Real Income: Section 50C & Important Tax Decisions by various Courts

Real Meaning of Real Income : Must Know details of Section 50C & Important Tax Decisions by various Courts

Introduction:-

Real income is crucial specially when it comes to provisions like Section 50C of the I.T. Act. Section is specifically designed to prevent tax evasion in real estate transactions regularly ends up taxing income estimation i.e. money which is not have actually been received by  assessee.

It is very much important to look beyond  legal language & understand real impact of these provisions

Here we are exploring key highlights of case laws that have shaped how Section 50C is applied including the situations where various courts have stepped in to protect Assessee from unjust tax assessments. We will have complete understanding of this cases, highlighting observations made by Officer and decisions of appellate authorities along with final judgments by court.

This is not just about the law : it is all about how law interacts with realities of present market, intention behind transactions importance of fairness in taxation.

By the end of this article, you will clearer understanding of how real income should be treated what you can do if you find yourself facing tax situation where Section 50C is invoked.

1. Small view on Section 50C

Finance Act 2022 introduces Section 50C, It is a significant provision aimed to prevent black money in real estate transactions. It deems value assessed by  stamp valuation authority for the purpose of calculating stamp duty on property transactions as  minimum consideration for capital gains tax purposes. If the Real sale consideration is lower than  stamp duty value,  latter is considered as  deemed sale consideration for calculating capital gains.

Essential Points:

• Make- Believe: Section 50C impose deemed consideration based on stamp duty value, which may not reflect  actual transaction value.
• Harsh in Nature: Section  50C is often criticized for being Harsh and severe as it taxes estimated income rather than real income, which can lead to unfair taxation.
• Comparison with Section 43CA: Section 43CA is equivalent to Section 50C but applies to computation of business profits and gains from property transactions.

2. The foundation Behind Section 50C:

The Supreme Court in K.P. Varghese v. ITO &Anr. (1981) highlighted the burden of proof on  revenue to demonstrate understatement of consideration. This Section was introduced to provide legislative remedy to this issue by deeming  stamp duty value as  minimum consideration.

Essential Points:

• Burden of Proof: Prior to Section 50C, Burden was on  revenue to prove that consideration was very low rated.
• Revenue’s Point of view: This  provision was introduced to protect  revenue from underreported transactions, ensuring that capital gains tax is calculated on at least stamp duty value.

3. The Principle of Real Income

The principle of real income, as backed by Apex Court in CIT v. ShoorjiVallabhdas & Co. (1962), dictates that taxes should only be levied on income  accrued or been received. on the other hand, Section 50C challenges this principle by taxing imaginary income based on stamp duty values.

Essential points:

• Real vs. Hypothetical Income: Income tax should be levied on real income, not hypothetical or speculative figures.
• Challenges in Measuring Real Income: Determining real income can be complex, especially when dealing with varying expenses and the imaginary nature of profits.

4. Evaluation of the Real Income

Real income requires complete approach that considers all factors affecting income. However, the I.T allows or disallows certain expenses, leading to possible discrepancy between real income and taxable income.

Essential Points:

• Discrepancies in Taxation: Deeming provisions,  Section 50C, create a divide between real income and taxable income.
• Compliance and Anti violence Provisions: While these provisions aim to ensure compliance, they can also alter the principle of real income taxation.

5. fulfillment with Section 50C

To avoid implications of Section 50C, Assessee must promise compliance with certain conditions. This includes challenging the stamp duty value and forcing Assessing Officer to obtain  independent valuation from Departmental Valuation Officer .

Essential Points:

• Double Conditions for Compliance:Assessee must challenge the stamp duty value and request  DVO valuation to protect themselves from Section 50C implications.
• Practical Challenges:  Even though these defensive measures, Assessee often face significant financial burdens and practical challenges.

6. Amendments to Section 50C

Recent amendments to Section 50C introduced  limit of 10% for differences between the real consideration and stamp duty value, providing some relief to Assessee. This amendment has been held to be showing in several cases.

