Section 50C and 56(2)(vii)of the Income Tax Act

Section 50C of the Income Tax Act, 1961 (the Act)

History and brief background of the evolution of Section 50C Under the Act of 1922 , first proviso to Section 12B(2) entitled the Assessing Officer to ignore the actual consideration received for the transfer and to substitute a notional or artificial consideration based on the fair market value of the asset on the date of transfer where the transfer was to a person directly or indirectly connected with the assessee and the Income-tax officer had reason to believe that the transfer was effected with the object of avoidance or reduction of the liability to capital gains tax.

With the enactment of the 1961 Act, the said provision found place in Section 52 of the said Act. The scope of that Section was examined and whittled down by the famous decision of the Apex Court in K. P. Vargheses case 131 ITR 597 (SC) .
Thereupon in the year 1982, Chapter XXA was inserted in the Act, providing for compulsory acquisition of immovable properties by the Government. The provisions of the Chapter XXA were not successful in arresting the proliferation of black money in the transfer of immovable properties and therefore, the said Chapter was replaced by a new Chapter XXC by the Finance Act, 1986.
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History and brief background of the evolution of Section 50C (Contd...)

The new Chapter XXC gave the government a pre-emptive right to acquire the immovable property in question at the consideration agreed to between the seller and buyer in certain cases of transfer in notified cities and towns (above threshold amounts fixed) and on fulfilment of the prescribed conditions. The provisions of the Chapter remained in force till 01.07.2002.

The Finance Bill (No.2) of 1998 contained a proposal to insert proviso to Section 48 to make value adopted for the purpose of stamp duty as the basis for computing taxable capital gain. However, the same was dropped while passing the Finance Act.

Section 50C was thereafter introduced by the Finance Act, 2002 (w.e.f. 01.04.2003)

Section 50C is proposed to be amended by the Finance Act 2009 w.e.f.- 1.10.2009

PROVISIONS PRIOR TO PROPOSED AMENDMENT

Applicability of Section 50C The Section applies to computation of capital gains under Section 48 in case of transfer of land or building or both. Constitutional validity of Section 50C has been upheld by Madras High Court in K.R. Palanisamy v UOI, 306 ITR 61(Mad)

Section 50C is mandatory.

It is statutory duty of the AO to invoke Section 50C when facts indicate that the value adopted by the Stamp Duty Authorities is higher than the sale consideration shown by the assessee in the sales deed. Under such circumstances it is obligatory on part of the AO to treat the value adopted by the Stamp Duty Authorities as the deemed sales consideration accrued as a result of transfer. [Ambattur Clothing Co. Ltd. v ACIT, 221 CTR 196 (Mad); A.K.G. Consultants (P) Ltd. v ITO, 17 SOT 592 (ITAT Lucknow) and Jitendra Mohan Saxena v ITO, 117 TTJ 974 (ITAT Lucknow)]

 Conditions precedent for applicability of Section 50C transfer of land or building or both; Although the Section speaks of transfer of land or building or both, it will also cover part of building on the reasoning that the term "whole" includes "part." Thus, transactions of flats and shops in a building complex will be covered by the provisions of Section 50C. asset transferred may be short term or long term capital asset Capital asset defined under Section 2(14) does not include stock-in-trade

M/s Inderlok Hotels Pvt Ltd v ITO, 2009-TIOL-156-ITAT-MUM The assessee was in the business of constructing residential flats. The Mumbai Tribunal held that: o The basic intention behind Section 50C is the determination of full value of sale consideration for the purpose of computation of capital gains u/s. 48 of the Act. Section 50C has application only to the extent of determining sale consideration for computation of capital gains and it cannot be applied for determining the income under other heads.
Sale consideration reported is less than the value assessed (adopted)/assessable (w.e.f. 1.10.2009) by the state stamp valuation authority for working out stamp duty payable on such transfer.

Implications on satisfaction of aforesaid conditions

If assessee accepts the value assessed (adopted) by the state stamp valuation authority, then capital gains on such transfer is computed with reference to such value assessed (adopted) i.e. considered to be the full value of consideration for such transfer;

If assessee disputes the value assessed (adopted) by the state stamp valuation authority by way of appeal under the stamp duty regulations, then capital gains on such transfer is computed with reference to value as is finally assessed under the stamp duty regulations (be it in appeal or revision or other relevant proceedings);

Implications on satisfaction of aforesaid conditions (Contd...)

If assessee accepts the value assessed (adopted) by the state stamp valuation authority under the stamp duty regulations but disputes it before the AO as being higher than fair market value (FMV) for the purpose of computation of capital gains, then the AO is required to make reference to the valuation officer [VO] (under the Act)

Though the word used in Section 50C (2) is may, the AO has to refer the valuation of the transferred property to the VO, if the assessee makes request for such valuation or the assessee, in any way, disputes before the AO the value adopted by stamp duty authorities. [Meghraj Baid v ITO, 114 TTJ 841, (ITAT Jodhpur) and M/s Rumans Industrial Chemical Corp. v ACIT, 2009-TIOL-439-ITAT-Mum] If, before the AO, the assessee does not object to the value adopted by the stamp duty authorities or offers no explanation for higher valuation by the stamp duty authorities, then the AO need not make reference to the VO. [Ambattur Clothing Co. Ltd., 221 CTR 196 (Mad); M/s Shah Yarn Private Ltd., 2009-TIOL-414-ITATMad; Dr. V. Ramachandran v Addl. CIT, 2009-TIOL-216-ITAT-Mad and Mohd. Shoib v DCIT, 2009TIOL-205-ITAT-Lucknow]
The AO cannot refer valuation of the transferred property to the VO if the consideration shown by the assessee in the sales deed is accepted by the stamp duty authorities. [Punjab Poly Jute Corp. v ACIT, 120 TTJ 1113 (ITAT Amritsar)]

Implications on satisfaction of aforesaid conditions (Contd...)

