Finance Act, 2013 has substituted clause (b) of section 56(2)(vii) w.e.f. 1.4.2014 providing, inter alia, that where an individual or Hindu Undivided Family receives, in any previous year, from any person or persons any immovable property-
(i) Without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
(ii) For a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration
shall be chargeable to income tax under the head “Income from Other Sources”.
Prior to the above substitution, the provision of clause (b) was introduced u/s 56(2)(vii) w.e.f 1st Oct, 2009 laying down that in a case when any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds Rs. 50000/-, the stamp duty value of such property was taxable in the hands of the transferee individual or HUF under this section as “Income from other sources”. Finance Act, 2013 has thus extended the scope of this section, inter alia, covering the cases when any immovable property is received by an individual or HUF for inadequate consideration.
1. Transferor of the property covered u/s 50C/43CA, Individual/HUF Transferee covered by new clause (b) of section 56(2)(vii)
As per the provision of section 50C, which was introduced under the Income Tax Act by Finance Act 2002 w.e.f. 1.04.2003, if land or building is transferred for a value less than the stamp duty value or circle rate of the property and the property is in the nature of capital asset, the difference is taxed in the hands of the transferor as deemed Capital Gain. Finance Act, 2013 has, by way of introduction of new section 43CA on the lines of section 50C, has sought to cover such immovable property in the nature of trading asset also. Both sections 50C and 43CA are applicable to seller/transferor of such immovable property. The amendment u/s 56(2)(vii)(b) has however sought to cover the buyer/ transferee of such immovable property on the lines of section 50C/ 43CA.
The underlying assumption in both the situations seems to be that the actual consideration passed on the transfer of immovable property can not be less than circle rate/ Stamp duty Value and in case the apparent consideration shown in the transaction is less than the stamp duty value, the deeming fiction as envisaged u/s 50C/43CA or u/s 56(2)(vii)(b) qua transferor & transferee shall come into force.
Finance Act, 2009 had introduced similar fiction qua the transferee individual or HUF u/s 56(2) but the same was withdrawn by Finance Act, 2010 with retrospective effect. No worthwhile explanation as to the rationale behind withdrawal of such provision earlier and now reintroducing the same by Finance Act, 2013 has come forward from the side of Government. Memorandum explaining the provisions of Finance Act, 2013 is silent on this aspect.
2. Section 56(2)(vii)(b) applicable in the case of Individual & HUF only
It is important to note that provision of section 56(2)(vii) applicable in case of transferee of immovable property covers only Individual or HUF, whereas provisions of section 50C/43CA applicable to the transferor of the property cover all the assessees. It implies that if the transferee of property is a person other than individual or HUF i.e. a Company, Firm, LLP etc., provision of section 56(2)(vii) shall not be applicable. Thus, if an immovable property is purchased by a person other than an individual or HUF for a consideration which is less than Stamp Duty Value / Circle Rate, there will not be any implication or attraction of the provision of this section. There is however nothing explicit as to why only individual and HUF have been brought into the ambit of this section and as to why other persons have been left out. The only broad rationale one can gesticulate & comprehend is that the origin of the provision of section 56(2)(vii) relates to the introduction of the concept of gift/ deemed gift into the income Tax Act after the abolition of Gift Tax Act and since the gift tax used to affect largely to individual and HUF, the applicability of this provision has also been restricted to individual and HUF only.
3. Cost of acquisition to the buyer?
A question arises as to what would be the cost of acquisition to the buyer/ transferee in a case when he has paid tax under this section on the excess of stamp duty valuation over the actual consideration paid by him.
The legislature has provided sub-section (4) to section 49 prescribing cost of acquisition with reference to certain modes of acquisition. It states that where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under clause (vii) or clause (viia) of sub section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia).
It means that in case the buyer of the property has acquired the property as capital asset, the legislature has prescribed the provision for cost step-up available to the buyer/ transferee for the purpose of calculating capital gain at a later date when such property is sold / transferred by such person. Provision such as sub-section (4) to section 49 would mean that cost step-up shall be available to the person only for the purpose of calculating capital gain when such property is transferred at a later date as capital asset. Since provision of section 49(4) cannot be extended to section 32, assessee cannot account for such asset at higher value in the books of accounts and cannot claim depreciation on the enhanced value of the asset.
Further, in case assessee being Individual or HUF has acquired the immovable property as trading asset, the enhanced value of such asset cannot be accounted for in the books of accounts by the assessee, as no such provision corresponding to section 49(4) has been brought under the head ‘Profit & gains of business or profession.’ It would mean that if an Individual or HUF being in the business of real estate, buys the land or building at less than stamp duty value and therefore being subject to rigor of newly inserted clause (b) of section 56(2)(vii), pays tax on the difference of stamp duty value and the actual consideration yet such individual or HUF would not be able to take advantage of the cost step up despite the fact such individual or HUF has paid the tax with reference to stamp duty value.
