Chitra sold a plot of land for Rs. 54 lakh. The guideline value of the property as assessed by the stamp duty authorities is around Rs. 72 lakh. Stamp duty on transfer was, of course, paid based on the guideline value.
After completing the sale, Chitra submitted the information to her tax advisor for inclusion in her tax returns and financial statements. She was in for a shock when she was told that for taxation and capital gains purposes the sale value would be considered to be Rs. 72 Lakhs under Sec 50 C of the Indian Income Tax Act.
The Act
Sec 50 C clearly states that if the value stated in the instrument of transfer is less than the valuation adopted, assessed or assessable by the stamp duty authorities, the valuation as adopted, assessed or assessable by the stamp duty authorities will be considered for the purpose of computation of capital gains arising on transfer of land or building or both.
Many like Chitra are in a spot. If gains were computed using the guideline value as sale value they would have to pay tax for gain they never received in monetary terms. If they were to save on tax by investing in instruments that allow exemption of long term capital gains (such as another house, capital gain bonds etc), they would have to shell out additional money to cover for the funds they never received but was only deemed to have received.
Aim
It goes without saying that land prices in India are booming. Huge gaps in demand and supply, especially in urban areas, tend to push up prices and generate a speculative market and also provide an unmonitored channel for unaccounted money. In undervalued transactions, the seller saves on capital gains and the buyer on wealth tax by not disclosing the actual higher value of the transaction. Thus, real estate transactions in India tend to be undervalued leading to fall in revenue to the government. With a view to plugging this leak, the government introduced Sec 50 C into the Income Tax Act.
Of course, it is the buyer who pays the stamp duty and has a right to challenge the value as assessed by the authorities but the process of appeal with the State Government authorities takes a longer time. The seller cannot appeal for reassessment since he or she is not directly concerned or a participatory to paying the stamp duty.
Solution
In such circumstances, the seller does have a provision for relief under Sec 50 C. The assessee may represent before the Income Tax Authorities that the valuation adopted by the Stamp duty authorities is higher than the fair market value and request the ITO to refer the matter of valuation to the Valuation officer of the Income Tax Department. If the valuation arrived at is lower, the same may be adopted by the IT authorities for purposes of computing capital gains. The assessee also has the option of disregarding a higher valuation by the valuation officer, should such a situation arise. This situation also demonstrates some inequity in application of taxation principles. The seller is subjected to taxation on money she did not receive while the buyer has some advantage. He or she has to pay additional stamp duty but when the property is sold, the cost basis will be inflated the guideline value was never actually paid to purchase the property. This will result in lower than actual gain on sale in the future.
