For the buyer, this meant stamp-duty savings on the ₹16 lakh portion. It seemed like a win-win until the NRI tried transferring the sale amount to his US bank account.
When an NRI wants to remit money abroad, they must obtain certificate 15CB from a chartered accountant (CA) to prove the source of funds; it’s similar to an audit. When the NRI in question, who wished to remain anonymous, approached a CA, he was asked for invoices for the furniture and fixtures worth ₹16 lakh. He didn’t have any. “I am not aware of Indian laws and just trusted the buyer’s word. He tricked me,” the NRI said.
Now, the NRI had two options: obtain the original invoices to prove the value of the furniture and fixtures, or recalculate their tax liability on ₹16 lakh and pay the remaining tax.
The NRI’s predicament highlights the challenge of declaring furniture and fixtures as personal effects during a property sale. Documentary proof is essential in case of scrutiny.
Experts note that sellers often inflate the value of furniture and fixtures to save tax since supporting invoices are not requested at the time of sale or when filing the income tax return (ITR).
“Since no authority actually goes to the site to check the furniture being sold, sellers quote obnoxious numbers. This is not the right way as it could raise scrutiny later,” said Karan Batra, founder of Charteredclub, a platform for tax-related resources.
Documentation, the right way
To classify a part of the property sale amount as furniture and fixtures, the seller should declare the appropriate value of the items and create bills of sale. The items can be valued at current fair market value or an amount agreed upon by the seller and buyer, as long as it is justified.
Batra advises creating a separate agreement listing each item with its market value or a consolidated amount for all items. Invoices don’t have to be attached to the agreement but should be preserved as proof of ownership, which will be crucial if tax authorities demand an explanation of the valuation.
If the seller doesn’t have invoices showing where he bought the items, it could become a problem. “By showing furniture and fixtures as a separate transaction, the taxpayer will not be paying capital-gains tax on the amount. So, tax authorities will probe the matter deeply. If the taxpayer doesn’t have sufficient proof, he or she will have no choice but to pay the tax,” said Prakash Hegde, chartered accountant, Acer Tax & Corporate Services LLP.
Without original bills, getting the furniture valued by a registered valuer won’t help either. “The key point is that the tax department wants proof of ownership of the furniture. The buyer and seller can take any furniture to a valuer and get it valued, so the role of a valuer is of little importance if the original bills are not available,” said Hegde.
Further, a legitimate invoice, called a pakka bill in common parlance, qualifies as proof of purchase. “A lot of buyers get a temporary bill to avoid paying GST or when the payment is done in cash. These won’t work in this case,” said Batra.
On the flip side, if the seller has lost the invoices but paid digitally through a bank, the bank statement can be used as proof of purchase.
Sellers should also note that not all household items qualify as personal effects, even though they may be for personal use. For instance, archaeological collections, jewellery including silver, platinum and other precious metals, and paintings and any other form of art do not qualify as personal effects.
What are the potential consequences?
NRIs cannot carry out this transaction without invoices because they need certificate 15CB to send money abroad. While they may sell the property without supporting invoices, they will need them soon after to get certificate 15CB. This means they will have to pay the remaining tax if they don’t have supporting bills.
Since resident Indians don’t have any such obligation, they often exclude furniture and fixtures from the property sale amount even without proper documents. This, however, could have dire consequences.
If a tax scrutiny arises later and the seller doesn’t have bills to support the amount paid and the source of investment, the tax department will declare the amount as capital gains and charge 20% tax (30% in the case of short-term gains). Along with the due tax, the taxpayer will also have to pay 1% monthly interest on it and any penalty levied by the tax officer.
“The tax officer will impose a penalty for not declaring the correct value of the asset on purpose to reduce taxes. The penalty could either be for under-reporting, which attracts a penalty of 50% of the tax due, or it could be for mis-reporting, which attracts a penalty of 200% of the tax due. There’s a higher chance of the latter being levied,” Hegde.
The buyer in such a case will face no consequences from the tax department, but could come under scrutiny from the state stamp authority if it finds out that the furniture and fixtures transaction was illegitimate. Hegde said, however, that this is unlikely to happen unless the tax department informs the stamp authority. “When they do find out, some state stamp authorities can go to the extent of charging the buyer with evading stamp duty through unlawful means,” he said.
Mayank Mohanka, founder director at TaxAaram India, said buyers conducting such a transaction should keep in mind that they won’t be able to include the amount paid towards furniture and fixtures in the cost of acquisition when they want to sell the property later on.