Legal minefield: Decoding resources gains tax obligation on the sale of leasehold and occupancy civil liberties

It is an approved lawful placement that such civil liberties are prime possessions and therefore responsible for resources gains tax obligation. Capital gains on the transfer of leasehold civil liberties is calculated by considering the sale factor to consider obtained on the transfer of such civil liberties and subtracting the expense sustained for getting these civil liberties.

Deemed sale factor to consider presented in 2003

In 2003, the Indian Income- tax obligation Act included a guideline (Section 50C) specifying that if you offer a home (land, structure, or both) for a rate less than the worth examined by the federal government for stamp task functions, after that for earnings tax obligation estimations, the federal government will certainly take into consideration the greater stamp task worth as your price, not your real reduced asking price.

For instance, if a taxpayer markets a story of land for 1 crore and the land was valued at 1.25 crore for the objective of stamp task, he is called for to pay resources gains tax obligation based upon a sale worth of 1.25 crore and not 1 crore.

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The concern of whether Section 50C covers occupancy civil liberties has actually been elevated prior to different appellate authorities.

Judicial placement on occupancy civil liberties

In the situation of Atul G. Puranik, a Mumbai tribunal provided a choice in 2011, holding that Section 50C used just to possessions in the nature of‘land or building or both’ Leasehold civil liberties are neither land neither structure, so it was held that these stipulations would certainly not use. This sight was supported in 2 various other instances– CIT vsHeatex Products Pvt Ltd, and CIT vs Greenfield Hotels andEstates Pvt Ltd.

However, this lawful placement was examined by the Nagpur bench of Bombay High Court when it comes to Vidarbha Veneere Industries Ltd vs ITO in 2022. The court took an in contrast sight in its reasoning on 1 April 2025. It stated that although the language of the stipulation described ‘land or building or both’, there are a variety of methods which land or structure can be held– as proprietor, lessee, sub-lessee, allottee, renter, licensee, unjustified licensee or any kind of various other setting allowable or acknowledged by regulation. In various other words, the holding of land is just an approach where civil liberties to the land can be held or obtained by an individual. The court ended that leasehold civil liberties would certainly likewise be covered by Section 50C.

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Hence, when calculating resources gains tax obligation on the transfer of leasehold civil liberties, one requires to locate the evaluation of such civil liberties for the objective of settlement of stamp task. This will certainly be taken into consideration as the sale worth if it is less than the sale factor to consider obtained by the taxpayer.

Challenges for taxpayers

Following the judgment, taxpayers have to beware when determining their resources gains on the transfer of leasehold/tenancy civil liberties. They require to worth such civil liberties for the objective of stamp task settlement, which might cause a bigger quantity of resources gains tax obligation if the evaluation taken on is more than the real sale factor to consider.

This might likewise present one more difficulty to taxpayers in instances where the factor to consider obtained on the transfer of leasehold/tenancy civil liberties has actually been spent and an exception from resources gains tax obligation has actually been declared under areas 54, 54F or 54EC.

On 12 March 2019, the Bombay High Court kept in the situation of Jagdish C. Dhabalia vs ITO that for the objective of 54F, the considering fiction of Section 50C would use and the boosted sale factor to consider would certainly be taken into consideration for the objective of financial investments and substantial exception.

(‘Deeming fiction’ is a lawful idea where a law or regulation proclaims something to be real, or to have actually taken place, also if it is not real or has actually not taken place in truth. The objective is to permit details lawful policies or repercussions to use as if that imaginary state of events held true. It’s a synthetic building and construction utilized to prolong the actual significance of a regulation, streamline its application, or protect against technicalities.)

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For instance, state a taxpayer markets leasehold/tenancy civil liberties in a home for 1 crore and reinvests the quantity in the defined possessions to obtain an exception from resources gains tax obligation. Ordinarily, the whole earnings would certainly be excused from tax obligation. However, if the occupancy civil liberties on the residential property is valued at 1.25 crore for the objective of stamp task evaluation, according to Section 50C, he would certainly be called for to pay resources gains tax obligation on 1.25 crore sale quantity. Hence, the extra 25 lakh would certainly be taken into consideration as resources gains and he would certainly need to pay tax obligation on it.

Dharmesh Shah practices as an advice in the Income- tax obligation Appellate Tribunal and high court for earnings tax obligation issues.