Ravi Associates

Taxation in Real Estate Sector

Dr Ravi Gupta

Ravi Associates

Classification of asset as business asset or capital asset

Investment in Land

Business Income Vs Capital Gains

Development Agreement

Sale Agreement vs Development Agreement

Applicability of Section 2(47)(v), sale through POA

Transfer in a Development Agreement

Fair Market Value (Section 50D)

Property on land Constructed Earlier

Period of Holding of share in housing Co-op

Treatment of Advance Money Received

Deemed Capital Gain (Section 50C)

Taxability under Capital Gains

Exemption under section 10(37)

Exemption under section 54

Exemption under section 54EC

Exemption under section 54F

Exemptions

Deemed consideration of land and building part of SIT (Section 43CA)

Rental income from letting of immovable property

Gift of immovable Property

TDS on transfer of immovable property

Other Aspects

Taxation in Real Estate Sector

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Business Income vs Capital Gains

Capital Asset means(a) property of any kind held by an assessee, whether or not connected with his business or profession;

but does not include––(i) any stock-in-trade (iii) agricultural land in India, not being land situate—(a) in any area which is comprised within the jurisdiction of a municipality which has a population of not less than ten thousand or(b) in any area within the distance, measured aerially,—

(I) not being more than 2 KM, from the local limits of any municipality with a population of 10,000<1,00,000(II) not being more than 6 KM, from the local limits of any municipality with a population of 100000<10,00,000(III) not being more than 6 KM, from the local limits of any municipality with a population of 10,00,000<

Classification as SIT or capital Asset• Whether a particular asset is stock-in-trade or capital asset does not depend upon the nature of the article, but the manner in which it is held .

• Entries in the account books are not decisive [Fort Properties Pvt. Ltd. v CIT (1994) 208 ITR 232 (Bom)]

• Normally, the purchase of land represents investment of money in land. [CIT v Jawahar Development Association (1981) 127 ITR 431 (MP)]

• If the land owner developed the land, expended the money, laid roads convert the land into house sites and with the view to get better price it will not be considered as an adventure in the nature of trade to give any business profit. [CIT v A. Mohammed Mohideen (1989) 176 ITR 393 (Mad)]

• The activity of an assessee in dividing the land into plots and not selling it as a single unit as he purchased, goes to establish that he was carrying on business in real property and it is a business venture. [42 ITR 179 (SC)]. However, Selling of own Land after division to secure better price is not trade. [209 CTR 410 (MP)]

• Principles as prescribed by Bombay High Court determining whether land is trading asset or Investment. [CIT v Trivedi (V.A.) (1988) 172 ITR 95 (Bom)]

1.The original intention of the party in purchasing the property 2. The magnitude of the transaction of purchase 3. The nature of the property 4. the length of its ownership and holding 5. The conduct and subsequent dealings of the assessee in respect of the property 6. the manner of its disposal 7. the frequency and multiplicity of transactions

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Transfer in Development Agreement

Development agreement• It is an executory agreement, whereby the developer undertakes to put up a superstructure on that part or portion of land retained by the owner in consideration of

transfer of remaining part.

• Development agreement is not a sale simpliciter but in the case of Ashok Leyland Finance Ltd. v Appropriate Authority (1997) 230 ITR 398 (Mad) a development agreement is considered as an agreement for sale.

Development agreement as Sale Agreement

• unqualified, uninterrupted and irrevocable right of possession to the developer

• the inference of transfer on mere signing of the agreement

• the developer applies for permissions from various authorities either under power of attorney or otherwise

• If the contract read as a whole indicates passing of or transferring of complete control over the property in favour of the developer then the date of the contract would be relevant to decide the year of chargeability. [Chaturbhuj Dwarkadas Kapadia v CIT (2003) 260 ITR 491 (Bom)].

Other Relevant Points

• A mere grant of a permissible right to build on plot of land and permission was there to build a multistoried building and rights of a lessee had continued to vest with the assessee shall not be treated as transfer. [CIT v Atam Parkash & Sons (2008) 175 Taxman 499 (DEL)]

• cost of construction of proposed building allotted to the assessee in the ultimately constructed area and not the market value of such share of constructed area, has to be reckoned as consideration for the purpose of computation of capital gains. [Dy. Director of IT v G. Rahguram (2010) 46 DTR 136 (Hyd)]

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Taxability under Capital Gains

Fair Market Value

(Section 50D)

Property constructed on a land purchased

earlier

Right to acquire any house property

Share in the co-operative

housing society

Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.

