Time to Revisit Section 50C/43CA/56(2) of Income Tax Act concerning Adoption of Circle Rates for Computation of Capital Gain/Business Profits/Income from Other Sources on Land & Building!!

The Finance Act 2002 has introduced a new section 50C with effect from 1-4-2003, for the purpose of computation of capital gains in real estate transactions, in the hands of seller of such land or building or both. Under this section the sale consideration as declared by the seller of land or building or both is to be substituted by the stamp duty valuation rates/ circle rates of such land or building or both, in cases where the declared sale consideration is less than the corresponding stamp duty valuation rates/circle rates, for the purpose of calculating capital gains under Section 48 of the Income Tax Act, 1961.

The Explanatory Memorandum to the Finance Bill 2002 explained the rationale of introduction of the said section 50C in the Direct Tax Laws as under:

Computation of Capital Gains in Real Estate Transactions

The Bill proposes to insert a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property.

It is proposed to provide that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed 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 shall be deemed to be the full value of the consideration, and capital gains shall be computed accordingly under section 48 of the Income-tax Act.

It is further proposed to provide that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, and he has not disputed the value so adopted or assessed in any appeal or revision or reference before any authority or Court, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A of the Income-tax Act. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the Assessing Officer may take such fair market value to be the full value of consideration. However, if the fair market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty purposes, the Assessing Officer shall not adopt such fair market value and will take the full value of consideration to be the value adopted or assessed for stamp duty purposes.

It is also proposed to provide that if the value adopted or assessed for stamp duty purposes is revised in any appeal, revision or reference, the assessment made shall be amended to recompute the capital gains by taking the revised value as the full value of consideration.

These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years.”

Since then, the Revenue Authorities are pressing into service the deeming fiction of substituting the sales consideration of land or building or both, based on the circle rates with the actual sale consideration of such land or building or both, as envisaged in section 50C, and are re-computing the resultant capital gains on the land or building or both on such deeming fiction basis.

Similarly a new section 43CA has been incorporated in the Income Tax Act by the Finance Act 2013. Under this section the sale consideration as declared by the seller of land or building or both is to be substituted by the stamp duty valuation rates/ circle rates of such land or building or both, in cases where the declared sale consideration is less than the corresponding stamp duty valuation rates/circle rates, for the purpose of calculating income under the head “Profits & Gains of Business or Profession”.

The Explanatory Memorandum to the Finance Bill 2013 explaining the rationale of introduction of the said section 43CA in the Direct Tax Laws provided as under:

“COMPUTATION OF INCOME UNDER THE HEAD “PROFITS AND GAINS OF BUSINESS OR PROFESSION” FOR TRANSFER OF IMMOVABLE PROPERTY IN CERTAIN CASES

Currently, when a capital asset, being immovable property, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then such value (stamp duty value) is taken as full value of consideration under section 50C of the Income-tax Act. These provisions do not apply to transfer of immovable property, held by the transferor as stock-in-trade.

It is proposed to provide by inserting a new section 43CA that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business of profession”.

It is also proposed to provide that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

These amendments will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.

The above mentioned sections 50C and 43CA of the Act, provides for taxing the shortfall in the declared sale consideration with that of circle rates of land or building or both in the hands of sellers under the head capital gains and business and profession respectively.

In addition to such deeming fiction of taxability in the hands of sellers of land or building or both, u/s 50C & 43CA of the Act, section 56(2)(vii)/56(2)(vii)(b)/56(2)(x) of the Income Tax Act, provides for taxing the shortfall in the declared purchase consideration with that of circle rates of land or building or both in the hands of purchasers under the income for other sources.

So for the same income or rather the deeming income, both the seller and the buyer of land or building or both, are being taxed twice. This ‘double taxation’ is contrary to the well-established and well settled principle of Law that “a same income can’t be taxed twice.”

Further, this deeming fiction of taxation needs to be examined from another perspective also, that is the “real income theory” perspective.

In view of the currently prevailing sluggishness and slow-down in the real estate sector, the property transactions of sale and purchase of land or building or both, in majority areas, are taking place at prices/rates much below their respective circle/stamp duty valuation rates.

In such cases, the application of the provisions of section 50C/43CA/56(2), deeming the sale/purchase consideration equivalent to the applicable circle rates irrespective of the fact that the actual sale/purchase consideration is lesser than the circle rates, is resulting in a lot of undue hardships both in the hands of sellers as well as buyers, in the form of increased income tax liability on even notional sale/purchase consideration towards immovable property.

It needs to be appreciated that the legislative intent of introduction of the said sections 50C/43CA/56(2) was to plug the cash dealings and under-recording of sale/purchase consideration of immovable properties in the arena, whereby market rates of properties were substantially higher than the circle rates.

However, presently times have changed. Circle Rates have been revised on a substantially higher side whereas the market rates of immovable properties have comparatively fallen in view of the sluggishness in the real estate sector, and as such the gap between the market rates and circle rates of immovable properties has narrowed down considerably and infact in large number of areas, the actual transaction rates/market rates of immovable properties are even lower than the circle rates.

Concluding Remarks:

Therefore, in view of the changed dynamics of the demand & supply conditions in the real estate sector, there is a crucial need for review, reconsideration and rationalisation of the provisions of section 50C/43CA/56(2) of the Income Tax Act, so as to bring them in alignment with the actual transaction rates of immovable properties, in order to ensure the avoidance of “double taxation” both in the hands of sellers and buyers as well as to avoid the taxation on notional income contrary to the “real income theory” in order to provide the “ease of living” to the general masses and to provide the much needed push and fillip to the real estate sector.

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Hi there!! I am Mayank Mohanka, FCA, a Tax Practitioner based at New Delhi. Philosophy of Life: There is one thing which is more powerful than your Nav Grahas & that is Your Will Power.. I can be reached at mayankmohanka@gmail.com or at 9999981515. View Full Profile

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One Comment

  1. PRAFULL PRADHAN says:

    Sir,
    What you have said here is absolutely correct. First of all the real estate in shambles. We are trying to sell property located on collectors land in Mumbai. We have to pay 6% stamp duty . registration and over and above another 6% collectors NOC charge and yet total sale consideration will be less that Rady Rackner (Circle Rate) in Mumbai. In such situn, when we file our return section 50 C of Income Tax act will trigger. In such situn, will you pl advise how do one defend/justify our sale which will be below circle rate. It is very much less that 2001 FMV too. I also got valuation report for calculating FMV as on 2001 as per present norm. Yr advise shall be apreciated tks . .

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