Essential Points:

• Tolerance Limit: A 10% tolerance limit has been introduced to address minor discrepancy between actual consideration and stamp duty values.
• Role of DVO: The DVO’s valuation can sometimes result in a lower value than the actual consideration, but this benefit is not passed on to  Assessee.

7. All sides Protection – Section 56(2)(x)

Section 56(2)(x) reflecting Section 50C by taxing difference between  stamp duty value and actual consideration as income from other sources in thands of the buyer if the transaction value is lower than stamp duty value.

Essential Points:

• Buyer’s viewpoint:  Section 56(2)(x) make sure that both  seller and buyer are taxed on difference between the transaction value and stamp duty value.
• Extension of Legal Assumption: This provision extends the concept of estimated income taxation beyond  seller to  buyer.

Here some case laws Regarding Real income and Section 50C of the Income Tax Act, 1961

Ramsing Himmatsing Rajput v. Income Tax Officer [2024 TaxPub(DT) 2585 (Pune-Trib)] – Section 50C of the Income Tax Act, 1961

• The appellant, Ramsing Himmatsing Rajput, is individual engaged in business of labor contracting.
• The appellant filed  return of income for the assessment year 2015-16 declaring a total income of ₹18,32,450.
• Information available with an Officer indicate that  appellant had sold land on 22-7-2014 for a consideration of ₹8,00,000, while stamp duty value for registration purposes was ₹22,25,000.
• The AO, after obtaining necessary approvals, reopened the case u/s. 147 of the I.T Act and issued notices u/s.  148 and 142(1).
• No response was received from the appellant, leading the Officer to pass an ex-parte order u/s. 144/147, determining the total income at ₹40,57,450 by adding ₹14,25,000 as short-term capital gains, being difference between the stamp duty value and  actual sale consideration.

Submission by the Assessee:

• The assessee claimed that the land sold was near a bank of river , bordering to a cremation ground, and lacked an approach road, justifying  lower sale value.
• The appellant relied on a valuation report from a government-approved valuer, which estimated the fair market value at ₹10,10,915.
• The assessee contend that AO should have referred the matter to the DVO as per section 50C(2) of the I.T Act but failed to do so.

Observation by Income Tax Officer :

• The Officer  added the whole stamp duty valuation as the assessee income due to non-compliance from the assessee.
• Since no request for valuation was made by the assessee during the assessment proceedings, the officer  didn’t refer the matter to  DVO.

 Commissioner of Income Tax  :

• The CIT observed  Assesses provide valuation report by private valuer, not the DVO,  therefore was not acceptable.
• The CIT partly allowed the appeal, directing the AO to compute the capital gain after giving Indexation benefit  but upheld the addition based on the stamp duty valuation.

Analysis by the Court:

• The ITAT noted that the assessee only  8th class pass, was not familiar with technology, which led to  non-compliance.
• The court found merit in the assessee’s argument that  AO should have referred the matter to the DVO, even if no such request was made by  assessee.
• The ITAT relied on the judgment of Sunil Kumar Agarwal v. CIT (2014) 372 ITR 83 (Cal-HC), which emphasized the need for valuation by a DVO u/s. 50C to avoid ruination of justice.

List of Other Case Laws Referred:

• Sunil Kumar Agarwal v. CIT, (2014) 372 ITR 83 (Cal-HC)

Conclusion:

• The ITAT set aside the orders passed by both Officer and t CIT(A) and returned the matter back to the AO, directing AO to refer the valuation to the DVO as per section 50C and pass a fresh order based on DVO’s report.

Rekha Agrawal v. Assistant Commissioner of Income Tax [2024 TaxPub(DT) 3637 (Raipur Bench)] – Section 50C of the Income Tax Act, 1961

Facts of the Case:

• Rekha Agrawal, the appellant, is individual involved in commodity derivatives, and shares under her proprietorship concern, Rekha Agrawal Securities. She is also partner in B. K. Agrawal Developers.
• During relevant assessment year, the appellant sold land in Cherikhedi for ₹49,86,000. The return of income was filed on 30-9-2015, declaring a total income of ₹44,23,530.
• The case was selected for limited scrutiny due to discrepancies, including the  property’s sale consideration  being reported lower in the ITR than in the AIR.
• The AO observed that the Lands sale agreement was executed on 31-3-2014, with part of consideration received through proper banking channels on the date of the agreement.

