Section 50C Capital Gains Explained: Impact of Multiple MOUs on Property Sale Taxation – ITAT Ruling Simplified

Understanding how capital gains tax is computed on property sales can be confusing for many taxpayers, especially when multiple agreements were signed over time before the final sale. A recent Income Tax Appellate Tribunal (ITAT) decision in the case of ACIT vs. South India Research Institute Pvt. Ltd. sheds crucial light on how Section 50C of the Income Tax Act, 1961 applies when property sale consideration was fixed under earlier MOUs and not at the date of registration. This article explains the case in simple, SEO-friendly language – covering the facts and issues of the case, observations by the tribunal, applicable law, and the final conclusion – to help taxpayers and practitioners grasp the implications.

Facts and Issue of the Case

The taxpayer, South India Research Institute Pvt. Ltd., was engaged in selling land parcels and had executed several agreements/MOUs over the years with a buyer group. The original Memorandum of Understanding (MOU) was signed way back in May 2004, fixing the sale consideration and detailing payment terms. Over time, due to litigation and settlement dynamics, interim MOUs were signed (e.g., in 2013), and the final registered sale deeds were executed only in FY 2015-16.

During assessment proceedings for AY 2016-17, the Assessing Officer (AO) noted that the stamp duty valuation authority (SRO/Circle Rate) for the dates of registration was much higher than the actual sale consideration reported by the taxpayer. Consequently, the AO invoked Section 50C of the Income Tax Act and adopted the stamp duty value as the ‘full value of consideration’ for capital gains computation, resulting in a massive Long-Term Capital Gain (LTCG) addition of over ₹35 crore.

The taxpayer argued that the consideration was fixed much earlier under the 2004 MOU, and that substantial payment was received through banking channels at that time, so the proper value adopted for capital gains should be the stamp duty value as on the agreement date, not the registration date. This was the core dispute: Does Section 50C require us to use stamp duty value on the registration date only, or can earlier agreements and receipt dates also be considered?

Observation by the Tribunal

The ITAT Visakhapatnam meticulously examined the facts and legal position, particularly focusing on whether the appellant’s reliance on older MOUs and earlier receipt of payments should affect the computation of capital gains under Section 50C. The tribunal highlighted several key points:

• Section 50C’s purpose is to prevent tax evasion by treating undervalued property transactions at less than circle/stamp duty value as containing hidden unaccounted money.
• The Apex Legislature, through Finance Act, 2016, introduced a proviso to Section 50C that allows the stamp duty value as on the date of agreement to be taken into account if the consideration, or part thereof, was received by an account payee cheque or bank transfer on or before that date.
• Although this proviso was inserted with effect from AY 2017-18, the tribunal held that its nature is retrospective. This means it applies even to cases where registration predates the amendment, because it merely clarifies how the law was always intended to operate wherever the conditions (early agreement + proper receipt of consideration) are met.
• The tribunal accepted that the assessee had executed an earlier MOU (2004), received substantial part of the consideration through banking channels, and later MOUs and compromises did not alter the fact that the main economic transaction was agreed long before registration. Thus, the stamp duty value as on the date of the 2004 MOU should be the basis for computing capital gains.
• The tribunal also dismissed Revenue’s objections that the original MOU was unregistered or that interim MOUs changed terms because the substance of the transaction and timing of consideration mattered more for tax purposes than formal registration date.

In essence, the tribunal emphasized that the spirit of Section 50C – preventing undervaluation – should not penalize taxpayers who have legitimately fixed consideration and received payment on earlier agreements but registered sale much later due to circumstances like litigation.

Law Applicable

To appreciate the tribunal’s decision, it’s crucial to understand the relevant law:

Section 50C of the Income Tax Act applies when an assessee transfers land or building or both and the declared consideration is less than the value assessed by the Stamp Valuation Authority (SVA) for stamp duty purposes. In such conditions, the Act deems the higher stamp duty value as the “full value of consideration” for capital gains tax computation.

Before the Finance Act, 2016, ambiguity existed about whether the date of registration alone should determine the stamp duty value for such computations, even if the sale price was fixed earlier. To address hardships arising due to delays in registration and subsequent spike in circle/stamp duty values, the legislature incorporated a proviso in Section 50C. The proviso states that where the sale consideration is fixed in an agreement executed before the registration date, and the payment (in whole or part) was received through an account payee channel on or before the date of that agreement, then the stamp duty value as of the agreement date may be adopted for Section 50C purposes.

This interpretation aligns with the objective of Section 50C – i.e., to prevent under-reporting – rather than unduly penalizing taxpayers for administrative delays like late registration. The tribunal’s view that this proviso is retrospective fits within broader judicial precedents holding that clarificatory amendments explaining intent should apply to pending transactions.

Conclusion by the Tribunal

The ITAT ultimately dismissed the Revenue’s appeal and upheld the Commissioner of Income Tax (Appeals) order in favor of the taxpayer. The tribunal concluded that:

• The proviso to Section 50C is retrospective; it clarifies how the deemed consideration must be computed when sale consideration was fixed earlier under an agreement that satisfies conditions such as receipt of payment in account payee mode.
• In this case, the taxpayer had fixed sale consideration in the 2004 MOU and received substantial part consideration through banking channels, so the stamp duty value as on that earlier date is the correct basis for computing capital gains.
• Adoption of inflated stamp duty value at the date of registration, many years later, is not warranted in view of the legal provisions and the substance over form approach adopted by the tribunal.

Thus, the addition of ₹35.41 crore was deleted and capital gains must be recomputed using the earlier stamp duty value. This ruling brings welcome relief to taxpayers in similar situations where multiple MOUs and staggered payments preceded the final property transfer.