Sec. 56(2)(vii)(b) Purchase of Rural agricultural Land - A Neoteric absurdity

Purchase of Rural agricultural Land and its connection with Sec. 56(2)(vii)(b) - A Neoteric absurdity 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. ****** 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 theterm 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. This Article has been shared by CASahil Garud. He can be reached at: Ph: +91 9823617797 Email: [email protected]