property as stock in trade

8/18/2019 property as stock in trade

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JAMIAMILLIAISLAMIA

IRAMPEERZADA

[ PROPERTY AS STOCK INTRADE ]

SUBMITTED TO- Ms. RAVEENA


2/22

ACKNOWLEDGEMENTBefore I start off on this endeavor that has been given to me as the tax law project

in the sixth semester of this joyful ride that I have undertaken under the flagship of The Faculty of Law, amia !illia Islamia, I would like to thank everybody whohas been instrumental in my successful completion of my projects"

First, I would like to acknowledge the immense contribution that my teacher of taxlaw, !s" #aveena has had on this project" By creating the basic framework of thesubject in my mind through his excellent lectures he also contributed in thecreation of the basic framework and limitations of my topic in my mind"

$ext, it would be my duty to thank the excellent library staff in the Faculty of Law,amia !illia Islamia for their never ending readiness to help anyone in findingexact readings for any such subject that he%she is researching"

Lastly, I would like to thank my classmates who never backed off when I neededthem to clarify any concept that I couldn&t catch during the process of the class"


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INDEXINTRODUCTION

SECTION -22, Income from house ro er!"SECTION- #$CAANAL%SIS O& 'RO(ISION O& SEC #$CAREDE(ELO'MENT AGREEMENTCANCELLATION AGREEMENTCONSTITUTIONAL (ALIDIT% O& 'RO(ISION O& SEC #$CA


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TA)LE O& CASES

CIT *+ Ans .ouse &/n nc/n0 Co+ L!1+ 234$5A !/ (en6 ! r m /h *+ CITSm!+ K/shor/ Sh r 1 G /!on1e *+ ITO.e !e7 'ro1uc!s '+ L!1+ (+ ACITAr/f A6h ! r .uss /n *+ ITO 23445G" n Ch n1 ) !r *+ ITOK+'+ ( r0hese *+ ITOA+ S n" s/ R o


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6/22


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0" .nnual value of property is assessed to tax in the hands of the owner even if heis not in receipt of the income" This is very important to note" /e will cover this indetail in 2art5II and 2art5III of this series of posts also" This essentially means thatif your house property is capable of generating income ?and actually it is not6, you

are liable to pay taxes on the deemed income"

)" Income from subletting is not taxable under section 99" For example, . owns ahouse property" 7e lets it out to be B" B further lets it ?or a portion of it6 out to "#ental income of . is taxable under the head >Income from house property&"7owever, since B is not the owner of the house, his income is not taxable asincome from house property, but as income from other sources under section 0)"

HOUSE PROPERTY INCOME

: Tax rental income from house property even if not let out

: 8tock5in5trade in case of builders % developers

: $o distinction between capital asset A business asset%stock in trade

: 2roperty consists of any buildings or lands appurtenant thereto

.ssessee is the owner

.ny portion of property used for business or profession purposes are excluded

2roperty includes both

residential and

ommercial

hargeability as per sec"9<

.pplicable from4

: ompletion of construction and ready to use i"e" under5construction property notcovered

: /hether only after @ or once construction completed


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Section ) *+CA

8pecial provision for full value of consideration for transfer of assets other thancapital assets in certain cases"

*+CA.

-1 /here the consideration received or accruing as a result of the transfer by anassessee of an asset ?other than a capital asset6, being land or building or both, isless than the value adopted or assessed or assessable by any authority of a 8tate

overnment for the purpose of payment of stamp duty in respect of such transfer,the value so adopted or assessed or assessable shall, for the purposes of computing

profits and gains from transfer of such asset, be deemed to be the full value of theconsideration received or accruing as a result of such transfer"

-( The provisions of sub5section ?96 and sub5section ?


10/22

;" /here the builder%developer has entered into an agreement with buyer for transfer of land and building and also fixes the consideration for such transfer at anearlier date, but the transfer takes place at a later date, in such cases the stamp dutyvalue as on the date of agreement is to be compared with the fixed consideration"

7owever the condition is that part or full payment should have been received byany mode other than cash on or before the date of agreement for transfer"

TRANS$ER O$ /USINESS

.88DT8 : 8";< .

2rovision summariHed4

: onsideration received or accrued

: @n Transfer of asset other than capital asset

: .ssets means land or building or both

: onsideration is less than value adopted % assessed%assessable by stamp dutyauthority

: 8tamp duty value will be considered as Full value of consideration on transfer of asset

: +E@ valuation option available as provided in sec"0G ?96 A adoption of valueas per sec"0G ?


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It is true that the word >transfer& is used in addition to the word >sale& but even so,in the context transfer must mean effective conveyance of the capital asset to thetransferee" +elivery of possession of immovable property cannot by itself betreated as eJuivalent to conveyance of the immovable property"-

: 7owever, ;< . also covers cases of stamp duty value assessable and notassessed, hence, registration of agreement even if not done, still provision to apply?similar to sec"0G 6, hence, definition of T@2. may stand modified to this extent

&an' o2 /"i!'in# o2 oth

$o definition of land or building in the Income5tax .ctC

Land or Building may include part thereofC

Land or building may also include any rights therein

Thus, flat or unit or premises in a building, whether residential or commercial would be included

7owever, since definition of capital asset excludes stock in trade but notother business assets, possible only stock in trade is covered u%s";< .

7ence, this provision mainly or rather covers only those assessees dealing inreal estate and treats the land or building as his stock in trade and therefore doesnot merely cover builders or developers

/hether tenancy rights included

: !ay not get covered since not a case of transfer of asset being land or building 5refer Smt. 7i ho2i Sha2a' 8aiton'e v. ITO *CTe in'e2 Sin# : ?IT.T Kol6

7owever, rights in immovable property is also immpovable property : but,Juestion arises whether the tenancy rights can be shown as stock in trade of assesse

# Mum5 ;ITA 48?

8 83 SOT $>45 ITAT 6o 5


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/hether leasehold rights included

: !ay not get covered since not transfer of asset being land or building : refer

decisions rendered in context of sec"0G i"e" At"! P"2ani5 6C Heatex P2o'"ct P.&t'. 4. ACIT ;

7owever, now5a5days, builders develop ?mainly in respect of commercialspace6 and lease it out : whether provision of s";< . applies : +epends on facts : in most cases refundable security deposit is taken, if it is a case of non5refundabledeposit and small rent, provision may get hit

/hether sale of F8I % T+# covered

3nder sec"0G , it has been held that sale of T+# is not land or building andtherefore not covered u%s"0G :refer5 .tul 2uranik ?IT. no"


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: Thus, there would be transfer of land as well as potentials of land i"e" F8I, etc"and hence, if the landowner is dealing or trading in land or otherwise, provisions of sec";< . may be applicable

: If the landowner is not treating the asset as stock in trade, then sec"0G wouldapply to him as held in .rif .khatar case, supra, !umbai IT.T"

C Land owner getting compensated partly by cash and party by constructedarea

: 7ere again there is transfer of land and building

: onstructed area is given free of cost i"e" it is part of overall consideration

: 8ame situation as per ?B6 above and the value as assessed by 8tamp dutyauthorities for such type of agreements will be the consideration for ;< . % 0G

< Land owner getting compensated fully by constructed area

: 7ere also there will be transfer of land and building

: onstructed area is given free of cost i"e" consideration for transfer of development rights

: 8ame outcome as in ? 6 earlier

: Further ;< . will be applicable when the builder sells to third parties

Food for Thought4 onstructed area agreement to be given to landowner again registered : what happens

Re'eve!o3ment A#2eement

7ere issue arises with respect to existing owners of flat vis5 5visredeveloped new flats received by them

: Dxisting flat owners getting extra area

: .greement is made generally as


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>2ermanent .lternate .ccommodation on @wnership Basis&

7owever, it is new flat received with extra area hence may be treated astransfer

Flat owner would be getting free of cost but there is element of stamp dutyon such agreements

Both section ;< . as well as section 0) may apply one to the seller andother to the buyer

In books of builder, there is no sale reflected for such flats and it only goesas part of overall cost of construction, however, registered agreement may becalled for

T2an e2 o a et into 3a2tne2 hi3 i2m, etc "

+ealer in land joins hands with another builder % developer for jointconstruction and sale thereof

;0?


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Cance!!ation o A#2eement

ases of cancellation of agreement

: First time agreement entered into with builder, ;< . applies and sale valueaccounted in books of account as per agreement, but only for taxation purposes,.@ applies stamp duty valuation

: 8uch agreement gets cancelled either in the same year of in subseJuent year

: It may be treated as purchase of flat by builder at the price paid to the seller ?i"e"to the person cancelling the agreement6

: 8econd sale of the same asset : @n second sale again ;< . will be applicable

: Issue is : what is the cost to be taken against the sale of same asset second time : will the same be amount assessable to tax at the time of first sale i"e" whether thedifferential value be added to cost of purchase of asset upon cancellation

#eference to >ai3"2 ITAT in 80an Chan' /at2a v. ITO 9

Inve to2 ) A!!otment, etc.

ases of investor flats i"e" investors are allotted flats, which are later either sold bythem to third party or to builder

: @n launching project, investors book flats at price which is lower that stamp duty

price : what happens when investor cancels such booking subseJuently at marketvalue which is eJual to or more than stamp duty valueM

: /hat happens if the investor sells the rights to third party at market price and the builder is confirming party to the agreement which is registered subseJuentlyM

> ;2343?


