Stakes in transactions in immovable properties are quite high and so are the tax implications. It is not only perceived but an open secret in India that sale transactions of immovable properties are undervalued leading to leakage of tax revenue causing losses to the Government and unaccounted money is not good for the health of the society in general. Therefore, the restlessness on the part of Government to plug such leakage and attempts by assessees and tax professionals to avoid hardships to genuine assessees. The provisions of section 50C of the Income Tax Act, 1961 specifically dealing with transactions in immovable properties are in this context.
PART I: SECTION 50C OF INCOME TAX ACT, 1961
SPECIFIC PROVISIONS IN RESPECT OF TRANSACTIONS IN LAND AND BUILDING:
Basic Provision in Section 50C :
With effect from A.Y. 2003-2004 section 50C has been inserted in the Income Tax Act, 1961 dealing specifically about gross consideration in computation of capital gains in respect of transactions in land or building or both.
Section 50C provides that if the value stated in the instrument of transfer is less than the valuation adopted, assessed or assessable by the stamp duty authorities, the valuation as adopted, assessed or assessable by the stamp duty authorities will be considered for the purpose of computation of capital gains arising on transfer of land or building or both. For example if in the agreement for sale, the value of the flat is stated at Rs. 24 lacs but according to the stamp duty authorities the valuation of the flat is Rs. 34 lacs, then it will be considered that the flat has been sold for Rs. 34 lacs and capital gains will be computed on the basis of Rs. 34 lacs.
In certain cases, this causes a very difficult situation for the seller of the property as he is required to pay tax on extra money which he never received. Alternately, if he wants to claim exemption by investing in a residential house or capital gains bonds, etc. depending upon the facts of his case, he has to invest an extra amount, which he never received on sale. It is not necessary that one should invest the very sale proceeds in exemption schemes as funds from any sources can be invested to avail exemption. To come out of the difficulty one may consider recourse to relief provisions, but by the time decision in respect of relief provisions come, the time limit for planning investment gets expired.
History and background of section 50C:
The history and background of section 50C can be traced to Government’s restlessness to tax the black money in transactions in land and buildings. The prices of land and buildings like other items are a function of market forces of demand and supply. The demand far exceeds the supply; more so in big cities. This wide gap between demand and supply generates an inflationary and speculative market for immovable properties and provides a major avenue for investment of black money. The consideration for their transfer is understated in the instrument of transfer by the vendor and the purchaser and a substantial part is paid unrecorded in black money. The vendor saves on capital gains on undeclared portion of the sale proceeds while the purchaser saves on wealth tax and accommodates his unaccounted funds.
Position between 1972 and 1986:
Considering the wide-spread use of black money and under-statement of consideration in the instruments of transfer, which adversely affected the interest of revenue, the Government introduced Chapter XXA in the Income Tax Act, 1961 with the purpose of curbing such arrangements. Chapter XXA was there in statute book from November 15, 1972 to September 30, 1986 and was applicable to transfers of immovable properties during that period. It provided for acquisition of immovable property by the Government when it was found that fair market value was higher than the consideration stated in instrument of transfer. The proceedings under Chapter XXA started after transfer was completed. In Chapter XXA, the Government was required to determine the fair market value of the property but the Supreme Court in the case of K.P. Verghese at 131 ITR 597 took a view that apart from determining the fair market value of the property transferred, the Government was also required to prove that extra consideration not stated in the transfer document had passed from the buyer to the seller. This requirement of proving passing of under-hand consideration from the buyer to the seller rendered Chapter XXA unworkable.
Position between 1986 and 2002:
In view of the above SC decision and because Chapter XXA applied after the immovable property was transferred, with effect from October 1, 1986, Chapter XXA was replaced by Chapter XXC which granted the Government pre-emptive right to purchase immovable property at a price agreed to by the transferor.
Chapter XXC of the Act inter alia provided for the purchase of immovable property by the Central Government in certain cases of transfer. A transaction relating to a transfer of any immovable property, if it was situated in any of the notified cities and towns of India and if the apparent consideration of such transaction exceeded the prescribed limit, required compliance with provisions of Chapter XXC. Accordingly, whenever a person wanted to transfer an immovable property for a price exceeding specified amount, he could not do so before undergoing the procedure as laid down in Chapter XXC.
