International Taxation Conference, 2010

The Foundation for International Taxation organizing its annual International Taxation Conference from 2-4 December, 2010 in Mumbai, India.

This Conference is the sixteenth in the annual conferences orgainsed by the FIT. The speakers include the top authorities on International Taxation.

For those interested, more details available at the FIT website.

Capital Gains and Full Value Consideration

Section 50C of the Income Tax Act, 1961 was introduced as a measure to curb shady deals and the circulation of black money in the property dealings. It seeks to impose capital gains tax on the seller on the basis of the value adopted by the ‘stamp valuation authority’. However, it is not clear what the effects would be on the purchaser and his income. The problematic question arises as to whether this amount would be included in the income of the purchaser section 69 as well?

1. Preliminary:

1. It has been held by the Hon’ble High Court of Judicature at Bombay in the latest case of Bhatia Nagar Cooperative Society v. Union of India[i] that the provisions of section 50C are constitutionally valid and thus, the same shall have applicability.

2. Scope of Section 50C:

2. Upon the reading of the provisions of section 50C, it is clear that the provision is a deeming provision and it specifically targets to charge the seller-assessee. The scope of Section 50C, which is a deeming provision, is restricted by the Act itself, as the Act must be read as a complete code,[ii] whereby section 50C has no applicability on the buyer in this case. Through the deeming provision as under Section 50C, and specifically the present case whose purpose can be ascertained to be taxation of the income of the seller-assessee, full effect is required to be given to the statutory fiction and it should be carried to its logical conclusion and cannot be extended beyond the purpose for which it is enacted.[iii] It cannot thus be extended to rope in the purchasers on grounds of section 69.

3. In the case of Dinesh Kumar Mittal vs. ITO and Ors.[iv] the Hon’ble High Court of Judicature of Allahabad while holding that the value determined for the purpose of stamp duty was not the actual consideration passing between the parties to a sale, observed at para 3:

“We are of the opinion that we cannot recognise any rule of law to the effect that the value determined for the purpose of stamp duty is the actual consideration passing between the parties to a sale. The actual consideration may be more or may be less. What is the actual consideration that passed between the parties is a question of fact to be determined in each case, having regard to the facts and circumstances of that case.”

3. Genesis of Section 69

4. Under the genesis of section 69 it is clear that it does not embody the legal fiction by which the value assessed by stamp authorities could be considered to be the actual consideration paid by the purchaser of the property and further, there is no presumption that unexplained investment must necessarily be added to the assessee’s income. It has been held that even the unsatisfactoriness of the explanation need and did not automatically result in deeming the value of investment to be the income of the assessee.[v] Thus it may be concluded that the scope of Section 50C is limited to the extent that it cannot be utilised as a tool for additions to the income in the hands of a purchaser.

4. Hitting the nail on the head:

The latest case of ITO v. Harley Street Pharmaceuticals Ltd.[vi] as decided on 16.03.2010 held that Section 50C creates a legal fiction for taxing capital gains in the hands of the seller and it cannot be extended for taxing the difference between apparent consideration and valuation done by Stamp Valuation Authorities as undisclosed investment under section 69. This fiction cannot be extended any further and, therefore, cannot be invoked by AO to tax the difference in the hands of the purchaser.

5. Conclusion and effect:

Thus, from the above discussion it is clear that there shall be no effects of the circle rates for the purposes of stamp duty valuation in regard to the income of the seller for the purposes of capital gains, on the purchaser. There shall be no repercussions on the purchaser in this regard and no income can be added to the income of the purchaser by the Income-tax Officer/Assessing Officer.

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[i] Writ Petition No. 1305 of 2009, decided on 15.03.2010

[ii] Commissioner Of Income-tax Bangalore v. B. C. Srinivasa Setty , [1981] 128 ITR 294 (SC),(para 10).

[iii] CIT v. Bharani Pictures, (1981) 129 ITR 244 (Mad), State of Travancore v. Shanmugha Vilas Cashwenut Factory, AIR 1953 SC 333 (para 49), CIT v. T.S. Rajam, (1980) 125 ITR 207, CIT v. Bharani Pictures, (1981) 129 ITR 244 (Mad), CED v. Smt. Krishna Kumari Devi, (1988) 173 ITR 561(All), CIT v. Kar Valves Ltd, (1987) 168 ITR 416(Ker), Addl CIT v. Durgamma, (1987) 166 ITR 776(AP)

[iv] (1992) 193 ITR 770 (All)

[v] (1980) 123 ITR 3 (Ker), (1995) 216 ITR 301 (AP)

[vi] (2010) 35 (II) ITCL 128 (Ahd `B'-Trib)

Service Tax and Construction of Property

In the Finance Act of 2010, the government has decided to impose service tax on the purchase of under-construction properties. However, this tax is applicable only if the consideration (either in full or in part) has been paid by the buyer to the developer prior to the issuance of a completion certificate by an ‘appropriate authority’. The activity of construction has been deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax is charged accordingly. The ‘authority competent’ to issue completion certificate has been widened to include authorities other that the government authorities[1]. Completion certificate issued by an architect or chartered engineer or licensed surveyor can be now taken to determine the service tax liability.

After these were brought forward in the Finance Bill, 2010, views were expressed that the tax liability on construction sector has been tightened at a time when the sector was recovering after recession. Keeping this in mind the government provided that the abatement which could be claimed by the builders in respect of these services was increased from 67%[2] to 75%[3]. Therefore, the service tax is leviable on only 25% of the amount paid before the issuance of the completion certificate. At 10.3%, this turns out to be roughly 2.575%(10.3% of 25%) of the total value. Therefore, a flat worth Rs. 40 Lakhs becomes dearer by around Rs. Lakh. Importantly seventy five percent abatement will be applicable only if the gross value of commercial or residential complex or unit includes cost of land. Otherwise the existing rate of abatement of 67% would continue to apply.[4] Service Tax exemption is provided to construction done under the Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana.[5]

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[1] Notification No.28/2010- Service Tax, dated 22nd June, 2010

[2] Notification No. 1/2006-Service Tax, dated the 1st March, 2006

[3] Notification 29/2010-Service Tax, dated 22nd June, 2010

[4] D.O.F.No.334/03/2010-TRU

[5] Notification No.28/2010- Service Tax, dated 22nd June, 2010