Practical Issues in Implementation of Section 50C of the Income Tax Act 1961
Measures to Prevent Generation and Circulation of Black Money
The main source to generate and circulate the unaccounted money is sale and purchase of Land & Building and major stake of this unaccounted money is held in the real estate business. As it were a long standing practice to pay a substantial part of actual consideration with unaccounted money i.e. cash and not disclosing the same for the purpose of evasion of income tax.
Hence, Finance Act,2002 brought a revolutionary amendment to insert section 50C to prevent large undervaluation real estate and tax unaccounted money in transactions.
Scope of Section 50C
(1.) Section 50C provides that if the amount received or receivable by transfer of land or building or both is less than value adopted, assessed or assessable by stamp valuation authority (hereinafter referred as “the authority”), then value so adopted, assessed or assessable by the authority shall be considered for the purpose of computing capital gains arising from such transfer.
For example: If the agreement of sale mentions the sale price to be Rs. 40 lakhs whereas the authority determines the value at Rs.55 lakhs. Then, Rs.55 lakhs shall be considered as sales consideration and capital gains will be calculated accordingly.
However, if stamp value doesn’t exceed 110% of amount received or receivable, then amount so received or receivable shall be deemed to be the full value of consideration.
(2.) Under sub section 2, if assessee disagrees and claims that value taken by stamp valuation authority exceeds the fair market value before A.O., then A.O. “may” refer the valuation of capital asset to a Valuation Officer.
(3.) Sub section 3 provides that lower of stamp value and value determined by valuation officer shall be taken as full value of consideration.
Some practical aspects with regard to implementation of provisions of section 50C :
Q-1 : Market price of Land & Building are subject to fluctuation from time to time based on many factors like demand and supply and in such circumstances, there will be cases where stamp value differs on the date of agreement to sell and on date of sale deed. So, what value should be adopted for the purpose of computing Capital Gains?
Ans.: In case of deviation of stamp value on date of agreement and on date of registration, the stamp value on the date of agreement may be taken for the purpose of computing capital gain if whole or part of consideration received by way of account payee cheque, account payee bank draft or ECS on or before the date of agreement for transfer.
Q-2 : Is the provision of section 50C applicable to Land or Building held as stock in trade or business asset?
Ans.: As per Asst. CIT v. Excellent Land Developers (P.) Ltd. 1 ITR 563 (DELHI-ITAT) [2010] and CIT v. Thiruvengadam Investments (P.) Ltd320 ITR 345 (Mad.)[2010], there is no dispute as to the facts that property transferred is assessee’s inventory and held as stock intraday which is assessable under the head PGBP u/s 28 and no addition could be made on ground that sales consideration was understated. In such cases, provisions of Section 43CA shall be applicable which is similar to the provisions of section 50C.
Q-3 : What does the term “Assessable” means and whether it is prospective or retrospective in nature when comes into force from 01/10/2009?
Ans.: There were many cases in which the property is not registered with Stamp Valuation Authority, hence A.O. was not able to take Stamp value for the purpose of this section. Hence term “assessable” inserted in section 50C which include transactions which are not registered with stamp valuation authority and executed through agreement to sell and power of attorney.
The term assessable is prospective in nature as taken in case of Smt. Alka Jain v ACIT [2020] 116 taxmann.com 413 (Del) (Tribunal)
Q-4 : Deeming fiction created by Section 50C is limited for the purpose of computing Capital Gains u/s 48 only and doesn’t go beyond that to displace to legal fiction created by Section 69, 69A and 69B.
Ans.: Sections 69, 69A and 69B of Income-tax Act also create legal fiction by which unexplained investments, etc., are deemed to be the income of the assessee. They place the burden on the assessee to satisfactorily explain the nature and source of investments. Deemed income may be income for the purposes of assessment but that does not ipso-facto mean that the deemed consideration is actually and physically available for investments. Though section 50C creates legal fiction to the effect that the value adopted/assessed by the Stamp Valuation Authority for payment of stamp duty would be deemed to be the consideration received yet the said legal fiction cannot be extended to create another legal fiction to the effect that the consideration deemed to be so received would also be deemed to generate cash/funds for making the investments or meeting the expenses, or otherwise displace the legal fiction created by sections 69, 69A and 69B.
Supporting judgement relied upon this is Subash Chand Vs Assistant Commissioner of Income Tax- ITAT Chandigarh.
Q-5 : Does provision of Section 50C applicable to transfer of Leasehold or tenancy rights?
Ans.: Lease hold right in land & building cannot be equated with “Land & Building”. Hence, capital gains shall be calculated on transfer of leasehold or tenancy right but Section 50C is not applicable on transfer of such leasehold rights.
Supporting judgement favoring the above is as follows :
- AtulG. Puranik v/s ITO (2011) 132 ITD 499 (Mum.)
- CIT v/s Greenfield Hotels & Estate (P) Ltd (2016) 389 ITR 68 (Bom)(HC)
- Kishori Sharad Giatonde v/s ITO ITA No. 1561/M/09 dated 27/11/2009 (Mum) (Tribunal)
- ITO v/s M/s Pradeep Steel Rerolling Mills Pvt. Ltd. in ITA No. 341/M/2010
- Shavo Norgren (P) Ltd. v/s DCIT (2013) 58 SOT 23 (Mum.)
- Kancast Pvt. Ltd. v/s ITO (2015) SOT 110 (Pune) (Tribunal)
- Fleurette Marine v/s ITO (2015) 70 SOT 203 (Mum) (Tribunal)
Q-6 : Is Section 50C applicable in case of transfer of capital asset being land and/or building by a person to a firm u/s 45(3)?
Ans.: Since both the provisions are deeming fiction in nature and deals separately with specific situation, it can’t be said that one provision supersede the other one. Although section 50C is a special provision dealing with Land & Building, it is not a notwithstanding provision which supersede other provision of Income Tax Act. Hence, importing section 50C in section 45(3) to charge capital gains tax on stamp value is impermissible in law. There is always a conflict between these provisions as it results in supposition on other supposition of law.
Supporting judgement in favor of this is Fleurette Marine v ITO (2015) 70 SOT 203 (Mum) (Tribunal)
Q-7 : Is Section 50C applicable when undertaking as a whole is transferred i.e. Slump Sale u/s 50B?
Ans.: Section 50C is not applicable for computing capital gains u/s 50B. In Explanation 2 to Section 2(42C), it is clear that determination of value of asset and liability for the purpose of payment of stamp duty shall not be regarded as assignment of values to individual assets and liabilities. Hence, it can be said that if land &/or building is transferred in slump sale, stamp value shall be ignored insofar as calculation of full value of consideration of whole undertaking is concerned.
Supporting judgement in favour of this is Dy CIT v/s Summit Securities Ltd. (2012) 135ITD99 (Mum) (SB)
Q-8 : Is section 50C applicable to sale of shares of company where such company is the owner of Land & Building?
Ans.: Here, assessee company has adopted tax planning tool for non-application of Section 50C. Since, Sec. 50C is deeming section and has to be interpreted strictly in limited manner with the spirit of respective provision. So, transfer of shares is not dealt in the provisions of sec. 50C and would be restricted only to transfer of Land and/or Building.
Supporting judgement in favour of this is Abdul Kader Fazlani v/s ACIT (2013) 56SOT12 (Mum.)
Q-9 : If value adopted or assessed or assessable is taken as full value of consideration and subsequently such value revised in appeal or revision or reference to Valuation Officer, then what shall need to be done?
Ans.: In such situation, the Assessing Officer shall rectify the order of assessment u/s 155(15) so as to compute the capital gains by taking the full value of consideration to be the value as so revised in such appeal or revision or reference and provisions of section 154 w.r.t. rectification shall apply accordingly.
Q-10 : Is Section 50C applicable to exemption u/s 54F?
Ans.: It is a debated question as to whether the exemption u/s 54F is applicable before or after applying Section 50C.
For Example :
Actual Sales Consideration- Rs.50 Lakhs
Stamp Value of such property- Rs. 70 Lakhs
Indexed Cost- Rs.30 Lakhs
Hence, capital gains before and after giving effect of Sec.50C will be Rs. 20 lakhs and Rs. 40 lakhs respectively.
Now, the question is that “What amount to be invested to claim exemption u/s 54F?”
So, as per :
(a) Gyan Chand Batra v/s ITO (2010) 133 TTJ (Jp) 482
(b) Gouli Mahadev appa v/s ITO (2011) 128 ITD 503 (Bang)
“It is held that if entire sales consideration i.e. Rs.50 Lakhs is invested for buying new asset as per Section 54F, then entire capital gains after applying Section 50C i.e. Rs.40 Lakhs shall be exempted.”
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The Author is Amit Rai and he can be reached at amit.especia@gmail.com or raiamit2507@gmail.com
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