Tax on deemed gains on property sale?

In March this year, Pankaj Khanna sold his land for Rs 50 lakh. The property was purchased four years back for Rs 15 lakh. Pankaj used the entire money to buy a residential house for Rs 50 lakh. Since the entire sale consideration was reinvested, he understood that he would not have to pay capital gains tax on his profit of Rs 35 lakh. To his surprise, he was told from his tax advisor that he still has to pay capital gains tax.

The buyer of his original property had paid stamp duty on a fair market value of Rs 60 lakh as determined by the stamp valuation authority while getting the land registered in his name. Pankaj was informed by his tax advisor that Rs 60 lakh would be considered as deemed sale price of the land and he would be liable to pay capital gains tax on an amount of Rs 10 lakh (Rs 60 lakh minus Rs 50 lakh).

Rigours of section 50C

Pankaj found himself in this situation because of Section 50C of the Income Tax Act coming into play. Inserted in law with effect from April 1, 2002, Section 50C provides that where the sales consideration received by any person on transfer of land and/or building, is less than the value adopted by the valuation authority of a state government for the purpose of payment of stamp duty, the value adopted for stamp duty purposes shall be considered to be the sales consideration for computing capital gains.

If however, the value stated in the sale agreement between the buyer and seller is more than the value adopted by the State Valuation Authority, the value as per the agreement will be taken as sales consideration. In Pankaj’s case, the deemed sales consideration for computing capital gains is Rs 60 lakh. Pankaj must, therefore, pay tax on this higher consideration even though he has not actually received the additional amount.

An option for the seller could be to dispute the valuation of property by stamp authorities. Section 50C provides that where the seller claims that value determined by stamp authorities exceeds the fair market value, the tax officer may refer the property for valuation by the valuation officer. If the valuation officer values the property at a value higher than the value adopted for stamp duty, the value adopted for stamp duty will prevail. However, if the valuation by the officer is lower than the value adopted for stamp duty, such value will be taken.

The genesis of Section 50C was to curb the problem of loss of income tax in real estate transactions in situations where buyer and seller resorted to understating the consideration in the agreement for sale. Though the section was introduced to check tax evasion, it also covers in its ambit, sale transactions where the immovable property is sold at a value less than market value under special circumstances like sale to close relative, distress sale to tide over financial crisis or sale during reconstruction of a business.


(The authors are with Ernst & Young)