Suppose....i sold a flat at value less than stampduty value. The entire amount is invested in another flat as a part payment and balance amount is paid by my family members and market value of flat purchased is more than or equal to stamp duty value of flat which i sold.
What are the consequences under sec.50C and Sec.54 ?
Stakes in transactions in immovable properties are quite high and so are the tax implications. It is not only perceived but an open secret in India that sale transactions of immovable properties are undervalued leading to leakage of tax revenue causing losses to the Government and unaccounted money is not good for the health of the society in general. Therefore, the restlessness on the part of Government to plug such leakage and attempts by assessees and tax professionals to avoid hardships to genuine assessees. The provisions of section 50C of the Income Tax Act, 1961 specifically dealing with transactions in immovable properties are in this context.
PART I: SECTION 50C OF INCOME TAX ACT, 1961 SPECIFIC PROVISIONS IN RESPECT OF TRANSACTIONS IN LAND AND BUILDING: Basic Provision in Section 50C : With effect from A.Y. 2003-2004 section 50C has been inserted in the Income Tax Act, 1961 dealing specifically about gross consideration in computation of capital gains in respect of transactions in land or building or both.
Section 50C provides that if the value stated in the instrument of transfer is less than the valuation adopted, assessed or assessable by the stamp duty authorities, the valuation as adopted, assessed or assessable by the stamp duty authorities will be considered for the purpose of computation of capital gains arising on transfer of land or building or both. For example if in the agreement for sale, the value of the flat is stated at Rs. 24 lacs but according to the stamp duty authorities the valuation of the flat is Rs. 34 lacs, then it will be considered that the flat has been sold for Rs. 34 lacs and capital gains will be computed on the basis of Rs. 34 lacs. In certain cases, this causes a very difficult situation for the seller of the property as he is required to pay tax on extra money which he never received. Alternately, if he wants to claim exemption by investing in a residential house or capital gains bonds, etc. depending upon the facts of his case, he has to invest an extra amount, which he never received on sale. It is not necessary that one should invest the very sale proceeds in exemption schemes as funds from any sources can be invested to avail exemption. To come out of the difficulty one may consider recourse to relief provisions, but by the time decision in respect of relief provisions come, the time limit for planning investment gets expired.
History and background of section 50C: The history and background of section 50C can be traced to Government’s restlessness to tax the black money in transactions in land and buildings. The prices of land and buildings like other items are a function of market forces of demand and supply. The demand far exceeds the supply; more so in big cities. This wide gap between demand and supply generates an inflationary and speculative market for immovable properties and provides a major avenue for investment of black money. The consideration for their transfer is understated in the instrument of transfer by the vendor and the purchaser and a substantial part is paid unrecorded in black money. The vendor saves on capital gains on undeclared portion of the sale proceeds while the purchaser saves on wealth tax and accommodates his unaccounted funds. Position between 1972 and 1986: Considering the wide-spread use of black money and under-statement of consideration in the instruments of transfer, which adversely affected the interest of revenue, the Government introduced Chapter XXA in the Income Tax Act, 1961 with the purpose of curbing such arrangements. Chapter XXA was there in statute book from November 15, 1972 to September 30, 1986 and was applicable to transfers of immovable properties during that period. It provided for acquisition of immovable property by the Government when it was found that fair market value was higher than the consideration stated in instrument of transfer. The proceedings under Chapter XXA started after transfer was completed. In Chapter XXA, the Government was required to determine the fair market value of the property but the Supreme Court in the case of K.P. Verghese at 131 ITR 597 took a view that apart from determining the fair market value of the property transferred, the Government was also required to prove that extra consideration not stated in the transfer document had passed from the buyer to the seller. This requirement of proving passing of under-hand consideration from the buyer to the seller rendered Chapter XXA unworkable.