Chapter XXC had limited application and was failing:
Thus, Chapter XXC was applicable only to certain notified towns and cities and only if the price of the immovable property exceeded a specified amount. Therefore, only a few people were affected by the provisions of Chapter XXC.
Of late, there were many litigations between the assessees and the Income Tax Department. It was also observed that even when Tax Department acquired such high priced properties, the same could not be disposed off at a profit in many cases. This had resulted in a situation whereby the Department was criticised for unnecessarily acquiring the high priced immovable properties. The funds of the Government were unnecessarily blocked. Thus, neither the Income Tax Department nor the tax payers were happy about Chapter XXC. The Finance Act, 2002 deleted Chapter XXC w.e.f. 1st July 2002.
2002 onwards Section 50C inserted:
While deleting Chapter XXC, the Government simultaneously decided to introduce section 50C with effect from A.Y. 2003-04.
Coverage of section 50C is very wide :
Section 50C affects all the transactions of land and buildings in the country except Jammu and Kashmir. Although the section speaks of transfer of land or building or both, on the reasoning that the term “whole” includes “part.” It also covers part of building. Thus, transactions of flats, shops, galas factories etc. are covered by the provisions of section 50C. It is observed that in some cases, the stamp duty authorities have been adopting valuation of properties at higher level than the real values.
Stamp duty generally paid by buyer:
Stamp duty is generally paid by the purchaser of the property. Therefore, the purchaser is entitled to dispute higher valuation by stamp duty authorities. However, generally the purchasers do not prefer an appeal before the stamp duty authorities as compared to the purchase price involved, the amount of additional stamp duty becoming payable due to higher valuation by stamp duty authority is meager amount which does not afford spending money and time involved in an appeal.
The seller may not have much representation before the stamp duty authorities even when an appeal is preferred by the purchaser.
It may happen that the purchaser after completing the transaction of purchase may prefer an appeal before the stamp duty authority and the seller has no information about it. Further, under the provisions of most of the State Acts, stamp duty authorities have the power to revise valuation of immovable property for a certain period of years from the date of stamping. In such circumstances, the assessment order may be subjected to rectification requiring the seller to pay additional tax, interest u/s 234B, as investment u/s. 54/ 54F/ 54EC may fall short than required.
In view of the provisions of section 50C, the vendor is more concerned with the stamp duty valuation. Practically, it is suggested that for the purpose of allowing appeal to the vendor under stamp duty laws, it may be provided in the document of transfer that a small part of stamp duty would be borne and paid by the vendor so that the locus of the vendor is not challenged. Corresponding adjustment may be made in the consideration money.
Transactions not covered:
Section 50C is applicable only to transfer of land or building or both provided it is a capital asset. Thus, in cases when such assets are held as stock-in-trade, the section does not apply. By implication, it does not affect sale of land or building by a builder or a developer because land, building, shops, flats, etc sold by the builders and developers are generally stock-in-trade in their hands and not the capital assets. This section will also not be applicable to transfer of tenancy. In such a case, there is no transfer of land or building or both to which provisions of section 50C are applicable.
Relief provisions for separate income tax valuation:
It is however provided in section 50C that even though the higher valuation by stamp duty authorities has not been disputed, the seller of the property may represent before the Income Tax Officer that the valuation adopted by stamp duty authorities is higher than the fair market value of property on the date of transfer and that the Income Tax Officer may refer the matter of valuation to the Valuation Officer of the Income Tax Department itself. Although the word used is “may”, the ITO has to refer the case for valuation once requested by the assessee. If the valuation by the Valuation Officer of the IT department is lower, then such lower valuation is to be adopted by the Income Tax department for the purpose of capital gains taxation under section 50C.
