Applicability of Section 50C to sale of immovable property by Builders and sale of immovable Property in block of assets.
1. INTRODUCTION:
The generation of black money is major problem in India. Various committees were formed and number of suggestions were given by such committees to finance ministry and based on said recommendations number of measures have been taken to curb generation of black money. Even schemes like VDIS and other options like investment in bonds etc were also taken but the success ratio of such measures is not upto expectation. A parallel economy of black money is in operation. Out of the reports of various committees, the finance ministry came to know that real estate transactions are major generators of black money. After terrorist attacks, the government tried to know the source of funding to terrorists and it was observed that hawala transactions, black money of real estate and share market transactions were the source of funding to terrorist. Money Laundering Act was introduced to curb such transactions but it has not given the results as expected. One of the measures introduced by the Finance minister was introduction of section 50C in Income tax Act vide Finance Act, 2002, w.e.f 01-04-2003. The provisions of said section and its applicability are discussed in detail herein below.
2. SECTION 50C:
The provisions of section 50C are reproduced herein below for ready reference.
SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION IN SPECIAL CASES:
50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable) by any authority of a State Government (hereafter in this Section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed (or assessable) shall, for the purpose of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.
The provision can be correctly interpreted only when its major words are taken into consideration which is as under.
· Consideration
· Capital asset
· Transfer
· Section 48
· Deemed to be full value of consideration.
· Now let us take each point enumerated herein above and deliberate so as to reach to correct interpretation of section 50C (1).
· CONSIDERATION: There has to be consideration and if consideration is not there provisions of section 50C are not applicable. Hence, the transfer of land, building or both by gift deed will not be governed by section 50C.
· CAPITAL ASSET: The capital asset has been defined vide section 2 (14) which reads as under.
Section 2(14): “Capital asset: means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-
· Any stock-in-trade, consumable stores or raw materials held for the purpose of his business or profession;
· Agricultural land in India, not being land situate-
(a) In any area-----------
(b) In any area----------
In the definition portion of capital asset only relevant sub clauses which are connected with section 50C are reproduced as other sub clauses are not relevant.
In view of above it can be concluded that for builders land and building meant for sale are stock-in- trade and hence, it will be out of purview of section 50C. Secondly section 50C is for computation of capital gain whereas land and building sold by builder which is his stock in trade is business income and hence, 50C would not be applicable to sale of land building or both which are in the form of stock in trade. Even to an agricultural land situated in specified area which does not form part of the definition of capital asset, the provisions of section 50C are not applicable as it is not capital asset at all and hence, question of computation of capital gain does not arise on such agricultural land.
· TRANSFER: The word transfer has also been defined in section 2(47) which reads as under.
Transfer in relation to a capital asset, includes,-
(i) The sale, exchange or relinquishment of the asset; or From the above definition also it states that transfer should be in relation to capital asset and as stock- in – trade is not capital asset as per definition of capital asset prescribed in section 2(14) of Income tax Act, 1961 the sale of land, building or both which forms part of stock in trade would not be covered in the scope of section 50C of Income tax Act, 1961.
· SECTION 48:
Mode of Computation.
48. The income chargeable under the head capital gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of capital asset the following amounts, namely:-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
Only relevant portion of section 48 is reproduced herein above. Here also it is to be noted that the section is for income chargeable under the head capital gain and it should be for transfer of capital asset but the income of builders who shows the land, building or both as stock-in –trade are supposed to offer their income under head business and profession and not under capital gain, the transaction of sale of land, building or both shown as stock-in-trade will not be within scope and ambit of section 50C. It is also to be noted that as discussed earlier, income arising on account of sale of land, building or both does not accrue due to transfer of capital asset as prescribed in section 48 r.w.s 2(14) of Income tax Act, 1961, the question of applicability of section 50C to sale of land, building or both forming part of stock-in-trade does not arise.
· DEEMED TO BE FULL VALUE OF CONSIDERATION:
While computing income under head Capital gain is concerned, the procedure for computation of capital gain is prescribed in Section 48. Section 48 says that from full value of consideration, the cost of acquisition and expenditure incurred wholly and exclusively in connection with transfer of capital asset is to be deducted. For calculation of capital gain only deeming provision section 50C is introduced and the full value of consideration as said in section 48 will be deemed to be value as prescribed by stamp valuation authority if full value of consideration is less than valuation assessed or assessable by stamp valuation authority. As provisions of section 48 are not applicable on transfer of land, building or both as per para relating to section 48 discussed herein above, the question of applicability of section 50C to sale of land, building or both forming part of stock-in-trade does not arise.
