File your ITR Hassle-Free and Maximise your Refunds
Trusted by 1 Million+ Users
4.8 Star User Rating
Authorized by Tax Department
Tax on real estate or property transactions typically gets covered under capital gains. However, there are certain exceptions, like when such real estate is held as stock in trade. In this case, the taxation would then need to be evaluated as business income. Regardless of the mannerism of taxation, real estate is often associated with black money, which also directly results in the proliferation of taxes. Parties often enter into arrangements where only a part of the consideration would be reflected in the agreement, and the balance would be paid by the buyers in black money. This is primarily done to avoid tax on the entire sale consideration, which otherwise would have been payable entirely in white money / through proper payment channels.
In order to check this proliferation of tax, section 50C was introduced in the Income-tax Act, 1961 ('the Act'), by virtue of which the stamp duty value assessed or assessable by the Stamp Valuation Authority is deemed as the full value of sale consideration received/accrued on sale of a capital asset, being land or building or both.
Now, the scope of this section 50C was restricted to land or building, or both, which were held by the taxpayers as capital assets. What happens in a situation where the property is held as stock-in-trade by the developers of the property? It is unlikely that such gains will remain out of the scope of Income-tax law. The avoidance of tax, like in the case of capital gain, was equally a menace in such business dealings of property. Therefore, in order to address this issue, a similar provision was introduced in the Act by way of section 43CA. This article aims at analysing this section in further detail - read on to find out more.
Section 43CA shall apply only to land or building or both. In order to determine the undervaluation of land or building, if any, in the sale agreement, section 43CA uses the value adopted by the Stamp Valuation Authority(SVA) on which stamp duty is payable, as per the State Government rules.
If the sale consideration received or claimed to be received by the seller on the sale of the land or building or both is less than the adopted by SVA, then such value adopted by SVA would be considered as the actual sales price received or accruing to the seller. Consequently, such stamp duty value would be considered for determining the taxable profits/gain arising from such transfer.
Section 43CA provides that no adjustments are required to be made when the variation between stamp duty value and the actual sale consideration is not more than ten per cent of the sale consideration. In brevity, if the stamp duty value adopted by the SVA does not exceed 110% of the actual consideration, such actual consideration received/receivable by the taxpayer would be considered as the full value of consideration, and the tax would be computed accordingly. This relief was introduced to minimise the hardship in the case of genuine transactions in the real estate sector.
It may so happen that the promoter/developer enter into a sale agreement with the buyer, but the sale is registered with SVA on a subsequent date. In such a case, the taxpayer has an option to take the stamp duty value of such property as on the date of sale agreement. He is not required to consider the stamp duty value as on the date of property registration. However, this option shall be available only in those cases where the amount of consideration is received through the following modes:
- an account payee bank draft or
- account payee cheque or
- electronic clearing system of a bank account or
- such other electronic mode as may be prescribed
The prescribed modes of payment given in the section read with rule 6ABBA are:
The illustration tabulated below would help in understanding the threshold applicability better -
| Consideration received | Stamp Duty Value | 110% of Consideration received | Full Value of Consideration as per section 43CA |
|---|---|---|---|
| 1,00,000 | 1,05,000 | 1,10,000 | 1,00,000 |
| 1,00,000 | 1,15,000 | 1,10,000 | 1,15,000 |
| 1,00,000 | 95,000 | 1,10,000 | 1,00,000 |
| 95,000 | 1,00,000 | 1,04,500 | 95,000 |
| 80,000 | 1,00,000 | 88,000 | 1,00,000 |
Note: Extension of safe harbour rules from 10% to 20% .i.e., this limit of 110% was increased to 120% for a specific class of asset, subject to the following requirements:
a. ‘Residential units’ of value upto Rs. 2 crores.
b. Primary sale between real estate developer and home buyers (.i.e., in nature of stock-in-trade)
c. Sold during the period 12.11.2020 to 30.06.2021
The following are some of the illustrative cases where the said extension of safe harbour rules would not apply:
a. Sale of residential units of value more than Rs. 2 crores
b. Secondary sale by a homeowner to another person. i.e., sale of Capital Assets (not stock-in-trade)
c. Sale of commercial units or land (i.e., Offices/shops etc.)
Suppose the seller does not accept the value adopted by SVA and believes that the stamp duty value determined by the stamp valuation authorities (‘SVA’) is higher than the fair market value as on the date of transfer.
The buyer of the property generally bears stamp duty, but he may not be very concerned with the value adopted by SVA as the stamp duty would be meagre compared to the purchase cost.
However, it makes a massive difference to the seller as it increases his tax liability substantially if stamp duty value is substituted for actual sales consideration.
Thus, the taxpayer has an option to present its claim before the tax officer and request him to obtain the valuation of the property as per a valuation officer ('VO'). In addition to the taxpayer requesting such reference to VO, another condition to be satisfied is that the value adopted by SVA has not been disputed in any revision or appeal before any Court or the High Court or any other authority.
The outcome and consequence of reference to the VO could be as follows -The illustration tabulated below would help understand this provision better -
| Consideration received | Fair Market Value as per taxpayer | Stamp Duty Value as per SVA | Value as per VO | Full Value of Consideration as per section 43CA |
|---|---|---|---|---|
| 1,00,000 | 1,15,000 | 1,35,000 | 1,25,000 | 1,25,000 |
| 1,00,000 | 1,15,000 | 1,35,000 | 1,40,000 | 1,35,000 |
It is to be noted that the objective of introducing section 43CA was to keep a check on the cash dealings prevalent in property / real estate transactions and under-reporting of consideration, contrary to substantially higher market rates and stamp duty values. However, with such deeming fiction as envisaged under section 43CA, genuine transactions with the actual sale consideration lower than the stamp duty value are adversely impacted. It is also to be factored that the pandemic has led to sluggishness in the real estate sector as a whole, driving down the market prices below the stamp duty values in some cities. To add to the woes, the interplay of this section with other sections such as section 56(2)(x) also leads to double taxation of income arising from the same property, albeit in the hands of buyers. Therefore, this has resulted in undue hardships faced by both the buyers and the seller. Thus, there is an immediate need for rationalisation of the existing provisions, keeping in mind the changing dynamics in the real estate sector.
