Where capital gain arose out of long-term capital asset and was invested in specified assets, exemption under section 54EC could not be denied due to deeming fiction created under section 50

Where capital gain arose out of long-term capital asset and was invested in specified assets, exemption under section 54EC could not be denied due to deeming fiction created under section 50

The High Court held in favour of assessee as under:

1) There is nothing in Section 50 to suggest that the fiction created in it is not only restricted to Sections 48 and 49 but also applies to other provisions;

2) Section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of Section 50 is restricted only to the mode of computation of capital gains contained in Sections 48 and 49;

3) It is well-established, in law, that a fiction created by the Legislature has to be confined to the purpose for which it is created. The fiction created under Section 50 is confined to the computation of capital gains only and cannot be extended beyond that;

4) Legal fiction created under section 50 is restricted to computation of capital gains; such deeming fiction cannot restrict application of section 54EC which allows exemption of capital gains, if assessee makes investment in the specified asset;

5) Exemption provided under section 54EC couldn’t be denied to the assessee due to deeming fiction created under section 50. Thus, the assessee couldn’t be charged to capital gains when short-term gains of long-term capital assets were invested in the areas specified under the law – CIT V. ADITYA MEDISALES LTD (2013) 38 taxmann.com 244 (Gujarat)

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Considerat​ion received by an advocate in form of land to undertake patta and layout of properties is taxable as capital gains and not as profession​al receipts

Consideration received by an advocate in form of land to undertake patta and layout of properties is taxable as capital gains and not as professional receipts

 

Facts of the case:

A. The assessee, an practising advocate, entered into an agreement as per which he had to undertake the job of obtaining patta and design the layout of the properties and for the services rendered the owners agreed to transfer 3 plots of land to him;

B. In pursuance of the agreement, possession of the property was handed over to the assessee and General Power of Attorney was executed in his favour;

C. Sale agreement was executed in respect of three plots of land for a consideration of Rs. 1.5 crores out of which the assessee received a consideration of Rs. 90 lakh as ‘confirming party’.

D. The AO held that such receipt was to be assessed as income from professional services. On appeal, the CIT(A) reversed the order of AO and held that the receipt could only be taxed as capital gains. The Tribunal upheld the order of AO.

The High Court held as under:

1) The agreement entered between the assessee and the owners made no reference at all to the professional status of the assessee for taking his services. There was no mention about his being an Advocate and that his services were being taken only in that capacity;

2) The possession given of the entire 5 plots of land to the assessee was with the specific object of getting patta and layout of the property. The sale agreement made it very clear that the transfer of 3 plots of land to the assessee was intended by way of consideration for securing patta and layout and, as such, the original owners had entrusted the entire land to the assessee;

3) The assessee had rightly placed his reliance on section 2(47)(v) of the Income-tax Act, 1961, read with section 53A of the Transfer of Property Act, 1882, that the receipt would attract capital gains at his hands. There was nothing on record to show that the services to be rendered were taken in the capacity as a lawyer. Therefore, the Consideration received by an advocated in form of land to undertake patta and designing of layout of properties is taxable as capital gains and not as professional receipts – CIT V. J. MAHALINGAM (2013) 37 taxmann.com 38 (Madras)

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Section 43CA & Section 56(2) (vii) - A Critical Analysis by CA Sahil Garud

Section 43CA & Section 56(2) (vii) - A Critical Analysis 

The implications of the newly inserted Section 43CA and the amended Section 56(2)(vii)(b), in the Income-tax Act, 1961 (the Act) are discussed in this article. The article explains the evolution and applicability of these sections together with how there is an apparent double taxation/deferred taxation of the same transaction or due to a same transaction, and also how the assessee may plan complex procedures in genuine situations to try and mitigate the tax impact. This Article also discusses the possible legal impact in different scenarios which may be thought of by an assessee to escape from the garb of these sections.

Section 43CA inserted in the Act has raised a lot of eyebrows. The Government with an intention to curb black money has resorted to a very strict approach of applying the stamp duty value of an immovable property to respective incomes of persons transacting in it. Nature of their business activities have a serious bearing on the income that is offered to tax, from the point of view of the Revenue.

