The Hindu : Tax ordeals in real property transactions

Online edition of India's National Newspaper
Monday, Mar 22, 2004

Business

Business

Tax ordeals in real property transactions

QUESTION: The author in his article under the caption `Negotiating taxing details' published in The Hindu dated January 31, 2004 has suggested a useful tip to the seller of an immovable property regarding the date of sale. However, some other points have not been highlighted.

In the example cited by the author, the capital gains has been computed based on the sale value. However, the Guideline value should be considered, if it is higher than the sale value according to the provisions of Section 50C of the Income-tax Act introduced last year.

In fact, there are instances where the sellers caught unaware and had to pay higher tax since the GL value in some of the localities is much higher. For example, in Haddows Road, (Chennai), a property was sold for Rs. 12 crores during March 2003, while the GL value was Rs. 23 crores.

In another prominent locality, the seller could not get a buyer for a long time and recently entered into an agreement for sale for Rs. 90 lakhs per ground while the GL value is Rs. 170 lakhs per ground.

The author has arrived at the tax at Rs. 1.24 lakhs for short term, which is applicable only if the assessee has no other income. In case, the assessee has other income, the gains will be added to the income and the tax will be higher depending on the slab.

According to some experts and officials the date of handing over will be considered as transfer although registration is not done. This is also to be clarified.

ANSWER: The problem posed by C. H. Gopinatha Rao of Chennai, in the above letter indicates the vagaries imported in income-tax law for ascertainment of capital gains by substituting the transaction price as recorded in the agreement or sale deed as between the parties not by the fair market value, if that is different but by stamp value that is Guideline Value or the value in Basic Valuation Register.

The Supreme Court in Jawajee Naganatham v RDO (1994) 4 SCC 595; Prakashwati v Chief Controlling Revenue Authority (1996) 4 SCC 657; U.P. Jal Nigam, Lucknow v Kalra Properties (P.) Ltd. [AIR 1986 SC 1170] and State of Punjab v Mohabir Singh (1996) 1 SCC 609 has uniformly held that such value does not bind even the registering officer, so that it is inapplicable in compensation and similar other cases.

It has not been considered relevant in respect of compulsory purchase of property under Chapter XXC in Mrs. Nirmal Laxminarayan Grover v Appropriate Authority (1997) 223 ITR 572 (Bom) and Hindustan Motors Ltd. v Appropriate Authority (2001) 249 ITR 424 (Mad). It was considered irrelevant for gift-tax purposes in CGT v R. Jawahar (1996) 217 ITR 59 (Mad). It is, therefore, odd that it should have been adopted as a benchmark for capital gains tax, though remedies have been provided by way of appeal under the stamp law or reference to the valuation cell. But either remedy is time-consuming.

The provision in course of time is bound to be ineffective and found illusory and abandoned by the Government itself sooner or later, meanwhile creating hardship for bona fide transactions.

Any attempt to tamper with the value of a transaction for tax purposes should be based on investigation indicating some evidence of understatement as was pointed out in K. P. Varghese v ITO (1981) 131 ITR 597 (SC).

While the anxiety of Revenue to deal with widespread practice of understatement of value to save stamp duty and consequent liability for capital gains tax is understandable, the solution lies in proper investigation on one hand and removing the temptation to understate the value by having reasonable rate of tax both for stamp duty and for capital gains tax.

Downward revision of stamp duty has been effected in Maharashtra and recently in Tamil Nadu, but even then it is too stiff, while the rate of capital gains tax fixed at 20 per cent when the normal rate was more than double the rate has remained stationary at the same rate, even after the normal rate has been considerably scaled down.

Inflated guideline value neutralises the benefit of lower rate of stamp duty, so that there is no need for rationalising such value on a more scientific basis than on stray registered transactions.

The reader's point as to the method of calculation of capital gains tax is also correct in law underscoring the necessity of the need for proper understanding of the tax provisions including reliefs by way of reinvestment benefit before any major real estate transaction is undertaken.

S. Rajaratnam

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