The Maharashtra state government has sharply increased the rates used to calculate taxes paid by home buyers when buying property for the calendar year 2015. The hike in ready-reckoner rates, which is effective January 1, is to the tune of almost 30-40 per cent for some of the fastest growing and popular suburbs in Mumbai. It is widely debated that the hike could dampen hopes of home buyers waiting for a fall in property prices since quite some time ago. It is not unusual for parties to a property transaction to first enter into an agreement to sell, giving additional time to the buyer to raise funds for the purchase (let's call it the first agreement). Once the mobilisation of funds is done within a given time frame, the sale agreement is executed (let's call it the second agreement). Under section 50C of the Income Tax Act, 1961 ['the Act'], the higher of the agreement value received on sale of property and the stamp duty value of the property (reckoner rate) is to be considered for the purpose of calculating capital gains on the sale of property. For example, if the agreement value of a property is Rs 75 lakh and the reckoner rate is Rs 78 lakh, then Rs 78 lakh shall be taken as the sale consideration for computing capital gains. Now, let's consider a hypothetical situation. Ajith Sharma enters into the first agreement at an agreement value of Rs 80 lakh for the sale of his property in November 2014, when the reckoner rate of the property was Rs 75 lakh. In view of the hike in the reckoner rates, when Sharma executes the second agreement in February 2015, the reckoner rate now stands at Rs 83 lakh. In this situation, how does one interpret the provisions of section 50C as above? Section 50C of the Act makes no reference to the first agreement or second agreement. Should Sharma consider Rs 83 lakh as his sale consideration (Rs 83 lakh being higher than Rs 80 lakh of agreement value at the time of the second agreement) or Rs 80 lakh (Rs 80 lakh being higher than Rs 75 lakh of the reckoner rate at the time of the first agreement)? The case In a recent case before the Delhi Income Tax Tribunal, this exact matter came up for decision. In the said case, the taxpayer had sold a plot of land on May 27, 2004 vide the first agreement where the agreement value was Rs 2.62 crore against the reckoner rate of Rs 2.62 crore. The second agreement was executed on September 16, 2004 when the reckoner rates had been hiked to Rs 4.03 crore.
During the course of assessment proceedings, the tax officer observed that the reckoner rate of the plot on the said date was Rs 4.03 crore. Accordingly, the tax officer, taking recourse to section 50C of the Act, took the value of Rs 4.03 crore for the purpose of computing capital gains on sale of the plot, being higher of the values of Rs 2.62 crore and Rs 4.03 crore. First appeal At the first appellate level, the tax payer argued that the plot of land was sold vide registered agreement to sell dated May 27, 2004 when the reckoner rate of the plot was Rs 2.62 crore. However, on the date of the second agreement, September 16, 2004, the reckoner rate was hiked to Rs 4.03 crore. The taxpayer claimed that it was not justified on the part of the tax officer to enhance the sale consideration for the purpose of computing capital gains on the basis of the reckoner rates as on the date of the second agreement instead of the first one. The first-level appellate authority rejected the taxpayer's claim and held that the property cannot be considered to be sold merely on the basis of the first agreement as all the rights continued to vest with the taxpayer in relation to the said property. The actual transfer of rights in relation to the property took place only after the second agreement on execution of the sale deed in September 2004 and accordingly, the consideration for the purpose of capital gains has to be taken as per the reckoner rates in September 2004. Second appeal The tribunal in the said case had to decide whether the reckoner rate to be considered for the purposes of section 50C should be that as on the date of the first agreement or the second. The tribunal remarked that the enhancement in the stamp duty valuation in the said case was beyond the control of the taxpayer and the tax officer had nothing on record to show that the buyer of the plot has given any further consideration post the hike in the stamp value. The tribunal relied on an earlier Supreme Court decision wherein it was held that by executing an agreement to sell in respect of an immovable property, the seller is restrained from selling the property to anyone else due to the buyer's right to buy the property under the agreement. In the given situation, as the seller gives up his right to sell the property, it can definitely be regarded that an agreement to sell is also conclusive evidence for the property sale. Final decision In view of the above decision, the tribunal held to comply with the provisions of section 50C, the comparison between reckoner rates and agreement value as on the date of the first agreement is appropriate. No further comparison with the second agreement is necessary. In order to be fair and just to the taxpayer in the said case, where there is clearly no understatement of consideration in respect of transfer of the plot, the taxpayer should not be made liable to pay tax on capital gains which have not accrued or arisen to him. What it means Relying on the Delhi Tribunal case, in the example quoted above, Sharma can consider the value of Rs 80 lakh as his sale consideration for the purpose of capital gains and not Rs 83 lakh. So, if you have already executed the first agreement in 2014 and are now looking to execute the second agreement in 2015, remember this. First, the reckoner rate and the agreement value at the time of the first agreement should be compared. The higher of the two will be taken as the sale consideration for the purpose of computing capital gains. If the reckoner rate at the time of the second agreement is higher than the answer to the first comparison, the seller can still stick to the first answer for tax purposes. The writer is a chartered accountant