Applicability of Section 50C and Section 56(2)(x) / Section 56(2)(vii) of Income Tax Act, 1961 on Rural agricultural land

Applicability of Section 50C and Section 56(2)(x) / Section 56(2)(vii) of Income Tax Act, 1961 on Rural agricultural land

Computation of Capital Gain is many times not free from ambiguity. Further, due care is required in cases of transactions of immovable property for a consideration, which is less than the stamp duty value of such immovable property.

Transfer of capital asset being land or building or both (‘immovable property’) for a consideration, which is less than the Stamp duty valueof such immovable property attracts the provisions of Section 50C of the Income Tax Act, 1961 (‘the Act’) in the hands of seller. As a result, the stamp duty value of such immovable property is deemed to be the full value of consideration for the purpose of computation of Capital Gains in the hands of seller. Further, the provisions of Section 56(2)(x) of the Act are attracted in the hands of buyer. As a result, the difference between the stamp duty value and the transaction value is treated as ‘Income from other sources’ and is chargeable to tax u/s. 56(2)(x) of the Act in the hands of buyer of such immovable property.

Whether the provisions of Section 50C and Section 56(2)(x)/Section 56(2)(vii) of the Income Tax Act will be applicable in cases of transfer of rural agricultural land?

Applicability of Section 50C and Section 56(2)(vii)/56(2)(x) has been discussed in this Articlein following sub-parts:

1. What is rural agricultural land?

2. Applicability of Section 50C to rural agricultural land

3. Applicability of Section 56(2)(x) to rural agricultural land

4. Conclusion

1. What is rural agricultural land?

As per the provisions of section 2(14)(iii) of the Act, any agricultural land in India, not being aland situated in the following area is a rural agricultural land:

a. Agricultural land situated within the jurisdiction of a municipality or a cantonment board having population of not less than 10,000; or

b. Agricultural land situated within the distance, measured aerially from the local limits of municipality or cantonment board referred to in point (a) above:

Note: Population means population as per latest census

Thus, any land situated within the limits as specified above is a capital asset (urban agricultural land). Further, any land which is situated beyond the limits specified in (a) or (b) above or situated in area specified in (a) above if population is less than 10000, is a Rural Agricultural Land i.e. such a land will not be treated as a Capital Assetas per Section 2(14) of the Act.

Accordingly, any gainarising from Sale of rural agricultural land is not chargeable to tax under the Income Tax Act, 1961. Further, the holding period of such agricultural land is irrelevant.

2. Applicability of Section 50C to rural agricultural land

The provisions of Section 50C of the Act states that where the consideration received or accruing as a result of  transfer by an assessee of a capital asset, being land or building or both, is less than the stamp duty value for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable 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.

From the above, it is apparent that the provisions of Sec. 50C of the Act will get attracted where a capital asset, being land or building or both is transferred for a consideration, which is less than the stamp duty value. Thus, the basic condition for invoking the provisions of Section 50C of the Act is that the asset transferred should be a capital asset as per Section 2(14) of the Act.

Thus, a rural agricultural land, not being a capital asset u/s. 2(14) of the Act is beyond the ambit of Section 50C of the Income Tax Act, 1961 and any transfer of a rural agricultural land for a consideration, which is less than the stamp duty value is out of purview of Section 50C.

3. Applicability of Provisions of Section 56(2)(x) to rural agricultural land

The provisions of section 56(2)(x)of the Act, in relation to immovable property states that where any person receives any immovable property, the following amount shall be chargeable to tax under the head ‘Income from other sources’:

(A) where any person receives any immovable property without consideration, the stamp duty value of which exceeds Rs. 50,000, the stamp duty value of such property

(B) where any person receives any immovable property for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:-

(i) 50,000 and

(ii) the amount equal to 5% (10% w.e.f A.Y.2021-22)of the consideration

Section 56(2)(x) of the Act was introduced vide Finance Act, 2017 and was applicable w.e.f A.Y. 2018-19 onwards as against the erstwhile provisions of Section 56(2)(vii) of the Act.Under the erstwhile provisions of Section 56(2)(vii), only the receipts by individual or HUF were covered. However, the present provisions of Section 56(2)(x) is not restricted only to receipts by Individual or HUF but covers receipts by any person.

Thus, any receipt of immovable property without consideration (after 1.10.2009) or for inadequate consideration(from F.Y.2013-14) upto 31.03.2017 was taxable under 56(2)(vii)(b) of the Act and from 1.4.2017 onwards, the same is taxable u/s. 56(2)(x)(b) of the Act.

Explanation to Section 56(2)(x) states that, “For the purposes of this clause, the expressions “assessable”, “fair market value”, “jewellery”, “property”, “relative” and “stamp duty value” shall have the same meanings as respectively assigned to them in the Explanation to clause (vii)”.

