Synopsis:
Section 43CA and Section 56 bring to tax incaome based on the concept of stamp duty value of the property transferred. The provisions contemplate the valuation as on the date of an agreement if the same is anterior to registration. There is no such saving in Section 50C, making it unfair.
This article attempts to examine whether amendments brought by Finance Act, 2013 has created anomaly, rendering section 50C of Income-tax Act, 1961 (“Act”) unfair or causing inequity.
Vide the Finance Act 2013, a new section viz. 43CA has been introduced in the Actto come into effect from 1st April, 2014. Section 43CA is similar to section 50C of the Act, (which came into effect from 1st April 2003). Section 50C provides for capital gains tax on deemed consideration as per the stamp duty valuation of capital asset at the time of its transfer. The newly introduced section 43CA creates a legal fiction, that in case of transfer of land and building by assessee, who held such asset not as a capital asset but as stock in trade. (eg. a builder), the market value decided by the Stamp authority shall be the deemed consideration received by the Transferor and income tax shall be charged on such deemed consideration notwithstanding the lesser consideration written in the deed of transfer. However, section 43CA carves out an exception to this legal fiction, where the consideration has been already fixed under an earlier Agreement for sale and when sale is completed subsequently in pursuance of such earlier Agreement for sale, the stamp duty value on the date ofprior Agreement for sale shall be taken into account and the legal fiction would operate with reference to such prior date of agreement for calculating the income tax liability under the head “profits and gains of business/profession”.
By the Finance Act 2013, section 56 of the Act is also amended, which amendment is to come into effect from 1st April, 2014. Prior to the amendment section 56 provides that, in case of purchase of an immovable property, if consideration stated in the agreement, is less than the stamp duty value of the property, the differential amount, shall be deemed to be an income of the Purchaser, under the head “Income from other source” and accordingly, the purchaser shall be required to pay the income tax on such differential amount under the head “income from other source”. The amendment to section 56, however, provides for similar exception to the legal fiction by laying down that in cases in which the sale is completed subsequently in pursuance of an earlier agreement, the stamp duty value on the date of the earlier Agreement for sale shall be taken into consideration for income tax purpose and not the stamp duty value of property on the date of completion of transfer. In other words, the escalated market value of the property on the date of completion of transfer will not bring any additional tax liability for the purchaser.
The exceptions as aforesaid, introduced by Finance Act, 2013, to the deeming provisions are do not find a place in section 50C of Income Tax Act. The insertion of section 43CA and amendment to section 56 of the Act seem to have been brought in to provide for a remedy in several genuine situations, where under an earlier Agreement for sale the consideration is fixed and the completion of transfer is required to be postponed on account of transfer being conditional upon various statutory permissions and sanctions etc. and merely because in the meantime, the property prices have shot up, the assessee would not be required to pay additional taxes due to deeming provisions, although in fact the parties are bound by the consideration fixed under the earlier agreement and the boom in real estate market is of no help to seller for claiming higher consideration.
There seems to be no reason for not providing the similar exception in section 50C. The status of seller who is taxed u/s. 50C of the Act and the one u/s. 43CA of the Act is the same in almost all respect except that in the first case there is a transfer of capital asset and in the latter case, there is a transfer of immoveable property held as stock in trade. For the differential treatment to be valid, there has to be an intelligible differentia and reasonable nexus connected to the object of statute, which does not seem to be present in this case.
Section 50C and section 56 of Act seek to tax two sides of one transaction. The former seeks to tax the seller on a deemed to have incremental consideration on sale of capital asset and the latter seeks to tax the benefit that the purchaser is deemed to have received by paying consideration lesser than the stamp duty value. Amending only section 56 leads to an incongruous situation. The purchaser alone can rely on earlier Agreement for sale and successfully establish that the stamp duty valuation on the date of agreement is to be considered for testing the deeming fiction, however the seller in the same transaction cannot raise this contention. Further, having accepted in the assessment of purchaser a particular stamp duty valuation, it will be absurd for the department to contend in assessment of seller that a different stamp duty valuation is to be adopted.
Therefore, section 50C in its existing form is unfair and needs to be amended or read down by judicial forums.
