By Subash Agarwal, Advocate
Section 50C was enacted a decade ago under Chapter IVof the Act, which deals with computation of capital gains arising from the sale of a capital asset. This provision was enacted to check the proliferation of black money in property transactions by deeming the value assessed or assessable by the Stamp Valuation Authority (in short, SVA) as the full value of consideration received / accrued on sale of a capital asset, being land or building or both. The provision applied to land or building or both held as a capital asset by the assessee and not to cases, where such assets were held as stock-in-trade.
2. Enactment of section 43CA
To extend the ambit of deeming fiction to such cases, where such assets are held as stock-in-trade, the Finance Act, 2013 has enacted section 43CA w.e.f. 1.4.2014, which falls in chapter-IV relating to the computation of Business Income.
3. Salient features of Section 43CA
(a) It applies to transfer of land or building or both held other than as a capital asset i.e., as a stock-in-trade.
(b) In computing the business profit arising from the transfer of such asset, the value assessed or assessable by the SVA will be substituted in place of the actual consideration received.
(c) Like as per the provision of section 50C, the assessee can claim before the A.O. that the value assessed / assessable by the SVA exceeds the FMV as on the date of transfer and ask him to refer the valuation of the property to the valuation officer.
(d) Where the promoter or developer has entered into an agreement for sale with the buyer of the property but the sale is accounted for at the time of registration of deed at a subsequent date, the promoter-assessee has the option to take the value assessable by SVA on the date of agreement provided the consideration or a part of it has been received by him on or before the date of agreement in cheque.
4. FAQs on section 43CA
Attempt is being made hereunder to address various important issues that may arise from the enactment of this new provision.
5. Fact Situation
Suppose, one builder make an agreement for sale in a newly launched project at a price of Rs. 5,000/- PSF (Market price on that date is Rs. 7,000/- ). Subsequently, the investor cancels the deal and settles the deal at Rs. 7,000/- PSF and took the difference of Rs. 2,000/- PSF.
Whether the provisions of section 43CA will apply in the above example?
The provision of section 43CA is not applicable to the stated fact situation. The fact that the builder has entered into an agreement with an investor does not result into transfer of land or building. In the given fact situation, the builder has incurred a loss and the same is arising out of and in the course of business. As such, the builder can claim deduction of loss out of his business profits which is allowable u/s 28.
What would be the situation if in the above case, the investor instead of canceling the deal, nominate some other person at the market price of Rs. 7,000/-?
Where the investor nominates a person, he becomes the confirming party and the nominee becomes the buyer in the conveyance deed that is ultimately executed and registered.
But the problem will arise when the conveyance deed is ultimately executed and registered. At that time, the sale will take place and in terms of section 43CA, deemed sale value will be the assessable value as per the State Stamp Valuation Authority (SVA) on the date of agreement with the investor, provided the investor has paid the booking amount by account payee cheque. Admittedly, the investor has booked the property at a price lower than the assessable value of the SVA and he has also pocketed the difference received from the nominee. Inspite of the fact that the difference does not go into the pockets of the builder, he has to face the brunt of the newly introduced section 43CA inasmuch as per the sub-section (3) thereof, the actual value of consideration will have to be substituted by the value assessable by the SVA on the date of agreement.
What would be the situation if the investor cancels the deal and settles for the same amount of Rs. 5,000/-?
If the investor cancels the deal and settles at the same price at which the property was booked (i.e., at the price less than the assessable value of the SVA), section 43CA does not come into play. It can be applied only when there is execution and registration of the conveyance deed.
Suppose, a builder sells the right in Flat before the construction is complete – Will the provision of above section be attracted as at that point of time, the building is not ready for use, so it cannot be termed as a building, nor does it come under the purview of Land?
As stated in response to Q no. 5(c), the provision of section 43CA cannot be applied where the builder merely sells the right in flat without entering into sale through the registered conveyance deed.
Suppose, a buyer of a flat, who purchased the right in flat @ Rs. 5,000/- PSF, sells the right in flat to another person at Rs. 6,000/- PSF before the construction is completed. Will the provisions of section 43CA be attracted, since there is no building or land which he is selling, although transfer includes extinguishment of rights u/s 2( 47)?
In the hands of the purchaser of right in a flat, the provision of section 43CA does not apply. The provision of section 43CA applies to an asset other than a capital asset, being land or building or both. This is specifically stated in sub section (1) of section 43CA. It is true that sale of a right in a capital asset results in extinguishment of right therein, but it is important to note that “extinguishment of right” is a form of transfer in relation to a capital asset in terms of section 2(47). Therefore, in the hands of the buyer of the right in flat, the differential sum on the sale of right is chargeable to tax as capital gains.
