A chronic problem concerning taxation of gains in real-estate transactions relates to the understatement with regard to the valuation of properties. The Government has tried several ways to combat the menace of black money generated by such understatement.
Tax law had a provision enabling the income-tax officer (ITO) to adopt fair market value for the property at his discretion. The provision practically became a dead letter because of the way judiciary interpreted it. Compulsory acquisition was tried and given up. Appropriate Authority was brought in to take over undervalued properties for sale at a profit. This measure also proved unsatisfactory.
Finally, the Finance Act, 2002 inserted Section 50C in the Income-Tax Act, 1961 to provide that w.e.f. April 1, 2003, where the value adopted or assessed by the stamp valuation authority in respect of transfer of land or building or both for the purposes of payment of stamp duty exceeded the consideration received or accrued by the assessee for such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration received or accrued for the transfer.
Section 50C
Tribunal's View
Remedy
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By Mr Chitranjan, Section Taxation - Service Tax
Posted on Fri Oct 31, 2008 at 10:20:27 PM EST
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This Section was challenged on the ground of not being constitutionally valid in a number of cases. It deems as income something which never accrued to the transferor either in the present or in the future. He is obliged to pay tax on the stamp value even though it may not be the real value. This is against the very basis of tax structure as a whole and impinges on the fundamental right to hold the property. Old case law relating to Section 52(2) was relied on for this challenge.
The Madras High Court dismissed all the writ petitions challenging the vires of Section 50C. It pointed out that the Section was inserted to prevent large scale undervaluation of the real value of the property in the sale deed so as to defraud revenue which the Government was legitimately entitled to. Section 50C, held the Madras High Court, is validly enacted and not hit by legislative incompetence (K. R. Palanisamy vs Union of India -- WP 4387 of 2003 dated August 5, 2008).
Tribunal's View
The matter was considered by the Income-Tax Appellate Tribunal (ITAT) in some cases recently. Jitendra Mohan Saxena sold his residential property in Lucknow for an apparent consideration of Rs 21,50,000. Stamp duty authorities determined the fair market value as Rs 37,51,480.
In the assessment year 2003-04, the question of computing capital gains on the transaction arose. Saxena objected to the stamp duty value being adopted at the fair market value. The assessing officer (AO) referred the property for valuation to the District Valuation Officer (DVO) under Section 50C(2) read with Section 55A. After hearing the party, the AO adopted the sale consideration at the stamp duty value of Rs 37,51,480 and worked out long-term capital gains thereon.
This was challenged in appeal. The Tribunal dismissed the appeal. The following points emerge from a consideration of the order of the Tribunal:
Section 50C providing for substitution of stamp value for the apparent consideration declared in the document of sale, is mandatory and the value adopted by the stamp duty authorities is binding on the AO.
Where the assessee objects, the AO is bound to refer the matter to the DVO.
If the value assessed by the DVO is higher than the stamp duty value, the stamp value duty has to be adopted for assessment to capital gains.
If the stamp value duty is disputed in appeal before State Government authorities, the income-tax officer (ITO) cannot refer the valuation of the capital asset to a valuation officer.
Remedy
It is not as if the transferor is left without remedies. Stamp value is too general and applies area-wise. Valuation of properties depends on several factors such as location, size, access to conveniences, probability of distress sale, bad reputation for the property, etc. It is open to the transferor to show that the stamp duty value was unnatural. Such value is not binding in such cases even on the registering authorities. The Madras High Court had held that the rates for the purpose of registration of immovable property were limited only for payment for stamp duty and had no application for determining market value. Guideline values are indicative and are open to question (249 ITR 424 Madras).
The Tribunal also rejected the argument based on deemed income versus real income. It referred to Sections 68, 69, 69A, 69B and 69C which all bring to tax what is deemed as income in various situations (305 ITR AT 62).
Section 50C has successfully stood the test of judicial scrutiny.
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