The Hindu Business Line : Transfer troubles

In real estate transactions, the property value is given by government agencies such as Urban Development authorities, based on the property's location and infrastructure. Conveyancing of the property is done at this value, which is the minimum. Transactions can be effected at a rate higher than the rate fixed by the government (known as the guideline value). Even if the property has been transacted lower than the guideline value, stamp duty shall depend on the government rate.

A property might sell lower than the market rate under several circumstances

* The property is not "as per vastu"

* The property is under litigation

* The property is in illegal possession

* It is rumoured to be a "haunted place"* Distress sale for, say, the marriage of a daughter or for medical expenses, etc.

* Rushed sale — for example, the seller might be in a hurry to wind up all his business in the country before going abroad.

Such transactions are covered by Section 50 C of the Income Tax Act, which has evoked severe opposition in recent times. There have been representations to the finance minister to reconsider the provisions in the forthcoming budget.

What is Section 50C?

Section 50 C was introduced by the Finance Act, 2002. It is applicable to transfer of land or building or both.

This is a deeming section which uses the guideline value to calculate stamp duty and arrive at the capital gains, if the guideline value is higher than the actual consideration received.

It allows referral to the valuation officer if the seller claims that the property's market value on the date of transfer is less than the guideline value.

If the market value according to the valuation officer exceeds the guideline value, then the guideline value shall be used.

This provision cannot be invoked if the matter is disputed and an appeal for revision pending before any authority or court of law. The assessment shall be based on the existing stamp duty value. If, at a later date, the dispute is resolved and the value revised downwards, the assessing officer can adopt the revised value.

The implications

If the sale amount is less than the guideline value, the capital gains tax is based on the guideline value. For example, if an assessee sells his property at Rs 25,000 per sq yard but the guideline value is Rs 30,000 per sq yard, as per Section 50 C, the matter may be referred to a valuation officer. Let us consider some of the likely scenarios. a) Value as per the valuation officer is more than the guideline value: The valuation officer puts the value at Rs 40,000 per sq yard. Under such circumstances, the valuation report is filed and the adopted value is Rs 30,000 per sq yard.

b) Value as per the valuation officer is less than the guideline value but more than the actual value: If the valuation officer puts the value at Rs 27,000, then the capital gains shall be computed based on this value and not Rs 30,000 per sq yard.

c) The valuation officer puts the value at less than the actual consideration: If the valuation officer sets Rs 22,000 per sq yard as the value, the valuation report is again ignored and the actual consideration given by the assessee will be taken as the base.

Impact on real estate investments

The assessee is badly affected as he has to pay capital gains tax on gains not realised by him. On the one hand he loses by selling below the guideline price (which, in a majority of the cases, is less than the market value) and on the other, he has to pay capital gains tax based on the guideline value.

The reference to a valuation officer is not given as a matter of right. The assessing officer decides if the case merits such a reference. This leads to complications.

The valuation officer may not be equipped to value certain types of land such as agricultural land.

The reference as well as the report both contain an element of discretion on the part of the assessing officer and the valuation officer. This leaves scope for alternative values as well.

The valuation officer needs to take into consideration aspects peculiar to each property such as sentimental values and so on. The valuation officer's report is also likely to be questioned at a later date. All this adds to the burden of the honest taxpayer. This Section has been extensively debated on in recent times. Legal experts have termed such provision ultra vires the Constitution.

To quote a report that appeared in Business Line on January 2, 2006:

"... .in the celebrated case of K.P. Verghese vs CIT, the Supreme Court has held that it was improper to deem a higher sale consideration without specific material to prove that the transferor got any money in addition to what was shown in the sale agreement or conveyance deed."

The author is a Hyderabad-based chartered accountant.

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