From above discussion, it can be concluded that for transfer of land, building or both which forms part of stock-in-trade provisions of section 50C are not applicable. Now let us discuss the asset in the form of building which forms part of block of asset on which depreciation is claimed and said asset is sold whether provisions of section 50C are applicable or not. Before we discuss the same it is necessary to know how computation is to be made for gain on sale of such asset. As such if there is gain on account of sale of asset like office building, factory building, godown etc. the income should be taxable as long term capital gain or short term capital gain based on its period of holding but on account of deeming provision under section 50 it is treated as short term capital gain. Hence, it is necessary to know the provisions of section 50 which are reproduced herein below.
Section 50: Special provision for computation of capital gains in case of depreciable assets.
50. Notwithstanding anything contained in clause (42A) of Section 2, where the capital asset is an asset forming part of block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income tax Act,1922 (11 of 1922), the provisions of section 48 and 49 shall be subject to the following modifications:-
(1) Where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts namely:-
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
Such excess shall be deemed to be the capital gains arising from the transfer of short term capital assets;
Now we have to see important words and definitions which are required to be referred for interpretation of section 50 of Income tax Act,1961. They are as under.
· Section 2(42A) defines short term capital asset.
· Block of assets as per section 2(11)
· Short term capital gain as per section 2(42B)
· Written down value as defined in section 43(6)(c)
(i) SHORT TERM CAPITAL ASSET AS PER SECTION 2(42A)
“Short term capital asset” means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer:
Provided that in the case of a share held in a company (or any other security listed in a recognized stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act,1963 (52 of 1963) or a unit of Mutual Fund specified under clause (23D) of section 10 or a zero coupon bond , the provisions of this clause shall have effect as if the words thirty six months , the words twelve months have been substituted.
On analysis of the above provision any other asset other than asset stated in proviso shall be treated as short term capital asset if it is not hold for more than thirty six months and for assets like shares of a company or security listed on recognized stock exchange or unit of UTI or unit of Mutual fund or a zero coupon bond they shall be treated as short term capital asset if they are hold not more than twelve months. In section 50 it is provided that even if asset which forms part of block of asset on which depreciation has been allowed shall be treated as short term capital asset even if they are hold for more than 36 months and gain on sale shall be treated as short term capital gain by deeming provision.
(ii) BLOCK OF ASSETS AS PER SECTION 2(11).
“Block of assets” means a group of assets falling within a class of assets comprising-
(a) Tangible assets, being buildings, machinery, plant or furniture;
(b) Intangible assets being know how, patents, copyrights, trade- marks, licences, franchisees or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.
As buildings of different nature on which depreciation is allowable shall form part of block of asset as per percentage of depreciation prescribed under Income Tax Rules, 1962.
(iii) SHORT TERM CAPITAL GAIN AS PER SECTION 2(42B).
“Short term capital gain” means capital gain arising from the transfer of a short term capital asset.
On analysis of above definition short term capital gain arises when short term capital asset is sold. Short term capital asset is defined in section 2(42A) as per discussion given herein above. However, section 50 says that even if assets are not short term capital assets i. e they are long term capital asset but if they are part of block of asset on which depreciation has been allowed the gain shall be short term capital gain by deeming provision and not long term capital gain.
(iv) WRITTEN DOWN VALUE AS PER SECTION 43(6)(c).
The definition of written down value in the case of block of assets is summarized as under.
Opening WDV+(plus) acquisition of asset during the year – (less) sales consideration of asset sold. It is treated as block till it does not become zero. When it results into negative, it is treated as short term capital gain irrespective of holding period of asset under deeming provision of section 50.
Now from analysis of above provisions , it can be concluded that building which forms part of the block of assets even if held for more than 36 months and gain arises on sale of said block (when block becomes negative on deduction of sale consideration), the gain will be short term and not long term. Such gain is considered as Short term gain by deeming provision under section 50 of Income tax Act,1961. Then question arises why deeming provisions of section 50C are not applicable to asset like building which forms part of block of asset. The reasons are as under.
· For arriving the short term capital gain u/s 50 specific formula as given by me in clause (iv) for Written down Value as per section 43(6)(c) is to be referred and in said section it is specifically said that consideration received or receivable is to be deducted which is not as per section 48 and hence, deeming provisions of section 50C are not applicable.
· Both section 50 and section 50C are deeming provision for different purposes. Section 50 is for treating gain on sale of asset sold in block of asset as short term capital gain irrespective of its period of holding. Where when it will be considered as capital gain is also prescribed by specific method or formula and in said method value of consideration is to be deducted and it is not to be replaced by value as per stamp valuation authority. Whereas in case of asset like land, building or both when sold and on which computation of capital gain is to be made the sale consideration is to be replaced by valuation made by Stamp valuation authority if sales consideration is less than valuation made by stamp valuation authority. Hence, it can be concluded that purpose of deeming provisions u/s 50 and u/s 50C are different and methods are specifically provided in relevant sections to arrive at capital gain.
