Sec. 50C of the Income-tax Act was introduced in 2003 for computation of capital gains in real estate transactions. The real estate sector of India prior to 2005 was much unorganised. Deliberate under-valuation of immovable property was often used as a tax-avoidance practice by some taxpayers. To curb this, the taxman came up with section 50C to target cases of real estate transactions where immovable property (land or building or both) was sold at less than circle valuation-rate (or stamp duty valuation rate).

Sec. 50C says that in case a seller transfers immovable property at a value less than stamp duty valuation rate, capital gains shall be calculated by considering such stamp duty valuation rate as consideration received on transfer. In such cases, the consideration agreed between the seller and buyer would become redundant, as capital gains tax would still require to be calculated and deposited as per the Government’s valuation (i.e, stamp duty valuation rate) and not what the parties may mutually decide amongst themselves to declare ‘on paper’. In other words, Government’s kitty for income tax would be immune to any deliberate undervaluation of property by the seller.  

The next six years (2003 till 2009) noticed some taxpayers escaping clutches of Sec. 50C, by resorting to transfers which are not registered with stamp duty valuation authority, and executed through ‘agreement to sell’ or ‘power of attorney’. Till 2009, such transactions were not covered within the scope of Sec. 50C. Consequently, the Government came up with an amendment effective from 1.10.2009 to prevent leakage of revenue, saying that Sec. 50C shall be applicable even in cases where the property is not registered for the purpose of payment of stamp duty. By virtue of this amendment, the  tax authorities are free to refer the property to stamp valuation authority for the purpose of capital gains, irrespective of whether the same has been registered for stamp duty purposes or not. In other words, a seller who transfers beneficial ownership of immovable property by means of an ‘agreement to sell’ or ‘power of attorney’ (typically an ‘agreement to sell’ or a ‘power of attorney’ does not convey legal title or interest in the immovable property) but not legal ownership (by refraining to execute a conveyance deed and paying stamp duty), would still face the consequences of Sec. 50C.

As mentioned above, an ‘agreement to sell’ or ‘power of attorney’ does not convey any title nor create any interest in an immovable property, as held by Hon’ble Supreme Court of India in case of Suraj Lamp & Industries (P) vs. State of Haryana (SLP no. 13917 of 2009). Beneficial ownership in immovable property can be legally and lawfully transferred/ conveyed only by a registered deed of conveyance.  The observations by the Delhi High Court, in Asha M. Jain v. Canara Bank - 94 (2001) DLT 841, that the ‘concept of power of attorney sales have been recognized as a mode of transaction’ when dealing with transactions by way of agreement to sell or power of attorney have been found by the Supreme Court to be unwarranted and not justified, unintendedly misleading the general public into thinking that such transactions are some kind of a recognized or accepted mode of transfer and that it can be a valid substitute for a sale deed. Such decisions to the extent they recognize or accept agreement to sell/ power of attorney transactions as concluded transfers, as contrasted from a deed of conveyance, are not good law as laid down by the Hon’ble Supreme Court.

Date of enforcement of amendment to Sec. 50C vide Finance Act (No.2), 2009

This article focuses on the disputes that have since arisen regarding the date of applicability of above amendment. As per the law (as clarified by Circular No.5 dated 3.6.2010), it has been clearly mentioned that the amendment is applicable with effect from 1.10.2009 and will accordingly apply in relation to transactions undertaken on or after such date. However, the tax authorities on various occasions have been arguing that the amendment is clarificatory in nature and is indicative of intention of the legislation is to bring all the transactions where the registration of sale has not taken place also within the ambit of Sec. 50C, and accordingly, the amendment should be applicable retrospectively. Taxpayer, on the other hand, has been adopting the position that the amendment is effective from 1.10.2009, and hence cannot be applied retrospectively prior to that said date – in other words, for transactions taken place prior to 1.10.2009, Sec. 50C could be invoked only in cases where the registration of the sale deed had taken place and not otherwise.

Retrospective amendments in the tax law is something not surprising for Indian taxpayers. What makes the above dispute interesting regarding amendment in Sec. 50C, is that what is the position that the judiciary would take when it has been specially mentioned by the legislature that the amendment is applicable from 1.10.2009 (vide CBDT circular no.5/2010), but the tax authorities still choose to axe the taxpayer for transactions prior to the said date.

The Chennai High Court (in 2013) and the Rajasthan High Court (in 2017) had the chance to dwell on this dispute. Their observations in the case are interesting and worthwhile to note, as given below.

Chennai High Court in the case of CIT vs. R.Sugantha Ravindran [TS-90-HC-2013(MADRAS)-O]

The AY in question was 2005-06. The issue involved was whether the tax officer was entitled to adopt the value of the property assessable by State Government for the purpose of payment of stamp duty in respect of said transfer or not, for the purpose of capital gains calculation. Admittedly, no registration of sale deed had taken place.

