Budget 2018 introduced various rationalisation measures. One such move was rationalisation of sections 43CA, 50C and 56 of the Income Tax Act, 1961 that deal with transactions of immovable property. According to section 43CA, stamp duty value is adopted as full value of consideration if the same is higher than the sale consideration accruing or arising on account of transfer of a business asset, being land and/or building.

Similarly, section 50C provides for considering stamp duty value as full value of consideration in case of transfer of a capital asset, land and / or building. Section 56 inter alia considers stamp duty value as the full value of consideration in certain cases where any person receives immovable property for a consideration less than the stamp duty value and taxes the same in the hands of the recipient.

Such measure was adopted to ensure that the full value of consideration is not understated. The Government has appreciated that the stamp duty value could be higher than the consideration on account of various factors such as shape of the plot or location and that the differential arising on account of stamp duty value being considered as full value of consideration, is taxed in the hands of both, the purchaser as well as the seller of immovable property being land and / or building.

Well-intended, but

Thus, to minimise hardships in genuine real estate transactions, it has been proposed in the Finance Bill 2018 to provide that no adjustments in these sections shall be made if the variation between stamp duty value and the sale consideration is not more than five per cent of the sale consideration.

However, there is another aspect to the rationalisation measures — removing the effect of double taxation of the differential between the stamp duty value and the sale consideration. If a person (transferor) who transfers immoveable property at a price less than the stamp duty value, the notional business income / capital gain is computed considering the stamp duty value as the sale consideration as per section 43CA and 50C of the Act.

Similarly, in the case of transfer of movable property being unquoted shares of a company, at a price less than the fair market value (FMV), the notional capital gain is computed considering the FMV as the sale consideration as per section 50CA (inserted vide Finance Act 2017) of the Act.

Wrong results

At the same time, the transferee (recipient) is also subject to tax on the notional income being the difference between the FMV and the consideration received for transfer of the immoveable property and unquoted shares as income under the head “Income from other sources”.

This can lead to double taxation of the same income in the hands of the seller (section 43CA, 50C and 50CA) and the buyer [section 56(2)(x)]. The Finance Minister refers to the difference (in stamp duty valuation and sale consideration) being taxed as income both in the hands of the purchaser and the seller.

The intention of the government in amending the provisions of section 56 of the Act was to prevent money laundering which was taking place in the garb of gifts to unrelated persons. To achieve that, the transfer that is chargeable to capital gains and taxed as per section 43CA, 50C or 50CA of the Act should not be considered for the purpose of section 56.

However, the law as it stands today, taxes certain income / gain twice, once in the hands of the transferor and simultaneously in the hands of the transferee. The measures taken by the government to rationalise the provisions of section 43CA, section 50C and section 56 are, hence, incomplete. The Govenment must fix this immediately.

Kamdin is Partner, Hakim is Senior Manager and Mathias is Manager with Deloitte Haskins and Sells

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