The menace of Black Money stashed abroad as well as in India is both an external and internal threat as this could be used to finance militancy. It is also unhealthy for the Indian economy as taxes are avoided – which increases the burden on the honest tax payer. Time and again, efforts have been made to unearth black money either by way of strict enforcement or by way of amnesty schemes or voluntary disclosure schemes.
It is an open secret that a major portion of `black money’ gets parked in the real estate sector. Towards this end, the various State Acts (Stamp Acts) and the Central Law –The Income-tax Act have tried to curb this malpractice e.g. the Income- tax Act contained provisions for obtaining tax clearance certificates before sale of immovable properties, thereby providing for a mechanism for preemptive purchase of undervalued properties by the Central Government. However, it is an admitted fact that these mechanisms failed and therefore have either been omitted by the Government or struck down by the Apex Court (e.g. Section 52 was read down by the Hon’ble Supreme Court in the case of K.P. Varghese vs. ITO (1981) 7 Taxman 13). Similarly, Chapter XXC of the Act also proved ineffective.
State Governments have also joined hands in these efforts by amending their respective Stamp Acts to provide for levy of stamp duty on higher of the prescribed ‘ready reckoner value’ and apparent consideration. The Central Government also introduced section 50C in the Income -tax Act w.e.f. 1-4-2003, section 43CA w.e.f. 1-4-2014 and amended section 56(2)(vii) w.e.f. 1-4-2014. Though such provisions are a welcome step in indirectly curbing the flow of black money in real estate transactions, sometimes some unintended and unfair consequences follow. A few such instances are listed below:
The ‘ready reckoner value’ fixed by State Governments for an under construction property and a ready possession property is the same. When it is an open secret that in the real estate market there is an undesirable flow of black money, it is also equally true that the property rates vary according to the stages of construction. If a person is booking a flat today in the year 2015 in a big project, where possession is likely to be received in the year 2020 (though the builder might have intended it to be in the year 2018), the rates would be substantially different from the rates of a ready possession property. Further, in many cases, the builder offers the properties even at much lower rates in the pre-booking stage, to finance the construction. It is openly advertised in newspapers etc. for discounts in pre-booking stage. But the ‘ready reckoner value’ does not provide for any concession for such under construction properties.
In many cases, people have some existing rights in the properties and there is some pending litigation in the Courts. We are all aware of the speed of disposing of litigations in India. In a few such cases, parties agree for out-of-court settlement and decide a consideration substantially lower than the current market value, for obvious reasons.
In some cases, the Court itself decides the consideration to be paid by one litigant to the other, which is substantially lower than the market value.
Recently, I came across a few cases, where a builder has asked for extra consideration for the extra area (balcony) due to change in DC Regulations. Though such area was actually not an ‘extra area’, as the balcony was already there in the original plan but due to change in DC Regulations, it is now to be included in the carpet area. The actual consideration for such so called extra area when compared with the current ‘ready reckoner value’, is bound to be lower. There is a separate supplementary agreement executed and registered after the change in DC Regulations.
Therefore, even the saving clause of sub-section(3) of section 43CA or proviso to Section 56(2)(vii) may not help. (i.e. existence of an agreement of a prior date).
In all the above cases, there are genuine hardships to both the buyers and sellers because of the application of section 43CA and 56(2)(vii). It is accepted that there are safeguards in-built in these sections to refer the valuation to the departmental valuation officer, wherever assessee claims that the ‘ready reckoner value’ is higher than the market value, but the ‘effectiveness’ of such reference is known to all. From a common man’s perspective, when the agreement is executed, it gets reported through AIR to the Income Tax department and the case is taken up for scrutiny in almost all cases of difference between the actual consideration and the ‘ready reckoner value’. In genuine cases, at higher appellate levels, justice may be obtained with a time consuming and costly litigation. However, at the first assessment stage, getting a relief even in genuine cases is a herculean task.
Legislation with a sound objective is always welcome but is it fair to have a rigid, mechanical and rather oversimplified approach in its implementation?
Suggestion:
An appropriate discounting factor be introduced for valuation of incomplete construction based on the stage of construction. So also, exceptions be provided in situations like decisions of a court. Moreover, exceptions provided in Sections 43CA and 56(2) are missing in Section 50C. The provision should be amended to include the same.