Position between 1986 and 2002: In view of the above SC decision and because Chapter XXA applied after the immovable property was transferred, with effect from October 1, 1986, Chapter XXA was replaced by Chapter XXC which granted the Government pre-emptive right to purchase immovable property at a price agreed to by the transferor. Chapter XXC of the Act inter alia provided for the purchase of immovable property by the Central Government in certain cases of transfer. A transaction relating to a transfer of any immovable property, if it was situated in any of the notified cities and towns of India and if the apparent consideration of such transaction exceeded the prescribed limit, required compliance with provisions of Chapter XXC. Accordingly, whenever a person wanted to transfer an immovable property for a price exceeding specified amount, he could not do so before undergoing the procedure as laid down in Chapter XXC.
Chapter XXC had limited application and was failing: Thus, Chapter XXC was applicable only to certain notified towns and cities and only if the price of the immovable property exceeded a specified amount. Therefore, only a few people were affected by the provisions of Chapter XXC.
Of late, there were many litigations between the assessees and the Income Tax Department. It was also observed that even when Tax Department acquired such high priced properties, the same could not be disposed off at a profit in many cases. This had resulted in a situation whereby the Department was criticised for unnecessarily acquiring the high priced immovable properties. The funds of the Government were unnecessarily blocked. Thus, neither the Income Tax Department nor the tax payers were happy about Chapter XXC. The Finance Act, 2002 deleted Chapter XXC w.e.f. 1st July 2002.
2002 onwards Section 50C inserted: While deleting Chapter XXC, the Government simultaneously decided to introduce section 50C with effect from A.Y. 2003-04. Coverage of section 50C is very wide : Section 50C affects all the transactions of land and buildings in the country except Jammu and Kashmir. Although the section speaks of transfer of land or building or both, on the reasoning that the term “whole” includes “part.” It also covers part of building. Thus, transactions of flats, shops, galas factories etc. are covered by the provisions of section 50C. It is observed that in some cases, the stamp duty authorities have been adopting valuation of properties at higher level than the real values.
Stamp duty generally paid by buyer: Stamp duty is generally paid by the purchaser of the property. Therefore, the purchaser is entitled to dispute higher valuation by stamp duty authorities. However, generally the purchasers do not prefer an appeal before the stamp duty authorities as compared to the purchase price involved, the amount of additional stamp duty becoming payable due to higher valuation by stamp duty authority is meager amount which does not afford spending money and time involved in an appeal.
The seller may not have much representation before the stamp duty authorities even when an appeal is preferred by the purchaser. It may happen that the purchaser after completing the transaction of purchase may prefer an appeal before the stamp duty authority and the seller has no information about it. Further, under the provisions of most of the State Acts, stamp duty authorities have the power to revise valuation of immovable property for a certain period of years from the date of stamping. In such circumstances, the assessment order may be subjected to rectification requiring the seller to pay additional tax, interest u/s 234B, as investment u/s. 54/ 54F/ 54EC may fall short than required.
In view of the provisions of section 50C, the vendor is more concerned with the stamp duty valuation. Practically, it is suggested that for the purpose of allowing appeal to the vendor under stamp duty laws, it may be provided in the document of transfer that a small part of stamp duty would be borne and paid by the vendor so that the locus of the vendor is not challenged. Corresponding adjustment may be made in the consideration money. Transactions not covered:
Section 50C is applicable only to transfer of land or building or both provided it is a capital asset. Thus, in cases when such assets are held as stock-in-trade, the section does not apply. By implication, it does not affect sale of land or building by a builder or a developer because land, building, shops, flats, etc sold by the builders and developers are generally stock-in-trade in their hands and not the capital assets. This section will also not be applicable to transfer of tenancy. In such a case, there is no transfer of land or building or both to which provisions of section 50C are applicable.
Relief provisions for separate income tax valuation:
It is however provided in section 50C that even though the higher valuation by stamp duty authorities has not been disputed, the seller of the property may represent before the Income Tax Officer that the valuation adopted by stamp duty authorities is higher than the fair market value of property on the date of transfer and that the Income Tax Officer may refer the matter of valuation to the Valuation Officer of the Income Tax Department itself. Although the word used is “may”, the ITO has to refer the case for valuation once requested by the assessee. If the valuation by the Valuation Officer of the IT department is lower, then such lower valuation is to be adopted by the Income Tax department for the purpose of capital gains taxation under section 50C.
