Section 50C and 562viiof the Income Tax Act

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Section 50C and 56(2)(vii)of the Income Tax Act
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• Section 50C of the Income Tax Act, 1961 (the Act)
•  
• History and brief background of the evolution of
  Section 50C  
• Under the Act of 1922 , first proviso to Section
  12B(2) entitled the Assessing Officer to ignore
  the actual consideration received for the
  transfer and to substitute a notional or
  artificial consideration based on the fair market
  value of the asset on the date of transfer where
  the transfer was to a person directly or
  indirectly connected with the assessee and the
  Income-tax officer had reason to believe that the
  transfer was effected with the object of
  avoidance or reduction of the liability to
  capital gains tax.
• With the enactment of the 1961 Act, the said
  provision found place in Section 52 of the said
  Act. The scope of that Section was examined and
  whittled down by the famous decision of the Apex
  Court in K. P. Vargheses case 131 ITR 597 (SC) .
• Thereupon in the year 1982, Chapter XXA was
  inserted in the Act, providing for compulsory
  acquisition of immovable properties by the
  Government.
• The provisions of the Chapter XXA were not
  successful in arresting the proliferation of
  black money in the transfer of immovable
  properties and therefore, the said Chapter was
  replaced by a new Chapter XXC by the Finance Act,
  1986.

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• History and brief background of the evolution of
  Section 50C  (Contd...)
• The new Chapter XXC gave the government a
  pre-emptive right to acquire the immovable
  property in question at the consideration agreed
  to between the seller and buyer in certain cases
  of transfer in notified cities and towns (above
  threshold amounts fixed) and on fulfilment of the
  prescribed conditions. The provisions of the
  Chapter remained in force till 01.07.2002.
• The Finance Bill (No.2) of 1998 contained a
  proposal to insert proviso to Section 48 to make
  value adopted for the purpose of stamp duty as
  the basis for computing taxable capital gain.
  However, the same was dropped while passing the
  Finance Act.
•  
• Section 50C was thereafter introduced by the
  Finance Act, 2002 (w.e.f. 01.04.2003)
•  
• Section 50C is proposed to be amended by the
  Finance Act 2009 w.e.f.- 1.10.2009
•  
•  

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• PROVISIONS PRIOR TO PROPOSED AMENDMENT
•  
• Applicability of Section 50C
• The Section applies to computation of capital
  gains under Section 48 in case of transfer of
  land or building or both.
•  
• Constitutional validity of Section 50C has been
  upheld by Madras High Court in K.R. Palanisamy v
  UOI, 306 ITR 61(Mad)
•  Section 50C is mandatory.
• It is statutory duty of the AO to invoke Section
  50C when facts indicate that the value adopted by
  the Stamp Duty Authorities is higher than the
  sale consideration shown by the assessee in the
  sales deed. Under such circumstances it is
  obligatory on part of the AO to treat the value
  adopted by the Stamp Duty Authorities as the
  deemed sales consideration accrued as a result of
  transfer.
• Ambattur Clothing Co. Ltd. v ACIT, 221 CTR
  196 (Mad) A.K.G. Consultants (P) Ltd. v ITO, 17
  SOT 592 (ITAT Lucknow) and Jitendra Mohan Saxena
  v ITO, 117 TTJ 974 (ITAT Lucknow)

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•  
• Conditions precedent for applicability of Section
  50C
• transfer of land or building or both
• Although the Section speaks of transfer of land
  or building or both, it will also cover part of
  building on the reasoning that the term "whole"
  includes "part." Thus, transactions of flats and
  shops in a building complex will be covered by
  the provisions of Section 50C.
• asset transferred may be short term or long term
  capital asset
• Capital asset defined under Section 2(14) does
  not include stock-in-trade
• M/s Inderlok Hotels Pvt Ltd v ITO,
  2009-TIOL-156-ITAT-MUM
• The assessee was in the business of constructing
  residential flats.
• The Mumbai Tribunal held that
• The basic intention behind Section 50C is the
  determination of full value of sale
  consideration for the purpose of computation of
  capital gains u/s. 48 of the Act. Section 50C has
  application only to the extent of determining
  sale consideration for computation of capital
  gains and it cannot be applied for determining
  the income under other heads.
• Sale consideration reported is less than the
  value assessed (adopted)/assessable (w.e.f.
  1.10.2009) by the state stamp valuation authority
  for working out stamp duty payable on such
  transfer.