Revenue’s argument was that only in pursuance of the agreement of sale, the assessee had transferred the property and received the sale consideration. In such background, the Chennai High Court was required to decide whether Sec. 50C would be applicable even where the registration had not taken place, for AY 2005-06.  

The assessee relied on Circular No.5/2010 dated 3.06.2010 issued by CBDT and submitted that as per the circular, it was abundantly clear that the amendment made by the Finance (No.2) Act, 2009 is only prospective in nature and cannot be applied retrospectively.

The Chennai High Court held the following:

1. If the CBDT has issued a circular clarifying the date of applicability of Sec. 50C in pursuance of the amendment made by Amendment Act 2 of 2009, the Revenue was nor correct in canvassing the same issue which essentially was against the spirit of the circular issued by the CBDT.

2. Revenue is bound by the circular issued by CBDT. Revenue cannot plead that it is inconsistent with the statutory provisions, as per decision of Hon’ble Supreme Court in case of State of Tamil Nadu and another Vs. India Cements Ltd. (2011) 40 VST 225 (SC).

3. Most importantly, insertion of the words ‘or assessable’ by amending Sec. 50C with effect from 01.10.2009 is neither a clarification nor an explanation to the already existing provision. It is rather an inclusion of new class of transactions namely the transfers of properties without or before registration.

4. Before introducing the above amendment, only the transfers of properties where the value ‘adopted or assessed’ by the stamp valuation authority were subjected to Sec. 50C application. However after introduction of the words ‘or assessable’ after the words ‘adopted or assessed' such transfers where the value assessable by the stamp valuation authority are also brought into the ambit of Sec. 50C.

5. The introduction of new set of class of transfer would certainly have prospective application only and not otherwise. Hence the assessee's transfer admittedly made earlier to such amendment cannot be brought within the scope of Sec. 50C.

6. Based on above observations, Revenue’s appeal was dismissed.

Rajasthan High Court’s decision in the case of CIT vs. Satya Dev Sharma [TS-6092-HC-2017(RAJASTHAN)-O]

In the above case, the assessee had shown long term capital gains of Rs.7.29 lakh on sale of agriculture land at Jaipur. The assessee was asked to file the Registered Sale Deed, to which the assessee filed copy of the sale agreement and power of attorney issued in favour of assessee by Smt. Pushpa Devi and Smt. Gulab Devi. The power of attorney was registered in the office of Sub Registrar, Jaipur. As per registered power of attorney, the value of sold property was determined at Rs.1.35 Crores u/s. 54 of the Stamp Duty Act. The assessee was asked to explain as to why the sale consideration of the property be not adopted at Rs.1.35 crores as provided u/s. 50C of the Act. The assesse replied as below:

1. The power of attorney was executed in favour of the assessee by Smt. Pushpa Kedia and the assessee made payment of Rs.62.70 lakh to Smt. Pushpa Kedia on execution of power of attorney in his favour. The power of attorney was duly registered before the Sub-Registrar and the Sub-Registrar has assessed the value for registration of power of attorney at Rs.1.35 crores.

2. The assessee executed an agreement dated 13.11.2006 in favour of M/s. Rising Build Estate Ltd. and transferred all the right acquired under the power of attorney on consideration of Rs.70 lakh. This Registration was presented for registration before the Stamp Duty authority.

3. The assessee has not transferred any immovable property but has transferred the right of purchase of immovable property. The assessee neither received the possession of property nor has any control been acquired on the property.

4. The assessee has not presented the agreement executed in favour of M/s. Rising Build Estate Ltd. for registration before the Stamp Duty Authority to assess or adopt any value of the transaction. Hence, Sec. 50C is not applicable. Sec. 50C is a fiction made in the Act for adoption of value in certain specific cases. The fiction cannot be read in wider sense. Thus, provisions of Sec. 50C are not applicable.

5. Revenue is not disputing about the existence of circular issued by the CBDT on 3.6.2010

In background of the above facts, the Rajasthan High Court has echoed the decision in case of Chennai High Court in the case of CIT vs. R.Sugantha Ravindran [TS-90-HC-2013(MADRAS)-O] and held that provisions of Sec. 50C are not applicable in the instant case.

Conclusion

In view of the above decisions of Hon’ble Chennai High Court and Rajasthan High Court till date, it is safe to infer that the amendment made in Sec. 50C with effect from 1.10.2009 bringing into net transfers of immovable property made by means other than registered conveyance deed, is so far, prospective in nature. However, as we all may be aware, till the fate of ruling of High Court is decided by the Hon’ble Supreme Court (or for that matter, amendment in the next Union Budget), it is always a wait & watch situation!