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Capital Gains Tax on Transfer of Property

Capital gains tax is charged on the profits or gains received from the transfer of any property of a taxpayer. The Income Tax Act of India also provides for certain exemptions and deductions from such tax in certain cases.

Under the Income tax Act, capital gains tax is levied on the profits or gains received by a person for transfer of a capital asset. Depending on how long the capital asset was held by the person, it may be a long term capital gain or a short term capital gain. Capital gains tax has long since been a complex computation and several disputes have been launched surrounding its taxation.

In this article we are looking to cover some recent decisions that provide clarity on how capital gains tax is levied on the sale of property- particularly flats.
Tax on Transfer of Capital Asset:

Tax is charged on capital tax under the Income Tax Act, if the there is a profit or gain arising from the transfer of a capital asset by the taxpayer during an assessment year. Capital asset has been defined under section 2(14) of the Income Tax Act, to mean the following: i. Any kind of property held by the taxpayer, whether it is connected to a business or profession and ii. Any securities held by a foreign institutional investor which has been invested in accordance with the SEBI Act, 1992.

It also excludes the following assets:
  • Stock-in-trade, consumable stores, raw materials held for the purpose of business or profession;
  • Movable property held for personal use of taxpayer or for any member of his family dependent upon him.
  • Specified Gold Bonds and Special Bearer Bonds;
  • Agricultural Land in India, not being a land situated within the jurisdiction of a municipality, notified areas or town area committee, etc.
  • Deposit certificates issued under the Gold Monetisation Scheme, 2015.
Capital assets can be both short term capital assets and long term capital assets, depending on the period for which they’re held. Short term capital assets are capital assets held for less than 36 months before the date of transfer, while long term capital assets are those held for more than 36 months (or 24 or 12 months depending on the type of asset).

Under the Income Tax Act, individuals and Hindu undivided families have been provided the option of an exemption or deduction from the long term capital gains arising from the transfer of a long term capital asset being a residential house property if the proceeds from the sale are used for purchasing or constructing another residential property. This is laid down in section 54 of the Income Tax Act.

Under section 50C of the same Act, it has also been provided that the valuation of the land or building as determined by the Stamp Duty Valuation Authority will be used for the purpose of levying stamp duty on registration of properties and as a guidance value to determine any instance of undervaluation of any property.

If the value is less than the stamp value, then the stamp value shall become the actual value of sale, and capital gains tax would be levied as according to the stamp value. Since 2020, this method of replacing the undervalue with the stamp value of the property is only applicable if the difference in value is greater than 10%.

There have been various contentions surrounding the application of section 54 and section 50. Recently, the income tax tribunals have decided some matters that have provided some clarity on such rules.
Recent Rulings on Capital Gains Tax for Transfer of Residential Property:

1. Transfer of the asset has to be effectuated for attracting capital gains tax

In the case of Sh. Ijyaraj Singh, Kota vs. ACIT, the Jaipur ITAT held that the capital gains tax would not be attracted on a transfer of property until the transfer had been actually effectuated. The assessing officer argued that when the transfer is supported by a registered sale deed, then the transaction would be liable to capital gains tax. The taxpayers argued that since the payment had not been received due to a breach of contract, the transfer of asset had not been concluded.

The tribunal held that the deduction with respect to capital gains is allowed in the year that a transfer capital asset results in a gain or profit. Two amounts i.e. the expenditure incurred wholly and exclusively in connection with such transfer; and the cost of acquisition of the capital asset and the cost of any improvement thereto, is deducted from the full value received or accrued as a result of the transfer of capital asset.
They held that the title of property does not necessarily pass when the title deed is registered, but rather it rests on the intent of the parties in executing the instrument. Registration of the transfer of title itself is not proof of an operative transfer, and the transfer itself will only become effective on payment of the full consideration amount. Hence, the transfer of title is considered effectuated on the receipt of the full consideration amount and not at the time of execution or registration of the title deed. 

In regard to whether income has accrued for tax to be charged on the transfer of assets, the tribunal held that tax can only be charged on the real income and not on any hypothetical income which may or may not arise. Hence, the tribunal held that the capital gains tax would only arise once the total amount of sale consideration has been received by the taxpayer.
2. Deduction under section 54 cannot be denied for non-completion of construction

As explained above, deduction for long term capital gains can be availed if the taxpayer uses the proceeds for purchasing or constructing another residential property within three years. In the case of Estate of Late Dr. S. Zakaulla Masood, the Bangalore ITAT has held that this deduction cannot be denied merely on the fact that the construction is not completed within three years.

The assessing officers had denied the deduction on the grounds that the completion certificate had not been provided by the assesee to prove that the construction of the new property had been completed.

The tribunal held that the intention of the legislatures in providing the deduction under section 54 was to encourage investments in the real estate sector. The only condition precedent to section 54 is that the capital gain received from the transfer of capital asset has to be parted with by the assesee and further invested in either purchasing or constructing another residential property. Lack of occupation or completion certificates will not be reasons enough to disentitle the assesee from the capital gains that he has already parted with.

The evidence that the assesee must provide is that the consideration received from the transfer of capital asset has been further invested.
3. Deduction under capital gains tax is allowed for purchase of foreign property

In the case of Joseph K. Zachariah, the Bangalore ITAT has held that the capital gains received from transfer of capital asset applied towards purchasing or constructing a property outside India will be an allowable deduction under section 54 of the Income Tax Act.

The assesee had remaining balance from the transfer of his capital asset which he had no deposited in the capital gains account by the due date for income tax filing. Hence, the assessing officers held that the deduction could not be allowed as the remaining balance was not utilized. The assesee contended that this amount had been invested in purchasing a property in Chicago, USA.

The tribunal held that if the assesee provided evidence of the investment of the capital gains amount in the property in Chicago, then the assesee may be allowed the deduction. The property being situated abroad is not reason enough to disallow the deduction.

4. Benefit of difference between sale price and stamp duty valuation of property is allowed

In the case of Maria Fernandes Cheryl vs. ITO, there was an instance of the stamp duty valuation differing from the actual valuation of the property as per the sale agreement. As per the 2020 amendment to section 50 C, the fiction of section 50C would only be applicable if the difference in value was greater than 10%. The matters referred to in this case were in effect before the amendment had been introduced in 2020, and so the assessing officers argued that the value of the property had to be considered as per the old law.

The tribunal rejected this argument and held that the amendment would be applicable retrospectively, and that the taxpayers should receive the benefit of the capital gains as per the lower valuation.

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