Immovable Property Sold at less than Stamp Duty Value – Tax Impact on Seller

Income-Tax Implications for the Sellers, if any Immovable Property is Sold for a consideration less than Stamp Duty Value

When any person sells an immovable property being a Capital Asset, the Sale Transaction is taxed under the head “Capital Gain”. In the case of immovable property, if the same is held for more than 24 months, the gain is treated as Long Term Capital Gain (in short, “LTCG”) and if it is held for less than 24 months, the gain is treated as Short Term Capital Gain (in short, “STCG”). If the sale consideration of the immovable property as per the agreement is less than the fair market value adopted for Stamp Duty purposes, then the Full Value of Consideration for the purposes of computation of Capital Gain is governed by the provisions of Section 50C of the Income Tax Act. The fair market value of the property for Stamp Duty purposes is called by different names such as Stamp Duty Value, Government Value, Ready Reckoner Value, Guideline Value, Circle Rate, etc.

In this article, the consequences and remedies for the Seller for selling the property of a lesser value than the Stamp Duty Value have been discussed with examples for easy understanding.

1. Property sold for a higher value than the Stamp Duty Value:-

Normally the immovable property is sold at a higher value than the Stamp Duty Value. In this scenario, the actual sale consideration as per the agreement is taken as the full value of consideration while working out the Capital Gain and the stamp duty value is ignored. Let us understand this with an example:-

Mr. A had purchased an immovable property during F.Y. 2003-04 for a consideration of Rs. 25,00,000/- for which he also paid stamp duty and registration charges of Rs.1,50,000/-. He sold the same property in F.Y. 2022-23 for a consideration of Rs.1,15,00,000/-. The stamp duty value of the property on the date of sale, let us presume, was Rs.1,10,00,000/-. Since the property was held for more than 24 months, it comes under the purview of Long Term Capital Gain, which will be computed as under:-

The property was sold for Rs. 1,15,00,000/- and the stamp duty value was Rs. 1,10,00,000/-; hence, the full value of sale consideration was taken at Rs.1,15,00,000/-. In the above scenario, the stamp duty value is irrelevant and hence ignored while computing capital Gain.

Property sold for a lesser value than the Stamp Duty Value:-

When a person sells the property for consideration which is less than the stamp duty value, then only all the complications arise. In this scenario, Section 50C of the Income-tax Act is attracted. The different situations where the immovable property is sold for consideration below the stamp duty value and their consequences/remedies are discussed hereunder:-

(a) Stamp duty value less than 110% of the actual sale consideration:- As provided in Section 50C, with effect from A.Y. 2021-22, if the stamp duty value is less than 110% of the actual sale consideration, then the actual sale consideration shall be taken as the full value of consideration for working of Capital Gain, and stamp duty value will have no impact on Capital Gain. Let us understand this with the following example:-

Mr. A had purchased an immovable property during F.Y. 2003-04 for a consideration of Rs.25,00,000/- and on purchase he paid stamp duty and registration charges of Rs.1,50,000/-. He sold the same property in F.Y. 2022-23 for a consideration of Rs.1,05,00,000/-. The stamp duty value of the property on the date of sale was Rs. 1,10,00,000/-, that is, higher by the amount of Rs.5,00,000/-. Since the property was held for more than 24 months, it comes under the purview of Long-Term Capital Gain.

Full Value of Consideration:- Here, 110% of the actual sale consideration comes to 1,15,50,000/- (110% of 1,05,00,000/-). The stamp duty value is Rs. 1,10,00,000/-. Since the stamp duty value (Rs. 1,10,00,000/-) is less than 110% of the actual sale consideration (Rs. 1,15,50,000/-), the actual sale consideration of Rs. 1,05,00,000/- shall be taken as full value of consideration for working of Capital Gain, as illustrated below:-

Although the stamp duty value of the property being Rs. 1,10,00,000/- was higher than the actual sale consideration Rs.1,05,00,000/-, the full value of consideration was taken at Rs. 1,05,00,000/- and stamp duty value was ignored while working Capital Gain, as provided u/s 50C of the Income Tax Act.