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• Implications on satisfaction of aforesaid
  conditions
•  
• If assessee accepts the value assessed (adopted)
  by the state stamp valuation authority, then
  capital gains on such transfer is computed with
  reference to such value assessed (adopted) i.e.
  considered to be the full value of consideration
  for such transfer
•  
• If assessee disputes the value assessed (adopted)
  by the state stamp valuation authority by way of
  appeal under the stamp duty regulations, then
  capital gains on such transfer is computed with
  reference to value as is finally assessed under
  the stamp duty regulations (be it in appeal or
  revision or other relevant proceedings)

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• Implications on satisfaction of aforesaid
  conditions (Contd...)
• If assessee accepts the value assessed (adopted)
  by the state stamp valuation authority under the
  stamp duty regulations but disputes it before the
  AO as being higher than fair market value (FMV)
  for the purpose of computation of capital gains,
  then the AO is required to make reference to the
  valuation officer VO (under the Act)
•  
• Though the word used in Section 50C (2) is may,
  the AO has to refer the valuation of the
  transferred property to the VO, if the assessee
  makes request for such valuation or the assessee,
  in any way, disputes before the AO the value
  adopted by stamp duty authorities.
• Meghraj Baid v ITO, 114 TTJ 841, (ITAT
  Jodhpur) and M/s Rumans Industrial Chemical Corp.
  v ACIT, 2009-TIOL-439-ITAT-Mum
• If, before the AO, the assessee does not object
  to the value adopted by the stamp duty
  authorities or offers no explanation for higher
  valuation by the stamp duty authorities, then the
  AO need not make reference to the VO.
• Ambattur Clothing Co. Ltd., 221 CTR 196
  (Mad) M/s Shah Yarn Private Ltd.,
  2009-TIOL-414-ITAT-Mad Dr. V. Ramachandran v
  Addl. CIT, 2009-TIOL-216-ITAT-Mad and Mohd. Shoib
  v DCIT, 2009-TIOL-205-ITAT-Lucknow
•  
• The AO cannot refer valuation of the transferred
  property to the VO if the consideration shown by
  the assessee in the sales deed is accepted by the
  stamp duty authorities.
• Punjab Poly Jute Corp. v ACIT, 120 TTJ
  1113 (ITAT Amritsar)

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• Implications on satisfaction of aforesaid
  conditions (Contd...)
• If fair market value determined by VO is less
  than the value assessed (adopted) by the state
  stamp valuation authority, then capital gains on
  such transfer is computed with reference to the
  value determined by VO
• The AO cannot ignore the value determined by the
  VO under Section 50C(2) and has to adopt such
  value when it is lower than the value assessed by
  the stamp duty authorities. Ravikant v ITO, 110
  TTJ 297 (ITAT Delhi)
• If fair market value determined by VO is more
  than the value assessed (adopted) by the state
  stamp valuation authority, then capital gains on
  such transfer is computed with reference to the
  value assessed (adopted) by the state stamp
  valuation authority- Section 50C (3)
• Punjab Poly Jute Corp. v ACIT, 120 TTJ 1113
  (ITAT Amritsar)
•  
• While valuing the transferred property under
  Section 50C (2), the VO cannot rely mainly on the
  circle rates fixed under the stamp duty
  regulations. The VO has to arrive at the value
  independently. Ravikant v ITO, 110 TTJ 297
  (ITAT Delhi)