What is the meaning of term “transfer” u/s 43CA, since in terms of section 2(47), “transfer” is used in relation to Capital Assets, whereas section 43 CA uses the term “transfer” in relation to an asset (other than a capital asset)?
As stated in the preceding paragraphs, definition of “transfer” as per section 2(47) is confined to “capital assets”, gains arising out of which is chargeable to tax under the head “Income from Capital Gains”. Meaning of “transfer” u/s 43CA has not been defined. Therefore, the meaning as per the general law i.e., Transfer of Property Act will apply. “Transfer” u/s 5 of the Transfer of Property Act, 1882 implies conveyance of property “in present or in future” by a living person (including a company or AOP) to himself or to others. Conveyance is complete by registration of the document in respect of immovable properties.
Suppose a flat is booked in the year 2008-09 and a part consideration is also received in cheque. The flat is registered in the F.Y.: 2013-14, whether section 43CA of the Act is applicable?
In the given situation, section 43CA will be applicable. This is because, the provision is applicable from the A.Y.:2014-15 in regard to transfer of assets other than capital assets. Since the flat is registered in F.Y.: 2013-2014, transfer has also taken place in that year.
Suppose, a flat is booked in the year 2008-2009 or any date before 31.03.2012 and a part consideration is also received in cheque. The possession of the flat is given in F.Y.: 2011-2012 and maintenance charges are also received in that year. The flat is registered in the F.Y.: 2013-14, whether 43CA of the Act is applicable? Whether it makes any difference, if completion certificate is received after 31.03.13?
Date of registration is important for the purpose of applicability of section 43CA. Possession and other factors like completion certificate are irrelevant.
Suppose, the Buyer has shown the cost of flat in his Balance Sheet long back say, in F.Y.: 2005-06 and the developer has also shown the sale and booked profit in profit & loss account and his return of income in the said year. Now the flat is getting registered in F.Y.: 2013-14 and the stamp duty value is higher than the sale price even on the agreement date. I.T. return of either party is not reflecting any income/loss or any investment in AY 2014-15. Buyer has also taken benefit u/s 54 in the year of purchase/possession. Whether the assessing officer can reopen the case for earlier year for the developer (for considering sec. 43CA) and the buyer for sec. 56(2)(viib) or will do the assessment for the differential price in the year of registration? How far it is practically feasible and more so. when the section was inserted from the AY 2014-15?
The replies are as under –
(a) It is to be clearly understood that the year of purchase in the hands of the buyer / investor and the year of sale in the hands of the builder / promoter / developer need not be the same.
(b) A person who purchases a property as a capital asset is governed by the provisions relating to Capital Gains viz., chapter IV, E of the Act. He is also governed by the definition of the term “transfer” as per section 2(47), which has been conferred a very wider meaning. Thus, as per clause (v) thereof, even allowing of the possession of any immovable property to be taken in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act will amount to “transfer”.
(c) The builder / promoter who is in the real estate business and is showing the income under the head business is not governed by the section 2(47) of the Act. In his hands, the sale / transfer will take place on the execution and registration of sale deed.
In the context of 1922 Act, when the present day wider definition of ‘transfer’ as in section 2(47) was not on the statute book, the Hon’ble Supreme Court in CIT vs. Bhurangya Coal Co. 34 ITR 802 held that in the cases of an immovable property, transfer takes place only when the sale deed is concluded and not when the agreement for sale is executed. It is only in case of movable property that the title passes by delivery. In the case of Alapati Venkataramiah vs. CIT 57 ITR 185 (SC), this view was once again reiterated. It was held in the context of section 12B (corresponding to section 45 of 1961 Act) as under –
“Before section 12B of the 1922 Act, can be attracted, title must pass to the company by any of the modes mentioned in section 12B, of the 1922 Act i.e., sale, exchange or transfer. It is true that the word ‘transfer’ is used in addition to the word ‘sale’ but even so, in the context transfer must mean effective conveyance of the capital asset to the transferee. Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of the immovable property.”
(d) Thus, the wider definition of “transfer” u/s. 2(47) is confined to the “Capital Asset” and taxation under the head “Capital Gains”. The same cannot be extended to the determination of income under the head “Business”. It is pertinent to note here that the provision of section 43CA falls under chapter IV, D of Act, which relates to the determination of income under the head “Profit and Gains of Business or Profession”.
Though word “transfer” has been used in section 43CA but the same has not been defined therein. Section 2(47) specifically states that “transfer” defined therein is in relation to “capital asset”.
Therefore, for the purposes of section 43CA, “transfer” has to construed as per the general law which has been discussed in the preceding para.
(e) If the builder / promoter / developer has already shown the sale on the basis of handing over of the possession and agreement in the preceding year(s) and the said return has been accepted by the department, the department cannot reopen those assessments as in those years provision of section 43CA cannot be applied. It may be noted that there cannot be two sales of the same transaction.