If fair market value determined by VO is less than the value assessed (adopted) by the state stamp valuation authority, then capital gains on such transfer is computed with reference to the value determined by VO;

The AO cannot ignore the value determined by the VO under Section 50C(2) and has to adopt such value when it is lower than the value assessed by the stamp duty authorities. [ Ravikant v ITO, 110 TTJ 297 (ITAT Delhi)]

If fair market value determined by VO is more than the value assessed (adopted) by the state stamp valuation authority, then capital gains on such transfer is computed with reference to the value assessed (adopted) by the state stamp valuation authority- Section 50C (3) [Punjab Poly Jute Corp. v ACIT, 120 TTJ 1113 (ITAT Amritsar)]
While valuing the transferred property under Section 50C (2), the VO cannot rely mainly on the circle rates fixed under the stamp duty regulations. The VO has to arrive at the value independently. [Ravikant v ITO, 110 TTJ 297 (ITAT Delhi)]

Issues under Section 50C

Wide coverage applies to the whole of India (even small towns and villages included) applies to all transactions of transfer of land or building or both (being capital asset) Stamp duty is generally paid by the buyer may not want to contest the value assessed (adopted) by the state stamp valuation authority leaves the seller in doldrums cannot challenge levy of capital gains tax on higher amount further unless persuades the buyer to contest under the stamp duty regulations. Even if purchaser contests the value assessed (adopted) by the state stamp valuation authority, the seller may not be aware of the outcome may not have the right to inquire about it.

Seller may only be left with the option of requesting the AO to refer the valuation to VO would lead to a whole new set of proceedings, paper work, efforts, litigation there is silver lining that the seller would not be worse off approaching the VO (through the AO) since higher valuation (over the value assessed by the state stamp valuation authority) is to be ignored.

May lead to higher number of cases being taken up for scrutiny assessment in order to apply the value assessed (adopted) by the state stamp duty valuation authority.

Issues under Section 50C (Contd...)

Seller may be subjected to higher capital gains tax liability and payment thereof even during the pendency of the proceedings under the stamp duty regulations to finally assess the value for the purpose of payment of stamp duty.

Even if an assessee invests in a new asset under Sections 54, 54EC and 54F, Section 50C can be invoked by the AO. Provisions of Section 50C provide for taxing of notional income. There is no occasion for the assessee to claim any exemption/deduction by investing such notional income in specified assets. [Mohd. Shoib v DCIT, 2009-TIOL-205-ITAT-Lucknow]

Deeming fiction created under Section 50C is applicable only for computing capital gains in the hands of the seller and the same cannot be applied to the buyer for invoking Section 69/69B. [ ITO v Optec Disc Manufacturing, 11 DTR 264 (ITAT Chandigarh)] Section 56(2) (vii) inserted w.e.f. 1.10.2009

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Issues under Section 50C (Contd...)

Unless the property transferred has been registered by paying stamp duty and for that purpose the value has been assessed, Section 50C cannot come in to operation. [ Navneet Kumar Thakkar v ITO, 112 TTJ 76 (ITAT Jodhpur) and Carlton Hotel (P) Ltd. v ACIT, 122 TTJ 515 (ITAT Lucknow)]

Whether Section 50C applies to Section 50 of the Act ?

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AMENDMENT w.e.f. 1 OCTOBER 2009

To nullify the judgments which held that Section 50C will not apply if the sales deed is not registered and if there is no assessment under the Stamp Duty regulations, the Government has proposed in the latest Budget that the provisions of Section 50C will apply even if there is no assessment by the stamp duty authorities. The term assessed in Section 50C is proposed to be substituted by the term assessed or assessable.

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SECTION 56 (2)(vii) w.e.f. 1 October 2009

Receipt of immovable property and specified movable property without consideration or for inadequate consideration will be treated as income of the recipient. Applicable to Individuals and HUF.

Applicable only to items of property defined in the section

Covers immovable property: Land, Building, or both Covers movable property: Shares & Securities, Jewellery, Archaeological collections, drawings, paintings, sculptures or any work of art. Section shall not apply to money received from relatives on the occasion of the marriage of individual under a will or by way of inheritances in contemplation of death of the payer or donor, as the case may be from any local authority from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of Section 10 from any trust or institution registered u/s. 12AA

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SECTION 56 (2)(vii) w.e.f. 1 October 2009 (Contd)

Income due to receipt of immovable property - without consideration stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property - for consideration less than stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration

Income due to receipt of movable property

- without consideration fair market value of which exceeds fifty thousand rupees, the fair market value of such property - for consideration less than fair market value of the property by an amount exceeding fifty thousand rupees, the fair market value of such property as exceeds such consideration

Whenever assessee sells the property received, income taxed u/s. 56(2) (iv) will not be considered as cost of acquisition of the property.

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