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• Issues under Section 50C
•  
• Wide coverage applies to the whole of India
  (even small towns and villages included)
  applies to all transactions of transfer of land
  or building or both (being capital asset)
•  
• Stamp duty is generally paid by the buyer may
  not want to contest the value assessed (adopted)
  by the state stamp valuation authority leaves
  the seller in doldrums cannot challenge levy of
  capital gains tax on higher amount further unless
  persuades the buyer to contest under the stamp
  duty regulations.
•  
• Even if purchaser contests the value assessed
  (adopted) by the state stamp valuation authority,
  the seller may not be aware of the outcome may
  not have the right to inquire about it.
• Seller may only be left with the option of
  requesting the AO to refer the valuation to VO
  would lead to a whole new set of proceedings,
  paper work, efforts, litigation there is silver
  lining that the seller would not be worse off
  approaching the VO (through the AO) since higher
  valuation (over the value assessed by the state
  stamp valuation authority) is to be ignored.
•  
• May lead to higher number of cases being taken up
  for scrutiny assessment in order to apply the
  value assessed (adopted) by the state stamp duty
  valuation authority.

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•  Issues under Section 50C (Contd...)
• Seller may be subjected to higher capital gains
  tax liability and payment thereof even during the
  pendency of the proceedings under the stamp duty
  regulations to finally assess the value for the
  purpose of payment of stamp duty.
• Even if an assessee invests in a new asset under
  Sections 54, 54EC and 54F, Section 50C can be
  invoked by the AO.
•  
• Provisions of Section 50C provide for taxing of
  notional income. There is no occasion for the
  assessee to claim any exemption/deduction by
  investing such notional income in specified
  assets.
• Mohd. Shoib v DCIT, 2009-TIOL-205-ITAT-Luckno
  w
•  
• Deeming fiction created under Section 50C is
  applicable only for computing capital gains in
  the hands of the seller and the same cannot be
  applied to the buyer for invoking Section 69/69B.
  
• ITO v Optec Disc Manufacturing, 11 DTR
  264 (ITAT Chandigarh)
• Section 56(2) (vii) inserted w.e.f. 1.10.2009

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Issues under Section 50C (Contd...)

• Unless the property transferred has been
  registered by paying stamp duty and for that
  purpose the value has been assessed, Section 50C
  cannot come in to operation.
• Navneet Kumar Thakkar v ITO, 112 TTJ 76
  (ITAT Jodhpur) and Carlton Hotel (P) Ltd. v ACIT,
  122 TTJ 515 (ITAT Lucknow)
• Whether Section 50C applies to Section 50 of the
  Act ?

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• AMENDMENT w.e.f. 1 OCTOBER 2009
•  
• To nullify the judgments which held that Section
  50C will not apply if the sales deed is not
  registered and if there is no assessment under
  the Stamp Duty regulations, the Government has
  proposed in the latest Budget that the provisions
  of Section 50C will apply even if there is no
  assessment by the stamp duty authorities. The
  term assessed in Section 50C is proposed to be
  substituted by the term assessed or assessable.

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•  
• SECTION 56 (2)(vii) w.e.f. 1 October 2009
• Receipt of immovable property and specified
  movable property without consideration or for
  inadequate consideration will be treated as
  income of the recipient.
•  
• Applicable to Individuals and HUF.
• Applicable only to items of property defined in
  the section
• Covers immovable property Land, Building, or
  both
• Covers movable property Shares Securities,
  Jewellery, Archaeological collections, drawings,
  paintings, sculptures or any work of art.
• Section shall not apply to money received
• from relatives
• on the occasion of the marriage of individual
• under a will or by way of inheritances
• in contemplation of death of the payer or donor,
  as the case may be 

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• SECTION 56 (2)(vii) w.e.f. 1 October 2009
  (Contd)
• Income due to receipt of immovable property
• - without consideration stamp duty value of
  which exceeds fifty thousand rupees, the stamp
  duty value of such property
• for consideration less than stamp duty value of
  the property by an amount exceeding fifty
  thousand rupees, the stamp duty value of such
  property as exceeds such consideration
• Income due to receipt of movable property
• - without consideration fair market value of
  which exceeds fifty thousand rupees, the fair
  market value of such property
• for consideration less than fair market value
  of the property by an amount exceeding fifty
  thousand rupees, the fair market value of such
  property as exceeds such consideration 
• Whenever assessee sells the property received,
  income taxed u/s. 56(2) (iv) will not be
  considered as cost of acquisition of the property.