The definition of property was first ever introduced Section 56(2)(vii) of the Act by the Finance (No.2) Act, 2009 w.e.f 01.10.2009 which defined the property as under:

“(d) “property” means—

(i) immovable property being land or building or both;

(ii) shares and securities;

(iii) jewellery;

(iv) archaeological collections;

(v) drawings;

(vi) paintings;

(vii) sculptures; or

(viii) any work of art

(ix) bullion”

However, vide Finance Act, 2010 the above definition of ‘property’ was amended and for the words ‘property means’ the words ‘property means the following capital asset of the assessee, namely:-’were replaced with retrospective effect from 01.10.2009.

Thus, after amendment vide Finance Act, 2010, the definition of property u/s. 56(2)(vii) of the Act reads as under:

“(d) “property” meansthe following capital asset of the assessee, namely:—

(i) immovable property being land or building or both;

(ii) shares and securities;

(iii) jewellery;

(iv) archaeological collections;

(v) drawings;

(vi) paintings;

(vii) sculptures; or

(viii) any work of art

(ix) bullion”

Thus, in view of the above amendment in the definition of ‘property’, wherein the word ‘capital asset’ has been specifically introduced w.r.e.f. so as to keep any asset which is not a capital asset out of the ambit of Section 56(2)(vii)(b) and now Section 56(2)(x) of the Act.

Thus, any property, not being a capital asset is out of the purview of Section 56(2)(x) and Section 56(2)(vii)(b) of the Income Tax Act, 1961.

This issue, regarding applicability of the provisions of Section 56(2)(vii)(b) of the Act on purchase of rural agricultural land at less than the stamp duty value arose before the Hon’ble Jaipur ITAT in the case of ITO vs. Trilok Chand Sain [(2019) 101 taxmann.com 391] (ITA No. 449/JP/2018) wherein the Hon’ble Jaipur Tribunal, while allowing the appeal of the revenuevide its Order dated 07.01.2019 held as under:

“6. … The Revenue’s contention is that the provisions of Section 56(2)(vii)(b) talks about any immoveable property and thus even an agriculture land falls under the definition of an immoveable property and the provisions of Section 56(2)(vii)(b) are clearly attracted. On reading of provisions of 56(2)(vii)(b), we find that it refers to any immoveable property and the same is not circumscribed or limited to any particular nature of immoveable property. It refers to any immoveable property which by its grammatical meaning would mean all and any property which is immoveable in nature, i.e, attached to or forming part of earth surface. In the instant case, the assessee has purchases three plots of agricultural land and such agricultural land is clearly an immoveable property. Whether such agriculture land falls in the definition of capital asset u/s 2(14) or whether such agriculture land is stock-in-trade of the assessee, in our considered view, are issues which cannot be read in the definition of “any immoveable property” used in context of section Section 56(2)(vii)(b) and are thus not relevant. In the result, we set- aside the order of the ld CIT(A) to this extent and upheld the order of the Assessing officer. In the result, ground no. 1 of the Revenue’s appeal is allowed”.

However, similar issue arose before Hon’ble Pune ITAT in the case of Mubarak Gafur Korabu vs. ITO (ITA No. 752/PUN/2018) wherein the Hon’ble Pune Tribunal, after considering the order of Hon’ble Jaipur Tribunal held in favour of the assessee vide its order dated 05.04.2019, held in favour of the assessee. The relevant extract of the Order of Hon’ble Pune Tribunal is as under:

“10. In the totality of above definitions, we hold that agricultural land purchased by assessee is not governed by the provisions of section 56(2)(vii)(b) of the Act being not capital asset and also because of the fact that the assessee was holding it as stock in trade. Hence, it is outside the purview of said section and no addition has to be made in the hands of assessee.

11. Now, coming to the decision of Jaipur Bench of Tribunal in ITO Vs. Trilok Chand Sain (supra), wherein provisions of clause (b) of section 56(2)(vii) of the Act were considered. However, they have failed to take into cognizance the provisions of clause (c) of said section, which talks of property other than immovable property. The Tribunal in para 6 refers only to the definition of ‘immovable property’ and hold that it is not circumscribed or limited to any particular nature of property. However, clause (c) very clearly talks of property other than immovable property and the word ‘property’ has further been defined under clause (d) of Explanation thereunder. In the totality of the above said facts and circumstances, there is no merit in reliance placed upon by the learned Departmental Representative for the Revenue on the ratio laid down by Jaipur Bench of Tribunal in ITO Vs. Trilok Chand Sain (supra). In view of clear- cut provisions of the Act, we find no merit in the orders of authorities below in making the aforesaid addition in the hands of assessee. The ground of appeal No.1 raised by assessee is thus, allowed.

In the result, the appeal of assessee is allowed”.

4. Conclusion:

The above discussion has mainly been done with respect to transactions of rural agricultural lands in India for a consideration, which is less than stamp duty value.

In view of the above decision of Hon’ble Pune ITAT and amply clear provisions of the Act, it can be concluded that the provisions of Section 50C, Section 56(2)(vii)(b) and Section 56(2)(x) can be invoked only when the property is a capital asset u/s. 2(14) of the Act. Thus, any genuine transaction of purchase and sale of rural agricultural land, not being a capital asset is out of purview of Section 50C, Section 56(2)(vii)(b) and Section 56(2)(x).