Submission by the Assessee:

• The assessee argued that the agreement for the sale was executed on 31-3-2014, and part consideration was received on that date through proper banking channels.
• The assessee contended that the stamp duty value as on the date of  agreement should be considered for capital gains calculation, referencing  amendment introduced by the Finance Act, 2016, which she argued should be applied with hindsight.

Observation by Income Tax Officer:

• The AO rejected the assessee’s contention, noting that  sale deed was executed on 31-3-2015, and the full value of consideration should be based on the stamp duty valuation of ₹59,37,000 as of that date, leading to an addition of ₹9,51,000 to the assessee’s income.

Observation by Commissioner of Income Tax (Appeals) [CIT(A)]:

• The CIT(A) partially accepted the assessee’s arguments, reducing the addition to ₹99,400 based on DVO report, which was not fully considered by the AO during the assessment.

Analysis by the Court:

• The ITAT considered  submission of  assessee that  amendment introduced by the Finance Act, 2016, should be applied retrospectively. The assessee relied on the judgment in CIT v. Vummudi Amarendran (2020) 429 ITR 97 (Mad-HC), which supported the retrospective application of the amendment.
• The court found merit in the assessee’s argument and directed the AO to recomputed  capital gains based on  stamp duty value as on   agreement date , thereby vacating the addition of ₹99,400.

List of Other Case Laws Referred:

1. CIT v. Vummudi Amarendran (2020) 429 ITR 97 (Mad-HC)

2. Suraj Lamp & Industries Pvt. Ltd. v. State of Haryana &Anr. (2012) 340 ITR 1 (SC)

3. CIT v. Calcutta Export Co. (2018) 93 taxmann.com 51 (SC)

4. Allied Motors (P.) Ltd. v. CIT (1997) 224 ITR 677 (SC)

5. Whirlpool of India Ltd. v. CIT (2000) 245 ITR 3 (SC)

6. CIT v. Alom Enterprises (2009) 319 ITR 306 (SC)

7. Dharamshibhai Sonani v. Asstt. CIT (2016) 161 ITD 627 (Ahd-Trib)

8. Rahul G. Patel v. DCIT [ITA No.2767/Ahd/2016, dt. 26-9-2018]

9. Asstt. CIT v. Thomson Press (India) Ltd. (2023) 202 ITD 149 (Del-Trib)

10. Bellandur Chikkagurappa Jayaramareddy v. Asstt. CIT [ITA No. 1322/Bang/2019, dt. 5-1-2022]

Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 (SC)

This case deals with  principle that income tax should only be levied on real income, particularly u/s. 5 of I.T. Act , 1961, which defines the scale of total income. The key issue was whether income that was payable but not realized due to dispute should be taxed.

Observations:

• Observation by the Assessing Officer :

• • AO’s Position: The Officer  applied Section 5 of the I.T , asserting that income is taxable upon accrual.  Officer argued that since the income had been owed, it had accrued to the Assessee and should be taxed, even though recognition of the income was in dispute.
  • Relevant Section: Section 5 – This section deals with the scope of total income and includes income received or deemed to be received, income that accrues or arises, or is deemed to accrue or arise.

• Observation by the Commissioner of Income Tax :

• • CIT’s point of view: The CIT upheld the AO’s decision, stating that U/S. 5, income is taxable when it accrues, regardless of any disputes. The CIT focused on  principle that once income has accrued, it is subject to tax.
  • Relevant Section:  Section 5 importance was placed on the accrual concept under this section.

