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Allocation of Profit in sale of Land and Building, Income Tax

Issue Id: - 5269
Dated: 3-2-2013
By:- Deepak Whorra
Allocation of Profit in sale of Land and Building

  • Contents

We sold our factory land &building where the sale deed seperately stated the value of the land and seperately stated the value of the Building.  The Sale value was more than the combined values of Land and Building .The values were accepted by the Stamp Valuation Officer and stamp duty was duly paid.

The Value of the Land ( circle Rate ) was 1.23 Crore and the building was at  O.24 crore in the sale deed. However we sold the property at 2.40 crores and the same was in the sale deed. Thus there was an excess of about 92 lacs over the circle rates.

After deducting the indexed cost of land, we paid Long Term capital Gains.

The residual value i.e. 2.40 crores less (1.23 + 0.24 ) = 1.16 crores was Credited to the Block of Assets i.e. Buildings.This meant  0.24 lacs value of Building in the sale deed+ 92 lacs excess. Thus no tax was paid on that as the existing Block of Assets ( Buildings ) was more than 1.16 lacs

The AO is now stating that the excess over the stamp duty value cannot be all transferred to the Building account but should be divided between Land and Building in the ratio of the circle values as per circle rates. This would mean that we cannot Credit all the residaul value over the land value ( as per circle rates ) to the Block of Assets of the Building but have to add back 79 lacs to the land Values . We would then have to pay LTCG Tax on the Land Value.


This is a case where our sale deed is above the Circle rates and yet we are sufferring. Please Comment


Posts / Replies

Showing Replies 1 to 10 of 10 Records

1 Dated: 13-2-2013
By:- Deepak Whorra

Seems that there is no settled case law on the bifurcation criteria between Land and Buildings when the sale value is above the total of the Land and Building values as assessed by The stamp valuation authority ? Or is there ?

2 Dated: 15-2-2013

I am not clear as to what was the break up sale values mentioned in the sale deed since it was much above the circle values and stamp duty was paid on 2.40 as against combined circle value of 1.47.


However in real terms it is only the land which appreciates and not building (except for some specific reason or case depending on type of construction and the present cost for similar construction).  In such a situation it may be right thing to appropriate the consideration in acceptable proportion. 

The idea of setting off differential value to block of building, in such a situation, may not be an acceptable method.

3 Dated: 15-2-2013
By:- Deepak Whorra

Dear Mr.Sanjay Dave,

Thank You for your reply.

I have mentioned the break up of the sales values in the sale deed . To repeat - land 123.3 ( which is the circle rate )lacs and Building 24 lacs.

When we sell a Building, the sale is based on the present repeat present cost of construction... why should anyone sell at  construction a cost which was incurred 10 or 15 yearsago( construction consts have quadrupled over the last decade).  when construction costs were substantially lower ? We negotiate with  the buyer and sell at a price which is the cost of a similar construction at today's date.


We took the sale price of Land at the prevailing Circle rate ( as mentioned in the sale deed ) and the residual value we took as the sale price of the building. In the absence of any specified method in the ACT or of any case laws, what other method could we have adopted ???????

In any case the profit of the sale of a building ( being a depreciable asset ) is STCG which attracts a higher rate of tax than Long Term Capital Gains. So where are we wrong ?

Its a different matter that we had a block of Assets to absorb this sale price. However, now with our Building Block of Assets having depleted so much, when and if we sell the present building, we will have to pay STCG on a whooping profit !


You write - " Acceptable proportion". I do not understand how to arrive at an acceptable proportion ?? Please do eluciadate on this point - what is acceptable proportion and is there any Case law to support this .


Once again , thank You for making an effort




4 Dated: 16-2-2013

I agree with what you have mentioned in 2nd para of your response about the present cost of construction for building, which is what I have stated in my first reply with in the bracket.

By acceptable proportion I meant that entire consideration should have been allocated in a proportion instead of taking only circle values for L & B and then allocating entire surplus to B.  The three options of how to go about it, as I can think of are:

a. Having valuation by a regd. valuer and allocating entire consideration of Rs.2.40 to L & B based on valuation;

b. Alternately allocating entire Rs.2.40 in proportion of 123:24 which would have been Rs 2.00 & 0.40;

c. Hybrid of the above two.

I am not able to think of any case law on similar issue but will let you know if I come across something.

To my mind it is not important as to higher tax under STCG, future tax possibilities etc. when issues are challanged by tax dept. in present scenerio.  The best way to defend/justify is with an external evidence like option (a) above or acceptable evidence like option (b) above.  I think even now you may think of valuation by a regd valuer, if that is doable.  How do you substantiate that residual value is for B & not L since you have taken circle values for both?  Why you did not split the consideeration as Rs.1.23 for L & Rs.1.17 for B in the sale deed?  Do you have the workings of Registrar for payment of stamp duty by buyer- since generally it is done separately for L & B?  Is it on Rs. 1.23 & Rs.1.17?  Some of these facts could support you in defending your allocation. 

It is a known fact that circle rates are only indicative for limited purpose of stamp duty levy and generally do not reflect the current market price which is far above the circle rates (ofcourse there are always exceptions to this and section 50C is one such exception).


5 Dated: 16-2-2013

Please see this case law on similar issue:

ITA No. 285 of 2011 of Delhi High Court in Gadodia Electronics Pvt Ltd v/s CIT

6 Dated: 16-2-2013
By:- Deepak Whorra

Thank You for your reply and, as I see it , you have understood the issue very well.

A few points worth looking into ;


1) Now that this is done ( in 2009 ), what is the best remedy ? If the valuation of the building turns out  less than 116, then can we not claim profit on the building account ?

2) The case of Gadodia refers to a valuation by the DVO higher than that accepted by the dept being ruled in favour of the Assesse. There is no decision in connection with the bifurcation.

3) In the absence of any rule / law /prescribed method in the ACT , can we not take our stand based on interpretation of the law . In Vegetable Products Ltd v CIT, the honourable Supreme Court has ruled that where  two reasonable constructions of any taxing Provisions are possible that construction which favours the Assesse must be adopted.

In our case, since there is no case law or rule for bifurcation and several interpretations could be made .

4) If the view of the AO is accepted during appeals, then is this a case for penalty also ?

5) You have mentioned Section 50C . Is this applicable in our case since our computation is not below the Circle rates but above it ?  However the sanctity of the section is such that the AO cannot refer to a valuation officer nor can the AO apply a rate higher than than the circle rate . The GADODIA CASE is also relevant in this connection. But the question is that of bifurcation for which no provision exists in Law.

6) I am totally confused as your comments are on what could have been done and not on what can be done now as per the law.


Once again thank you for your efforts and I eagerly look forward to your reply


PS: For your information, the Indexed Cost of Land is about 14 lacs and the depreciated value of the building in our books is 16.7 lacs. Thus we have paid  LTCG on the Land at 123.3 less 14 lacs.  If an alternate method of bifurcation is taken, could it not be based on the ratios of the book values  x sale price of 240   OR  x total profit of about 210 lacs in which case the value of the building will still be higher than now Credited to the Block of Assets and the allocation towards the sale price will make the land value lower than the circle rates.

7 Dated: 16-2-2013
By:- Deepak Whorra

Two more points come to mind :


1) The circle rates for building construction vary from area to area and, in 2009, they vary from Rs.4750 per sqm and they are three times in some other areas of Delhi - upto Rs.13500 per sqm. I can understand this for Land Values but construction costs can never vary so much for similar quality of construction. This could be a possible ground for argument though I don't know if this can have any basis in legal terms and can be construed as argumentative.

2) You have mentioned that there can be three alternative methods of bifurcation and in point 3 you have stated a hybrid of theose suggested in points 1 and 2 above. What are the possible hybrid methods that one can look at ?

8 Dated: 16-2-2013

Please do not get confused.  I mentioned about what you could have done, so that you are prepared to counter Dept.'s arguments. 

G Case - Ref was made with only idea  that it was referred to valuation and based on that High Court has decided that valuation adopted by assessee may be accepted since it is closer to the valuation done.

50C is not applicable to you but was referred with a view to note exception to circle values being important where consideration/market value in sale deed is less than circle value.

Now what you can do - From facts provided by you, I can think of following 2 options:

1. As already suggested in my previous reply, get a valuation done from Regd valuer;

2. If buyer is willing to share the information with you, what are the values adopted in their books and on what value depreciation is claimed and allowed by Dept.

These two external evidences could support you, depending on the results of these exercises.

Two reasonable constructions - That is only in respect of interpretation of what is stated in section, here that is not the case.  

9 Dated: 16-2-2013
By:- Deepak Whorra

Firstly apologies for harping on the same points again and again...But , as I stated, I am confused


1) Two interpretations : Since nothing is stated in any section on this issue of bifurcation, then two interpretations could refer to any method of valuation being ad-hoc. Or not ? Our view is of residual value since Land sale value is computed as per circle rates

2) Re: Valuation : Is it prudent to get valuation done or to let the AO get it done since under which section would she get it done ?

3) it is difficult to obtain further information from the Buyer of the property since this does not affect them and why would they want to get entangled.

4) Have we contravened any part of the law ?

10 Dated: 16-2-2013
By:- Deepak Whorra

Sorry, but once again some thoughts:


1) If the AO adds to the Land value by reducing the allocation to the Building value, then under which section can she change the bifurcation ? Will that not be an ad-hoc change in value ?

2) When we put the residual value in the building even though both Land and Building   circle rates were mentioned in the sale deed, then does it not mean two interpretations and the assesse taking the construction that is beneficial to the assesse ?


Your quick replies have helped me, in clearing my mind somewhat but I do need to find a solution. This is a case where we took the full payment by cheque and are sufferring due to a technical error by not putting the building value in the sale deed but just the circle value. I do need a solution specially since this will go in appeal.


Thanks You once again


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