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: /hat happens in above situations where the construction of building is yet tocommence or has commenced and partly completed but not fully

: /hat happens if the project launched finally does not go through for whatever

reasons and the project is abandoned/hat will be the situation where the investors are allotted flats % rights in

flats much prior to .N ';5'0, however, all the aforesaid situation happens in .N';5'0

2rovision reJuires amount paid otherwise in cash prior to date of agreement : what happens if the date of agreement entered into is one day or couple of days prior to payment in cheJue : Further whether it is date of payment or date of actualencashment of cheJue in bank account of the builder % developer

.ny implication of a case of conversion of capital asset into stock in tradeand the said stock in trade is sold % transferred in .N ';5'0

/hat happens where the flat is sold earlier to date of amendment, possessionalso given, B! taxes, other charges also levied : however agreement isregistered in .N 9G';5'0 : whether provisions of ;< . applicable

/hat happens in the earlier case whether the purchaser has already sold the

asset in his balance sheet and is offering income from house property in respect of the same : will this make any difference

8ale to be recogniHed when

;< . : deeming provisions : whether taxability deemed to be income inyear of agreement % registration of agreement @# still can be said to be taxableonly as per the method of accounting followed

/hat happens if in between the completion of project, the earlier sale iscancelled and new sale takes place in respect of same property"


19/22

Con tit"tiona! 4a!i'it0 o P2ovi ion o ec.*+CA

: /hether valid

: /hether can be challenged

: Darlier Legislature brought similar provisions by way of sections 09?96 andhapter OO5 but omitted from 8tatute

) 7.P. 4a2#he e v. ITO1?

: provision of sec"09?96 can be invoked only if revenueestablishes that there is under statement of consideration

8ec"09?96 provided that if fair market value of property transferred exceeded saleconsideration by more than '0P than

department could adopt the fair market value for computation of capital gain

$o other condition was provided

.s the section provided, the assessee could not even prove that considerationrecorded is the correct consideration

In the case before the 8upreme ourt, the difference was more than '0P andtherefore the .@ added the difference to capital gain

: A. San0a i Rao 11 : provision of sec";;. was read down by the 8

8" ;;. was inserted to provide that business income for specified business of country liJuor, timber, etc shall be deemed to a specified percentage of purchase

price in auction and under new 8" 9G) tax shall be collected at source at the timeof collection of purchase price"

43 4$4 ITR 8>: SC5

44 24> ITR $$3 SC5


20/22

It was provided that normal computation provisions of 8" 9 to ;< will notapply and income shall be deemed to be specified percentage

.ssessee could not demonstrate that its income was lower than the specified

percentageThe hon&ble 8upreme ourt, though upheld the constitutional validity, it was

held that

tax can be collected at source at specified percentage u%s" 9G) ,

but provisions of 8" ;;. which provided that income shall be deemed atspecified percentage was read down, and

it was held that in assessment, the assessee will have a right to demonstratehis income is lower"

: ." 8anyasi #ao : provision of sec";;. was read down by the 8

8" ;;. was inserted to provide that business income for specified businessof country liJuor, timber, etc shall be deemed to a specified percentage of purchase

price in auction and under new 8" 9G) tax shall be collected at source at the timeof collection of purchase price"

It was provided that normal computation provisions of 8" 9 to ;< will notapply and income shall be deemed to be specified percentage

.ssessee could not demonstrate that its income was lower than the specified percentage

The hon&ble 8upreme ourt, though upheld the constitutional validity, it washeld that

tax can be collected at source at specified percentage u%s" 9G) ,

but provisions of 8" ;;. which provided that income shall be deemed atspecified percentage was read down, and

it was held that in assessment, the assessee will have a right to demonstratehis income is lower"


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: Impact of above two decisions5

.ll subseJuent legislative action of deeming income

though deem income

but it provides an option to the assessee to demonstrate that income is notwhat is deemed"

The trend in recent years is that presumptions provided are more rule based

no discretion to the .ssessing @fficer


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)I)LIOGRA'.%Income T 7- (+K+S/n0h n/ e1+234<BBB+/n1/ n6 noon+comM nu !rh!! ==sho1h0 n0 +/n / ne!+ c+/n
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property as stock in trade