There were cases (Kan Constructions-Allahabad  HC,  Discovery  Estates-Del  HC)  in  which  courts held that Section  50C being limitedly applicable to assessment of capital gains cannot apply to assessee holding land/building as his stock in trade. By this new  provision  (Section 43CA),  all  such  decisions will be overruled w.e.f Assessment Year  2014-2015 & the deeming provisions like Section  50C will be applicable to immovable property held as stock in trade.  Previously,  Section 56(2) (vii)  contained  the same  amended  sub-clause (b)     (though  there  was no  Section  like 43CA  then)  which  was  removed w.e.f. 01-10-2009 by Finance Act 2010. The reason  given for such removal in Memorandum explaining Finance Bill,  2010 was that  “there is often a time  gap  between  booking  of  a  property  and  receipt  of  such  property  on  registration,  which  results  in taxable  differential.  It  is,  therefore,  proposed  to amend clause (vii) of Section 56(2) so as to provide that it would apply only if the immovable property  is   received   without   any   consideration   and   to  remove   the   stipulation   regarding   transactions involving  cases  of  inadequate  consideration  in respect of immovable property”. Now that there is a provision to this effect by way of sub-section (3)  and    (4)    to   Section     43CA   and   proviso to Section 56(2)(vii), it has been reinserted with much stricter force.

It   would   be   relevant   to   mention   that   the Supreme Court had decided in the famous case of K. P. Varghese vs. ITO 131 ITR 597 (SC), in which the decision was delivered by the Bench of Hon’ble Justice  P.  N.  Bhagwati  and  Hon’ble  Justice  E.  S. Venkataramiah, as under:

"We  must,  therefore,  hold  that  sub-section (2) of  Section 52  can  be  invoked  only  where  the consideration for the transfer has been understated  by the assessee or, in other words, the consideration  actually  received  by  the  assessee  is  more  than what  is  declared  or  disclosed  by  him  and  the  burden  of  proving  such  an  understatement  or  concealment is on the revenue. This burden may be  discharged  by  the  revenue  by  establishing facts and circumstances from which a reasonable inference can be drawn that the assessee has not correctly declared or disclosed the consideration  received by him and there is an understatement  or  concealment  of  the  consideration  in  respect of the transfer. Sub-section (2) has no application in the case of an honest and bona fide transaction where the consideration received by the assessee has been correctly declared or disclosed by him, and there is no concealment or suppression of the consideration.”

"Some courts held that Section 50C being limitedly applicable to assessment of capital gains cannot  apply to assessee holding land/building as his  stock-in-trade. By insertion of new provision (section)  43CA), all such decisions will be overruled w.e.f. Assessment Year 2014-2015."

This  Section 52(2)  was  omitted  from  the  Act w.e.f.   assessment   year 1988-89.   However,   the provisions of deeming income are finding place in various  Sections  of  the Act,  which  is  against  the concept of charging tax on real income. For the purpose of simplicity in understanding, Sections 43CA  and 56(2) (viib)  are  dealt  with separately

General Meaning and Applicability

A. Section 43CA

Section 43CA is applicable to transaction of transfer  of  immovable  property  held  as  Stock-in-trade  by the transferor, if the value at which it is sold is less than the stamp duty value. Unlike Section 56(2)(vii) (b), the operation of Section 43CA is not dependable on the difference in actual transaction value and the stamp duty value. It is also provided that where the date of an agreement fixing the value of consideration
for  the  transfer  of  the  asset  and  the  date  of Registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this clause shall apply only where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

B. Section 56(2)(viii)(b)

Where any immovable property has been transferred for  a  consideration  which  is  less  than  its  stamp  duty  value  by  an  amount  exceeding  R50,000/, the  stamp  duty  value  as  exceeds  the  amount  of consideration shall be charged as gift in the hands of the purchaser. The clause regarding applicability of  value  in  case  of  difference  between  date  of initial  sale  agreement  and  the  date  of  registered
agreement  is  similar  as  in  case  of  Section 43CA, which is given by way of a proviso to this section. 

Impact and Consequences

A. Double Taxation

There is an apparent double taxation where the above provisions come into play. Where a property whose stamp duty value is R50 lakh, is sold for R40 lakh by the builder, these R40 lakh will constitute his part of  earnings from sale along with the excess R10 lakh which is the difference between the sale price and the stamp duty value. Thus the whole R50 lakh will be offered as earnings (gross) in the hands of the Builder. Though here the whole amount of transaction of a certain property has been offered to government as earnings to be taxed, the same R10 lakh (difference) is again taxed as gift under Section  56(2)(viib) in the hands of the purchaser, effectively taxing the net income on the difference of same R10 lakh.

B. Cost of Acquisition

Section 49(4) of the Act deals with Cost of acquisition of an Immovable property which has been subjected to  tax  under  Section 56(2) (vii)/(viia).  As  per  this section when any person, for whom the immovable property in question is a capital asset subjected to Income tax under Section  56(2)(vii)/(viia), sells his property, then the cost of acquisition of such property for the purpose of calculating the resultant capital gain shall be the value which has been taken into account whilst  that  Section 56(2) (vii)/(viia).  Thus,  post amendment in sub-clause  (b) of Section  56(2)(vii), it can be either said that the Government is kind enough and logical to at least allow the extra amount taxed in the hands of the purchaser  (for whom the immovable property is not his stock-in-trade) as his Cost of Acquisition on further sale of this immovable property or is just hoping to save and earn its revenue by assessing the probability that the purchaser will not sale the immovable property further!

   Further to the above discussion, it is quite evident that the position with respect to the Cost of acquisition will  be  totally  different  when  the  Re-seller  of  the Immovable property is the person who treats such properties as his stock-in-trade. As the above section of cost of acquisition is only applicable in case of capital assets and comes under the purview of the Chapter IV - E of the Act (capital gains), the benefit of deduction of extra amount treated as ‘Income from other sources’ in the hands of purchaser earlier, is not  available to such person being a trader in immovable properties. Thus there is an absolute double taxation when it comes to a situation where both the seller and the buyer are the persons who treat the property as stock-in-trade.

"Section 43CA is applicable to transaction of transfer  of immovable property held as Stock-in-trade by the transferor, if the value at which it is sold is less than the stamp duty value."

C. Non-Applicability of Provisions

1.  Section 43CA  is  made  specifically  applicable to  assets (not  being  capital  assets)  being  Land or  building  or  both.  Therefore  from  the  bare language of the section it doesn’t apply to assets being specific rights in a land or building, unlike provided specifically in Section 55(2) relating to cost  of  acquisition  for  capital  assets. Therefore there can be situation in which there is a joint ownership (managed by a firm or a company) in an immovable property (e.g Name of the assessee in ‘other right holders’ on 7/12 of a plot, or assessee being joint owner in a property say  30% stake- owner  in  private  company  having  business  of dealing in real estate) and the assessee being such a proportionate owner sells his rights and stake valued in that concern (valued as per valuation of  the property) to a third party for a consideration. For the sake of argument, this scenario may not be covered under Section  43CA as the rights or stake  in  the  concern  is  sold  and  not  Land  or building  as  such.  Thus  Assessee  might  be successful in evading the purpose of Section 43CA along  with  Section 56(2) (vii),  asset  not  being an immovable property as such. Though illegal along with being unethical, one may also think  about  a  Single  Shareholder  Company (OPC  -One person company) and act in above manner to escape from the garb of Sections 43CA and 56(2) (vii).

2.  Strictly speaking, Section 2(47) relating to transfer of asset doesn’t apply in case of transfers covered under Section 43CA since it is applicable only for transfer of capital assets. [Section 2(47): “transfer”in relation to capital asset, includes,-……]. Thus, as there is a corresponding Section - 2(47) with regard  to  operation  of  transfer  of  capital  asset [deeming under Section  50C], there is no such corresponding  Section  with  regard  to  operation of  transfer  of  current  asset (Section 43CA  for stock-in-trade).

