Stamp Duty Valuation u/s 50C cannot be ignored while computing Capital Gain exemption u/s 54F:

Section 50C provides for adoption of stamp duty valuation as the full value consideration for computation of capital gain u/s 48 whereas Section 54F offers capital gain exemption on the basis of “Net Sale Consideration”.

Whether section 54F overrides the provision of section 50C? Whether the rigor of section 50C could be reduced by taking the shelter of capital gain exemption provision u/s 54F?  It may be noted that subject to various stipulations, section 54F offers capital gain exemption to individuals / HUF if such person invests the amount of “Net Sale consideration” for purchase & consideration of a house property. For exemption u/s 54F, investment of “Net Sale Consideration” is important & not stamp duty valuation of the property sold.

There are various Tribunals like Jaipur ITAT, Delhi ITAT, Chandigarh ITAT which have held that the stamp duty valuation is not important for claiming an exemption u/s 54F.

However, Bombay HC in Jagdish C. Dhabalia & Anr. Vs. Income Tax Officer & Anr (2019) 308 CTR 0295 (Bom) have held that Stamp Duty Valuation would be relevant for capital gain exemption u/s 54F. As A result, taxpayers residing in Maharashtra may not be able to take the benefit in such cases.

While passing the judgment, Hon’ble Bombay High Court has made following observation:

1. Sec. 45(1) provides that any profits or gains arising from transfer of a capital asset effected in PY should, save as otherwise provided in Ss 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income tax under the head Capital gains and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 of the Act provides the mode of computation of capital gain. In terms of this provision, the income chargeable under the head Capital gains would be computed by deducting from the full value of consideration received or accruing as a result of the transfer of the capital any amounts towards expenditure incurred wholly and exclusively with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto.
2. Sub-Section (1) of section 54EC provides that where the capital gain arising from the transfer of a long-term capital asset being land or plot or both and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or part of the capital gains in specified asset, the capital gain shall be dealt with in accordance with clause (a) and (b) of sub-section (1). As per clause (a) if the cost of the long-term specified asset is not less than the capital gain arising from the transfer of the original asset, the whole of such capital gain shall not be charged under section 45. As per clause (b) if the cost of the long-term specified asset is less than the capital gain arising from the transfer of the original asset, the Assessee would receive proportionate exemption from payment of capital gain. Further proviso of sub-section (1) of section 54EC limits the investment that an assessee can make in any specified asset to Rs.50 lakhs. In other words, therefore clauses (a) and (b) of sub-section (1) of section 54EC would always have limit of Rs.50 lakhs specified in the further proviso for investment in the specified asset.
3. The deeming fiction under section 50C of the Act, must be given its full effect and the Court should not allow to boggle the mind while giving full effect to such fiction. However, while giving full effect to the deeming fiction contained under section 50C of the Act for the purpose of computation of the capital gain under section 48, for which section 50C is specifically enacted, the automatic fallout thereof would be that the computation of the assessee s capital gain and consequently the computation of exemption under section 54EC, shall have to be worked out on the basis of substituted deemed sale consideration of transfer of capital asset in terms of section 50C.
4. In present circumstances, even if for the purpose of section 48, in terms of section 50C of the Act, the sale consideration deemed to have been received by the assessee may be much higher than one declared in the sale deed, the assessee would claim no further capital gain tax liability by simply claiming to have made investment in specified asset the full declared sale consideration. Hence, no error was committed by ITAT.
5. Even if for the purpose of s/ 48, in terms of s. 50C, the sale consideration deemed to have been received by the assessee may be much higher than one declared in the sale deed, the assessee would claim no further capital gain tax liability by simply claiming to have made investment in specified asset the full declared sale consideration.
6. The court have discussed the observation of supreme court int eh case of CIT Vs. Amarchand N. Shroff, reported in (1963) 48 ITR 59 (SC), CIT Vs. Vadilal Lallubhai, reported in (1972) 86 ITR 2 (SC) & K.P. Verghese Vs. Income Tax Officer, as reported in 131 ITR 597 (SC)

Bombay HC has basically delivered the judgment so as to give deeming fiction under section 50C of the Act its full effect. Court concluded that  deeming fiction must be applied in relation to the situation for which it is created & so while giving full effect to the deeming fiction contained under section 50C of the Act for the purpose of computation of the capital gain under section 48, for which section 50C is specifically enacted. It may be noted that Hon’ble Bombay High Court have ignored the fact that by holding the taxpayers to invest the amount of capital gain in accordance with the computation by adopting value of section 50C is asking taxpayers to perform an impossible task. If the assessee had not received total sale consideration, it may not be possible to invest as well. It may not be in accordance with the basic spirit of the law. In my humble submission, the judgment will have the further pass the test of “impossible performance” at Supreme Court. Till it is done, the litigation would continue.

The copy of the Judgment by Bombay High Court in Jagdish C. Dhabalia & Anr. Vs. Income Tax Officer & Anr (2019) 308 CTR 0295 (Bom), (2019) 176 DTR 0417 (Bom),  (2019) 262 TAXMAN 0453 (Bombay) is produced hereunder: