This article is written by Achintya Sharma, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.
Table of Contents
Introduction
Navigating the waters of local authorities is a certain impediment that one has to face while selling their house property. In furtherance to that, it is not always easy to understand as to how the profit made from the sale of house property would be assessed and subsequently taxed, and taxed under what head.
In this article, I try to clarify the position under law regarding the income(s) that are associated when one sells their house property.
In order to not make this paper convoluted, I will not consider a scenario wherein one is in the business of selling and buying properties. That would be squarely covered under the head of “profits and gains from business and profession”. The scope of this article would be limited to an individual that sells off his personal house property.
Income can arise out of various heads and the same gets taxed accordingly under a particular head. Roughly, the Income Tax Act, 1964 recognizes the following various heads of income:
- Sales
- House Property
- Profits and Gains from Business and Profession
- Income from Capital Gains
- Other sources of income
In this scenario we will focus on the income that gets generated from selling one’s house property i.e. the income made from capital gains.
What is capital gain?
Any gain made pursuant to selling a capital asset amounts to capital gain. The said gain is calculated by deducting the sale price by the purchase price of the asset. One is taxed for the profit made in such a sale. House property can be defined as a capital asset and an individual, on the sale of house property, will be taxed under the head of capital gains.
The term ‘Capital Asset’ is defined u/S. 2 (14) of the Income Tax Act, 1961 (Act). Capital asset can be any property held by an Assesse or any securities held by a foreign institutional investor in tandem with the rules as formulated by the Securities and Exchange Board (SEBI) Act, 1992. The definition also captures jewelry, archaeological collections, drawings, paintings, sculpture or any work of art.
However, the definition in the aforementioned section explicitly prohibits any other stock in trade (apart from the one mentioned in part (b) of the definition above), consumable stores or raw materials held for the purposes of business or profession. Clothes/wearing apparel, furniture kept for personal use.
Capital gain can be further classified into short or long term capital gain. If a property is sold within a period of 24 months, then we classify the said gain as a Short Term Capital Gain (STCG), if the said property is sold after a period of 24 months[i] the same would get classified as Long Term Capital Gain (LTCG). The former is taxed under the head of STCG Tax and the latter as LTCG Tax. S. 111A of the Income Tax Act, 1961[ii] applies in the case of STCG and tax on LTCG is governed as per S. 112 of the said Act.
If the house property is sold after a period of 24 months, one would be liable to pay long term capital gains tax. LTCG are taxed at 20% whereas STCG is tax at as per the income slab of the individual. For instance if the assessee falls under the 30% tax bracket and earns capital gains of Rs. 20,00,000/- from the sale of house property, they will have to pay Rs. 6,00,000/- while filing their return.
What is Section 50C?
Section 50C of the Income Tax Act[iii] (the Act) is a deeming provision that covers a scenario wherein full value consideration is made during the transfer of immovable property. The tax on the computed value would be assessed as per S. 48 of the said Act.
50C of the Act was inserted in the assessment year (AY) of 2003-2004. The idea behind the section was that the transactions that involve the dealing of immovable properties go into crores of rupees and in order to reduce one’s tax liability the prices are undervalued on paper. This was not an ideal situation for the tax revenue of the country since it caused significant losses to the exchequer. Hence S. 50C was added to the Income Tax Act. The same was made applicable to land as well as buildings and dealt with scenarios wherein the value of a property on paper was less in comparison with the value assessed by the stamp duty/nodal revenue authorities. The value of the authority shall be used for the purpose of calculating capital gains tax for the purposes of this section.
It is pertinent to mention that S. 50C would be applicable only to the transactions that involve the transfer of immovable property that is a capital asset. Sale of property held for the purposes of business or profession would not be governed under S. 50C.
A title transfer is necessary for the said section, a transfer made for booking rights[iv] or any transfer made to the tenancy/lease[v] agreement would not trigger S. 50C.
What happens if the selling price is lower than the value adopted by Stamp Valuation Authority (SVA)?
In the event one buys the property below the circle rate[vi] or below the value as adopted by the government authority, as per S. 56(2) (x) of the Income Tax Act, the difference in the actual cost would be subtracted from the cost at which the property was sold. The amount left would then be taxed as ‘income from other sources’ and the assessee would have to pay tax over the said amount as per their requisite tax bracket.
In the event the valuation is referred to the DVO[vii] under sub-section (2) of the S. 50C and the value of the said officer is higher than the SVA, the latter valuation shall be used as a yardstick in order to compute capital gains. The same principle has been reiterated in the case of R.G. Bulchandani, Mumbai v. Assessee.[viii]
It must also be pointed out that the stamp duty as well as the registration will have to be borne in accordance with the circle rate or at the value as adopted by the SVA. Following the recent amendment, if there is a difference of 5% between the value as adopted by the SVA and the real sale price, the same would not accrue any further tax liability under the said section.[ix]
It would be pertinent to point out that if there’s a disparity regarding the date of the agreement and the date the property was registered, the price on the agreement shall be considered to be the price on which the property was sold for the purposes of this section. Furthermore, as per the judgment of Himmatbhai Dharamshibhai Sonani v. DCIT[x] for the purposes of assessing capital gains, the price as was adopted during the time of affixing the sale consideration of the property would be considered for the computation of capital gains.
What happens if the seller does not accept the value adopted by SVA?
The final value of the property, if the seller is not content with the value given by the SVA and disputes the same, would be the one that was calculated for the purposes of giving stamp duty. Hence, it would be ideal for any seller to register their property on the basis of the stamp duty valuation.
The relief of getting the value referred by the Assessing Officer to the valuation officer under sub-section (2) of S. 50C would also be available to the seller.
What happens if the value of the valuation officer is higher than the value of the SVA?
In the event the valuation officer adopts a value higher than that of the DVO, one would take the value as reflected in the document of transfer or the actual consideration paid for the transfer of the property. The value as assessed by the SVA would be assumed to be the total value consideration that one would have received for the sale of the property.
Conclusion
From the very outset, the legislature seems to have forgotten the sacrosanct canon of taxation i.e. Convenience. The compliance costs for the property buyers soars high and the level of different valuations only adds up to the burden, not only for the buyer but also for the seller. While classification of the sale proceeds into STCG and LTCG is fair for the purposes of taxation, shelling out exorbitant fees and navigating the bureaucratic maze is the last thing any party to a transaction would consider a convenience.
It would not be amiss to venture into the idea of transforming these transactions at the nodal/district level. Given the huge rise in digitization of various governmental portals, it would be interesting to see how intermediaries like SVA’s or other valuation authorities could be done away with altogether in order to further fix the seepage of cash into the black market economy.
References
[i] Reduced to 24 months in the FY 2017-18 in case the asset is a land or a building
[ii] STCG are further divided into two parts i.e. the ones covered under S. 111A and the ones not covered by S. 111A, house property is not covered under S. 111A
[iii] As inserted w.e.f. 1st April, 2003
[iv] Income Tax Officer v. Shri Yasin Moosa Godil I.T.A. No. 2519 /AHD/2009
[v] DCIT v. Tejinder Singh I.T.A. No. 1459/ Kol/2011
[vi] Speculative rates as set by the government’s revenue department
[vii] District Valuation Officer
[viii] 2016 – LL – 0728-31
[ix] As per the proposed amendment that shall come into effect from 21st April 2021, the 5% difference in value will be increased to 10% difference in value. The said amendment was proposed by the Finance Bill of 2020. Clause 27 of the same seeks to insert the said amendment in Section 50C
[x] IT no. 1237/Ahd. 2013
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:
