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September 23, 2020

ITAT deletes addition of 8% done by the AO in accordance with Section 50C for Capital gain on Property

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

ITAT deletes addition of 8% done by the AO in accordance with Section 50C Capital gain on Property

Income tax law has broadly classified incomes into 5 different categories for taxation purpose. One of the categories is ‘Capital gains.’ Capital gains are income on sale of any capital asset in the hands of seller. When you sell your property, any gain arising from such sale will be considered as capital gains. 

Section 50C of the Income Tax Act provides that if the value stated in the instrument of transfer is less than the valuation adopted, assessed or assessable by the stamp duty authorities, the valuation as adopted, assessed or assessable by the stamp duty authorities will be considered for the purpose of computation of capital gains arising on transfer of land or building or both.

However, Budget 2018 brought an amendment in section 50C whereby no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration was not more than 5% of the sale consideration. This was introduced in order to minimize hardship in case of genuine transactions in the real estate sector.

In simple words, the full value of consideration will be higher of:


actual consideration received
or
stamp duty value


Provided,
Stamp Duty Value does not Exceed 105% of Actual Consideration

Illustration to Understand Section 50C

PropertyActual ConsiderationStamp Duty Value (SDV)110% of Actual ConsiderationValue to be considered
11,00,0001,10,0001,05,0001,10,000
21,00,00080,0001,05,0001,00,000
31,00,0001,03,0001,05,0001,00,000

However, in section 50C of the Income-tax Act, in sub-section (1), in the third proviso, for the words “5%”, the words “10%” shall be substituted with effect from the 1st day of April, 2021.

Let us refer to the case of Shri B.S. Sanjay [HUF] Vs ITO (ITAT Bangalore), where an appeal was filed by the assessee against the order of Commissioner of Income-tax [Appeals] [CIT(A)], pertaining to value adopted of a property under Section 50C.

Facts of the Case:

  • In the present case, the assessee had sold a property and the difference between the sale price and the valuation as per stamp duty was less than 10%.
  • The assessee has shown sale consideration of Rs. 59.40 Lakhs and the Departmental Valuation Officer (DVO) has valued the property u/s 50C(2) at Rs. 64,10,400.
  • The Assessing Officer (AO) made the addition of Rs. 4,70,400 pertaining to the said difference.
  • According to the assessee as this difference is less than 10% of the value of sale consideration declared by assessee of Rs. 59.40 Lakhs, therefore no addition was justified.
  • Assessee appealed before the CIT(A). However, the CIT(A) confirmed the addition made by the AO.
  • Aggrieved with the order of the CIT(A), assessee appealed before the Income Tax Appellate Tribunal (ITAT)

The grounds raised by the assessee were as under:

  • The authorities were not justified in adding a sum of Rs. 4,70,400 by invoking the provisions of section 50C, without properly appreciating the reasons for difference in the agreed value of sale consideration as against the value adopted for the purposes of section 50C.
  • The authorities erred in law in not appreciating the difference between the fair market value determined by the department valuation officer which was considered by the AO in the assessment order and the actual amount of sale consideration received by the appellant is marginal to the extent of 7.34%.

Submissions by Assessee

  • It was submitted by the assessee that the issue involved was the addition of Rs. 4,70,400 made by the AO by invoking the provisions of section 50C.
  • He submitted that the issue was covered in favour of the assessee by the Tribunal order rendered in the case of M/s. John Fowler (India) Pvt Ltd Vs DCIT.
  • He submitted a copy of the Tribunal order and pointed out that it was held by Tribunal in the case that if the difference between the valuation as per stamp duty and the sale consideration received by the assessee was less than 15%, in such circumstances no addition could be made.
  • He also pointed out that the Tribunal in this case had followed two other Tribunal orders rendered in the case of Sita Bai Khetan Vs. ITO and in the case of Rahul Constructions Vs. DCIT.

Observations by ITAT

  • ITAT found strength in the submissions of the assessee because in the present case, the sale consideration as per sale deed was Rs 59.40 Lakhs and the value adopted by DVO u/s 50C (2) was Rs. 64,10,400.
  • Therefore, the difference between these two values was of Rs. 4,70,400 which was less than 8% of the sale consideration shown by the assessee.
  • Following the Tribunal order rendered in the case of M/s. John Fowler (India) Pvt. Ltd. Vs. DCIT (supra) and also other two Tribunal orders followed by the Tribunal order in the case of Sita Bai Khetan Vs. ITO (supra) and Rahul Constructions Vs. DCIT (supra), ITAT held that in the facts of the present case, no addition was justified.
  • Therefore, ITAT deleted the same.

In conclusion, Section 50C uses value adopted by the Stamp Valuation Authority for the purpose of levying stamp duty on registration of properties, as guidance value to determine undervaluation of land or building if any in the sale agreement.

In case sale consideration received or claimed to be received by seller on sale of land or building or both is less than value adopted by stamp valuation authority, such value adopted by the valuation authority would become actual sale consideration received or accruing to the seller. Therefore, capital gain would be Valuation as per stamp valuation authority reduced by cost/indexed cost of acquisition. However, in this case the difference was marginal (less than 8%) the actual sale consideration was considered for tax purposes and not the stamp duty value.

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