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KPMG FLASH NEWS
KPMG IN INDIA

Section 43CA providing for stamp duty valuation of property held as stock-intrade applies p...
Issue before the Tribunal
 Whether provisions of stamp duty valuation are
applicable in the hands of the taxpayer on sale...
 Where the Revenue requires a taxpayer to show as to
why there is a difference in the price charged from two
customers, a...
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Section 43CA providing for stamp duty valuation of property held as stock-in-trade applies prospectively

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Recently, the Mumbai Bench of the Income-tax Appellate Tribunal in the case of Neelkamal Realtors and Erectors India Pvt. Ltd. (the taxpayer) held that stamp duty valuation provisions under Section 50C of the Income-tax Act, 1961 (the Act) are not applicable to sale of flats held as stock-in-trade.

Further, the provisions of Section 43CA of the Act providing stamp duty valuation for land or building or both, held as stock-in-trade is applicable only from Assessment Year (AY) 2014-15 and not retrospectively. It is only from AY 2014-15, i.e. after the insertion of Section 43CA, that the Assessing Officers (AO) have been discharged from the burden of proving that sale price of land or building or both held as stock-in-trade is understated. For the period prior to AY 2014-15, burden is squarely on AO to prove that sale price of land or building or both held as stock-in-trade ought to be higher than the sale price declared by the taxpayer.

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Section 43CA providing for stamp duty valuation of property held as stock-in-trade applies prospectively

