CA Mohit Mittal

The provision was introduced in order to counter act the various decisions of high courts where it was held that provisions of Section 50C is not applicable when the seller holds the land or building or both as a capital asset. However , there are certain practical issues difficulties that arose due to the section.

Relevant extracts of Section 43 CA has been reproduced below:

“43CA. (1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government 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 computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer:

Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed one hundred and 84[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 computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration.

(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far as may be, apply in relation to determination of the value adopted or assessed or assessable under sub-section (1).

(3) Where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same, the value referred to in sub-section (1) may be taken as the value assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer on the date of the agreement.

(4) The provisions of sub-section (3) 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 an account payee bank draft or by use of electronic clearing system through a bank account 85[or through such other electronic mode as may be prescribed] on or before the date of agreement for transfer of the asset.”

Salient features of the section are:-

(a) The section is applicable to assessee who held land or building or both as stock in trade and not capital assets. Immovable properties being land or building can be residential flats, commercial flats, industrial building or plots, agricultural lands whether in rural area or urban area.

(b) The section comes into force when the transferred value is less than the stamp duty value of the immovable property and the receipt is taxable under the head PGBP.

(c) The assessee has the option to claim before the Assessing officer that the value adopted or assessed or assessable by the stamp valuation officer exceeds the Fair market value as on date of the transfer and refer the valuation to the valuation officer as per the provisions of Section 50C.

(d) In case the date of agreement fixing consideration and date of registration are different, then for the purposes of determination of value under the section , the value as on the date of agreement shall be considered, provided the consideration or part of consideration is received prior to date of agreement by any mode other than cash.

ID-100296238

Practical Difficulties

I. Double Taxation when the buyer treats the property as stock in trade and seller treats it as capital asset.

To understand the problem let’s take an example:

Suppose Mr. A, holds a commercial flat as capital asset (Suppose the cost of Acquisition is Rs 60 Lacs).

Mr. A enters into a sale agreement for sale of flat to Mr. B, real estate developer.

The flat was transferred by Mr. A to Mr. B for Rs. 60.00 Lacs (Transaction value) and the Stamp duty value of flat is Rs 100.00 Lacs (SDV) who further sold it for 200.00 Lacs

For Mr. A– Income under the head Capital Gains (Asper50C) =100-60=40.00 lacs

For Mr. B-Income under other sources = Nil as Mr. B purchased the flat as stock in trade.

Income under head PGBP (at time of sale) = 200.00 Lacs-60.00 Lacs=140.00 Lacs

Now the sale of flat below SDV will attract the deeming provisions of the section 50C in the hands of seller Mr. A without giving any benefit to Mr. B by way of enhanced cost of acquisition. This situation results in double taxation, although not on the same assessee but on the same immovable property.

Our Comments

The government/revenue authorities seem to knowingly doubly tax the income for real estate developers which are both unfair and illogical. There is an immediate need to correct this by permitting the buyer to take the difference between stamp duty value & transaction value as enhanced cost price of the stock in trade.

II. Applicability of section on transfer of tenancy rights or booking rights

The section is applicable for only two kind of assets land and building. The section comes into existence when the assessee transfers land or building or both.

The question arises whether the section is applicable only on transfer of actual land and building or also on transfer of tenancy or booking rights.

Our View

On reading of the section it is clear that the S. 43CA will be applicable on transfer of land & building. The section was introduced to plug the loopholes of S.50C, and thus has the legal intention of the same. Various appellate authorities have confirmed that S. 50C is not applicable on tenancy or booking rights.

III. Transfer of Development Rights

Whether transfer of development rights attracts S.43 CA or not, will depend on facts and circumstances of the case. If the transfer of such rights results in transfer of absolute rights in land then the section will most likely be applicable.

When the incidence of capital gain tax arises? The point where the capital gain is deemed to accrue will purely depend on the terms of Joint Development Agreement. Where the agreement is of such nature that possession is given in part performance of a contract, the liability of capital gain tax will arise on the handing over of such possession to the builder. If the possession is not transferred but deferred until the construction is completed, the liability to capital gain tax will arise in the year in which the developer completes the construction.

IV. Percentage completion method & S. 43 CA

Real estate developers generally sell the booking rights to under develop properties by way of entering agreement which requires the buyer to make the payments in various installments.

The property comes into existence (or becomes fully developed) after several years. The real estate developer meanwhile books its revenue on the basis of percentage completion method (PCM) as per the guidance note and accounting standards.

Income Tax is also charged by way of PCM. Now the question arises whether 43CA will be applicable on year to year basis in line with revenue recognition or will be applicable at the time of actual transfer of the asset.

Our View

One of the cardinal rules of interpretation of tax statute is that a deeming provision has to be interpreted strictly in terms of the words /language used to create the deeming fiction. As per the relevant section, it is imperative that there should be” actual transfer” of land or building or both.

Since the builder/developer can transfer the asset on its existence i.e. on its completion, 43CA can’t be applied on year to year basis and will be applicable on the final transfer of the asset.

(CA Mohit Mittal is associated with M.Mittal & Co, a Delhi based Chartered Accountancy firm. ,M.Mittal & Co deals exclusively in Income Tax & FEMA Matters, For any queries please contact me at mohit@mmittal.com)

Image courtesy of hywards at FreeDigitalPhotos.net

(Republished with Amendments by Team Taxguru)

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10 Comments

  1. Priti says:

    How can somebody read your articles if it has advertisements on both the sides covering the text?
    Tax Guru used to be a ready reckoner, but it has failed to live upto the expectations.

  2. SHRENIK SHAH says:

    The government/revenue authorities seem to knowingly doubly tax the income for real estate developers which are both unfair and illogical. There is an immediate need to correct this by permitting the buyer to take the difference between stamp duty value & transaction value as enhanced cost price of the stock in trade…THIS ISWRONG ACCORDING TO ME..SINCE BUYER ACTUALLY PAYS 60 LACS.THEN WHY HE SHOULD BE ALLOWED TO TAKE ENCHANCED COST PRICE. HE ISACTUALLY MAKING PROFIT OF 200LACS-60LACS= 140LACS….CASH OUT FROM THE BUYER POCKET IS ONLY 60LACS.

  3. Neha Nathani says:

    In Case of Company, Can we increase the value of stock by difference value (on which buyer had paid tax) between stamp duty value and transaction value? If it possible then please refer section & case laws.

  4. SHUBHANKAR GHOSH(CA FINAL) says:

    IAM TOTALLY DISAGREE TO MOHIT SIR SORRY TO SAID BUT THE LAW MAKERS DELIBERATELY DO SUCH THING IN ORDER TO CURB THE BLACK MONEY CIRCULATION PRACTICE IF THEY SOLD AT STAMP DUTY VALUE OR HIGHER THAN STAMP DUTY VALUE THEN THIS DOUBLE TAXATION NOT SEEING

    1. SRSUBRAMANIAN says:

      I wanted to contact you on income tax mater LTCG out sale of apartment. ACIT, The assessing officer reopening the assessment of 2015-16 now and add back housing income to tax fully just because the builder’s joint construction agreement not registered and only land agreement registerd.

      Similar cases are here in Bangalore
      Builders always does the same
      They will register land value but not construction value
      Many cases reopened and all are pending with CIT Appeals
      Every builders register only land agreement as a practice going on from long time even though as per RERA act full value of the apartment construction value and land value to be registered.

      In Tamil Nadu as their stamp act has been amended in 2018, full property value are being registerd

      Where as in karnataka no such amendment under in stampduty act prior to RERA and even after 2018 to till now.

      In our case its matter of property invested 2008-2010 with builders and the property sold out in 2015 all perior periods.

      Sale proceeds deposited in LTCG DEPOSITS WITH BANK fetching interest.

      Every income has been declared in the income tax return 2015-16.

      After 4-5 years when approached bank to close the LTCG deposit they advised to approach income tax Officer,Ward for NOC in form – G.

      Applied for NOC in July aug 2019 and matter stands lingering on for long time and in dec ACIT issued notices on various sec for reopening the assessments of 2015-16 after lapses 3-4 years.
      [5/20, 12:52] Srs: Its my son-in-law income tax mater under sec 54 LTCG.

      Its straight forward cases and especially
      LTCG is tax paid as per INDEXATION and Capital gain deposit account to be closed for which applied for Noc in form – G somewhere in Aug 2019 and upto feb the ITO assessing officer of ACIT cader pushing the matter wisely and in mar they have issued notice under 147 for reopening and disputing the declared already taxpaid long term capital gain of AY 2015-2016.

      With my experience gained in taxation matters and legal mater during my services made submissions etc and now due to corona virus things not getting moved further..
      If matter pending to decide yet the department cannot to deny to issue NOC for closure LTCG deposit with bank and the money is blocked and unable to plan out and further investment in property out of previous sale proceeds of property.

      https://taxguru.in/income-tax/section-54f-benefit-allowable-case-part-performance-contract.html

  5. mohit mittal says:

    hitesh is right, I have committed a mistake instead of taking 200 lacs as sale price I have taken 150 lacs as sale. thanks for pointing the mistake out.Income under head PGBP will be 200-60 lacs = 140 lacs in hands of B.

  6. CA Hitesh says:

    I could not under stand PGBP in the hand of Mr. B in the given example. the Income under head PGBP (at time of sale) = 150.00 Lacs-60.00 Lacs=90.00 Lacs. How you got the figure of Rs.150 lacs?.

  7. Mohit mittal says:

    To some extent, that is correct. However the truth is there will be certain problems once the statute is introduced and even after being aware of such problems government is very slow/non receptive in remedying the situation. In these cases it is important to get the attention of the government/revenue authorities.
    The article intention or intent was never to blame the government.

  8. LKA says:

    This happens when the stakeholders do not participate in the statute making. Why blame on the Government. None gives suggestions and agitate when is the statute is in the making.

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