"The insertion of Section 43CA with amendment in Section 56(2)(vii)(b) might pose as a hardship for persons who have a genuine cases of transfer of  property at low rate than Ready-Reckoner rate due to some reasons."

3.   There  are  situations  where  agreement  to  sell is  effected  at  a  particular  period  of  time  after accepting part or full consideration and the final agreement is registered much later. (Say agreement to  sell  is  prepared  on 100  rupee  stamp  paper before March 2013 which is finally registered with the Sub-registrar afterwards¹). In such a situation, it is important to ascertain the event of occurrence of   ‘transfer’   of   Immovable   property.   It   is pertinent to note that subsection  (3) and  (4) of  Section 43CA which talk about difference in date of agreement fixing value of consideration & date of registration of final agreement, are only useful for fixing the value of stamp duty as of that date,  and not for deciding the occurrence of transfer.Thus there is still an ambiguity about how the date of transfer will be decided as per the Act, or it is the ‘Transfer of Property Act, 1882’ which will come into play here.

D. Some Practical Scenarios

1. Plot of land owned by a person who treats it as Stock-in-trade

Often, it is the practice that a person dealing in plots of land purchases a Land and plans its layout into number of proportionate small plots. After such layout is  sanctioned  by  concerned  Municipal  authorities, he sells it. Now, can there be a situation that owner of whole plot enters into agreement to sell with a prospective buyer vide which he has even accepted some  token  amount  out  of  mentioned  full  amount and agreed in writing that he has sold all rights, title and interest in a specific plot of land as per layout and will  receive  balance  consideration  after  layout  has been sanctioned. Now, if the proposal for sanction of layout was submitted in March 2013 and sanction was approved after  01-04-13, can the seller escape 43CA by contending that occurrence of transfer of property was before  01-04-13 when Section  43CA became effective?

è Referring to the principle laid down in the case of  Vania  Silk  Mills (P.)  Ltd.  vs.  CIT [1991] 59 Taxman 3/191 ITR 647 (SC)/Marybong & Kyel Tea Industries Ltd. vs. CIT [1997] 91 Taxman 11/224 ITR 589 (SC) that “Whatever the mode by which transfer  is brought about, the existence of the asset during the process of transfer is a pre-condition. Unless the asset exists in fact, there cannot be a transfer of it”., the Income Tax department may contend that since the  layout  was  not  sanctioned  and  that  possibility of  rejecting  such  layout  cannot  be  ruled  out,  the asset (specific  plot  of  land)  comes  into existence only when the layout is sanctioned. Since at the date which is sought to be transfer date by Assessee, the asset had not come into existence, the transfer cannot be effected. The Income Tax authorities may further rely  principally  upon  some  judgments  which  say that “In the case of sale of immovable properties, the sale can be said to have taken place on the date of execution of the sale deed and not on the date of the 

agreement to sell” - Hall & Anderson (P.) Ltd. vs. CIT [1963] 47 ITR 790 (Cal.)/CIT vs. F.X. Periera & Sons (Travancore) (P.) Ltd. [1990] 184 ITR 461 (Ker.) /CIT vs. Ghaziabad Engg. Co. Ltd. [2001] 116 Taxman 268 (Delhi).

2. There are some flats ready for sale by the builder. The  builder  already  possesses  back-dated  blank stamp-papers  and  has  also  accepted  advance/token amount from some buyers. Now if the builder designs an Agreement to sell which talks about transfer of possession and rights in the flat, before 31-03-2013 and offers the balance consideration to tax as sale amount receivable, will he be successful in escaping the provisions of Section 43CA since it has come into effect prospectively from 01-04-2013?

