Capital gains relief rule on flat sales given retro effect

 A recent ruling of the Income-Tax Appellate Tribunal (ITAT)’s Mumbai bench has come as a relief to taxpayers embroiled in litigation on capital gains arising out of sale of their flats due to the sale price being lower than the stamp duty valuation.


ITAT has held that the benefit of a higher tolerance band of 10% for the difference between the sale price of a flat and the stamp duty valuation will apply with retrospective effect.

To prevent tax abuse and deter the use of black money in property deals, Section 50C was introduced by the Finance Act, 2002. It provided that if the sale consideration claimed to be received by the seller is less than the stamp duty rate, the latter would be considered for determining capital gains.


Thus, the quantum of capital gains would be the “higher” stamp duty valuation minus the “indexed” cost of the flat sold. This would result in higher capital gains and consequently a higher tax outgo. To factor the effects of inflation, the Income-Tax (I-T) Act permits application of a cost inflation index to the original cost of the property being sold.


To minimize hardships in case of genuine transactions, the Finance Act, 2018, amended Section 50C and provided that no adjustment will be made in cases where the variation between stamp duty value and sale consideration was not more than 5% of the sale consideration. This proviso was further amended by the Finance Act, 2020, and enhanced the acceptable variation rate to 10%.


I-T authorities submitted to ITAT that the amendment carried out by the Finance Act, 2018, would come into effect only prospectively from financial year 2018-19. Similarly, the enhanced variation rate will apply from financial year 2020-21.

ITAT disapproved of this enhancement and provided relief to the taxpayer. According to ITAT, the proviso amending the variation rate to 10% was curative in nature and must relate back to the date of introduction of the section itself.