Sections 50C/43CA/56(2)(x) of Income Tax Act concerning Adoption of Circle Rates for Computation of Capital Gain/Business Profits/Income from Other Sources on Land & Building, Result in Double Taxation & are Contrary to Real Income Theory!!
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 and/or building. Under this section the sale consideration as declared by the seller of land and/or building is to be substituted by the stamp duty valuation rate/circle rate of such land and/or building, in cases where the declared sale consideration is less than the corresponding stamp duty valuation rate/circle rate, 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 the 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 the 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.”
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 and/or building is to be substituted by the stamp duty valuation rates/circle rates of such land and/or building, in cases where the declared sale consideration is less than the corresponding stamp duty valuation rates/circle rates, for the purpose of calculating income in the hands of seller under the head “Profits & Gains of Business or Profession”.
The Explanatory Memorandum to the Finance Bill 2013 explaining the rationale of the 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.
Since then, the Revenue Authorities are pressing into service the deeming fiction of substituting the declared sales consideration of land and/or building, by the stamp duty valuation rate/circle rate u/s 50C/43CA of the Act, and are re-computing the resultant capital gains/business gains respectively, on such deeming fiction basis, in the hands of the seller of such land and/or building.
Interestingly, the deeming fiction of taxability as envisaged in sections 50C and 43CA of the Income Tax Act, did not remain confined to just in the hands of seller of land and/or building and it has got extended in the hands of purchaser of land and/or building as well. There is one another section viz. 56(2)(vii)/56(2)(x) of the Income Tax Act, which provides for taxing the shortfall in the declared purchase consideration with that of the corresponding stamp duty valuation rate/circle rate of land and/or building in the hands of purchaser under the head ‘income for other sources’.
Uptill 1.4.2017, as per provisions of section 56(2)(vii), any sum of money or any property which was received without consideration or for inadequate consideration (in excess of the specified limit of Rs. 50,000) by an individual or HUF was chargeable to income-tax in the hands of the recipient under the head “Income from other sources”. The definition of ‘property’ for the purpose of this section included immovable property, jewellery, shares, paintings, etc. The cases where the declared purchase consideration of land and/or building falls short of the corresponding stamp duty valuation rate/ circle rate, were covered under the purview of the term ‘inadequate consideration’ in the context of receipt of an immovable property, by the purchaser.
The Finance Act, 2017 inserted a new clause (x) in sub-section (2) of section 56 so as to provide that receipt of the sum of money or the property by any person on or after 1-4-2017 without consideration or for inadequate consideration in excess of threshold limit of Rs. 50,000 shall be chargeable to tax in the hands of the recipient under the head “Income from other sources”.
The Explanatory Memorandum to the Finance Bill, 2017 explained the rationale of the amendment as under:
"Widening scope of Income from Other Sources
Under the existing provisions of section 56(2)(vii), any sum of money or any property which is received without consideration or for inadequate consideration (in excess of the specified limit of Rs. 50,000) by an individual or HUF is chargeable to income-tax in the hands of the resident under the head “Income from other sources” subject to certain exceptions. Further, receipt of certain shares by a firm or a company in which the public are not substantially interested is also chargeable to income-tax in case such receipt is in excess of Rs. 50,000 and is received without consideration or for inadequate consideration. The existing definition of property for the purpose of this section includes immovable property, jewellery, shares, paintings, etc. These anti-abuse provisions are currently applicable only in case of individual or HUF and firm or company in certain cases. Therefore, receipt of sum of money or property without consideration or for inadequate consideration does not attract these anti-abuse provisions in cases of other assessees. In order to prevent the practice of receiving the sum of money or the property without consideration or for inadequate consideration, it is proposed to insert a new clause (x) in sub-section (2) of section 56 so as to provide that receipt of the sum of money or the property by any person without consideration or for inadequate consideration in excess of Rs. 50,000 shall be chargeable to tax in the hands of the recipient under the head “Income from other sources”. It is also proposed to widen the scope of existing exceptions by including the receipt by certain trusts or institutions and receipt by way of certain transfers not regarded as transfer under section 47.”
"Double Taxation":
In the existing framework of the Income Tax Act, for the same income or rather the deeming income, both the seller and the buyer of land and/or building, are being taxed twice and as such the pressing of service of such deeming fiction of taxation both in the hands of the seller and/or buyer of land and/or building is resulting in “Double Taxation”. This ‘double taxation’ is contrary to the well-established and well-settled principle of Law and canons of direct taxation that "the same income can’t be taxed twice."
Time and again, numerous judgements of the Hon’ble Supreme Court and the Hon’ble High Courts have held the incidence and levy of ‘double taxation’ as unlawful and a nullity in the eyes of Law, prominent among these being the judgements of Hon’ble Supreme Court in the undermentioned cases viz.
Laxmipat Singhania vs. CIT 72 ITR 291 (SC)
CIT vs. Devi Prasad Vishwanath Prasad 72 ITR 194 (SC)
The Legislature while preparing and legislating the Direct Taxation Laws has always kept in mind the unlawful-ness and impermissibility of ‘double taxation’ of any particular income. The Income Tax Act contains numerous sections wherein the ‘double taxation’ of any income has been considered as impermissible and unlawful in the Act itself. The prominent examples include non-taxability of the partners’ share of profits in the partnership firm/LLP, in the hands of partners by virtue of express exemption u/s 10(2) of the Income Tax Act, non-taxability of Dividend income upto Rs. 10 lakhs, in the hands of recipient u/s 115BBDA, the express provisions as contained in sections 90 and 91 of the Income Tax Act and the Double Taxation Avoidance Agreements (DTAA) ensuring the avoidance of double taxation of income in two countries.
No doubt, the Constitution of India does not curtails or prohibits the Legislature for enacting and incorporating the express and specific provisions in the Income Tax Act resulting in ‘double taxation’, as has been presently done in incorporating section 56(2)(vii)/56(2)(x) in the Act, in addition to the prevailing section 50C/43CA of the Income Tax Act.
However, it is also desirable to keep in mind that such imposition of ‘double taxation’ even by express provisions in the Act is principally and fundamentally contrary to the principles of natural justice, equity and fair play and as such must be avoided by the Legislature. Just as any particular expenditure is allowable as tax deductible expenditure only in the hands of one particular assessee only and it is not allowed in the hands of two or more assessees, similarly the same income can’t be taxed twice in the hands of one or more assessees.
Contrary to “Real Income Theory”:
Further, this deeming fiction of taxation as envisaged in sections 50C, 43CA and 56(2)(x) of the Income Tax Act, needs to be examined from another perspective also, that is the “real income theory” perspective.
Time and again, numerous judgements of the Hon’ble Supreme Court and the Hon’ble High Courts have upheld the “real income theory” postulating the taxation of only real and actual income and not notional income. Some of the significant judgements of Hon’ble Supreme Court in this regards are enumerated as under viz.
CIT vs. Shoorji Vallabhdas & Co. 46 ITR 144 (SC)
CIT vs. Chamanlal Mangaldas & Co. 39 ITR 8 (SC)
CIT vs. Virtual Soft Systems Ltd 404 ITR 409 (SC)
CIT vs. Bokaro Steel Ltd 236 ITR 315 (SC)
In view of the currently prevailing sluggishness and slow-down in the real estate sector, the property transactions of sale and purchase of land and/or building, in majority regions and 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 stamp duty/circle rates irrespective of the fact that the actual sale/purchase consideration is lesser than the circle rate, is resulting in a lot of undue hardships both in the hands of sellers as well as buyers, in the form of unwarranted and unjustified income tax liability on 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 and reporting of sale/purchase consideration of immovable properties in the arena, wherein market rates of immovable properties were substantially higher than their corresponding 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 and regions, the actual transaction rates/market rates of immovable properties are even lower than the circle rates.
The well-established and well-settled "real income theory" postulates that only real and actual income can be taxed and any notional income can’t be brought under the purview of taxation. However, the existing legal provisions as contained in sections 50C, 43CA and 56(2)(x) of the Income Tax Act, provides for the deeming fiction of taxing the notional income in those cases of sale and/or purchase of land and/or building, where the actual transaction rates/market rates of such immovable properties are even lower than the circle rates.
The provision for reference to valuation officer u/s 55A of the Act, in cases where the assessee objects to the adoption of the stamp duty valuation rate/ circle rate in deeming the sale/purchase consideration, is also practically turning out to be a redundant and ineffective provision in view of the subjectivity and complexity involved in such valuation.
Concluding Remarks:
In view of the changed dynamics of the demand & supply conditions in the real estate sector, there is an immediate and crucial need for the review, reconsideration and rationalisation of the existing provisions of section 50C/43CA/56(2)(x) of the Income Tax Act, providing for the unjustified adoption of stamp duty valuation rates/ circle rates in deeming the sale/purchase consideration of immovable properties, even in those cases where the actual transaction rates/market rates are lower than the circle rates, 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 of 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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