Section 50C and ‘deemed’ sale consideration for capital gain computation
Section 50C of the Income Tax Act 1961 (the Act) exists to prevent revenue loss in situations where parties to real estate transactions undertaking the transfer of a capital asset (being land or building or both) have undervalued or not disclosed the relevant or complete sale consideration, to possibly avoid their tax obligations under the Act, chiefly tax computed on capital gains.
Through the above said ‘deeming’ section, for the purpose of computing any capital gain income, where the above said consideration disclosed as received or accruing as a result of the transfer by an assessee of a said capital asset, is less than the value adopted or assessed or assessable (for purpose of payment of stamp duty in respect of such transfer) by the concerned authority of the relevant State Government (the “stamp valuation authority”), then the latter value is ‘deemed’ to be the full value of the consideration received or accruing as a result of such transfer(s).
Important amendment to section 50C and deemed valuation may be as on ‘agreement’ date
Section 50C(1) is now subject to the ‘First and Second Provisos‘ (the Provisos), the latest said amendment inserted by the Finance Act 2016, and with effect from 1 April 2017 i.e. current financial year onwards. The said Provisos acknowledge and provide for circumstances directly concerning real estate transactions, wherein the date of the relevant agreement (generally an ‘agreement to sell’) fixing the amount of consideration for the sale/transfer of the subject capital asset/property, and the date of registration (generally through the ‘sale deed’ document) of the transfer of the subject property are not the same (the time gap).
Through the First of the said Provisos, the value adopted or assessed or assessable by the concerned stamp valuation authority on the date of agreement (to sell) may now be taken for the purposes of computing (the ‘deemed’) full value of consideration for the said transfer under section 50C.
However, the Second of the said Provisos requires, that for the First Proviso to be applicable, the amount of consideration, or a part thereof, should be received by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account, on or before the date of the agreement for transfer.
The Provisos have been inserted to provide relief under section 50C of the Act to the sellers of real estate/property in the above mentioned situations, wherein the stamp duty valuations are higher on the sale deed execution date as against the said agreement date, due to appreciation of valuations over the time gap as referred to.
Retrospective application and ‘Optional’ nature of beneficial ‘Provisos’^
The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, in a recent matter^ has made significant findings and interpreted the newly inserted ‘Provisos’ to section 50C through its adjudication. The matter concerned a Company assessee which had acquired agricultural land (the property) through an agreement to sell and sale deed, with the execution of the latter after a significant time gap due to the legal need of changing the classification of the subject property into non-agricultural land.
During reassessment proceedings of the said assessee, the concerned Assessing Officer (AO) for the purposes of section 50C, adopted the higher stamp duty valuation as on the sale deed execution date and rejected the same as on agreement to sell date, thus increasing the tax liability of the said assessee for the relevant assessment year and denying the benefits of the above said amendment as inapplicable to the relevant assessment year, due to its ‘prospective effect’ from a date subsequent thereto.
Ruling in favour of the appellant assessee, the ITAT held as follows (paraphrased and edited in relevant parts) –
- The above said Provisos to Section 50 C should be treated as curative in nature and with retrospective effect from 1 April 2003, i.e. effective from the date of introduction of section 50C even when the statute does not specifically state so, as the said Provisos were inserted to remove an apparent incongruity which had earlier resulted in undue hardships to the taxpayers.
- The application of the said Provisos is optional to the assessee concerned, which may provide tax relief even in circumstances where there is a fall in stamp duty valuation rates with passage of time resulting in higher valuations on agreement date as against sale deed/transfer date; the optional and non-mandatory nature is established by the use of the word ‘may’ in the said First Proviso and the legislative motive of providing a measure of relief to the taxpayers through the said Provisos cannot be construed as resulting in a higher tax burden on them.
The said amendments to section 50C through the insertion of the Provisos is beneficial to the sellers of real estate property, as the above mentioned delay and time gap in completion of sale/transfer transactions as well as general trend of inflationary rise in value of real estate in certain geographical regions of India is common.
Unfortunately however, I foresee the above matter being appealed by the Income Tax Deparment before the Hon’ble Gujarat High Court and by the vanquished thereafter before the Hon’ble Supreme Court of India, as the above discussed ITAT decision would have far reaching consequences for the authorities concerned and some of the potentially strong legal grounds that seem to be available to them at first glance along with the uncertainty that surrounds litigation on issues of statutory interpretation.
LL.B (CLC Faculty of Law Delhi University), JD (UNSW)
Taxation & Criminal Law Advocate
^ Refer Dharamshibhai Sonani v Asstt. Commissioner of Income Tax, Circle – 9, Surat in I.T.A. No.1237/Ahd/2013 as decided by the Hon’ble ITAT Ahmedabad “SMC” Bench on 30 September 2016