How Section 50C was invoked in a land sale case

Section 50C of the Income Tax Act ('the Act') provides that for calculation of capital gains in case of sale of land or flats, if the stamp duty value is more than the agreement value, then the former should be taken as the sale consideration and not agreement value. But in a recent case before the Ahmedabad Tribunal, this provision hit a controversy. Let's find out.

A taxpayer sold her immovable property for a consideration of Rs 51 lakh vide a registered sale deed on October 19, 2011. The registering authority had determined the market value [on which stamp duty was calculated] of the property at Rs 2.60 crore. In due course of time, the relevant tax officer observed that the tax payer had not declared any income by way of capital gains in the return of income filed within the due date. Considering the difference between the agreement value and stamp duty value was as high as Rs 2.09 crore, in the light of alleged under valuation of property, the tax officer chose to initiate reassessment proceedings against the tax payer. 

During reassessment, the taxpayer declared the capital gains at Rs 3.42 lakh on the sale consideration of Rs 51 lakh. The tax officer disputed the sale consideration of Rs 51 lakh with regards to the provisions of section 50C of the Act. The taxpayer submitted that the property was unauthorisedly occupied by 17 families and hence she was not in a position to get a vacant possession. The property was sold at a lower value as it was sold together with the encroachment. Subsequent to the sale (in 2013-14), the purchaser had negotiated with the illegal occupiers and incurred an additional cost of Rs 1.75 crore to get the property vacated. However, the tax officer observed that the stamp duty value was not disputed by the taxpayer and hence replaced the stamp duty value of Rs 2.60 crore in place of sale consideration of Rs 51 lakh in the capital gains calculation. 

Before the first level appellate authority, the taxpayer argued that she was able to close the sale deal at Rs 51 lakh because of the encroachments and the fact that the purchaser had agreed money to all the families for vacating the properties. It would not have been a fair deal for the purchaser to pay the taxpayer market value consideration and also pay the illegal occupants money to vacate. The appellate authority relied on precedents where in it has been held that the taxman should as far as possible bring the real income to tax, and while doing this, his approach should be liberal in applying the procedural provisions of the Act. Accordingly, the appellate authority directed the tax officer to consider the chargeable capital gains at Rs 3.42 lakh as claimed by the taxpayer as against the Rs 2.09 crore computed by him. 

Not happy with this order, the tax officer filed an appeal before the Ahmedabad Tax Tribunal. The tax officer argued that the taxpayer had admitted to declaring a lower consideration than the stamp duty value. The sale deed also suggests that the possession of the property given to the purchaser was vacant and peaceful without any reference to the alleged encroachment and other defects. Thereby, provisions of section 50C are clear and the sale consideration has to be replaced by the stamp duty value. 

The taxpayer submitted that application of section 50C is not automatic under the Act and the tax officer should appreciate circumstances for taking a lower value.

The Tribunal, after hearing both sides of the arguments, ruled that as per the provisions of section 50C can be invoked in this case and the sale consideration together with the costs towards obtaining the vacant property should be taken at Rs 2.26 crore. Further, the Tribunal also held that the difference of Rs 34 lakh (Rs 2.60 crore and Rs 2.26 crores) should also be added to the sale consideration in light of section 50C. Thus, the Tribunal ruled in favor of the taxman. 

The writer is a Sebi registered investment advisor