Jigar M. Patel
International Tax Attorney
Deeming provisions under Section 50C
Section 50C of the Income-tax Act is a special provision that addresses the issue of under-reporting of sale consideration in real estate transactions, with a view to evade capital gains tax. Section 50C provides that when a taxpayer sells a capital asset, being land or building or both and the sale consideration is less than the value adopted by the Stamp Valuation Authority, i.e., Stamp Duty Value (SDV) or Jantri value, then the SDV shall be deemed to be the full value of consideration for purposes of computing capital gains.
What is Stamp Duty Value?
SDV or Jantri Value is the minimum value of an immovable property, as determined by the State Government’s Stamp Valuation Authority for purposes of registering transfer of such property.
Safe Harbour Provision by way of a Special Concession
With a view to provide relief to taxpayers for any minor discrepancies in value, a safe harbour provision has been inbuilt in Section 50C, which provides that the deeming provisions of this section shall not be invoked if the SDV does not exceed 110% of the sale consideration.
Illustration: The sale consideration of a property is Rs. 1.25 crores and the SDV is Rs. 1.35 crores. 110% of the sale consideration works out to Rs. 1.375 crores. Since the sale consideration is within the range of the permitted variation of 10%, with reference to the SDV, the deeming fiction of Section 50C will not be attracted.
Section 50C also provides that where the taxpayer claims that the SDV is higher than the fair market value of the property and where such SDV has not been disputed in any proceedings before any authority, the taxpayer may request the Assessing Officer to refer the matter to the Departmental Valuation Officer (DVO) for determining the valuation. If the valuation so determined is lower than the SDV, the Assessing Officer would be required to adopt the same.
Tax Implications in case of the Buyer
Whereas Section 50C contains deeming provisions for computing capital gains in case of the Seller, corresponding tax implications would arise in the case of the Buyer of the immovable property. Section 56(2)(x) provides that where the SDV of an immovable property exceeds its sale consideration and if the amount of such excess is more than the higher of the following amounts, such excess shall be deemed taxable as ‘income from other sources’:
- Amount of Rs. 50,000
- Amount equal to 10% of the sale consideration
Section 56(2)(x) carries a similar provision as in case of Section 50C for reference to DVO.
Where SDV stands increased after Agreement for Sale?
Section 50C and Section 56(2)(x) provide for equitable relief in cases where the amount of sale consideration has been mutually agreed under the agreement for sale (Banakhat) and where the SDV stands revised prior to the execution of the sale deed.
This relief is, however, subject to the condition that the amount of consideration or part thereof, as agreed under the Banakhat was received by way of an account payee cheque or through electronic clearing on or before the date of such Banakhat.
Illustration: On the day when a Banakhat is entered into, the prevailing SDV was Rs. 90 lakhs. The mutually agreed consideration between the Buyer and Seller was Rs. 85 lakhs (within the permissible variation of 10%). Under the Banakhat, Rs. 10 lakhs was paid by the Buyer to the Seller through account payee cheque. Prior to the execution of the sale deed, the SDV stands revised to Rs. 1.20 crores. Keeping in view the special provisions, both under Section 50C and Section 56(2)(x), the Seller and the Buyer will stand protected and will not invite any taxability under the deeming provisions.
