Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Tax on purchase of immovable property

Value of flats in the same building may differ, which may give rise to possible tax liabilities.

If you have bought or plan to buy an immovable property after 1 April 2013, here’s a word of caution. You may end up paying income tax on account of such purchases. Perhaps one of the most dangerous amendments in the recent budget is the one relating to taxation of a deemed income (in the same manner as a gift) wherein an immovable property (land, building, flat, etc) is purchased for a consideration of less than the stamp duty valuation (circle rate value or ready reckoner value), where such difference is more than 50,000.

In most situations earlier, the purchaser was not much concerned about the stamp duty valuation—it just meant that the stamp duty that she had to pay on the purchase was higher on account of such difference. At worst, she ended up paying 5% more (in Maharashtra; the applicable rate in other states) on such difference. Now, with this amendment, she may end up paying 30% more (or her slab rate) by way of income tax, in addition to the stamp duty—a costly proposition indeed.

The permissible difference of 50,000 applies to each property—if the difference is less than 50,000 for each property purchased, though the aggregate difference of the multiple properties purchased exceeds 50,000, the difference would not be taxable. However, given the high level of property prices, and the fact that the stamp duty valuation is not necessarily the fair market value but an approximation of such value, such permissible difference of 50,000 is woefully inadequate. It would have been far better if the difference permitted had been a percentage of the stamp duty valuation, say 15%, as was held by the Supreme Court for the purposes of applicability of provisions of compulsory acquisition prevalent a few decades earlier.

Such difference has to be seen at the time of acquisition of the property. What if there is a large time gap between the date of agreement to purchase and the date of completion of the purchase? In such a case, the difference at the time of agreement when the price was fixed can be considered, provided at least a part of the consideration has been paid (not in cash) on or before the date of the agreement. What if that difference was higher on the date of agreement than on the date of acquisition, due to subsequent fall in property prices? The language of the provisions indicates that adoption of such earlier difference is optional, and not mandatory, and therefore one can choose to pay tax on the difference at the time of completion of purchase, if such difference is lower.

Would a letter of allotment be regarded as an agreement for this purpose if a specific flat is allotted by the builder under this letter and the price indicated therein? If a letter of allotment is not subject to stamp duty, as is the position in most states, computation of the stamp duty valuation on that date may not be applicable. Therefore, the date of subsequent agreement, which is subject to stamp duty, would be the applicable date to be considered.

What would be the date of receipt (purchase) of the property for this purpose? Would it be the date of possession, as applicable for computing capital gains under tax laws, or the date of execution of conveyance in favour of the purchaser? It appears that the date of acquisition would be the date of transfer under the Transfer of Property Act, which would be the date of conveyance, though the matter is not free from doubt.

There is an exemption for acquisition of a property from a relative, the types of eligible relatives being defined (the same as for gifts). There are also provisions for referring the valuation to the departmental valuation officer, where the stamp duty valuation has been contested before the stamp duty authorities, and adopting the difference determined on such valuation, if such difference is lower.

These provisions seem to have been enacted to curb the menace of black money in property transactions. However, the sweeping manner of the provisions could affect a large number of genuine transactions. At times, the price of a property sold in a distress sale may be lower than the stamp duty valuation. The stamp duty valuation adopts a standard rate for a particular area, without considering factors such as floor on which property is located, view available from the property, quality of construction, availability of amenities, etc. The value of flats in the same building may differ on account of such factors, which may give rise to possible tax liabilities.

There are various other reasons why the actual purchase price may be lower than the stamp duty valuation, not necessarily on account of payment of black money. To tax the purchaser in such situations is unfair. It is likely that the courts may take cognizance of this, and read down the provisions so that they do not apply in such genuine situations. In the meanwhile, however, genuine purchasers would suffer the consequences, and have to resort to litigation. So, be careful when buying a property at a bargain price. It may not be such a bargain, given the tax liability associated with such purchase.

Gautam Nayak is a chartered accountant.

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