4. Whether omission or legislative intent?
A question may arise as to whether this is a lapse on the part of the legislature and a provision of cost step up for trading asset corresponding to provision of section 49(4) has missed to be introduced in the statute or such omission is deliberate omission.
As discussed earlier, the underlying assumption behind section 56(2)(vii) seems to be that the actual consideration for a property cannot be less than its circle rate/ stamp duty value and in case the apparent consideration paid is less than the stamp duty value, the difference amount appears to have been paid in cash out side the books of accounts by the transferee. Such amount is deemed to be income of the Individual or HUF assessee as provided under this section viz. section 56(2)(vii)(b). If an analogy & comparison of this situation with the deeming provision of section 69 for unexplained investments and section 69C for unexplained expenditure is made, it seems that the legislature has intended with a conscious mind, to not to prescribe the cost step up in case of trading asset on the lines of section 49(4).
This is so because under the proviso to section 69C, the unexplained expenditure which is deemed to be the income of the assessee u/s 69C is not allowed as a deduction under any head of income. While in the case of unexplained investments u/s 69, there is no such restrictive provision, meaning thereby that if unexplained investment is deemed to be the income of the assessee u/s 69, such investment is allowed as deduction as cost of acquisition of the asset. It implies that the legislative intent is not to allow deemed income in the nature of revenue expenditure as deduction but to allow deemed income in the nature of capital expenditure as deduction. It seems that the same principle and analogy has been embedded in the case of provision of deemed income u/s 56(2)(vii).
However, this controversy is of limited applicability as the provision of section 56(2)(vii) is applicable only to individual and HUF and the cases when individual/HUF acquire immovable property as trading asset are not very common. Generally, immovable property as trading asset are acquired by the business entities such as firm/companies and provisions of section 56(2)(vii) are not applicable on such persons.
As a measure of tax planning, one may thus opt to do business of real estate in the form of business entities other than proprietorship
(i) Without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
(ii) For a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration
shall be chargeable to income tax under the head “Income from Other Sources”.
Prior to the above substitution, the provision of clause (b) was introduced u/s 56(2)(vii) w.e.f 1st Oct, 2009 laying down that in a case when any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds Rs. 50000/-, the stamp duty value of such property was taxable in the hands of the transferee individual or HUF under this section as “Income from other sources”. Finance Act, 2013 has thus extended the scope of this section, inter alia, covering the cases when any immovable property is received by an individual or HUF for inadequate consideration.
1. Transferor of the property covered u/s 50C/43CA, Individual/HUF Transferee covered by new clause (b) of section 56(2)(vii)
As per the provision of section 50C, which was introduced under the Income Tax Act by Finance Act 2002 w.e.f. 1.04.2003, if land or building is transferred for a value less than the stamp duty value or circle rate of the property and the property is in the nature of capital asset, the difference is taxed in the hands of the transferor as deemed Capital Gain. Finance Act, 2013 has, by way of introduction of new section 43CA on the lines of section 50C, has sought to cover such immovable property in the nature of trading asset also. Both sections 50C and 43CA are applicable to seller/transferor of such immovable property. The amendment u/s 56(2)(vii)(b) has however sought to cover the buyer/ transferee of such immovable property on the lines of section 50C/ 43CA.
The underlying assumption in both the situations seems to be that the actual consideration passed on the transfer of immovable property can not be less than circle rate/ Stamp duty Value and in case the apparent consideration shown in the transaction is less than the stamp duty value, the deeming fiction as envisaged u/s 50C/43CA or u/s 56(2)(vii)(b) qua transferor & transferee shall come into force.
Finance Act, 2009 had introduced similar fiction qua the transferee individual or HUF u/s 56(2) but the same was withdrawn by Finance Act, 2010 with retrospective effect. No worthwhile explanation as to the rationale behind withdrawal of such provision earlier and now reintroducing the same by Finance Act, 2013 has come forward from the side of Government. Memorandum explaining the provisions of Finance Act, 2013 is silent on this aspect.
2. Section 56(2)(vii)(b) applicable in the case of Individual & HUF only
It is important to note that provision of section 56(2)(vii) applicable in case of transferee of immovable property covers only Individual or HUF, whereas provisions of section 50C/43CA applicable to the transferor of the property cover all the assessees. It implies that if the transferee of property is a person other than individual or HUF i.e. a Company, Firm, LLP etc., provision of section 56(2)(vii) shall not be applicable. Thus, if an immovable property is purchased by a person other than an individual or HUF for a consideration which is less than Stamp Duty Value / Circle Rate, there will not be any implication or attraction of the provision of this section. There is however nothing explicit as to why only individual and HUF have been brought into the ambit of this section and as to why other persons have been left out. The only broad rationale one can gesticulate & comprehend is that the origin of the provision of section 56(2)(vii) relates to the introduction of the concept of gift/ deemed gift into the income Tax Act after the abolition of Gift Tax Act and since the gift tax used to affect largely to individual and HUF, the applicability of this provision has also been restricted to individual and HUF only.
