Dual taxation in connection with transfer of immovable property – A Brief Overview of Sections 50C and 56(2)(x)(b)(B) of the Income Tax Act, 1961
This article is a brief attempt to analyse two different provisions having similar impact on two different but connected assessees who amongst them have a relationship of buyer and seller of immovable property. The buyer gets taxed under the head “Income from Other Sources” while the seller is taxed under the head “Capital Gains”.
Finance Act, 2002, introduced a new provision under the head “Capital Gains” by way of Section 50C which added a new definition to the term “full value of consideration”. Section 50C was a deeming provision which laid down the conditions as to what would deem to be the full value of consideration in the event of the stamp duty value of the transfer of immovable property being higher than the actual value of the consideration. According to Section 50C, subject to certain conditions being fulfilled, as laid down in the provisos to the Section, the stamp duty value of the transfer of immovable property will be deemed to be the full value of consideration and shall be taxed in the hands of the assessee, being the seller of the property.
Finance Act 2017 inserted a new clause in Section 56 (2) of the Income Tax Act, 1961 bringing into the ambit of taxation deemed income arising out of a transaction involving transfer of immovable property. Clause (x) sub-clause (b) (B) taxes the recipient of an immovable property, understood in common parlance as “purchaser” of the immovable property for a value being the difference between the stamp duty value of such property and consideration “paid” by the purchaser (sale price as per the document of transfer). The differential value becomes taxable as “Other Income” in the hands of the purchaser if such excess is covered under the parameters laid down in the said sub-clause (b)(B) of clause (x) of Section 56.
Though both the provisions seek to tax two separate sets of assessees, being the seller and the purchaser, yet, the transaction that will be taxed under both the provisions will be common to both the seller and the purchaser. In the case of both the assessees, the tax will be on deemed income that arises solely on the basis of the value arrived at by the Stamp Valuation Authority under the State Government. Ironically, in the case of the purchaser of such a property, such differential value shall be his “income”, which simply defies logic and rationality.
Both the sections provide for a redressal mechanism to the assessees, being reference to a Valuation Officer. However, such Officer being under the Income Tax Department, the assessees would always be at a risk of a biased view at the level of the Valuation Officer. This would necessarily lead to litigation and continued harassment for the assessees.
Prior to the amendment by Finance Act, 2017, the risk of dispute arising out of two different value of considerations was restricted to the seller of the immovable property. However, with the amendment to Section 56(2), the risk has travelled to the purchaser of the immovable property also. Since the amendment bringing in the purchaser of the property is a recent event, there may not be much material available in terms of judicial interpretation of this provision. However, in times to come, it promises to be one area which could see high level of litigation.
This kind of transaction was normally reportable from one government authority viz. the Stamp Valuation Office of the State Government. Until the introduction of the amendment to Section 56(2), the seller had the option of treating the value of consideration received as the full value of consideration, even at the risk of disregarding the provision of Section 50C and leaving it to such an anomaly being questioned by the Revenue in its verification of the Tax Returns. However, subsequent to the introduction of sub-clause (x) to Section 56(2), the Finance Ministry further strengthened its grip on the implementation of Section 56(2)(b)(B), when recently, in its amendment to Form 3CD (Tax Audit Report) as applicable to A. Y. 2019-20, it cast an obligation on a Tax Auditor to report such transactions, in the case of an assessee being the purchaser of the immovable property and who was subject to Tax Audit. The Tax Auditor, therefore, became an additional reporting person for the Revenue in reporting simpliciter, the event rather than being allowed the option of offering his opinion along with the duty to report.
These two sections therefore, in my view, amount to dual taxation of the same transaction and would lead to a view that the Indian tax system is regressive, complex and unproductive to the assessee.
I also believe that these two provisions have good scope for further research and analysis and in due course, I shall try to put up analysis of cited judgements applicable to the two sections dealt with in this article.