• Period of Holding

• Apportionment of consideration

• Letter of Allotment

• Date of Allotment [Vinod Kumar Jain v CIT (2010) 195 Taxman 174 (P&H)]

• Period of Holding

• Physical Possession

Treatment of advance money

received

Provisions upto AY 2014-15 Provisions from AY 2015-16 1.Advance money forfeited is more than the cost of ‘acquisition’ 1. Section 56(2) (ix) 2.No distinction is made between moneys received and retained by way of 1. Section 2(24) ‘advance’ and ‘other money’ [Travancore Rubber & Tea Co. Ltd v CIT (2000) 243 ITR 158 (SC)].

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Deemed Capital Gain (Section 50C)

• Appeal against Valuation

• Valuation under section 50C, land and building cannot be treated as separate assets [J. Anjaneya Sharma v CIT (2014) 221 Taxman 148 (AP)]

• Re-computation of capital gain in case the consideration is revised in any appeal

• Mandatory Requirement by AO to make reference to Valuation Officer [Kalpataru Industries v ITO ITAT No. 5540/Mum/2007]

• Assessment order passed by Assessing Officer accepting stamp duty value without waiting for report of DVO is liable to be set aside [N.Meenakshi v ACIT (2009) 30 DTR 1 (Mad)]

• Value accepted by SVA cannot be contested by AO on the basis of valuation report. [Punjab Poly Jute Corporation v ACIT (2009) 313 ITR (AT) 178 (Amritsar)]

• Specific Objection By Assessee, AO is required to make reference to Valuation Officer. [S. Muthuraja v CIT (2013) 218 Taxman 73 (Mag) (Mad)]

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Exemptions

Compulsory Acquisition

[Section 10(37)]

Profit of House Property used for

Residence[Section 54]

Transfer of land used for

agricultural [Section 54B]

Capital Gain on transfer of asset

other than a residential house

[Section 54F]

• Compensation Before 1.4.2004• Compensation after 1.4.2004• Enhanced Compensation after 1.4.2004

• Residential house, the income of which is chargeable under the head "income from house property• long-term capital gain• Transferred by an individual or a Hindu Undivided Family• The assessee has, within the specified period, purchased/constructed another residential house

(i) 1 year before or 2 years after the date on which the transfer took place, for purchase of a residential house; or (ii) A period of 3 years after the date on which the transfer took place, for construction of a residential house.

• The agricultural land had been transferred by an individual• The agricultural land has been used by the individual or his parents for agricultural purposes during the 2 years immediately preceding the date of transfer;• The assessee had purchased another agricultural land (rural or urban) within a period of 2 years after the date of transfer • Acquisition of land on partition of HUF which was earlier used by HUF, will satisfy the condition of use for preceding 2 years. [CIT v Narayanaswamy (1985)

156 ITR 194 (Mad)].• The land sold was situated in a commercial area but was used for agricultural purposes and acquired for non-agricultural purposes shall be eligible [ CIT v

Savita Rani (2004) 270 ITR 40 (P&H)]

• Tranfer of any capital asset other than a residential house + long-term capital gain + by an individual or a Hindu Undivided Family• The assessee does not own more than one residential house on the date of transfer of the original asset• The assessee has, within the specified period, purchased/constructed another residential house

(i) 1 year before or 2 years after the date on which the transfer took place, for purchase of a residential house; or (ii) A period of 3 years after the date on which the transfer took place, for construction of a residential house.

• Reinvestment for the purpose of claiming exemption under section 54F should be in the assessee's own name. Where it was in the name of the assessee's son/wife[ITO v Parkash Timaji Dhanjods (2002) 258 ITR (AT) 114 (Nag)].

