Capital gain - urgent

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

29 August 2012 Dear Sir,
Our co. has a Flat, stamp duty valuation of the same is rs. 1 Cr. book value 30L & Indexed cost of Acquisition is Rs. 65 Lacs.
My Que Is :
1) If co. sale that flat at its WDV i.e.30Lacs (no profit no loss ), will it create some complication for company or purchaser form IT point of view.

Thx

U S Sharma

U S Sharma (Expert)
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29 August 2012 before such transfer let buyer be director of company by issue of fresh capital to him or transfer of shares from existinng, thereafter you can trf at book value also.

Querist : Anonymous

Querist : Anonymous (Querist)

30 August 2012 Dear Mr. Sharma, Actually the buyer is the director of the company so we are worried if we transfer the property more that 1 cr. at nominal value of just 20-25 Lacs, so it may have tax implication either on co. or director. Pls suggest your opnion.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 If the company sells the flat to its director at a value significantly lower than the stamp duty valuation (i.e., at Rs. 20-25 lakhs when the stamp duty valuation is Rs. 1 crore), there are indeed tax implications to consider, both for the company and the director. Here’s a breakdown:

### Tax Implications for the Company:

1. **Capital Gains Tax Consideration:**
- If the company sells the flat to the director at its written down value (WDV) of Rs. 30 lakhs (which is below the stamp duty valuation of Rs. 1 crore), it would be considered a transfer for capital gains tax purposes.
- The capital gains will be calculated as the difference between the WDV (Rs. 30 lakhs) and the indexed cost of acquisition (Rs. 65 lakhs). However, since the sale is at WDV, there may not be any immediate capital gains tax liability if the consideration is not more than the WDV.
- The company needs to ensure proper documentation and valuation to substantiate the sale value.

2. **Transfer Pricing and Valuation Issues:**
- The Income Tax authorities might question the valuation of the property if it is sold at a significantly lower value than the stamp duty valuation. They could potentially revalue the transaction and assess capital gains tax on the fair market value (FMV) instead of the actual sale consideration.
- This could lead to complications and scrutiny from the tax authorities, as they might suspect undervaluation to evade taxes.

### Tax Implications for the Director:

1. **Income Tax on Perquisite:**
- If the director buys the property at a value significantly lower than the stamp duty valuation, the difference between the stamp duty value and the actual purchase price could be considered a perquisite (benefit in kind).
- The Income Tax Act treats such benefits as taxable income in the hands of the director. The company would need to compute and deduct tax at source (TDS) on this perquisite.
- The director would also need to declare this benefit as part of their income in their personal income tax return.

### Recommendations:

1. **Valuation Consideration:**
- It’s advisable for the company and the director to conduct a proper valuation of the property before finalizing the sale.
- The sale price should ideally be close to the stamp duty valuation to avoid complications and potential tax scrutiny.

2. **Professional Advice:**
- Consult with a qualified tax advisor or chartered accountant to assess the specific tax implications based on the proposed sale value and to ensure compliance with all applicable tax laws.
- They can provide guidance on the correct valuation method and the tax implications for both the company and the director.

In summary, while selling the flat at its WDV might seem straightforward to avoid capital gains tax, selling at a significantly undervalued price could lead to tax complications and scrutiny from the tax authorities. Proper valuation and professional advice are crucial to navigate these potential issues effectively.