This blog post* is not at all prescriptive, instead it brings light to scenarios often shared by chartered accountants(via informal discussions) who have dealt with clients who have received Capital Gains Tax Notice in scenarios especially when
Agreement Value < Ready Reckoner Rate
Agreement Value – The value at which a buyer transacts and mentions it in the Agreement. This is the same amount on which the home loan also gets approved if there is one involved in the transaction
Ready Reckoner Rate – Call it Govt Rate, Circle Rate or Prescribed guideline of Property rate in given class of property in a given micromarket which is revised every year by the state government
- In such deals StampDuty is paid @ 6% of Ready Reckoner Rate, instead of 6% of Agreement Value as (Agreement Value is less than Ready Reckoner Rate, in all other cases where Agreement Value is higher than Ready Reckoner the StampDuty is paid 6% of the Agreement Value)
- The Agreement Value is atleast lesser than 5% of Readyreckoner rate
- Both the Buyer and Seller will be slapped with Capital Gains Tax notice of deficit payment on quantum of |0.95*RR-AV| (RR-Ready Reckoner Rate and AV-Agreement Value)
The scenario where such a challenge comes across is in micromarkets where Ready Reckoner Rate has grown past the actual property rate (hence Agreement Value shall be made lesser of Ready Reckoner). The challenge is the income tax authorities reads this scenario as a false positive of a transaction involving ‘black money’ meaning involvement of ‘untaxed cash’ being exchanged. To track and prohibit such transactions the tax authorities have prescribed a 5% limit around the Ready Reckoner Rate, which means the Agreement Value cannot fall lesser than 95% the value Ready Reckoner in all circumstances.
This becomes the teething issue for Sellers first and Buyers later (as both stand to be slapped with a notice of deficit assessment of capital gains tax).
The reason is since the Property Value is much lower than 95% value of Ready Reckoner Rate which puts the Seller in a fix. He has to transact at the Property Value leading to such a scenario.
where recently such false positive cases have arrived are as follows:-
- Royal Palms, Goregaon East, Mumbai
- A Complex in Mahalaxmi, Mumbai
- How does one calculate Ready Reckoner Rate ?
- How does one arrive at the correct Agreement Value to transact ?
*DISCLAIMER: We donot recommend modus operandi of transactions which are on the illegal side of the law. We hereby state that the above information is for educational purposes only.