Executive Summary:
This article deals with an untried
and untested situation emerging post amendment in Sec. 56(2)(vii)(b) w.e.f.
01.04.2014. The Article explains the taxation point of view with respect to chargeability
of notional income calculated u/s 56(2)(vii) for a transaction involving sale
of Rural Agricultural Land. The reasoning on non-applicability of
procedure given in Sec. 56(2)(vii) [sub-clause (b) specifically] to the
transaction of sale of Rural Agricultural Land, in the hands of purchaser is
explained.
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Recently with corresponding insertion
of Sec. 43CA, section 56(2)(vii) was also amended making it more stricter and stringent.
The difference between stamp value of property and the actual transaction value
is considered as deemed sale consideration, which is considered in turnover of
seller and as income from other sources under sub-clause (b) of Section
56(2)(vii) in hands of purchaser. Prior to such an amendment in Sec.
56(2)(vii)(b), immovable property which was received by any individual or HUF
for a consideration which was less than stamp value of that property by amount
exceeding Rs. 50,000/- was not taxable. [It was taxable as such before
01.10.2009].
For details about Section
56(2)(vii)(b) – please click here to read my article on this relevant
subject.
There
is no doubt that income tax law charges persons dealing in real estate (say
lands) on their business income derived from such activity. Also persons for
whom the land is an investment (capital asset) capital gain is computed which
is either charged at a special rate of 20% or according to normal slab rates
depending upon period of holding of that land [i.e. long-term or Short-term]. Thus,
about every kind and nature of such income is brought under the garb of income
tax. However, agricultural income of persons has been specifically exempted
with a view to give some promotion/incentive or benefit. Therefore, rural
agricultural land was specifically excluded from the purview of definition of
capital asset u/s 2(14), resultantly exempting the capital gain taxation. Rural
agricultural land not being a capital asset as per Sec. 2(14), capital receipt
on sale of such land is not taxable at all, which supports such legislative
intent. The stamp value of such land [Rural Agricultural land] and its actual
sale consideration is therefore practically irrelevant for income tax purpose.
However,
as per newly amended section 56(2)(vii)(b), any immovable property
purchased whose actual cost is less than stamp value by amount exceeding Rs.
50,000/- is brought to tax in hands of purchaser. This Sec. 56(2)(vii)(b) uses
the term ‘any immovable property’ and it has neither
differentiated it into capital and non-capital asset nor has defined the
term ‘immovable property’ by way of any explanation to this sub-clause (b). As
a result, when a rural agricultural land is sold for less than stamp value
there is no taxation for difference in stamp value and actual consideration in
hands of seller, however this difference is charged to tax in hands of
purchaser. It should be noted that this tax charged is on a notional income
derived as per calculation given in Sec. 56(2)(vii)(b). Thus, effectively the
notional income generated/computed due to sale of Rural agricultural land has
been charged to tax. Was
such a resultant tax effect on purchase of rural agricultural land intentional?
Whether the original legislative intent defeated?
If a strict interpretation of some
provision is resulting into an absurd situation by which the legislative intent
is defeated, then it becomes necessary to resort to a construction which is
reasonable and purposive to make the provision meaningful. [Bajaj Tempo
case (1992 AIR 1622)]
Now
if we observe the scheme of all clauses to Sec. 56(2), wherever any clause
needs some clarification of any term, a definition by way of an explanation is
inserted after that respective clause for it.
·
Section
56(2)(vii)(a) deals with charging to tax any sum of money received (except from
any relative).
·
Section
56(2)(vii)(b) deals with receipt of any immovable property for free or for
lesser consideration.
·
Section
56(2)(vii)(c) covers the situation of receipt of property for purpose of
taxation (except from relative). The term ‘property’ has been defined by way of
an explanation. This definition of ‘property’ includes immovable property [Ref:
Expl (d)(i)]. The Explanation given
after sub-clause (c) to Sec. 56(2)(vii) starts with “For the purposes of
this clause,-”. Therefore, it should be noted that this explanation applies
to whole clause (vii) of Sec. 56(2), i.e. to sub-clauses (a), (b) and (c) and
not only to sub-clause (c). If legislature would have intended to apply this explanation
only to sub-clause (c), it would specifically expressed so by starting it by
saying “For the purposes of this sub-clause,-”, e.g. as mentioned
in Sec. 10(15)(iv)(i), Sec. 2(14), Sec. 17, Sec. 13, etc.
For an immovable property to be
qualified as ‘property’ as per definition given in Expl., it should be a
capital asset first.
“ 41[(b) any immovable
property,—
(i) without consideration, the
stamp duty value of which exceeds fifty thousand rupees, the stamp duty value
of such property;
(ii) for a consideration which
is less than the stamp duty value of the property by an amount exceeding fifty
thousand rupees, the stamp duty value of such property as exceeds such
consideration:
Provided that where….”
According to me, for a transaction of
sale of Rural Agricultural Land, purchaser should not suffer any taxation on the
notional income computed as per Sec. 56(2)(vii). Every capital asset is a
property first, and then is a capital asset. For an asset like a Rural
Agricultural Land which is neither a capital asset nor a Revenue asset, none of
the clauses (b) or (c) should apply making it taxation-free in hands of
purchaser, thereby falling in line with the original legislative intent.
Taxation of Rural Agri. Land in hands of purchaser seems to be an absurd
situation by which the legislative intent is defeated. Therefore an
interpretation which is reasonable and purposive to make the provision meaningful
is necessary to be made.
There may be another
reason why Rural Agricultural Land should not suffer from charging provisions
of Sec. 56(2)(vii). For all properties [movable or immovable] which are capital
assets for purchaser and the valuation of which has suffered an increase u/s
56(2)(vii), a corresponding benefit is given by the Legislature at the time of
future sale of these properties. As per 49(4) of the Income Tax Act, for any
property the value of which is subjected to income tax u/s 56(2)(vii), the cost
of acquisition is deemed to be such value adopted for the purpose of Sec. 56(2)(vii). But as far as Rural
Agricultural Land is concerned, even if it is a capital asset in hands of the
purchaser and its value is adjusted as per Sec 56(2)(vii), no benefit as given
in Sec. 49(4) can be derived or booked at the time of its future sale, since
its entire sale itself is out of the purview of Capital Gains. [Rural Agricultural
land not being a capital asset]. Although some may say that such an entire
exemption for Rural Agricultural Land is more beneficial than giving a part
corresponding relief by increasing the cost of acquisition, however this is a
discriminating situation for as far as application of Sec. 49(4) is concerned.
However, the legislature
has not chosen to define immovable property by way of any explanation and has
used the words ‘any immovable property’. Going by strict interpretation, it may
not be correct to extract and create a definition of ‘immovable property’ using
the definition of ‘property’, as given in the explanation. Further notional
income computed u/s 56(2)(vii)(b) cannot be said to be ‘derived from’
land used for agricultural income, as per definition given in Sec. 2(1A) of the
Act, since word ‘derived’ has been given a strict meaning by
courts, and has been understood in the restricted sense of a direct derivation and
not understood in the broad sense as equivalent to derived directly or
indirectly.
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Readers are
requested to share their views / critics on this.
