SECTIONS 43CA, 56(2)(VII) & 194-IA - RELATED TO TRANSACTIONS OF CERTAIN IMMOVABLE PROPERTY

Section 43CA

Section 43CA was inserted by Finance Act, 2013 w.e.f. 01-04-2014 and is similar to the provisions of Section 50C. The provisions of section 50C are not applicable in relation to immovable property held as stock-in-trade, which section 43CA covers.

Section 43CA provides that where the consideration for the transfer of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable for purpose of stamp duty by the state government [i.e. stamp value], the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business of profession”. By virtue of Finance Act 2020, a 10% margin of error is now allowed for applicability of deeming fiction of this section. Such 10% is to be calculated on consideration for transfer of asset. Also, such 10% allowable margin is also allowed in case of transfer of capital assets under section 50C, by Finance Act 2020.

For transfer of an asset, being a residential unit made between 12th November 2020 to 30th June 2020, a 20% margin of error was allowed. In other words, if the stamp valuation of that residential unit is not more than 120% of the actual consideration, the deeming fiction of this section shall not apply. This benefit was applicable only if the sale of residential unit was a first-time sale to any person and that the total consideration was not more than Rs. 2 crores.

Further, where there is a difference in date of agreement fixing the value of consideration and date of final registration of the same, the stamp value as on date of agreement fixing the value of consideration would be considered for the purpose of applying the deeming fiction, subject to the condition that amount of consideration or part thereof must have been received in any mode other than cash, before the date of agreement.

Analysis

Any land and / or building transferred, which was held as stock-in-trade, shall be deemed to have been transferred at its stamp duty valuation and the resultant income shall be charged to tax under the head ‘profits and gains from business profession’, if the actual consideration received as a result of transfer is less than stamp duty valuation. In other words, the difference between stamp value and the actual consideration, if it is less than the stamp value, will be considered as “Profits and gains of business of profession”, pursuant to deeming fiction created by Section 43CA(1).

For transactions entered into after 01.04.2018 (i.e. for AY 2019-20), if the stamp duty valuation did not exceed the actual consideration amount by more than 5% of actual consideration amount, the transaction as entered into by an assessee at actual consideration amount should hold good for taxation purpose, and the whole deeming fiction would therefore not be applicable.

For transactions entered into after 01.04.2020 (i.e. for AY 2021-22), if the stamp duty valuation does not exceed the actual consideration amount by more than 10% of actual consideration amount, the transaction as entered into by an assessee at actual consideration amount shall hold good for taxation purpose, and the whole deeming fiction would therefore not apply in such case. Further, as far as transactions of primary sale of residential units between 12/11/2020 to 30/06/2021 are concerned tolerance margin of 20% was allowed; i.e. if the stamp duty valuation did not exceed the actual consideration amount by more than 20% of actual consideration amount, the deeming fiction of this section would not be applicable during this period. This is however subject to two conditions viz. (a) sale of residential unit is by way of first time allotment to any person (b) actual consideration of such residential unit is not more than Rs. 2 crores.

The cost of acquisition of asset depends upon the treatment of asset in the hands of transferee/purchaser. For a transferee for whom the immovable property is a capital asset, the stamp duty valuation of property would be considered as cost of acquisition at the time of computing capital gains during further sale of property, pursuant to section 49(4). However, as per literal reading of the provision, for a transferee who treats the property as stock-in-trade, the actual payment made by him for the purchase of property and not the stamp value, will be considered as Cost of acquisition during further sale of the property, since section 49(4) is not applicable for further sale of such stock by him.

There is a controversy on applicability of provisions of this section for territories which do not come under the jurisdiction of any state government, viz. Union territories, since there will be no assessable value by the state government for the purpose of stamp duty, as stated in the section 43CA(1).

Section 56(2)(ix)

This clause (ix) to section 56(2) was added by Finance Act 2014, and is applicable w.e.f. 01-04-2015.

According to this section, where any sum of money is received as an advance or otherwise in the course of negotiations for transfer of a capital asset, and such sum is forfeited and the negotiations do not result in transfer of such capital asset, the sum of such money received is chargeable to tax as “Income from other sources”.

Section 56(2)(x)

This clause is similar to provisions in erstwhile clause (vii) and (viia), however that it applies to all assessees and not just to an individual of HUF and a firm or company in certain cases. This clause is applicable for transactions entered into after 01.04.2017 and thus a concerned receipt of sum of money or property on or after 01.04.2017 shall be chargeable to tax in accordance with the provisions of this clause (x) of sub-section (2) of section 56.

As per this section, receipt of sum of money or an immovable property or any other property for zero or inadequate consideration is taxable in hands of the receiver. The amount of actual difference between stamp duty value and the actual consideration paid for that property if it exceeds Rs. 50,000/- or if it is more than the 10% allowable margin, is considered as income for the purposes of this section. For first time purchase of residential unit, such difference of Rs. 50,000/- or difference of more than 20% is considered as income. 

W.r.e.f. 01.04.2020, Finance Act 2022 added that a sum of money or property received by an individual from any person in respect of an expenditure incurred by him on such individual or his family member for illness related to Covid 19 shall be out of the purview of taxability under this section. Similarly, any sum of money or property received by a family member of a deceased person from certain persons shall also be out of purview of taxability under this section, subject to certain conditions. 

Further, w.e.f. 01.04.2023, sum of money or property received by a trustee / member / founder / author of a trust from such trust or an institution registered u/s 12A/12AA/12AB or u/s 10(23C), shall be taxable under this section.

Analysis

The transfer of immovable property for an inadequate consideration was not covered within the ambit of Section 56(2) before 01-04-2014. After introduction of the amendment under Section 56(2)(vii) and further insertion of 56(2)(x), a situation may arise wherein the transferor is taxed under deeming provisions of Section 43CA or Section 50C and at the same time the transferee is taxed u/s 56(2)(x) in respect of the same transaction of transfer of immovable property, leading to double taxation. However, since the provisions of Section 50C, Section 56(2)(x) and Section 43CA are viewed as anti-abuse provisions, the combined effect of same may not be viewed as unconstitutional. Further, it may be noted that wherever the transferee is taxed under Section 56(2)(x), then cost of acquisition of such property in the hands of the transferee shall be deemed to be the value which was taken for the purpose of Section 56(2)(x) of the Act. However, for a transferee who treats the property as stock-in-trade, provisions of sec. 56(2)(x) would not apply, and the actual payment made by him for the purchase of property and not the stamp value, can be considered as Cost of acquisition during further sale of that property.

During future sale of the property by the instant transferee, the cost of acquisition in the hands of transferee / purchaser of such property shall be deemed to be the value which was considered for the purpose of Section 56(2)(x) of the Act, as per provisions of Sec. 49(4).

W.e.f. AY 2019-20 (i.e. for transactions entered into after 01.04.2018), where a person receives immovable property for a consideration which is less than the stamp duty valuation of that property, but that stamp duty valuation is not more than 105% of such consideration, or the differential amount is not more than Rs. 50,000, then such differential amount would not be treated as income in the hands of recipient of property.

Now w.e.f. AY 21-22 (i.e. for transactions entered into after 01.04.2020), where a person receives immovable property for a consideration which is less than the stamp duty valuation of that property, but that stamp duty valuation is not more than 110% of such consideration, or the differential amount is not more than Rs. 50,000, then such differential amount would not be treated as income in the hands of recipient of property. Further, for transactions of first time allotment / sale of residential unit to any person made during 12/11/2020 to 30/06/2021 if stamp duty valuation is not more than 120% of actual consideration, or the differential amount is not more than Rs. 50,000, then such differential amount would not be treated as income in the hands of recipient of property. The benefit of 20% allowable margin calculated on actual consideration is allowable only for transactions where such consideration is not more than 2 crore rupees.

Separately, w.e.f. AY 2019-20 [i.e. FY 2018-19], any compensation received by a person due to termination of his employment or due to modifications of terms of employment is also not taxable.

Separately, Sub-clause (c) of Sec. 56(2)(x) includes taxability of capital asset received without consideration or for inadequate consideration. Proviso to Sec. 56(2)(x)(c) provides for exceptions where such a receipts of capital asset is from a relative, or on occasion of marriage, or through will/inheritance, etc. W.e.f. 01/04/2017, receipts of capital assets pursuant to transaction of transfer in a scheme of amalgamation or in scheme of demerger or business reorganization of a cooperative bank, are also added in exceptions to applicability of new Sec. 56(2)(x). Thus, even if shares or other capital assets in pursuance of business re-organization of cooperative bank, amalgamation, or demerger, are received for inadequate consideration, there will not be any taxability u/s 56 in hands of the recipient. Further, receipts from an individual by a trust created solely for the benefit of relative of that individual, are also added in exceptions to applicability. For transactions entered into after 01/04/2017 [i.e. for AY 2018-19], receipt of capital assets by a subsidiary company from its holding company or vice versa, is also exempt from taxation if the whole share capital of that subsidiary company is held by that holding company and the recipient holding/subsidiary company is an Indian company.

Separately, section 56(2)(x)(c) has also been amended so as to include in the exception list, receipt of property by way of transfer in relocation of a capital asset by the original fund to the resultant fund, or transfer by a shareholder/unit holder of a capital asset being a share or unit held in original fund for the share or unit in resultant fund.

The Finance Act 2022, w.r.e.f. 01.04.2020 added that a sum of money or property received by an individual from any person in respect of an expenditure incurred by him on such individual or his ‘family’ member for illness related to Covid 19 shall be out of the purview of taxability under this section.

Similarly, by virtue of Finance Act 2022, w.r.e.f. 01.04.2020, any sum of money or property received by a ‘family’ member of a deceased person from employer of such deceased person shall completely be out of purview of taxability under this section. Further, any sum of money or property received by a ‘family’ member of a deceased person from any person to the extent of Rs. 10 lakhs, shall be out of purview of taxability under this section. The term ‘family’ is defined to include only spouse and children of an individual and parents and brothers and sisters or any of them wholly / mainly dependent on such individual.

As per Finance Act 2022, w.e.f. 01.04.2023, the term ‘property’ as used in this section shall include a virtual digital asset also.

Further, w.e.f. 01.04.2023, a new proviso is added to section 56(2)(x) stating that a sum of money or property received by any person (exceeding the value of rupees fifty thousand) from any trust or institution registered u/s 12A/12AA/12AB or from any fund or foundation or university or any trust referred to in section 10(23C), shall be taxable if such recipient person is author / founder / trustee / member of such trust or institution or is a relative of such author/founder/trustee/member or is an entity in which such author/trustee/member has a substantial interest.

Section 51

According to this section, if any capital asset (proposed to be sold) was subject matter of any negotiations in past and any advance or other money was received and retained by the assessee in respect of such negotiations, then such money received is to be deducted from the cost for which the asset was acquired, or the WDV [written down value] or FMV [fair market value], while computing the cost of acquisition.

A proviso has been inserted in this section w.e.f. 01.04.2015 according to which if advance or other money received by the assessee was offered to taxation for any financial year as per section 56(2)(ix), then it is not required to be deducted from the cost for which the asset was acquired or the WDV or the FMV, in computing the cost of acquisition.

Analysis

Consequent to insertion of the new clause (ix) in subsection (2) of Section 56, a corresponding amendment has been made in Sec. 51 by way of a proviso. As per amended Sec. 51, where advance money has been forfeited & the negotiations did not result in transfer of such capital asset, and such sum/advance has been offered for taxation under “Income from other sources” as per Sec. 56(2)(ix), then the sum / advance is not required to be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. Such deduction from cost was required to be done pursuant to erstwhile provision of section 51. Such an amendment has been made to avoid double taxation.

Further, another corresponding amendment has been made in Sec. 2(24), which defines “income”, by way of addition of clause (xvii) to Sec 2(24). As per section 2(24)(xvii), the sum of money referred to in Section 56(2)(ix) will now be a part of the definition of “Income” and will thus be included in “Income”.

The effect of this insertion of clause (ix) to section 56(2) though does not lead to double taxation with the corresponding amendment in section 51, but has resulted into preponement of taxation, since the charge of tax is now not deferred to the point when the concerned capital asset is sold but is levied when the advance is forfeited.

Section 194-IA

This section was inserted w.e.f. 01-06-2013 by Finance Act 2013. According to the provisions of this section, any person being a transferee shall, at the time of making payment or crediting of any sum as consideration for transfer of immovable property (other than agricultural land) to a resident transferor, deduct tax, at the rate of 1% of such sum. Finance Act 2019 introduced a clause defining ‘consideration for immovable property’ so as to include payments made in the nature of membership fee, car parking fee, electricity or water facility fee, maintenance fee, advance fee or any other charges of similar nature, which are incidental to transfer of the immovable property.

Further, in order to reduce the compliance burden on the small taxpayers, it is provided that no deduction of tax under this provision shall be made where the total amount of consideration for the transfer of an immovable property is less than fifty lakh rupees.

As per Finance Act 2022, w.e.f. 01.04.2022, a TDS under this section is required to be made on higher of sum payable as consideration for transfer of property or the stamp value of such property. Further, TDS is not required to be made if both the actual consideration as well as the stamp value of concerned property are less than 50 lakh rupees.

