Whether the effect of section 43CA is to be given in the books of accounts by the Builder?

Income tax law is full of twists and turns. There are various notional tax provisions in the income tax law.  One such provision is with regard to the purchase and sale of immoveable property below its stamp duty valuation.  If the difference is more than 10% then the buyer as well as seller is liable for tax on such difference

One of the most common questions which is asked by the builder is whether the effect of section 43CA is to be given in the books of accounts?

Let us first read section 43CA in verbatim as under:

Special provision for full value of consideration for transfer of assets other than capital assets in certain cases.

43CA. (1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer:

Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed one hundred and ⁶[ten] per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration:

⁷[Provided further that in case of transfer of an asset, being a residential unit, the provisions of this proviso shall have the effect as if for the words “one hundred and ten per cent”, the words “one hundred and twenty per cent” had been substituted, if the following conditions are satisfied, namely:—

 (i)  the transfer of such residential unit takes place during the period beginning from the 12th day of November, 2020 and ending on the 30th day of June, 2021;

(ii)  such transfer is by way of first time allotment of the residential unit to any person; and

(iii) the consideration received or accruing as a result of such transfer does not exceed two crore rupees.]

(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far as may be, apply in relation to determination of the value adopted or assessed or assessable under sub-section (1).

(3) Where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same, the value referred to in sub-section (1) may be taken as the value assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer on the date of the agreement.

(4) The provisions of sub-section (3) shall apply only in a case where the amount of consideration or a part thereof has been received by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed⁸ on or before the date of agreement for transfer of the asset.

[Explanation.—For the purposes of this section, “residential unit” means an independent housing unit with separate facilities for living, cooking and sanitary requirement, distinctly separated from other residential units within the building, which is directly accessible from an outer door or through an interior door in a shared hallway and not by walking through the living space of another household.]

One may note that section 43CA creates a deeming fiction for substituting the sale consideration with no corresponding receivable to come into existence, any effect on taxable income due to applicability of the provision of Section 43CA is to be given in the return of income only in the year in which transfer of property takes place.

No accounting treatment in the books of accounts is thus required to be given and, provisions of Section 43CA will not affect revenue recognition process in the books of accounts.

In short, there is no benefit to the taxpayers even though they are paying the tax on a notional basis.