Background:

The valuation of immovable properties has been a critical factor from Income Tax perspective. The law makers have taken utmost care in last few years to plug the tax evasion using undervaluation of immovable property at the time of its sale.

Finance Act 2002 introduced section 50C which applies to the transfer of immovable property being a Capital Asset. As per section 50C:

(1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

Section 50C came into effect from assessment year 2003-04. It covered a situation in which the sale consideration is lower than the stamp duty valuation. In such situation the stamp duty valuation shall be considered as full value of consideration for computing capital gains under section 48. However, the said provision did not affect the undervaluation of immovable property in case of transfer other than capital asset. The provision of section 50C did not apply to the immovable property held as stock in trade.

In order to cover transfer of immovable property held as stock in trade, Finance Act 2013 introduced section 43CA which is:

(1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

Section 43CA covers the transfer of immovable property held as stock in trade according to which the undervalued portion of stamp duty valuation of immovable property held as stock in trade becomes taxable as business income in the hands of the seller.

To further prevent tax evasion using undervaluation of immovable property, sub-clause (b) of section 56 (2)(vii) was amended in Finance Act 2014 with effect from 1^st April 2014 as:

(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons on or after the 1st day of October, 2009:

(a) ...............

(b)  any immovable property,—

 (i)  without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(ii)  for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration 

According to sub-clause (ii), if the sale consideration is less than the stamp duty valuation of immovable property, then difference in excess of rupees fifty thousand shall be taxable as Income from Other Sources. Thus section 56 is applicable to the buyer of the property which is undervalued as compared to its stamp duty valuation. Further, provision of section 56(2)(vii)(b) was applicable only to the assessee who is individual or HUF.

In order to widen the scope of section 56 to all type of assesses, 56(2)(x) is inserted by Finance Act 2017 with effect from Assessment year 2017-18 and clause 56(2)(vii) has been withdrawn with effect from 1^st April 2017.

As per section 56(2)(x):

(x) where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

 (a)  ............;

 (b)  any immovable property,—

(A)  without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;

(B)  for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration:

Clause (B) covers the undervaluation of immovable property. When the buyer receives the property which is undervalued then the difference between the stamp duty valuation and sale consideration in excess of rupees fifty thousand shall be taxable as Income from Other Sources. Section 56(2)(x) is applicable to all types of assessees.

The implications of section 50C or 43CA read with section 56 are quite intense for both the parties i.e. buyer as well as seller of the property. In case where the property is undervalued as compared to the stamp duty valuation, then the undervalued portion is taxable in the hands of the seller as capital gain or business income depending upon it is a capital asset or stock in trade for the seller.

The assessee can file appeal with authority or court or high court in case if the stamp duty value is higher than the actual fair market value as on the date of transfer. In case if such appeal is not filed by the assessee then Assessing Officer may refer the valuation to a Valuation Officer. The value so determined by the Valuation Officer shall be taken as sale consideration for the computation of Capital Gains or Business Income and Income from other sources.

The value of the immovable property has been a matter of dispute for the purpose of tax computation. The assessee on various occasions experience that the fair market value of the property is actually lower than the stamp duty valuation. There can be various reasons like age of the property, locational advantage/disadvantage, exact location etc. for such lower valuation. The stamp duty authorities consider the ready reckoner for valuation of property for the locality and not exact location or age of the property and most importantly real estate market condition. Hence there can be significant variation in the value of the properties within same locality. Presently such variation is not accepted by tax authorities in light of provisions of sections 50C/ 43CA & 56. The said approach by tax authorities has already resulted into lot of litigation on this issue.

Proposed Amendment:

Finance Bill 2018 has introduced a proviso to section 43CA:

Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed one hundred and five percent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purpose of computing profits and gains from transfer of such asset, be deemed to be the full value of consideration.

According to the proposed proviso, the variation in sale consideration and stamp duty valuation will be accepted by tax authorities. For instance, if the stamp duty valuation is Rs. 105, then sale consideration not less Rs. 100 will be accepted as full value of consideration. However a situation in which sale consideration is Rs.108, then the proviso will not be applicable and the benefit can not be availed. The next challenge in such situation will be whether to consider Rs.105 as the full of consideration or Rs.100 or Rs.108. The proviso can not be applied as the stamp duty valuation is higher than 105% of sale consideration of Rs.108. As the proviso can not be applied, the full value of consideration shall be determined as per sub-section (1) of section 43CA. As per sub-section (1), if the stamp duty value is higher than the sale consideration then stamp duty value shall be taken as full value of consideration. Please refer the illustration in tabular form in the later part of this article for better clarity.

Finance Bill 2018 has inserted similar proviso to section 50C after second proviso as:

Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five percent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purpose of section 48, be deemed to be the full value of consideration.

As discussed above, the situation in which stamp duty valuation is higher than 105% of sale consideration, the stamp duty valuation shall be taken as full value of consideration for the purpose of computation capital gains under section 48.

Finance Bill 2018 has proposed to substitute sub-clause (B) in clause (x) of sub-section (2) of section 56 as:

(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:-

(i) the amount of fifty thousand

(ii) the amount equal to five per cent of the consideration.

As per the new clause (B), if the variation in stamp duty valuation and sale consideration is more than five percent of the consideration, then difference between stamp duty valuation and sale consideration in excess of rupees fifty thousand shall be taxed as Income from Other Sources.

All the three proposed amendments mentioned above are proposed to be made effective from 1^st April 2019 i.e. from Assessment Year 2019-20.

Illustration:

The proposed amendment to all the three sections is summarised in tabular form for better clarity:

Judicial Precedents:

The variation in the sale consideration and stamp duty valuation has been a point of litigation in several cases.  

Jammu Kashmir High Court in the case of Honest Group of Hotels Pvt. Ltd. [TS-6087-HC-2001(JAMMU & KASHMIR)-O] while deciding on the issue of taxing the difference between sale consideration and value as per Departmental valuer, ruled that:

“After having heard the learned counsel for the parties, I am of the opinion that the view expressed earlier by the Tribunal that if the margin between the value as given by the assessee and the Departmental valuer is less than 10%, then this difference is liable to be ignored, has some merit.”

Mumbai ITAT in a recent case of John Flower India Pvt. Ltd. [TS-6184-ITAT-2017(Mumbai)-O] referred the case of Honest Group Hotels Pvt.Ltd. (supra) allowing variation of 10% in value of immovable property.

 Pune ITAT in the case of Rahul Constructions [TS-5028-ITAT-2010(Pune)-O] deciding on the sale consideration u/s 50C ruled that:

“Since such difference is less than 10 per cent and considering the fact that valuation is always a matter of estimation where some degree of difference is bound to occur.”

Jaipur ITAT has taken similar approach in Sita Bai Khetan [TS-6042-ITAT-2016(JAIPUR)-O] 

Concluding Remarks:

The judiciary after considering the facts of each case with respect to property, location, sale consideration, stamp duty valuation and valuation by approved valuer decided the matters accepting 10% variation in actual sale consideration from the stamp duty or valuation by approved valuer. In present real estate market, there are so many instances in which the actual price offered by the seller of immovable property to the buyer is lower than the stamp duty valuation of the said immovable property. The judiciary till date has considered facts of each case to allow such variation in valuation of immovable properties. The variation of 10% has become a settled principle if facts are in line with such variation.

Now such lenient approach of accepting 10% variation on the basis of facts of specific case may not hold good in light of the proposed amendment accepting the variation of 5%. The proposed amendment on one hand appears to be in favour of the assessee but in light of the judicial precedents, it may unsettle the settled principle of accepting 10% variation based on the facts of the case.