• The assessee is not eligible for deduction under section 54F if the assessee constructs or purchases a residential house out of borrowed funds. Sharad Ruparel v ACIT (2009) 27 SOT 61 (Mum)

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Exemption under Section 54• Exemption u/s 54 and 54F to be allowed in case of investment in one residential house property only situated in India [W.e.f. A/Y 2015-16]

Delhi High Court in the case of CIT Vs Gita Duggal ITA 1237/2011 held that the Act required the taxpayer to acquire a “residential house” and so long as the taxpayer acquires a building, which may be constructed, for the sake of any convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and

independently be used as independent residence, the requirement of the section 54 and 54F should be taken to have been satisfied.

• Co-owner or co-owners release his or their respective share or interest in the property in favour of one of the co-owners. [ CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)].

• Construction of a new floor on another house owned by him. [CIT v Narasimhan (PV) (1990) 181 ITR 101 (Mad)]

• If the land alone is sold, the provisions of section 54 will have no application. [CIT v Zaibunnisa Begum (1985) 151 ITR 320 (AP)]

• Benefit of exemption under section 54(1) is available to legal representative after assessee's death during the stipulated period. [ Ramanathan (CV) v CIT (1980) 155 ITR 191 (Mad)]

• Purchase of partial stake in house property shall be eligible under section 54. [CIT v Chandaben Maganlal (2000) 245 ITR 182 (Guj)]

• Property purchased from two different persons, by virtue of four different sale instances in the shape of four different parcels which constituted one single residential unit or house shall be eligible. [CIT v Smt. Sunita Aggarwal (2006) 284 ITR 20 (DEL)]

• Property purchased in the name of assessee’s wife, exemption under section 54 shall be allowable. [CIT v V. Natarajan (2006) 154 Taxman 399 (Mad)]

• If the building is owned by one person and the land is owned by another person then it will be the case of land adjoining the building and by no stretch of imagination can it be called land appurtenant to the said building. [P.K. Lahiri v CIT (2005) 275 ITR 17 (All)]

• Where the assessee utilised the sale consideration for other purposes and borrowed the money for the purpose of purchasing the residential house property. The purchase of house property shall be eligible. [Bombay Housing Corporation v Asst. CIT (2002) 81 ITD 454 (Bom)]

• The exemption under section 54 was admissible either for purchase or for construction but not for both. [ Sarkar (B.B.) v CIT (1981) 132 ITR 661 (DEL)]

• Allotment of flat by DDA or co-operatve society shall be treated as construction. [Circular no. 471 and 672]

• If the assessee has paid the full consideration and obtained the possession of the house within the specified period, he is eligible for exemption. [ CIT v Shahzada Begum (1988) 173 ITR 397

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Some Other Aspects

Land and building forming part of stock-in-trade [Section 43CA]

• Stamp duty value to be deemed consideration for the purpose of PGBP

• Provisions of section 50C(2) and (3) made applicable to section 43CA

• Stamp duty value on the date of agreement can be taken instead of date of registration if any money in any mode other than cash has been paid on or before the date registration.(Section 43CA(3) and (4)

Gift of Immovable Property

[Section 56(2)(vii )(b)]

• Gift of immovable property received without consideration the stamp duty value of which exceeds `50,000• Received for inadequate consideration which is less than the stamp duty value of the property by an amount exceeding `50,000 (w.e.f.

AY 2014-15)• Stamp duty value on the date of agreement can be taken instead of date of registration if any money in any mode other than cash has

been paid on or before the date registration. In case of a transaction for sale for inadequate consideration.

TDS on immovable properties

[Section 194-IA]

• Section 194-IA has been inserted by the Finance Act, 2013 w.e.f. 1-6-2013 which provides for deduction of tax at source in case of certain immovable property provided the total amount of consideration for the transfer of immovable property is `50,00,000 or more.

• "Immovable property" means any land (other than agricultural land) or any building or part of a building.

• The rates of TDS in case of transfer of immovable property shall be 1%. The rate of TDS will be 20% in all cases, if PAN is not quoted.

Rental income from letting of

immovable property

• In the case of Karanpura Development Co. Ltd. the SC observed that the deciding factor is not the ownership of the property but the nature of the activity of the tax payer.

• Supreme Court in the case of Sultan Brother (P) Ltd observed that merely an entry in object clause cannot determinative factor to arrive at the conclusion that the income is taxable under PGBP.