  1. 1. KPMG FLASH NEWS KPMG IN INDIA Section 43CA providing for stamp duty valuation of property held as stock-intrade applies prospectively 18 November 2013 Background Facts of the case Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Neelkamal Realtors 1 and Erectors India Pvt. Ltd. (the taxpayer) held that stamp duty valuation provisions under Section 50C of the Income-tax Act, 1961 (the Act) are not applicable to sale of flats held as stock-in-trade.  For AY 2009-10, the taxpayer, a builder and developer, offered profit from sale of flats held as stock-in-trade on the project completion method. 2 Further, the provisions of Section 43CA of the Act providing stamp duty valuation for land or building or both, held as stock-in-trade is applicable only from Assessment Year (AY) 2014-15 and not retrospectively. It is only from AY 2014-15, i.e. after the insertion of Section 43CA, that the Assessing Officers (AO) have been discharged from the burden of proving that sale price of land or building or both held as stock-in-trade is understated. For the period prior to AY 2014-15, burden is squarely on AO to prove that sale price of land or building or both held as stock-intrade ought to be higher than the sale price declared by the taxpayer. _________________ 1 Neelkamal Realtors and Erectors India Private Limited v. DCIT (ITA No.1143/Mum/2013) 2 inserted by the Finance Act 2013  During the course of assessment proceedings for AY 2009-10, on observing that there were variations in the sale price of flats sold by the taxpayer to various customers, the AO called for justification from the taxpayer. However, by simply rejecting the reasons and the explanations provided by the taxpayer on the premise that such reasons and explanations are not justifiable, the AO made additions on the basis of difference between the sale price of flats charged by the taxpayer.  By relying on the provisions of Section 50C and Section 56(2)(vii)(b)(ii) of the Act, the Commissioner of Income-tax (Appeals) [the CIT(A)] sustained the additions by holding that market value of flats ought to have been considered instead of the actual sale consideration. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  2. 2. Issue before the Tribunal  Whether provisions of stamp duty valuation are applicable in the hands of the taxpayer on sale of flats being stock-in-trade for the year under consideration i.e. AY 2009-10 and, whether the AO was justified in considering higher sale price and making additions on hypothetical basis by simply rejecting the reasons and explanations provided by the taxpayer, where there were variations in the sale price. Tribunal’s ruling  Section 56(2)(vii)(b)(ii) of the Act, relied upon by the CIT(A) is not applicable to the present case since: 3  it is applicable only in the hands of the acquirer/transferee of immovable property, whereas the taxpayer is a transferor/seller of flats,  it is applicable in respect of an immovable property acquired on or after the 1 October 2009 and thus cannot apply to the transactions undertaken during the year ended 31 March 2009 i.e. AY 2009-10,  it is applicable in case of immovable property acquired by ‘an individual or a Hindu Undivided Family’, whereas the taxpayer is a Private Limited Company.  The provisions of Section 50C of the Act, relied upon by the CIT(A), are applicable only in case of transfer of ‘capital asset’ being land or building or both where income is computed under Chapter IV-E i.e. under the head ‘Capital Gains’. In case of taxpayer, sale of flats being stock-in-trade, income is computed under Chapter IV-D i.e. under the head ‘Profits and Gains of Business or Profession’ and thus provisions of Section 50C of the Act shall not be applicable. 4  The provisions for substituting stamp value for the actual sale consideration (if stamp duty value is higher than actual sale consideration) on transfer of the land, building or both, which were earlier restricted to the `capital asset’ under Section 50C of the Act, have now been extended to ‘other than a capital assets’ i.e. to stock-in-trade under Section 5 43CA(1) from Assessment Year (AY) 2014-15 and not before. In the instant case, the taxpayer is engaged in the business of selling of flats after construction, the income from which is chargeable under the head ‘Profits and Gains of Business or Profession’ therefore, the provisions of Section 43CA of the Act cannot apply to substitute the actual sale consideration with the stamp value in the year under consideration i.e. AY 2009-10.  It is only from AY 2014-15 i.e. after the insertion of Section 43CA that the tax authorities have been discharged from the burden of proving that sale price of land or building or both held as stock-intrade is understated. For the period prior to AY 2014-15, the burden is squarely on tax authorities to prove that sale price of land or building or both held as stock-in-trade ought to be higher than the sale price declared by the taxpayer.  The Tribunal held that if the AO was not satisfied with the taxpayer’s explanation for charging a lower sale price in comparison with the higher sale price of other flats, the AO was required to bring on record certain material to demonstrate that the taxpayer, in fact, charged such higher rate. The AO cannot make addition on hypothetical basis by presuming a higher sale price by simply rejecting the assessee’s explanation without cogent reasons.  The mere presumption of the tax department that the excess price could have been charged, is not a ground for coming to the conclusion that a taxpayer has charged a higher price. Perusal of certain 6 judicial precedents manifests that there is no law which obliges a trader to make the maximum profit on sales. __________________ 3 Section 56(2)(vii)(b)(ii) of the Act provides that where an individual or Hindu Undivided Family receives any immovable property for no consideration or a consideration which is less than the stamp duty value of the property by an amount exceeding rupees fifty thousand, the stamp duty value of such property (in case of receipt of property without consideration) or the stamp duty value as exceeds such consideration (in case of receipt of property at lower consideration) shall be considered as income under this head. 4 As per Section 50C of the Act, where the consideration received on transfer of a capital asset, being land or building or both, is less than the stamp value, then for computation of the income chargeable under the head ‘Capital gains’, the stamp value shall be considered as full value of consideration received or accruing as a result of such transfer. _________________ 5 As per Section 43CA(1) of the Act, if the consideration for the transfer of an asset (other than a capital asset) being land, building or both, is less than the value in relation to the stamp duty in respect of such transfer, such value shall be deemed to be the full value of the consideration for the purpose of computing profits and gains from transfer of such assets 6 K.P. Varghese v. ITO [1981] 131 ITR 597 (SC), CIT v. Shivakami Co. P. Ltd. [1986] 159 ITR 71 (SC), CIT v. Godavari Corp Ltd. [1993] 200 ITR 567 (SC), Commissioner of Agricultural Income-tax v. M.J. Cherian [1979] 117 ITR 371 (Ker) © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  3. 3.  Where the Revenue requires a taxpayer to show as to why there is a difference in the price charged from two customers, and such taxpayer offers some plausible explanation, no addition can be made simply by holding that such an explanation is fanciful. There must be something concrete to show that the version given by the taxpayer is incorrect.  It is only from AY 2014-15 i.e. after the insertion of Section 43CA that the tax authorities have been discharged from the burden of proving that sale price of land or building or both held as stock-in-trade is understated. For the period prior to AY 2014-15, burden is squarely on tax authorities to prove that sale price of land or building or both held as stock-in-trade ought to be higher than the sale price declared by the taxpayer. Our comments The issue with respect to applicability of stamp duty valuation provisions of Section 50C of the Act vis-à-vis property held as stock in trade has been a subject matter of controversy before the Courts. In line with other judicial precedents, the Mumbai Tribunal in this decision has held that stamp duty valuation provisions contained in Section 50C of the Act are not applicable to transfer of land or building or both being stock-in-trade. Further, the newly introduced provisions of Section 43CA of the Act with respect to property held as stock-in-trade apply prospectively. This ruling has reiterated that if the AO is not satisfied with the taxpayer’s explanation for charging a lower sale price, the AO is required to bring on record certain material to demonstrate that the taxpayer has received higher sale price than the one declared by the taxpayer. The AO cannot make addition on hypothetical basis by presuming a higher sale price by simply rejecting the taxpayer’s explanation without cogent reasons. Thus, after introduction of provisions of Section 43CA of the Act, the burden is squarely on AO to prove that sale price of land or building or both held as stock-in-trade ought to be higher than the sale price declared by the taxpayer. This ruling deals with an additional ground on valuation of closing stock. However the same has not been covered in this flash news as the same is not relevant. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  4. 4. www.kpmg.com/in Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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