BACKGROUND

Section 50C of the Income Tax Act, 1961 (IT Act) provides that if the consideration receied or accruing as a result of transfer of a capital asset, being land or building or both is less than the value assessed by the stamp valuation authorities, then such stamp duty value is deemed to be the full value of consideration for the purpose of computing capital gains. There has been an ongoing debate on whether property held under leasehold rights attracts the provisions of section 50C of the IT Act, potentially resulting in income tax being payable on the sale consideration arising from the transfer of such leasehold rights. 
Recently, in a significant decision, the Division Bench of the Hon’ble Bombay High Court¹  had an occasion to examine whether the provisions of section 50C of the IT Act apply to leasehold rights in land. We, at BDO in India, have summarised this ruling and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

• The taxpayer, an Indian company, was assigned leasehold rights in a land from its predecessor (lessee), to whom the land was originally allotted by Maharashtra Industrial Development Corporation (MIDC) through a lease. 
• The taxpayer claimed that the assignment of leasehold rights by the predecessor through a deed of assignment does not constitute a transfer of land or building within the meaning of section 50C of the IT Act. 
• During the course of assessment proceedings, the taxpayer argued that provisions of section 50C of the IT Act are specifically applicable to the transfer of land, building, or both and do not extend to transactions involving the transfer of leasehold interests. Accordingly, income tax would not be payable on the sale consideration received pursuant to assignment of leasehold rights.
• However, the tax authorities dismissed taxpayer’s appeal, opining that the manner in which a property is held is immaterial for the purpose of determining the applicability of section 50C of the IT Act. Aggrieved, the taxpayer filed a petition before the division bench of the Bombay High Court.

BOMBAY HIGH COURT RULING

The Division Bench of the Hon’ble Bombay High Court, while holding that section 50C of the IT Act applies to leasehold rights in land, made the following key observations:

• The expression ‘consideration received or accruing as a result of transfer of a capital asset being land or building or both’ as used in section 50C of the IT Act has to be read in conjunction with the definition of ‘capital asset’ under section 2(14) of the IT Act.

• Section 2(14) of the IT Act defines a capital asset to include property of any kind ‘held by a taxpayer’, thereby emphasising that the term used is ‘held’ and not ‘owned’. 

• Further, land or buildings can be held in a number of ways, which can be as an owner, lessee, sub-lessee, allottee, tenant, licensee, gratuitous licensee, or any other mode permissible by law. Therefore, the expression ‘held by a taxpayer’ does not impose any limitation on the manner in which the land or building is held.

• Hence, the holding of land is merely a method by which rights to the land can be held or acquired by a taxpayer. That cannot be in any manner equated with land or building, but rather, would be a species of the right to hold it, which as indicated above, are of multiple nature.

• Further, merely because the leasehold rights in land were granted to the taxpayer through assignment by its predecessor, such mode of transfer cannot create any exception with respect to the holding of land by the taxpayer. 

• Moreover, the term ‘transfer’ as used in section 50C(1) of the IT Act cannot be used in a restricted sense and will have to be given the widest amplitude, considering the nature and purpose of the section thus encompasses all modes of transfer permissible and recognisable in law.

• The taxpayer’s reliance on the decision of the Mumbai Tax Tribunal in the case of Atul Puranik² is unmerited as the ruling failed to consider the effect and import of section 2(14)(a) of the IT Act in conjunction with section 50C of the IT Act. The issue was not addressed in view of the statutory language, and it was merely concluded that the land held in a leasehold right cannot be equated with land or building, without considering that mode of holding of a property cannot be equated with the property itself. 

• Hence, the assignment of leasehold rights in land constitutes a transfer and attracts the deeming fiction of section 50C of the IT Act.

BDO INDIA COMMENTS

Hon’ble Bombay High Court has adopted a broader interpretation of the statutory language and has disregarded the erstwhile rulings of the Co-ordinate bench in the case of Atul G. Puranik (supra) and the jurisdictional court’s decision in the case of Greenfield Hotels and Estates³. While holding that section 50C of the IT Act is applicable to the leasehold rights, the Bombay High Court has relied significantly on the term ‘held’ in the definition of capital asset to extend the scope of section 50C of the IT Act to include leasehold rights. 

Consequently, this Ruling has unsettled the position and now, transactions involving the transfer of leasehold rights are now liable to stamp duty valuation. Thus, effectively narrows the distinction between leasehold and freehold rights for the purpose of computation of capital gains.

While this Ruling is rendered in connection with the applicability of section 50C to leasehold rights, one needs to evaluate its impact on other type of rights such as FSI, TDR, etc. Further, one also needs to evaluate impact of this decision on Section 43CA⁴ , Section 56(2)(x)⁵, section 194R⁶  and Section 194-IA⁷  of the IT Act to the transaction involving transfer of rights such as leasehold rights, FSI, TDR, etc.

---

¹Vidarbha Veneere Industries Ltd. (In Liquidation) v. ITO, I.T.A. No. 34 of 2022 (Bombay HC)
²Atul G. Puranik v. ITO, I.T.A. No. 3051 of 2010 (Mumbai Tax Tribunal)
³Commissioner of Income Tax v. Greenfield Hotels and Estates Pvt.Ltd., (2016) 389 ITR 0068 (Bom)
⁴where an immovable property being land or building held as stock-in-trade is transferred for consideration less than the stamp duty value, such stamp duty value is deemed to be the full value of consideration.
⁵where an immovable property is received for inadequate consideration, the difference between the stamp duty value and sale consideration is taxable.
⁶194R of the IT Act provides that any benefit / perquisite exceeding INR 20,000 given by a resident to a resident shall be subject to TDS.
⁷194-IA of the IT Act provides that transfer of immovable property shall be subject to tax withholding provided that its value exceeds 50 lakhs.