Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Proviso to section 43CA of the Act, inserted from 1 April 2019,
permitting consideration to be
within a range of five percent has retrospective effect
March 23, 2020
In brief
Recently,1 the Mumbai bench of the Income-tax Appellate Tribunal (Tribunal) held that the proviso to the deeming provisions of section 43CA of the Income-tax Act, 1961, (the Act) inserted vide Finance Act, 2018, aimed at mitigating the hardship caused to the taxpayer on the invocation of the deeming provisions, and shall be effective retrospectively.
In detail
Facts
• The taxpayer, a partnership firm, is a builder and developer engaged in the business of real estate.
• The taxpayer sold residential flats under construction and received part of the sale
consideration at the time of booking.
• The sale consideration was lower than the ready reckoner (RR) value adopted for stamp duty purposes as on the date of allotment.
• The difference between the sale consideration and the RR value in certain flats was less than 1%.
1
ITA No. 198/ Mum/ 2019
• The Tax officer (TO), however, invoked the provisions of section 43CA of the Act and added the differential amount as the deemed income of the taxpayer. This was further confirmed by the
Commissioner of Income- tax (Appeals) [CIT(A)].
Issues before the Tribunal
• Whether additions should have been made under section 43CA of the Act, on the basis of RR value for ready to move in flats and not for the under-
construction flats?
• Whether the marginal difference of less than 1%
ought to have been ignored?
• In case of a flat agreed to be sold in 2012, i.e., prior to the introduction of the
provisions of section 43CA of the Act, whether the date of registration should not have been considered as the date of sale for the purpose of invoking the said provisions?
Taxpayer’s contention
• There was a marginal difference between the stamp value and the sale consideration. Hence, the difference should not be added.
• No addition should be made for the flat that was agreed to be sold, since the
agreement for the same was already entered in 2012, i.e., prior to the
introduction of the
provisions of section 43CA of the Act.
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Tribunal’s ruling
• The Tribunal concurred with the CIT(A)’s observation that the taxpayer declared sale in the year of assessment and not in 2012. Accordingly, the Tribunal rejected the
taxpayer’s plea that agreement was entered in 2012.
• The Tribunal, with respect to the taxpayer’s submission seeking relief in cases where there was marginal difference, referred to the proviso
inserted vide the Finance Act, 2018, to restrict the
applicability of the provisions of section 43CA of the Act.
• The Tribunal considering the cardinal principle of
interpretation held that the proviso granting relief where there is only a 5% variation
was aimed at mitigating the hardship or the mischief caused to the taxpayer on the invocation of deeming provisions of section 43CA of the Act.
• The Tribunal held that the proviso shall be effective retrospectively, and
accordingly, no addition shall be made under section 43CA where the variation is within the specified threshold.
• The Tribunal remitted the matter to the TO to restrict the disallowances only to those cases in which the variation exceeds the threshold.
The takeaways
• The safe harbour threshold of 5% was introduced to
rationalise the provisions of
section 43CA of the Act, which earlier caused undue hardship to real estate developers. Thus, the proviso may be considered to be curative in nature.
However, it is pertinent to note that there are contrary decisions passed while dealing with section 43CA of the Act, which the Tribunal did not consider in this ruling.
• In the past, the Courts have liberally interpreted other rationalised provisions of the Act and have given
retrospective effect.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
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