Section 50C Cannot Be Invoked on Transfer of Contractual Right to Specific Performance: ITAT Chennai

A significant ruling has emerged from the Chennai bench of the Income Tax Appellate Tribunal concerning the scope and applicability of Section 50C of the Income Tax Act, 1961. The case of May Flower Enterprises Private Limited Vs ACIT (ITAT Chennai) for Assessment Year 2017-18 addressed a precise and practically important question: when an assessee pays for land under a sale agreement but never obtains a registered sale deed, and subsequently receives money from the vendor for surrendering its rights under that agreement, does Section 50C apply to substitute stamp duty value for the actual consideration received?

The ITAT answered in the negative. Since the assessee never became the registered owner of the land, what it ultimately relinquished was not the land itself but a contractual right to seek specific performance. The Tribunal held that Section 50C, being a deeming provision restricted to transfers of land or building or both, could not be stretched to cover such a relinquishment. Consequently, the Tribunal directed the Assessing Officer to delete the addition made by recomputing the long-term capital gain under Section 50C.

How the Transaction Was Structured

May Flower Enterprises Private Limited, engaged in housing project development, entered into a sale agreement dated 22 August 2005 with one Shri H. R. Ravichandra for the purchase of a site. The agreement specified a total consideration of ₹1,40,40,000, broken down as:

  • ₹32,40,000 — towards the site value
  • ₹1,08,00,000 — towards development charges (covering drainage, sewerage, electricity, water storage tank, tar road, plantation with concrete tree guards, club house, swimming pool in the layout, and individual water and sewerage connections)

Critically, no registered conveyance (sale deed) was ever executed in favour of the assessee company. Clause 4.7 of the agreement made clear that the assessee's remedy in the event of the vendor's default was to institute a suit for specific performance in a competent court of law:

"If the vendor fails to execute a registered conveyance or conveyances in favour of the purchaser, the purchaser can get the sale deed of the schedule property registered in their names by instituting a suit for specific performance of this agreement of sale in a competent court of law by paying the balance sale consideration amount pursuing to this agreement."

Subsequently, the vendor paid the assessee a sum of ₹2,00,00,000 in connection with the assessee giving up its rights under the 2005 agreement. The receipts issued by the assessee to Shri H. R. Ravichandra expressly described the payment as being towards cancellation of the agreement dated 22.08.2005. In its return of income filed for Assessment Year 2017-18 on 07.11.2017, reporting total income of ₹3,12,73,740, the assessee declared a long-term capital loss of ₹1,17,80,684, computed after setting off indexed cost against the ₹2,00,00,000 received.

The Assessing Officer's Approach and Addition Made

The Assessing Officer declined to accept the assessee's characterisation of the transaction. He split the ₹2,00,00,000 receipt into two components:

  1. ₹1,08,00,000 — treated as a return/reimbursement of development charges, on the basis that the contemplated development work had never been carried out by the vendor
  2. ₹92,00,000 — treated as consideration for the land itself

Correspondingly, the Assessing Officer restricted the cost of acquisition to only ₹32,40,000 (the site component), excluding the development charges amount. The stamp duty value of the land was ₹2,16,00,000. Invoking Section 50C of the Income Tax Act, 1961, the Assessing Officer substituted the stamp duty value for the ₹92,00,000 figure and recomputed the transaction, arriving at a long-term capital gain of ₹1,42,89,230, which was added to the assessee's income — a complete reversal of the capital loss the assessee had claimed.

Commissioner (Appeals) Order

The assessee challenged the assessment before the Commissioner of Income-tax (Appeals) (CIT(A)), Chennai-20. Several grounds were raised, including: