The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that taxpayers may still be eligible for capital gains tax exemption under Section 54 even if the Income Tax Department computes capital gains using the higher stamp duty value under Section 50C.
In a recent order, the tribunal held that Sections 50C and 54 operate independently. While Section 50C permits the tax department to substitute the stamp duty value for the actual sale price while calculating capital gains, it does not automatically take away the exemption available under Section 54 if the taxpayer reinvests the gains in another residential house and fulfils the prescribed conditions.
What was the case?
The case involved Himanshu Jain, who sold a residential property in Ghaziabad for ₹1.10 crore during Assessment Year (AY) 2023-24. However, the property’s stamp duty value was ₹1.962 crore. Invoking Section 50C of the Income-tax Act, the Assessing Officer treated the higher stamp duty value as the deemed sale consideration and added ₹86.20 lakh while computing long-term capital gains.
The taxpayer argued that the property had been sold below the circle rate because he had been transferred from Ghaziabad to Pune by his employer and needed to sell the house quickly. However, the tax authorities rejected this contention, observing that Section 50C does not provide any exception for distress sales.
After selling the property, Jain booked a residential flat in Pune for around ₹1.92 crore. He invested the entire sale proceeds from the Ghaziabad property and financed the balance through a home loan. He later contended that although he had not claimed the deduction while filing his return due to incorrect advice, he was entitled to exemption under Section 54.
What did the ITAT rule?
The tribunal upheld the application of Section 50C, stating that the provision mandates adoption of the stamp duty value where it exceeds the declared sale consideration.
However, it also observed that the deeming fiction created by Section 50C is limited to the computation of capital gains. It cannot be used to deny a taxpayer the benefit available under Section 54 if the statutory conditions for claiming the exemption are otherwise satisfied.
The ITAT therefore directed the Assessing Officer to separately examine whether the taxpayer had fulfilled the requirements of Section 54, including investment in the new residential property within the prescribed time. Since this factual verification had not been carried out earlier, the matter was remanded back to the Assessing Officer. The appeal was allowed for statistical purposes.
The tribunal also referred to earlier decisions of the Bombay High Court and Delhi High Court, as well as CBDT Circular No. 471, while observing that beneficial provisions such as Section 54 should be examined independently of Section 50C.
The ruling is significant for taxpayers selling property below the stamp duty value. It clarifies that while the Income Tax Department can compute capital gains based on the higher stamp duty value under Section 50C, such an addition does not automatically extinguish the right to claim exemption under Section 54. However, taxpayers must be able to demonstrate that they have complied with all the conditions prescribed under the law and maintain adequate documentary evidence to support their claim.
