In a welcome gesture for the property sellers and buyers of Delhi, the Delhi High Court, in a landmark verdict, has said that properties can be registered below the prevailing circle rates. Going against the popular practice of registering properties at circle rates in order to avoid tax incidence, the Court noted that there could be any number of factors which might warrant sale of property at less than the prevailing circle rates. The Court specifically pointed out instances of poor location, disputed property, etc to highlight the fact that property can be sold for less.
In an unrelated incident, there has been news of circle rates being fixed higher than even the market rates of properties in some areas of Noida. As a result, the buyers are not showing an interest in their purchase, resulting in higher inventories being piled up by builders. This incident is sufficient to highlight the fact that holding circle rates sacrosanct could lead to real practical problems in property transactions. There can be situations when fixing circle rates go against the market dynamics and sentiments related to property purchases.
Circle rates are generally increased by the governments in order to thwart speculative increase in property prices and to check the circulation of black money. By increasing these rates and registering properties at these values, there is increased collection of stamp duty. Income Tax department also holds these rates as a pointer to assess the capital gains. If registered above these rates, the difference is taken for tax calculation. If registered for less, as the current HC ruling would allow, the situation can become a bit complex because, the said property transaction would come under the purview of Collector of Stamps who would then decide on whether it was correct to register at below circle rates. Since the complexities could increase if properties are registered below circle rates, Income Tax panel has suggested deletion of the clause in this respect in the IT Act.
As per Section 50 of the IT Act, if property is sold for less than Circle Rate, it becomes chargeable in hands of both the seller and the buyer, as per an amendment from 1 April, 2014. It becomes taxable in hands of seller as ‘Capital Gains’ assuming Circle Rate to be Sale Price under section 50C. However, if the assessee asserts that the market rate is genuinely lower than circle rates, then the valuation is to be done by the Valuation Officer and the value so ascertained would be considered its Sale Price.
However, under Section 56(2) of the IT Act, it also becomes chargeable in hands of buyer. The difference between actual purchase price and the circle rate or valuation conducted property is more than Rs 50000, then tax incidence under would be attracted in the hands of buyer. It will be chargeable under Income from Other Sources in the hands of buyer.
The Committee formed for Income Tax Simplification has pointed out that Section 56 (2) of the IT Act works on presumption that buyer would have paid consideration higher than the declared sum to the seller. This presumption is against the judicial interpretation and the committee has suggested its deletion. This is also keeping buyers away from those markets where circle rates are higher than the market prices because they will be taxed under ‘Income from Other Sources’ if difference is more than Rs 50000.