(b) Stamp duty value more than 110% of the actual sale consideration :-

As provided in Section 50C, with effect from A.Y. 2021-22, if the stamp duty value is more than 110% of the actual sale consideration, then the stamp duty value shall be considered as the full value of consideration, irrespective of the actual sale consideration. Let us understand this with the following example:-

Mr. A had purchased an immovable property during F.Y. 2003-04 for a consideration of Rs. 25,00,000/- and on purchase he paid stamp duty and registration charges of Rs.1,50,000/-. He sold the same property in F.Y. 2022-23 for a consideration of Rs.95,00,000/-. The stamp duty value of the property on the date of sale was Rs.1,10,00,000/-. Since the property was held for more than 24 months, it comes under the purview of Long-Term Capital Gain.

Full Value of Consideration:- Here 110% of the actual sale consideration comes to 1,04,50,000/- (110% of 95,00,000/-). The stamp duty value of Rs.1,10,00,000/- is more than Rs. 1,04,50,000/- (110% of the actual sale consideration) and hence the stamp duty value of Rs. 1,10,00,000/- shall be taken as the full value of consideration for working of Capital Gain, as exemplified below:-

Although the property was sold for actual consideration of Rs.95,00,000/-, the full value of consideration was taken at Rs. 1,10,00,000/-, i.e., stamp duty value of the property, for working of Capital Gain, as provided u/s 50C of the Income Tax Act.

Advice to the Sellers:- From the above scenario (a) and (b), it is clear that the comparison of the stamp duty value with the actual sale consideration plays a very vital role in working of Capital Gain. The same property when sold at Rs.1,05,00,000/- resulted in a lesser Long-Term Capital Gain of Rs. 24,52,752/-, whereas when it is sold at a lesser value of Rs.95,00,000/-, it resulted in an increased Long-Term Capital Gain of Rs. 29,52,752/-. It is therefore advised that whenever the seller plans to sell any immovable property, before entering into any negotiation, he must apply for a Pre-Sale Valuation Report of the property from the relevant Sub-Registrar Office. The Sub-Registrar office issues a Pre-Sale Valuation Report, in which the Stamp Duty Value of the property is arrived at by the Stamp authorities. It will help in proper planning of the capital Gain tax and will also help for better negotiations with the buyer.

(c) Fair market value of the property less than the Stamp Duty Value due to encumbrances, litigations, distress sale, etc:- There may be a scenario where the owner of the property is compelled to sell the property for a lesser value than the stamp duty value due to certain reasons/circumstances associated with the property. It may also be a scenario where the actual fair market value is less than the stamp duty value. Even otherwise, stamp duty value does not always reflect the true fair market value of the property. This is mainly due to the fact that stamp duty rates are fixed as per the area, and shortcomings in a specific property are not considered. Let us assume that in such a case while computing the Capital Gain, the seller adopts the actual sale consideration received, ignoring the stamp duty value and files the Return of Income for the concerned year accordingly.

The Sub-Registrars send periodical reports of the property transactions registered with them, to the Income Tax Department. In the cases where the stamp duty value is more than the actual consideration, the Income-tax department gathers the data of these property transactions on the basis of the report of the Sub-Registrar. Here there is a strong possibility that the Return of Income may be picked up for Assessment/Re-assessment by the department.

In such a scenario, the Seller can request the Assessing Officer to refer the valuation of the property to the Govt. Valuation Officer. This request can be made to the Assessing Officer even if the Seller has not challenged/disputed the value adopted by the Stamp Duty Authority before the concerned authority. If such a request is made by the Seller, the Assessing Officer is legally bound to refer the valuation of the property to Govt. Valuation Officer. Once the Assessing Officer refers the matter to the govt. Valuation Officer, the value determined by the Govt. Valuation Officer shall be taken as the Full Value of Consideration of the property, if the value determined by the Valuation Officer is less than the stamp duty value. If the value determined by the Valuation Officer exceeds the Stamp Duty Value, then the Stamp Duty Value shall be taken as Full Value of Consideration and the higher value determined by the Valuation Officer shall be ignored.

