When stamp duty value overrides commercial reality: The contested application of Section 78 of Income-tax Act, 2025 to leasehold rights

This distinction has become commercially significant in recent years, particularly in stressed asset transactions, industrial land transfers, redevelopment situations, and long-term government leases. In many situations, leasehold property does not command the same value as freehold land. A lessee’s interest is often burdened with uncertainty of renewal, restrictions on transfer, payment of ground rent, obligation to pay “unearned increase” to development authorities, and limitations on redevelopment or change of use.

The disparity becomes particularly pronounced in distressed transactions involving dilapidated and commercially unusable assets, insolvency-driven sales, repeated failed auctions, or leases burdened with transfer restrictions and continuing liabilities. In such cases, the actual realisable value may be materially lower than the stamp duty value for registration purposes.

Yet, once Section 78 is triggered, the law substitutes the stamp duty value irrespective of whether the property could realistically fetch such consideration in the market.

Importantly, the debate is whether the deeming fiction under Section 78, which specifically refers to “land or building or both,” can be extended to rights in land rather than the land itself.

Against this commercial backdrop, courts and tribunals have increasingly been called upon to determine whether the deeming fiction should at all apply to transfers of leasehold rights. The jurisprudence broadly reflects two competing interpretive approaches: a strict construction of deeming provisions, confined to transfers of land or building itself, and a purposive approach treating valuable leasehold interests as economically equivalent to transfers of immovable property.

• Purposive approach: Section 78 extends to leasehold transfers

  The controversy resurfaced recently in Vidarbha Veneer Industries Ltd. v ITO (2025), where the Bombay High Court (Nagpur Bench) adopted a purposive interpretation in a case involving the assignment of leasehold rights, and held that Section 50C applies even to the transfer of rights in leasehold land. The Court reasoned that the definition of “capital asset” includes property “held” by the assessee and is not confined to absolute ownership. The term “held” can mean held as owner, lessee, allottee, tenant, or otherwise, and the mode of holding does not alter the nature of the property. Accordingly, leasehold land was treated as falling within the scope of Section 50C. The High Court expressly disagreed with earlier Tribunal rulings, including the long-standing Mumbai Tribunal decision in Atul G. Puranik v ITO, which had excluded leasehold rights from the ambit of Section 50C.

  The controversy, however, is not whether leasehold interests constitute “capital assets,” a point that is well settled, but whether the legislature intended the specific deeming fiction in Section 50C/78 to extend beyond transfers of land or building itself.

• Strict construction approach: Leasehold rights are distinct from land

  On the other hand, several Tribunal decisions continue to maintain a conceptual distinction between land itself and rights in land.

  In the case of Neha Gupta v ITO (ITAT Delhi, 2025) where the assessee sold an industrial unit held on leasehold land, the Delhi Tribunal held that Section 50C does not apply to the transfer of leasehold rights since leasehold interests are distinct from “land or building” and where the legislature wanted to distinguish between land and rights in land, it has done so expressly, as in Section 54G(1), Section 54GA(1) and Explanation to Section 155(5A) of the 1961 Act. The Tribunal further observed that where conflicting views of non-jurisdictional High Courts exist, the interpretation favourable to the taxpayer should prevail, relying on the Supreme Court ruling in CIT v Vegetable Products Ltd.

  Similarly, in M/s Torque Pharmaceuticals Pvt. Ltd. v DCIT (ITAT Chandigarh, 2026), while dealing principally with valuation of shares under Section 56(2)(x) of the 1961 Act and Rule 11UA of the Income-tax Rules, 1962, the Tribunal made significant observations on the nature of leasehold property. It noted that leasehold rights represent a limited bundle of rights and cannot be equated with unencumbered freehold ownership. The Tribunal observed that applying stamp duty values designed for freehold property to leasehold land was commercially unrealistic, particularly where: (i) the leasehold rights were transferable only on the condition that 50% of the “unearned increase” in the land’s value be paid to the appropriate government authorities, meaning that a significant portion of any appreciation accrues to the state rather than the seller, depressing the price a rational purchaser would pay; and (ii) the taxpayer was required to pay annual ground rent, a perpetual or long-term financial obligation that, unlike freehold ownership, operates as a continuing liability against the property’s total value.

  Since the leasehold rights were encumbered by these dual liabilities (i.e., the cost of transfer (unearned increase) and the cost of holding (ground rent)), the Tribunal concluded that they constituted only a “limited bundle of rights.” It held that applying a stamp duty value designed for unencumbered freehold land to such constrained interest would artificially inflate the value and lead to a “commercially unrealistic” tax outcome.

The emerging divergence reveals a deeper tension in tax jurisprudence. Section 50C/78 is a deeming fiction and therefore traditionally warrants strict interpretation. At the same time, courts adopting a purposive approach increasingly appear reluctant to allow transactions involving valuable immovable property rights to escape the provision merely because ownership is not absolute.

Equally, however, extending the fiction mechanically to leasehold interests can produce distortions in sectors where marketability itself is impaired. In several industrial and infrastructure leases, the risks attached to renewal, transfer restrictions, regulatory approvals, and deteriorating assets materially depress realisable value. Applying stamp duty benchmarks meant for freehold land may therefore overstate income that was never economically realised.

The statute itself contains an important corrective mechanism. Section 78(2) (Section 50C(2) of the 1961 Act) permits the Assessing Officer to refer valuation to a Departmental Valuation Officer (DVO) where the assessee disputes the adoption of the stamp duty value.

The DVO functions as an independent valuation authority tasked with determining fair market value, having regard to the actual characteristics and encumbrances attached to the property. In practice, a DVO examination can account for factors such as lease restrictions, residual lease tenure, non-renewability risks, encumbrances, litigation, physical deterioration of buildings, distressed sale circumstances and limitations on transfer or redevelopment.

However, the DVO mechanism remains only a post facto corrective process rather than a contemporaneous pricing certainty framework. While Section 78 provides a tolerance band permitting variation of up to 10% between the declared consideration and the stamp duty value without triggering the deeming fiction, disputes involving leasehold rights frequently arise in situations where the divergence is substantially higher due to genuine commercial factors such as distressed sales, restrictive lease conditions, deteriorating assets, lack of marketability, or uncertainty around lease renewal.

In this backdrop, reliance solely on the DVO process may not always provide sufficient certainty, particularly because valuation itself involves estimates and subjective assumptions. The continuing divergence in judicial approaches, therefore, underscores the need for clearer legislative or judicial guardrails on the extent to which deeming provisions intended for land and buildings can be extended to limited rights in land. Until authoritative clarity emerges, controversies involving leasehold property are likely to remain highly fact-driven and forum-sensitive, making contemporaneous valuation support, careful transaction documentation, and early assessment of Section 78 exposure critical in structuring such transactions.