"It is a normal practice for black money holders to  purchase immovable properties by paying say 20% to 70% of stamp value via banking channels and rest all in cash. After operation of amended Section 56(2) (vii) such balance consideration though paid in cash will be treated as Income in their hands which will betaxed as per normal slab rates say 30%. "

è As discussed above, the Income tax department may contend, based on some legal precedents, that in  the  case  of  sale  of  immovable  properties,  the sale can be said to have taken place on the date of execution of the sale deed and not on the date of the agreement to sell. Further if Section  2(47) is only applicable to transfer of capital assets and not those assets covered under Section 43CA, then the Section 54  of  Transfer  of  Property  Act  comes  into  play, which reads as follows: “[Such transfer, in the case of tangible immovable property of the value of one hundred  rupees  and  upwards,  or  in  the  case  of  a reversion  or  other  intangible  thing,  can  be  made only  by  a  registered  instrument]. [In  the  case  of tangible immovable property of a value less than one hundred rupees, such transfer may be made either by a registered instrument or by delivery of the property. Delivery of tangible immoveable property takes place when the seller places the buyer, or such person as he  directs,  in  possession  of  the  property………”]. 

Therefore,  as  per  Transfer  of  Property  Act,  only when  agreement  is  registered  is  the  immovable property sold/transferred, and hence the assessee may not escape from Section  43CA by resorting to this route too.

E. Hypothetical Situation for Genuine Taxpayers

The insertion of Section  43CA with amendment in Section  56(2)(vii)(b) might pose as a hardship for persons who have a genuine case of transfer of property at low rate than Ready-Reckoner rate due to some reasons (Distress sale due to many possible reasons). So, is litigation the only way for an assessee to prove his genuineness? And then what is the probability of courts deciding in favour of assessee going against bare interpretation of the act?

For example, a person wishes to buy a flat from a builder based on some agreed terms and conditions and the stamp duty value of the same is R50 lakh. Now both the builder (seller) and the purchaser in good faith execute the transaction at stamp duty value, i.e R50 lakh payable in installments. Now the gross earnings for the seller is R50 lakh and for the purchaser is

"The government seems successful in inserting  Section 43CA with amended Section 56(2)(vii) and  we may just hope that the position will be further clarified when questions in this regard are answered by adjudicating forums."

none as the value of transaction is the same as stamp value. Further, in future the seller does not adhere to the agreed terms at which point the purchaser has only paid say R40 lakh out of total R50 lakh. Due to such  disagreement  between  builder  and  purchaser, the balance R10 lakh, being reflected in balance sheet of builder as debtor and same amount reflected as liability in purchaser’s balance sheet, was not agreed  to be paid and so was written off. Such writing-off will finally result in deduction of R10 lakh for the builder and reduction in asset value and corresponding capital value and for the purchaser, finally resulting into taxation of property at R40 lakh.

F. Technical Way - Out

As  already  known,  Section  56(2)(vii)  applies  only to  individuals  and  HUF  and  not  to  other  persons. Taking advantage of this situation, an assessee who is planning to purchase a property can either form a tightly-held  partnership  firm  or  a  company  with customised deed/MOA in such a way that immovable property will be a capital asset for it. In such a manner property  having  stamp  value  of  R50  lakh  may  be purchased,  at  such  proportionate  price  in  cheque and cash as may be planned, by that firm/company. For the seller, taxation will be on Net earnings from such gross sale of R50 lakh (stamp duty) and for the purchaser it will be none, Section 56(2)(vii) being not applicable to its status.

G. Impasse for Black Money Holders?

It is a normal practice for black money holders to purchase immovable properties by paying say  20% to 70%  of  stamp  value  via  banking  channels  and rest all in cash. After operation of amended Section 56(2) (vii) such balance consideration though paid in cash will be treated as Income in their hands which will  be  taxed  as  per  normal  slab  rates  say 30%. Thus to avoid a situation in which tax payable will workout almost equivalent to the returned income or the accounting ratios show an unreasonable picture, there will surely be a curb over Cash spending and in- turn over generation of black money in the long run, at least via this route!

Thus  finally  with  some  ambiguities,  confusions and controversies the government seems successful in inserting Section 43CA with amended Section 56(2) (vii) and we may just hope that the position will be further  clarified  when  questions  in  this  regard  are answered  by  adjudicating  forums  which  they  will surely be needed to, considering the desperation of assessees to somehow escape these provisions.

(The author is member of the institute CA Sahil Garud. He can be contacted at ca.sahilgarud@gmail.com)

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