dr. Chockalingam happened to be the assessee’s husband. The assessee claims that but for the payment of Rs. 1 Crore, the property could not be sold. This Tribunal is unable to accept the claim of the assessee. The payment of Rs. 1 Crore to Dr. Chockalingam is only application of income. Having no right over the property on the date of sale, Dr. Chockalingam need not be a confirming party for sale of the property. By referring him as confirming party in the sale deed, the assessee is making an attempt to reduce the capital gain. Therefore, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly confirmed the order of the Assessing Officer. This Tribunal do not find any reason to interfere with the orders of the lower authorities and accordingly the same is confirmed.

6. In the result, the appeal filed by the assessee is dismissed.

Order pronounced in the court on 20^th November, 2019 at Chennai.