· It has been held by the courts and tribunals that deeming provisions are to be interpreted for the specific purpose for which deeming is provided in concerned section and it cannot be extended to other provisions for which it is not intended by legislature.
DECISIONS RELIED UPON:
1. Subash Chand v. Asstt. CIT [2012] 49 SOT 732 / 18 taxmann.com 149 (Chd.) The Chandigarh Bench of the Appellate Tribunal in this case has held that the legal fiction created by section 50C is intended only to compute capital gains arising from transfer of land or building or both and will not apply to any of the legal fictions created by sections 69, 69A and 69B of the Act.
The Tribunal held that section 50C was enacted for the limited purpose of section 48 to facilitate computation of capital gains. It held that the deeming provisions in the statute are legal fictions to facilitate achievement of certain desired results, though in reality these may be untrue.
The fiction created by section 50C is only to tax a transaction where the apparent sale consideration is less than the value adopted for registration purposes by the Stamp Valuation Authority. When the recital in the conveyance deed states a specific sum as the consideration and merely because the Assessing Officer had adopted the value fixed by the Stamp Valuation Authority as deemed sale consideration for computing capital gains, the assessee cannot take advantage of such deemed sale consideration to explain the source for subsequent investments.
The Tribunal explained the rules that are to be applied for interpreting a provision creating a legal fiction, viz., (i) the purpose of insertion; (ii) it should not be interpreted beyond the purpose or language of the section by which it is created; and (iii) outside the bounds of legal fiction, the difference between reality and fiction may subsist and such difference could be ascertained by making reference to the subject and context of those provisions.
2. Section 50C will apply only when the transferred immovable property is liable to tax under the head capital gains. Where the immovable property is stock-in-trade of the transferor, the provisions of section 50C will not apply [ CIT v. Thiruvengadam Investments (P.) Ltd. [2010] 320 ITR 345 (Mad.)].
3. The issue before the Supreme Court in CIT v. Amarchand N. Shroff [1963] 48 ITR 59 was whether the amounts received by the legal representatives of A could be taxed in their hands the Supreme Court following its earlier decision in Bengal Immunity Co. Ltd. v. State of Bihar AIR 1955 SC 661 and after observing that "legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that legitimate field" held that they (the receipts) could not be said to be income which might be deemed by fiction to have been received by the deceased A.
4. Following the same decision in Bengal Immunity Co. Ltd. (supra) the Supreme Court in this case made a similar observation as was done in Amarchand N. Shroff (supra) and that observation was to the following effect-
"It is well-settled that legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field."
5. In Mother India Refrigeration Industries (P.) Ltd. ( supra ) the same view was reiterated by holding that the "Legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond their legitimate field". We will discuss this case at length infra.
6. The Hon'ble jurisdictional High Court in CIT v. ACE Builders (P.) Ltd.[2006] 281 ITR 210 /[2005] 144-Taxman 855 (Bom.) considered a case in which the assessee was a partner in a firm which was dissolved in the year 1984 and the assessee was allotted a flat towards its credit in the capital account with the firm. The assessee showed the flat as capital asset in its books of account and depreciation was claimed and allowed from year to year. In the previous year relevant to the assessment year 1992-93 the assessee sold the flat and invested the net sale proceeds in a scheme eligible under section 54E of the Act and, accordingly, declared Nil income under the head 'Capital gains'. The Assessing Officer opined that since the block of building ceased to exist on account of sale of flat during the year, the written down value of the flat was liable to be taken as cost of acquisition under section 54E of the Act. He further held that since the assessee had availed depreciation on such asset which was otherwise long-term capital asset, the deeming provision under section 50 would apply and it would be treated as capital gain on the sale of short-term capital asset and resultantly no benefit under section 54E could be allowed. When the matter came up before the Hon'ble Bombay High Court, it noted that sub-sections (1) and (2) of section 50 contained a deeming provision and such fiction was restricted only to the mode of computation of capital gain contained in sections 48 and 49 and, hence, it did not apply to other provisions. Consequently, the assessee was held to be eligible for exemption under section 54E in respect of capital gain arising out of the capital asset on which depreciation was allowed. On the appraisal of above judgments, the legal position which turns out is that whenever a legal fiction is created by way of a deeming provision, it is of paramount importance to go strictly by the prescription of such provision. Such deeming provision cannot be extended beyond the purpose for which it is intended."
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