Higher Income Tax valuation to be disregarded:
However, it may happen that the valuation by the Income Tax Valuation Officer is higher than the valuation adopted by the stamp duty authorities. In such an event, the stamp duty valuation is to be adopted and higher valuation by the Income Tax Valuation Officer is to be disregarded. Thus by approaching the Income Tax Valuation Officer, the seller of the property will not be a loser in any case. The DVO has to follow the procedure under relevant sub-sections of section 16A of the Wealth Tax Act whereby the DVO has to call for the records, give an opportunity of being heard to the assessee and lead evidences and then pass a speaking order of valuation. Further, the order of the DVO can be appealed against.
Amendments in Section 50C :
Certain Amendments were made to this section by Finance Act, 2016. Two provisos were added to subsection (1) which are as follows:
Provided that where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority on the date of agreement may be taken for the purposes of computing full value of consideration for such transfer:
Provided further that the first proviso shall apply only in a case where the amount of consideration, or a part thereof, has been received by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account, on or before the date of the agreement for transfer.
Further this section was amended by Finance Act Finance Act, 2018. Third proviso was added to subsection (1) which is :
Provided also 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.
Some of the Ruling in Section 50C
Income Tax Officer Vs. Shri Yasin Moosa Godil (ITAT Ahemdabad)
From the reading of Sec. 50C,it is evident that Sec. 50C is a deeming provision and it extends to only to land or building or both. Section 50C can come into play only in a situation where the consideration received or accruing as a result of the transfer by an appellant of a capital asset, being land or building or both is less than the value adopted or assessed or assessable by any authority of State Government therefore for the purpose of payment of stamp duty in respect of such transfer. It is settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. Clearly therefore, it is essential that for application of Sec.50C that the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both” then section 50C will cease to apply. From the facts of the case narrated above, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with the capital asset and therefore section 50C cannot be invoked.
DCIT vs. Tejinder Singh (ITAT Kolkota)
ITAT held that Section 50C of the Income-tax Act, 1961 will apply on receipt of consideration on ’transfer of a capital asset, being land or building or both’ but will not apply in case of transfer of tenancy / leasehold rights.
ITO Vs. Chandrakant R. Patel (ITAT Ahmedabad )
– The language in section 55A does not refer the ‘value of consideration’ but only uses the term ‘Fair Market value’. So the scope of the section gets con-fined to determine the fair market value of a capital asset only. Thus, considering the language of section 48 the value so deter¬mined cannot be substituted for ‘Full value of consideration’.
– Section 50C states that the AO can refer to DVO u/s. 55A only if the assessee claims that the value adopted by the stamp valuation authority exceeds their fair market value or the value so adopted by stamp valuation authority has not been disputed by any authority, Court or High Court.
– Thus, the valuation made by the DVO and the consequential addition as made by the AO was reversed and the view taken by the CIT(A) was upheld.
ACIT Vs. M/s. Munsons Textiles (ITAT Mumbai)
On applicability of Section 50C of the Act in absence of registered document –Capital gain has to be computed on the basis of sale consideration received or accruing to the taxpayer. Even if the document was not registered, the capital gain has to be computed on the basis of the sale consideration shown and received by the taxpayer unless there was material to show that the sale consideration was understated. In this case, the document was not registered and no stamp duty had been paid. Therefore, stamp duty value cannot be adopted for the purpose of computation of capital gain and the value shown in the agreement has to be adopted as there is no material to show that the taxpayer had understated the sale consideration.
It is pertinent to note that an amendment has been made in Section 50C of the Act with effect from 1 October 2009 to bring unregistered document also under the purview of Section 50C of the Act. In view of this amendment, this Ruling would not hold good for the sale transactions entered into post 1 October 2009. However, it would still hold good for the sale transactions that are entered into prior to 1 October 2009
On applicability of Section 50C of the Act to tenancy rights –Only for the limited purpose of computation of capital gain in respect of sale of land and building, stamp duty value has to be substituted for sale consideration in view of specific provisions of Section 50C of the Act.Therefore, provisions of section 50C of the Act cannot be applied in case of transfer of tenancy rights in respect of land or building or both.
Subash Chand vs. ACIT (ITAT Chandigarh)
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 section 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.
Sudha Garg Vs ITO (ITAT Delhi)
The assessing officer made the assessment order u/s 147/143(3). The only issue involved in this appeal is regarding computation of long term capital gain on sale of property located at Ghaziabad. The assessee has declared the long term capital gain on the sale of the said property claiming real sale receipt value of the property.
Laxmi Ice & Cold Storage Vs Income Tax Officer (ITAT Lucknow).
provisions of section 50C of the Act is not applicable to the cold storage building so to substitute actual sale consideration by deemed sale consideration and the order of the Assessing Officer passed under section 147/143(3) of the Act cannot be a subject matter of section 263.
Amarshiv Construction Pvt. Ltd. Vs. D.C.I.T. (ITAT Ahmedabad)
Impugned addition u/s.50C(2) of the Act mandates reference to DVO in case an assessee contests the jantri price in question to be higher than fair market value of the relevant capital asset.
Sh. Anil Jain Vs DCIT (ITAT Delhi)
Provisions of section 50C of the Act are not applicable in the case of the assessee as the capital asset involved here was not land or building but it is a right to purchase a building (shop).
CIT Vs. Satya Dev Sharma (Rajasthan High Court)
Assessee entered into a purchase agreement for purchase of a land and later transferred all the rights acquired under the power of attorney for certain consideration, AO applied section 50C and enhanced short-term capital gains of assessee which was not justified since section 50C was not applicable in this scenario as there was no stamp valuation.
The Income-tax Officer Vs. Smt. Sejal D Shah (ITAT Ahmedabad)
The ITAT bench comprising Pramod Kumar (AM) and S. S. Godara (JM) recently confirmed that the sale consideration on agricultural land after its conversion to non-agricultural Land constitutes business income and therefore, section 50C of the Income Tax Act, 1961 cannot be applicable to such cases.
ACIT Vs. Everest Industries Ltd. (ITAT Mumbai)
The only grievance of the revenue in this appeal is that the provisions of section 50C of the Act mandates that where a transfer of capital asset being land or building or both is for consideration less then its value as adopted/assessed by the State Government for the purpose of stamp duty then the stamp duty value would be adopted as being the full value of consideration for computing capital gains arising out of transfer of the asset. It is the case of the revenue that section 50C of the Act would apply also to transfer of leasehold interest in land and is not limited to only to transfer of land and building or both.
Smt. Maniza Jumabhoy Vs. Asst. Commissioner of Income Tax (ITAT Hyderabad)
Assessee has entered into is not a ‘sale deed’ as considered by the AO and CIT(A) but only an ‘agreement of sale cum Irrevocable General Power of Attorney’ for a property, which the Hon’ble Court has held that these three parties have no ownership rights or title and now property was/is in the possession of Hyderabad Water Works Department for a long period. Without establishing that the assessee has title to the property and also without any sale deed of the transaction, the agreement of sale registered may not give rise to transfer of rights in a particular property, particularly in view of the fact that the Hon’ble Supreme Court did not approve the transfer of property by way of GPA. In these circumstances, the very basis for levy of capital gains is in doubt. However, the order of the court has been pronounced subsequently and there may be further contentions on the issue between the parties. Therefore, it is better if AO examines the issue afresh, in the light of the orders of the Hon’ble Court on the issue and also the fact is that it is only an agreement of sale not a sale deed.
Income-tax Officer Vs. Southern Steel Ltd. (ITAT Hyderabad)
The moot point in this case is whether Sec. 5OC can be invoked when the purchaser is a government undertaking i.e, Andhra Pradesh Industrial Infrastructure Corporation Limited (APIIC). In the real estate business it is prevalent that the substantial part of the consideration is unaccounted. In order to tax this unaccounted portion of consideration deeming provision was introduced as Section 5OC wherein when the consideration is less than stamp duty value, such stamp duty value is to be treated as full value consideration for the purpose of capital gain.
ITO Vs. Shri Ajay Sharma (ITAT Delhi)
Where assessee had offered actual amount received on sale of property for taxation, revenue authorities were not justified in passing penalty order under section 271(1)(c) by adopting higher sale consideration under section 50C on basis of stamp duty valuation of said property
CA. TARUN GHIA
(The Article was Originally written by CA Tarun Ghia in which we added few more Paras to update it with recent case laws)