A recent ruling of the Income-Tax Appellate Tribunal’s (ITAT) Mumbai bench has come as a relief to taxpayers embroiled in litigation on capital gains arising out of sale of their flats due to the sale price being lower than the stamp duty valuation.
ITAT has held that the benefit of a higher tolerance band of 10% for the difference between the sale price of a flat and the stamp duty valuation will apply with retrospective effect.
The ITAT bench of vice-president Pramod Kumar and judicial member Saktijit Dey held this benefit would apply retrospectively from financial year 2002-03 (assessment year beginning April 1, 2003) when anti-abuse provisions were introduced in the income-tax Act.
The ruling will help pending cases from these years when the acceptable variation rate was much lower or no such leeway was available. Tax experts said several such cases are pending at various levels, especially in larger cities such as Mumbai.
To prevent tax abuse and deter the use of black money in property deals, Section 50C was introduced by the Finance Act, 2002. It provided that if the sale consideration claimed to be received by the seller is less than the stamp duty rate, the latter would be considered for determining capital gains.Thus, the quantum of capital gains would be the “higher” stamp duty valuation minus the “indexed” cost of the flat sold. This would result in higher capital gains and consequently a higher tax outgo. To factor the effects of inflation, the Income-Tax (I-T) Act permits application of a cost inflation index to the original cost of the property being sold.
To minimise hardships in case of genuine transactions, the Finance Act, 2018, amended Section 50C and provided that no adjustment will be made in cases where the variation between stamp duty value and sale consideration was not more than 5% of the sale consideration. This proviso was further amended by the Finance Act, 2020, and enhanced the acceptable variation rate to 10%.
I-T authorities submitted to ITAT that the amendment carried out by the Finance Act, 2018, would come into effect only prospectively from financial year 2018-19. Similarly, the enhanced variation rate will apply from financial year 2020-21.
In the case before ITAT, the year covered by the litigation was 2010-11. The difference between the sale consideration as disclosed by the seller, Maria Fernandes Cheryl, and the stamp duty valuation was Rs 4.9 lakh. This was about 6.6% of the declared sale transaction.
According to the I-T officer, the tolerance band of 5% and 10% applied only prospectively and did not cover the year under litigation. He accordingly enhanced the capital gains computation. The matter finally reached ITAT.
ITAT disapproved of this enhancement and provided relief to the taxpayer. According to ITAT, the proviso amending the variation rate to 10% was curative in nature and must relate back to the date of introduction of the section itself.
“What holds good in 2021 was also good in 2003. If variations up to 10% need to be tolerated and need not be probed further, in 2021 under section 50C, there were no good reasons to probe such variations, in the earlier periods as well,” states the order.
The I-T department had also submitted to the ITAT that if its submissions of the amendments being prospective in nature are not accepted, the tax tribunal’s order should mention that “relief is being provided as a special case and this decision may not be considered as a precedent.” The ITAT has come down heavily on this plea, terming it as an “antithesis of the principle of equality before all.” It firmly stated that its order will hold good for all other similarly placed litigants as well.