• In the case of Chennai Properties and Investments Limited the Supreme court held that as the main object of the assessee was to acquire property and hold the property and to let out them, the income shall be taxable as business income.

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TDS on immovable properties [Section 194-IA]

Who is liable to deduct tax at source under section 194-IA?

• Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA, relating to compensation in case of compulsory acquisition of property) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land) shall be liable to deduct tax.

When is the tax to be deducted under section 194-IA?

Tax is to be deducted:(a) at the time of credit of such sum to the account of the transferor, or(b) at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode,

whichever is earlier.

Procedure of deposit of tax deducted at source : Notification No. 39/2013• Any sum deducted under section 194-IA shall be paid electronically within 7 days from the end of month in which deduction is made• Payment shall be accompanied by accompanied by a challan-cum-statement in Form No. 26QB• Online payment of challan is available on TIN NSDL website• Both transferee and transferor must have Permanent Account Number (PAN). Transferee is not required to hold/obtain TAN for payment of TDS• The certificate of deduction of tax at source in Form No.16B to the payee within fifteen days from the due date for furnishing the challan-cum-statement in

Form No. 26QB

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TDS on immovable properties [Section 194-IA]

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Whether TDS is to be deducted on total amount or the amount in excess of `50,00,000 ?• TDS to be deducted by the transferee on the total amount in case the value of the property sold is more than `50 Lakhs

Where the payment is made in instalments• TDS is to be deducted at the time of payment. Therefore, the date of transfer is not relevant.

Is section 194-IA applicable if the transferor is a Non-Resident of India?• No. Where the transferor is a Non-Resident, section 194-IA will not be applicable. In this case section 195 will be attracted.

Is section 194-IA applicable case of Gift• No. Where the transferor is a Non-Resident, section 194-IA will not be applicable. In this case section 195 will be attracted.

Applicability of Section 194-IA where the actual consideration price is less than the stamp duty value referred to in section 50C• In this case, tax will have to be deducted on the actual consideration price and not the stamp duty value as the reference of the stamp duty value is

only for the purpose of computation of capital gain.

Property acquired from builder/developer but it is still under construction• Tax will be deductible at source at the time of making any payment to the builder/developer whether such amount is given as advance at the time of

booking or during the construction period or otherwise.

Property acquired through loan• Tax will have to be deducted by the buyer. Thus, where the lender makes the payment of the loan amount directly to the seller, he may remit 99% of

the loan amount directly to the lender and balance 1% can be given to the buyer who will deposit the TDS. Alternatively, the lender may make the entire payment of the loan to the seller and the TDS may be deposited by the buyer himself.

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Deemed income in case of assets received without consideration and taxation of capital gains

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 Particulars Whether capital gains taxable in the hands of the

donor

Whether taxable in the hands of the recipient i.e.

donee

Cost of acquisition in the hands of recipient

of gift in case of subsequent sale by

him

Period of holding of the recipient

for computing capital gains

1. Gift of immovable property i.e. land/ house property

       

(a) From a relative as defined in Explanation to section 56(2)(vi)

No, as it is not a transfer as per section 47

No Cost to previous owner as per section 49(1)

From the date it is acquired by the previous owner till the date prior to the date of sale [Explanation to section 2(42A)]

(b) From a person other than relative  

No, as it is not a transfer as per section 47

Yes. As per section 56(2)(vii)(a) the value of gift will be the stamp duty value if it exceeds `50,000

Stamp duty value as per section 49(4)

As per Explanation 1 to section 2(42A) it shall be from the date it is acquired by the previous owner till the date prior to the date of sale.Note.—However, logically it should be from the date of receipt of gift till the date prior to the date of sale as the cost has been taken to be the stamp duty value according to section 49(4).

(c) On occasion of marriage

No, as it is not a transfer as per section 47

No Cost to previous owner as per section 49(1)

From the date it is acquired by the previous owner till the date prior to the date of sale [Explanation to section 2(42A)]

        2. Sale of immovable property for inadequate consideration

Yes, as it is a transfer as per section 47

Yes. As per section 56(2)(vii)(b) the value of difference between stamp duty value and actual sale consideration the if it exceeds `50,000

Stamp duty value as per section 49(4)

From the date it is acquired by the previous owner till the date prior to the date of sale [Explanation to section 2(42A)]

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