Advice to the Seller:- Please preserve all related documents to establish the problems and limitations facing the sale of the property. Also take and preserve photographs of the property on the date of sale, establishing encroachment, etc. on the property. These documents will help you during assessment proceedings and also in the determination of the proper value of the property by Govt. Valuation Officer.

(d) Full Value of Consideration Where the date of Agreement and date of Registration of the agreement document are different:-

In many instances, while selling the immovable property, it happens that after negotiation with the prospective buyer, the sale consideration is fixed, the token amount is also taken and an MOU or Agreement is signed by both Seller and Buyer, recording details of the property, the amount of sale consideration fixed, other terms, etc. There may be a letter of allotment of the property, wherein the details of the property, sale consideration, etc. are also specified. Also, part or full amount of the sale consideration is received before signing the MOU or Agreement by account payee cheque or through banking channels. It may happen that registration for the transfer of the property is done later on. In such a situation, the full value of consideration shall be taken as the Stamp Duty Value of the property on the date of the MOU/Agreement/allotment letter and not the Stamp Duty Value on the date of registration of the documents. Let us understand this with the following example:-

Mr. A intends to sell his property. Mr. B approached Mr. A to purchase the property in F.Y. 2019-20. The sale consideration is fixed at Rs. 90,00,000/- and Mr. B gives an advance of Rs.15,00,000/- by way of an account payee cheque to Mr. A in F.Y. 2019-20. After receiving the payment, Mr. A and Mr. B signed the MOU/Agreement/allotment letter, giving details of the property, sale consideration, etc. The stamp duty value of the property on the date of this MOU/Agreement/allotment letter was Rs. 85,00,000/-. However, due to some reason, the registration of the sale document was done in F.Y. 2022-23. The stamp duty value as on the date of registration in F.Y. 2022-23 was Rs.1,10,00,000/-.

Full Value of Consideration:- In the above case, while calculating the Long-Term Capital Gain, the full value of consideration shall be taken of the stamp duty value of F.Y. 2019-20 at Rs. 90,00,000/- and not at Rs. 1,10,00,000/-. Because the actual sale consideration of the property was fixed in F.Y. 2019-20 and an advance of Rs.15,00,000/- was also taken through Account Payee Cheque before signing the MOU/Agreement/allotment letter.

Please note that Sub-registrar’s offices report the sale consideration of the property as per the agreement and the stamp duty value of the property as per stamp duty authority, to the Income-Tax Department. If the stamp duty value of the property is greater than the actual sale consideration, there is a strong likelihood that the case will be picked up for assessment/Reassessment. At the time of assessment/Reassessment proceedings, the Seller can produce documentary evidences being MOU/Agreement/allotment letter and also the evidence of receiving of part/full payment of the consideration through banking channels to claim that stamp duty value on the date of MOU/Agreement/allotment letter should be considered as the full value of consideration and the stamp duty value on the date of registration be ignored. Being satisfied with these documents, the assessing officer will not make any addition on the basis of higher stamp duty value on the date of registration.

Things to be remembered and taken care of while entering into property transaction where MOU/Agreement/Letter of allotment is made and Registration is done afterward:-

• Procure the Pre-Sale Valuation Report of the property from the Sub-Registrar’s office as on the date of the MOU/Agreement/letter of allotment and preserve it.
• Sign the MOU/Agreement/Letter of allotment only after the credit of the Token/Advance money/Consideration into your Bank Account.
• Accept the Token/Advance payment/Consideration in your bank account only by way of Account Payee Cheque/Account Payee Bank Draft/NEFT/RTGS/Any other electronic mode.

The consequences of buying an immovable property for a lesser value than the Stamp Duty Valuation in the hands of the buyer will be discussed in a separate article for the sake of clarity.

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