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.
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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.
 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.
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© 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.