Higher Income Tax valuation to be disregarded:
However, it may happen that the valuation by the Income Tax Valuation Officer is higher than the valuation adopted by the stamp duty authorities. In such an event, the stamp duty valuation is to be adopted and higher valuation by the Income Tax Valuation Officer is to be disregarded. Thus by approaching the Income Tax Valuation Officer, the seller of the property will not be a loser in any case. The DVO has to follow the procedure under relevant sub-sections of section 16A of the Wealth Tax Act whereby the DVO has to call for the records, give an opportunity of being heard to the assessee and lead evidences and then pass a speaking order of valuation. Further, the order of the DVO can be appealed against.
Some of the Recent Ruling in Section 50C
1. S.50C not applies to transfer of booking rights Income Tax Officer Vs. Shri Yasin Moosa Godil (ITAT Ahemdabad)
From the reading of Sec. 50C,it is evident that Sec. 50C is a deeming provision and it extends to only to land or building or both. Section 50C can come into play only in a situation where the consideration received or accruing as a result of the transfer by an appellant of a capital asset, being land or building or both is less than the value adopted or assessed or assessable by any authority of State Government therefore for the purpose of payment of stamp duty in respect of such transfer. It is settled legal proposition that deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. Clearly therefore, it is essential that for application of Sec.50C that the transfer must be of a capital asset, being land or building or both. If the capital asset under transfer cannot be described as “land or building or both” then section 50C will cease to apply. From the facts of the case narrated above, it is seen that the assessee has transferred booking rights and received back the booking advance. Booking advance cannot be equated with the capital asset and therefore section 50C cannot be invoked.
2. Section 50C not applies to transfer of tenancy/ leasehold rights DCIT vs. Tejinder Singh (ITAT Kolkota) ITAT held that Section 50C of the Income-tax Act, 1961 will apply on receipt of consideration on ’transfer of a capital asset, being land or building or both’ but will not apply in case of transfer of tenancy / leasehold rights. 3. Section 50C – Fair market value determined by DVO cannot be replaced for full value of consideration ITO Vs. Chandrakant R. Patel (ITAT Ahmedabad ) - The language in section 55A does not refer the ‘value of consideration’ but only uses the term ‘Fair Market value’. So the scope of the section gets con-fined to determine the fair market value of a capital asset only. Thus, considering the language of section 48 the value so deter¬mined cannot be substituted for ‘Full value of consideration’. - Section 50C states that the AO can refer to DVO u/s. 55A only if the assessee claims that the value adopted by the stamp valuation authority exceeds their fair market value or the value so adopted by stamp valuation authority has not been disputed by any authority, Court or High Court. - Thus, the valuation made by the DVO and the consequential addition as made by the AO was reversed and the view taken by the CIT(A) was upheld. 4. Section 50C not applicable to tenancy rights and unregistered document ACIT Vs. M/s. Munsons Textiles (ITAT Mumbai) On applicability of Section 50C of the Act in absence of registered document -Capital gain has to be computed on the basis of sale consideration received or accruing to the taxpayer. Even if the document was not registered, the capital gain has to be computed on the basis of the sale consideration shown and received by the taxpayer unless there was material to show that the sale consideration was understated. In this case, the document was not registered and no stamp duty had been paid. Therefore, stamp duty value cannot be adopted for the purpose of computation of capital gain and the value shown in the agreement has to be adopted as there is no material to show that the taxpayer had understated the sale consideration. It is pertinent to note that an amendment has been made in Section 50C of the Act with effect from 1 October 2009 to bring unregistered document also under the purview of Section 50C of the Act. In view of this amendment, this Ruling would not hold good for the sale transactions entered into post 1 October 2009. However, it would still hold good for the sale transactions that are entered into prior to 1 October 2009 On applicability of Section 50C of the Act to tenancy rights -Only for the limited purpose of computation of capital gain in respect of sale of land and building, stamp duty value has to be substituted for sale consideration in view of specific provisions of Section 50C of the Act.Therefore, provisions of section 50C of the Act cannot be applied in case of transfer of tenancy rights in respect of land or building or both. 5. Legal fiction u/s 50C cannot mean that deemed sale amount of property is actually received Subash Chand vs. ACIT (ITAT Chandigarh) Deemed consideration” u/s 50C for computation of capital gain u/s 48 is quite different from actual consideration or actual availability of money for the purpose of making investments or for meeting the expenses. Deemed consideration within the meaning of section 50C cannot and does not mean that the amount of deemed consideration has actually been paid by the transferee or actually received by the assessee.