3. Cost of acquisition to the buyer?
A question arises as to what would be the cost of acquisition to the buyer/ transferee in a case when he has paid tax under this section on the excess of stamp duty valuation over the actual consideration paid by him.
The legislature has provided sub-section (4) to section 49 prescribing cost of acquisition with reference to certain modes of acquisition. It states that where the capital gain arises from the transfer of a property, the value of which has been subject to income tax under clause (vii) or clause (viia) of sub section (2) of section 56, the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii) or clause (viia).
It means that in case the buyer of the property has acquired the property as capital asset, the legislature has prescribed the provision for cost step-up available to the buyer/ transferee for the purpose of calculating capital gain at a later date when such property is sold / transferred by such person. Provision such as sub-section (4) to section 49 would mean that cost step-up shall be available to the person only for the purpose of calculating capital gain when such property is transferred at a later date as capital asset. Since provision of section 49(4) cannot be extended to section 32, assessee cannot account for such asset at higher value in the books of accounts and cannot claim depreciation on the enhanced value of the asset.
Further, in case assessee being Individual or HUF has acquired the immovable property as trading asset, the enhanced value of such asset cannot be accounted for in the books of accounts by the assessee, as no such provision corresponding to section 49(4) has been brought under the head ‘Profit & gains of business or profession.’ It would mean that if an Individual or HUF being in the business of real estate, buys the land or building at less than stamp duty value and therefore being subject to rigor of newly inserted clause (b) of section 56(2)(vii), pays tax on the difference of stamp duty value and the actual consideration yet such individual or HUF would not be able to take advantage of the cost step up despite the fact such individual or HUF has paid the tax with reference to stamp duty value.
4. Whether omission or legislative intent?
Such amount is deemed to be income of the Individual or HUF assessee as provided under this section viz. section 56(2)(vii)(b). If an analogy & comparison of this situation with the deeming provision of section 69 for unexplained investments and section 69C for unexplained expenditure is made, it seems that the legislature has intended with a conscious mind, to not to prescribe the cost step up in case of trading asset on the lines of section 49(4)
As discussed above, the benefit of cost step-up has been granted by the legislature for a situation where the asset is a capital asset for the purpose of calculating capital gains on its subsequent sales but the benefit of the cost step-up has not been granted to an Individual or HUF when the asset is acquired by them as trading asset. In case the asset acquired is in the nature of trading asset, the deduction shall be allowed for an amount being the actual consideration paid by the assessee even when tax has been paid by him on enhanced value in accordance with the provision of section 56(2)(vii).A question may arise as to whether this is a lapse on the part of the legislature and a provision of cost step up for trading asset corresponding to provision of section 49(4) has missed to be introduced in the statute or such omission is deliberate omission.
As discussed earlier, the underlying assumption behind section 56(2)(vii) seems to be that the actual consideration for a property cannot be less than its circle rate/ stamp duty value and in case the apparent consideration paid is less than the stamp duty value, the difference amount appears to have been paid in cash out side the books of accounts by the transferee. Such amount is deemed to be income of the Individual or HUF assessee as provided under this section viz. section 56(2)(vii)(b). If an analogy & comparison of this situation with the deeming provision of section 69 for unexplained investments and section 69C for unexplained expenditure is made, it seems that the legislature has intended with a conscious mind, to not to prescribe the cost step up in case of trading asset on the lines of section 49(4).
This is so because under the proviso to section 69C, the unexplained expenditure which is deemed to be the income of the assessee u/s 69C is not allowed as a deduction under any head of income. While in the case of unexplained investments u/s 69, there is no such restrictive provision, meaning thereby that if unexplained investment is deemed to be the income of the assessee u/s 69, such investment is allowed as deduction as cost of acquisition of the asset. It implies that the legislative intent is not to allow deemed income in the nature of revenue expenditure as deduction but to allow deemed income in the nature of capital expenditure as deduction. It seems that the same principle and analogy has been embedded in the case of provision of deemed income u/s 56(2)(vii).
However, this controversy is of limited applicability as the provision of section 56(2)(vii) is applicable only to individual and HUF and the cases when individual/HUF acquire immovable property as trading asset are not very common. Generally, immovable property as trading asset are acquired by the business entities such as firm/companies and provisions of section 56(2)(vii) are not applicable on such persons.
As a measure of tax planning, one may thus opt to do business of real estate in the form of business entities other than proprietorship
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