Tax on capital positive aspects has lengthy led to disputes in lots of areas. One such space is capital positive aspects from the sale of leasehold or tenancy rights. Promoting tenancy rights is kind of widespread in Mumbai, the place a number of tenanted properties are present process redevelopment.
It’s an accepted authorized place that such rights are capital property and thus answerable for capital positive aspects tax. Capital positive aspects on the switch of leasehold rights is computed by making an allowance for the sale consideration acquired on the switch of such rights and deducting the associated fee incurred for buying these rights.
Deemed sale consideration launched in 2003
In 2003, the Indian Earnings-tax Act added a rule (Part 50C) stating that should you promote a property (land, constructing, or each) for a worth decrease than the worth assessed by the federal government for stamp responsibility functions, then for revenue tax calculations, the federal government will think about the upper stamp responsibility worth as your sale worth, not your precise decrease promoting worth.
For instance, if a taxpayer sells a plot of land for ₹1 crore and the land was valued at ₹1.25 crore for the aim of stamp responsibility, he’s required to pay capital positive aspects tax primarily based on a sale worth of ₹1.25 crore and never ₹1 crore.
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The difficulty of whether or not Part 50C covers tenancy rights has been raised earlier than numerous appellate authorities.
Judicial place on tenancy rights
Within the case of Atul G. Puranik, a Mumbai tribunal rendered a choice in 2011, holding that Part 50C utilized solely to property within the nature of ‘land or constructing or each’. Leasehold rights are neither land nor constructing, so it was held that these provisions wouldn’t apply. This view was upheld in two different circumstances – CIT vs Heatex Merchandise Pvt. Ltd, and CIT vs Greenfield Accommodations and Estates Pvt. Ltd.
Nevertheless, this authorized place was reviewed by the Nagpur bench of Bombay Excessive Court docket within the case of Vidarbha Veneere Industries Ltd vs ITO in 2022. The court docket took a opposite view in its judgement on 1 April 2025. It stated that despite the fact that the language of the availability referred to ‘land or constructing or each’, there are a selection of how during which land or constructing may be held – as proprietor, lessee, sub-lessee, allottee, tenant, licensee, gratuitous licensee or every other mode permissible or recognised by legislation. In different phrases, the holding of land is merely a technique by way of which rights to the land may be held or acquired by an individual. The court docket concluded that leasehold rights would even be lined by Part 50C.
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Therefore, when computing capital positive aspects tax on the switch of leasehold rights, one wants to search out the valuation of such rights for the aim of cost of stamp responsibility. This shall be thought-about because the sale worth whether it is decrease than the sale consideration acquired by the taxpayer.
Challenges for taxpayers
Following the ruling, taxpayers have to be cautious when calculating their capital positive aspects on the switch of leasehold/tenancy rights. They should worth such rights for the aim of stamp responsibility cost, which can lead to a bigger quantity of capital positive aspects tax if the valuation adopted is increased than the precise sale consideration.
This will additionally pose one other problem to taxpayers in circumstances the place the consideration acquired on the switch of leasehold/tenancy rights has been invested and an exemption from capital positive aspects tax has been claimed beneath sections 54, 54F or 54EC.
On 12 March 2019, the Bombay Excessive Court docket held within the case of Jagdish C. Dhabalia vs ITO that for the aim of 54F, the deeming fiction of Part 50C would apply and the improved sale consideration could be thought-about for the aim of investments and consequential exemption.
(‘Deeming fiction’ is a authorized idea the place a statute or legislation declares one thing to be true, or to have occurred, even when it’s not true or has not occurred in actuality. The aim is to permit particular authorized guidelines or penalties to use as if that fictional state of affairs had been true. It is a man-made development used to increase the literal which means of a legislation, simplify its software, or forestall loopholes.)
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For instance, say a taxpayer sells leasehold/tenancy rights in a property for ₹1 crore and reinvests the quantity within the specified property to get an exemption from capital positive aspects tax. Ordinarily, all the revenue could be exempted from tax. Nevertheless, if the tenancy rights on the property is valued at ₹1.25 crore for the aim of stamp responsibility valuation, as per Part 50C, he could be required to pay capital positive aspects tax on ₹1.25 crore sale quantity. Therefore, the extra ₹25 lakh could be thought-about as capital positive aspects and he must pay tax on it.
Dharmesh Shah practises as a counsel within the Earnings-tax Appellate Tribunal and excessive court docket for revenue tax issues.