Analysis

Section 194-IA requires deduction of tax at source at the time of credit or payment, whichever is earlier. Thus, in case of a person who does not maintain books of accounts, tax becomes deductible at the time of payment itself.

The assessee is not required to obtain the TAN for paying the tax deducted on transaction. The challan for payment of TDS is required to be filled in Form 26QB.

The consideration limit of rupees fifty lakhs is for the transaction as a whole, for transfer of immovable property and the no. of transferees or transferors being more than one, is not relevant for its applicability. Further charges paid by the buyer of property in the nature of membership fee, car parking fee, electricity or water facility fee, maintenance fee, advance fee orany other charges of similar nature, which are incidental to transfer of the immovable property, are also be included in calculating the amount of ‘consideration for immovable property’.

Further, a practical difficulty might be faced before the registration authority, where the transferor is a NRI and therefore no deduction of tax at source is done by the transferee since the provision is applicable on payment to resident transferor.

By virtue of the Finance Act 2022, w.e.f. 01.04.2022 section 194-IA has been amended to include TDS on stamp duty value of such property if the same is higher than the actual sum of consideration payable on transfer of such property. Further only if both the amounts, viz. amount of actual consideration payable and stamp duty value of such property, are less than Rs. 50 lakhs then only there is no need to make the TDS.   

Section 194-IB

This new section has inserted w.e.f. 01.06.2017 by Finance Act 2017 and is applicable for rents paid after 01.06.2017. According to provisions of this section individuals and HUF who are responsible for paying rent to a resident of amount exceeding Rs. 50,000/- for a month or part of month, shall deduct tax at source at 5% of such amount. The deductor is not required to obtain a Tax deduction account number or a tax collection account number and the deductor shall be liable to deduct tax only once in a financial year.

Analysis

Under the erstwhile provisions related to the chapter of TDS, an Individual and HUF, being a payer, other than those liable for tax audit, were out of the scope of section 194-I of the Act. By insertion of new section 194-IB in the Act, individuals or HUF (other than those covered under 44AB of the Act), who are responsible for paying to a resident any income by way rent exceeding rupees fifty thousand, shall be liable to deduct TDS. Tax is liable to be deducted on such income at the time of credit of rent for the last month of the previous year or the last month of tenancy if the property is vacated during the year, or at the time of such payment, whichever is earlier.

Such deduction of tax shall not exceed the amount of rent payable for the last month of the previous year or the last month of the tenancy.

Section 194-IC

This section was inserted w.e.f. 01.04.2017 by Finance Act 2017, and is applicable for relevant transactions being entered after 01.04.2017. According to provisions of this section, TDS @ 10% shall be made in case of payment of consideration [not being consideration in kind] pursuant to a joint development agreement [JDA] by the developer to the land owner. TDS on consideration relating to JDA shall be governed by 194-IC only and not by 194-IA.

Section 50CA

This section was inserted w.e.f. 2018-19 by Finance Act 2017, and is applicable for relevant transactions being entered after 01.04.2017. According to provisions of this section, where consideration received as a result of transfer of unlisted / unquoted shares is less than the Fair market value of those shares, the fair market value of shares shall be deemed to be full value of consideration for tax purposes. The procedure of valuation of such unquoted share is provided in rule 11UAA of the Income tax rules.

Section 194-M

A new section 194M has been inserted w.e.f. 01st September 2019. According to the provisions of this section, an individual or HUF, other than those covered under section 194C or 194J, shall be liable to deduct tax at source at the rate of 5% on payments made to any resident in pursuance of a contract or as professional fees. Such deduction needs to be made only if the sum paid or aggregate of sums paid in a financial year exceeds rupees fifty lakhs.

Analysis

At present there is no liability on an individual or Hindu undivided family (HUF) to deduct tax at source on any payment made to a resident contractor or professional when it is for personal use. Further, if the individual or HUF is carrying on business or profession which is not subjected to audit, there is no obligation to deduct tax at source on such payment to a resident, even if the payment is for the purpose of business or profession. The Legislature intends to plug the loophole of possible tax evasion after inserting this section, since presently the payments made on personal account or on business account by individuals and HUFs who are not covered under section 194C or 194J are not subjected to TDS.

After insertion of this section w.e.f. 01st September 2019, an individual or HUF who are not covered u/s 194C or 194J, shall be liable to make deduction of tax at source u/s 194M at 5% for contractual payments or professional fees to a person, if such amount or aggregate of such amounts to a person in a financial year exceeds Rupees Fifty lakhs.

In order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).