Amount of Exemption. The amount of exemption under section 54 is Equal to the amount of the capital gain if cost of new house property is more than the capital gain, or Equal to the cost of the new house property if the cost is less than the capital gain.
1.For the purpose of calculating the capital gain the stamp value price will be taken as sales consideration. 2. calculate the capital gain, if it is long term capital gain that u can claim the exemption u/s 54.
For computing the capital gains for the flat that was sold, section 50C will apply and the Full Value of Consideration will be taken to be the stamp duty valuation since it is more than the sale price.
On computation of capital gain, if the entire amount of gain is invested in the new flat, even if it is part purchase and part financed by others, you will be entitled to exemption provided the older flat was held for a period exceeding 3 years
yh ...by 50C ... Stamp Duty value will be considered as Sales Consideration .... but under sect.54 will i need to pay tax even if i have invested the whole amount in new flat stamp duty value of which is more than or equal to Stamp Duty value of flat i have sold.
Whole amount of sales consideration invested in new flat is exempted though the stamp duty value is more than the value of flat sold.
Capital gain tax is applicable on sale of asset and tax is payable on amount which is in excess of sales proceeds over the purchase cost. Capital gain exemption is available on investment which may equal or more than the sale proceeds of flat.
Thus you need not pay tax on investment by purchasing new flat where the stamp duty value is more than the stamp value of flat sold.
As per the provisions of section 54F(1)(a)and (b) of the Act, read with the explanation on ‘net consideration’ no capital gains are chargeable u/s 45 of the Act, “If the cost of the cost of the new asset is not less than the net consideration in respect of the original asset“. The principle of proportionate exemption vide clause (b) above is put into service.
Meaning of the expression ‘net consideration’ is defined in the Explanation below the section 54F(1) and the same reads that “For the purpose of this section (54F), net consideration’, in relation to the transfer of a capital asset, means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.” It is a settled issue that the provisions of section 54F of the Act are code by itself.
Thus, the plain reading of the provisions of sections 45, 48, 50C and 54F of the Act suggest that there is nothing to bar benefits of exemption u/s 54F in respect of the capital gains relatable to the FVC as per the deemed fiction u/s 50C of the Act. Clause (a) of section 54F(1) specifies that If the cost of the new asset is not less than the net consideration in respect of the original asset, there is no chargeable capital gains u/s 45 of the Act.
The clause (a) refers to the provisions of section 45 of the Act. In the given facts of the instant case, no chargeable capital gains arises u/s 45 of the Act. Thus, in this case, with investment of Rs. 17,65,752/- in new asset, the cost of the new asset is not less than the net consideration (NC) in respect of the original asset. Of course, the ‘net consideration’ has two variants depending on FVC adopted and in this case, the NCs are quantitatively lesser than the cost of the new asset leaving no chargeable capital gains u/s 45 of the Act. Therefore, in our opinion, the assessee is not chargeable to any capital gains considering the given facts of the case and also the said clause (a) of section 54F(1).
Decision in the case of Sri Gouli Mahadevappa dt 16.07.2010 is on the issue, wherein Banglore Tribunal held that the deeming fiction on FVC given in section 50C cannot be extended to section 54F as the same is an exemption provisions and is a complete code in itself and it does not override others. May also ref. Ace builders 281 ITR 210.
Considering the above there may not LTCG liable for tax if total consideration is invested for investment as per sect. 54, subject to fulfillment of other conditions.