Selling off land or building or flat? Understand what the implications of a higher stamp duty valuation of your property can mean for you – the seller.

First step, lets analyse the existing provisions of Sec. 50C with regard to sale of land or building or flat.

Section 50C states that when a capital asset, being immovable property, is transferred for a consideration which is less than the stamp duty value adopted, assessed or assessable for the purpose of payment of stamp duty in respect of such transfer, then the stamp duty value is taken as full value of consideration under section 50C of the Income-tax Act.

It is applicable when:

  • there is sale/transfer of land/ building or both. Hence 50C is not applicable in cases where land/building or both are transferred by gift deed.
  • The asset may be long term or short term capital asset (period of holding determines whether asset is long term(> 3 yrs) or short term(< 3 yrs)).Since these provisions apply to capital assets, sale of agricultural land or any immovable property held by transferor (such as builder) as stock in trade do not attract 50C.
  • The asset may be depreciable or non-depreciable asset.
  • The sale consideration received from the buyer is less than value adopted (or assessed/ assessable) by Stamp duty authority i.e. actual sale proceeds are less than stamp duty valuation of property.

If all the above conditions are satisfied, the value adopted for stamp duty purposes is considered to be the sale consideration and is used for computing Capital Gains.

So what does this mean for you – the seller?

Capital Gains tax is levied on the capital gains on sale of land/building/flat. Capital Gains is nothing but a deduction of expenses incurred for sale & Cost of acquisition(Indexed for long term) & Cost of improvement(Indexed for long term) from Sale Consideration. Now according to 50C, if the Sales Consideration is replaced by the higher Stamp duty value of the property, a higher Notional Capital Gains is computed on which a higher Capital Gains tax liability arises on the seller. In effect, the seller pays a higher capital gains tax even if the actual sale proceeds received by him is lower.

What recourse is available to the seller?

When stamp duty valuation is higher than the actual sale consideration, 3 situations arise in such a case:

  • If the assessee accepts the value adopted by Stamp duty authority, that value becomes the Sales Consideration.
  • If assessee files appeal under Stamp Act, whatever stamp duty valuation is finally decided upon by Court, becomes the Sales Consideration.
  • If assessee objects to stamp duty valuation but has not raised any dispute, the Assessing officer is duty bound to refer the matter to Valuation Officer. (Ajmal Fragrances & Fashions (P.) Ltd. v CIT(2009) 34 SOT 57 (Mum.)). Such a Valuation Officer is appointed by the Income Tax Department.

The Valuation Officer decides upon the the fair market value of the asset. If the fair market value is less than stamp duty valuation, fair market value of Valuation officer is Sales Consideration. However if the fair market value exceeds the stamp duty valuation, the stamp duty valuation is Sales Consideration. This is because the assessee cannot be punished for objecting to the stamp duty valuation and getting his case referred to the Valuation Officer. Of course, one can also challenge the valuation arrived at by the valuation officer, but this would involve litigation

Section 50C has the reputation of being one of the most draconian and controversial sections of Income Tax Act. Here’s why.

  • Sec 50C deems the stamp duty value of an immovable property to be the full value of consideration. Sec 54F requires an assessee to invest the ‘net consideration’ in a residential house to get the exemption from the capital gains tax. The term ‘net consideration’ is defined to mean the full value of consideration received/accruing as a result of the transfer less the expenses incurred on such transfer. So the question is this – Do the deeming provisions of Sec 50C apply also to Sec 54F ? i.e. If an assessee invests the full value of the consideration actually received by him in purchasing a house property, would his capital gains tax liability be nil because of Sec 54F, even though for the capital gains tax computation, the higher value as per the Stamp Act is adopted ? Similarly, if the stamp duty valuation is more than the consideration received, the seller may not be able to take full advantage of the exemptions available u/s.54, u/s.54EC, u/s.54F, etc.
  • Again, if by the time the Assessing Officer refers the matter to the Valuation Officer (which may be 2 to 3 years after the date of the original sale), the buyer has substantially renovated or demolished the building, how would the Valuation Officer determine the fair market value of the building in question.
  • This harsh provision also does not consider instances such as sale under distress or within the family, or to a near relative, where the sale price may genuinely be lower than the market value. In such circumstances, to levy capital gains tax on an artificial value would cause undue hardship to the assessees. It would amount to gift tax in the guise of additional capital gains tax.
  • In such transactions, stamp duty is paid by the buyer, and capital gains tax is paid by the seller. Most sellers, therefore, rarely bother to inquire the amount of stamp duty payable on the sale transaction by the purchaser. Most states have notional property rates for different areas, called “ready reckoner rates”, “circle rates” or “guideline values”. The stamp duty is to be paid on the basis of the valuation of the property computed on the basis of such notional rates, or the sale price specified in the sale deed, whichever is higher. In most cases, the purchaser is willing to pay the slightly higher stamp duty rather than fight the basis of valuation with the stamp duty authorities.
  • Further, the seller may have no information that the stamp duty valuation has been challenged by the buyer after registration of the conveyance.Under the Bombay Stamp Act, 1958, the Stamp Authority has power to revise the valuation of an immovable property for as many as 6 years. If the stamp duty valuation is revised after the income tax assessment, the question is : Can the seller’s assessment be rectified u/s.155(15) because S. 155(15) refers to only Sec 50C(2) of the Act. In that case, the consequences would be as follows :
  1. The assessee may have to pay additional tax or he may get a tax refund.
  2. This would involve adjustment in payment of interest u/s.234B.
  3. If the valuation is subsequently increased, the assessee cannot invest the deemed differential amount u/s.54, u/s.54EC or u/s.54F.
  • Moreover, the disposal of the appeal disputing stamp duty value by the buyer may take a number of years. Hence, the question that arises is, how would the seller who has to pay the capital gains tax on the basis of the stamp duty valuation adopted, be able to comply with these provisions.

In writing this article, I have referred to the following links for a deeper understanding of this section: http://www.bcasonline.org, http://www.cnkindia.com and http://www.incometaxindia.gov.in/

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