• Observation by the Tribunal:

• • Tribunal’s Analysis: The Tribunal took into account the matter over form, focusing on the actual realization of income. They recognized that income, although billed, was under dispute and its realization was uncertain. Therefore, it did not qualify as accrued income under Section 5.
  • Conclusion: The Tribunal ruled that since the income was not genuinely realized, it should not be taxed u/s. 5.

• Judicial Judgement:

• • Supreme Court Judgment: The SC. held that u/s. 5, only real income—income that is certain and accrued—should be taxed. Since the income was under dispute and not actually realized, it was not taxable.
  • Principle Established: The Court clearly stated that taxation should be based on real income, or  actually accrued or been received, as per Section 5.

Other Relevant Case Laws:

• CIT v. Shiv Prakash Janak Raj & Co. (P.) Ltd. (1996) 222 ITR 583 (SC): This case reinforces that disputed income should not be taxed until it is realized, in line with Section 5.

CIT v. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC)

Background

Shoorji Vallabhdas & Co. was a partnership Firm, During assessment for particular financial year, a significant issue arose regarding the treatment of certain income. The root of the case to move around whether  partial income received by  firm should be treated as taxable, given that this income was later reduced by a new agreement between the parties involved.

Relevant Sections of the Income Tax Act, 1961:

1. Section 4: Charge of Income-Tax: Explanation: This section is the base of the I.T Act , specify that income tax is charged on the total income of the previous year at the rates prescribed by  Finance Act. This section effectively establishes the Assessee’s liability to pay income tax.

2. Section 5: Scope of Total Income: Explanation: Section 5 defines the scope of total income, stating that  total income of any person includes all income from whatever source derived, which (a) is received or is deemed to be received in India, (b) accrues or arises or is deemed to accrue or arise to them in India, or (c) accrues or arises outside India during the relevant previous year.

Assessing Officer’s Observation:

The Officer  focused on the application of Section 5 of the I.T Act , which covers accrual or receipt of income. The AO observed that the firm had originally recorded  higher income based on certain contracts. However, this income was later reduced due to  subsequent agreement. The AO contended that the original income had already accrued and should be taxed u/s. 5. The AO argued that  reduction was  artificial attempt to avoid tax liability and thus treated original income as fully taxable.

Commissioner of Income Tax Observation:

Income Tax commissioner reviewed  matter and considered  implications of Section 4 and Section 5. The CIT agreed the legal principle that income must be real and have actually accrued to be taxable. The CIT found that decrease in income was based on a bona fide step of contractual obligations. It was held that  revised income should be recognized as the taxable income, as it reflected the real income of the firm for that year.

Tribunal’s Observation :

Upon further appeal, the Income Tax Appellate Tribunal reinforces the concept of “real income” as governed by Section 4 and Section 5. The Tribunal noted that  I.T law taxes only real income, not hypothetical  income. The ITAT emphasized that if  income didn’t accrue in reality due to  lawful and binding agreement, it should not be subject to tax. Therefore,  Tribunal upheld the CIT’s decision, recognizing  revised, lower income as  actual taxable income.

Supreme Court Judgment:

The matter was finally taken to  Supreme Court, where  main issue was whether income, as reduced by  subsequent agreement, should be considered for taxation under Section 4 and Section 5. The Supreme Court upheld the rulings of the lower authorities, including t Tribunal, by underscore the principle of “real income.”

Section 4 and Section 5, interpreted by the Court to mean that only income that has genuinely accrued or been received during  relevant financial year should be taxed. The Court ruled that t subsequent reduction in income, which was done through a valid and binding agreement, should be recognized, and the revised income should be taxed accordingly. The Court made it clear that hypothetical or notional income that does not represent actual earnings cannot be taxed

Conclusion:

The case of CIT v. Shoorji Vallabhdas & Co. teaches us  important lesson about how income should be treated for tax purposes. The SC court made clear that tax should only be paid on Real income  that you actually earn or receive during  year. If you make agreement later on that reduces  income you originally recorded, as long as that agreement is genuine and legally binding, the reduced amount  should be taxed, not the original higher amount.

In simple terms, the Court said that it’s not fair to tax someone on money they never actually got.