deemed taxation on builders & developers • provisions contd: – sub-sec. (3) provides –...

DEEMED TAXATION ON

BUILDERS & DEVELOPERS

CTC – STUDY CIRCLE MEETING

04th DECEMBER 2013

CA REEPAL TRALSHAWALA

PROVISIONS COVERED

• House Property Income – sec.22

• Transfer of business assets – sec.43CA

HOUSE PROPERTY INCOME

• Sec. 22 rws 23 – also a deeming provision

– Tax rental income from house property even if

not let out

– Stock-in-trade in case of builders / developers

– No distinction between capital asset &– No distinction between capital asset &

business asset/stock in trade

– Property consists of

• any buildings or lands appurtenant thereto

• Assessee is the owner

• Any portion of property used for business or

profession purposes are excluded


• Property includes both • residential and

• Commercial

• Chargeability as per sec.23• Chargeability as per sec.23

• Applicable from:

– Completion of construction and ready to use

i.e. under-construction property not covered

– Whether only after OC or once construction

completed


• Decision of Delhi High Court:– CIT v. Ansal Housing Finance & Leasing Co. Ltd.

(2013) 354 ITR 180 (Del) – wherein it was held asunder-

• House properties consisting stock-in-trade or trading assetsmade no difference from assessing the income from thesemade no difference from assessing the income from theseproperties under the head income from house property;

• Even though the flats are not let out, the incidence of tax isbased on ownership and once the assessee is owner of theproperties, ALV is to be adopted for taxing the income;

• Parliament has resorted to several presumptive methods forpurpose of calculation of income and collection of tax;

• Alternate argument that assessee is occupier of propertiesand in course of business therefore falls under exclusion -also rejected since legislative intention was active user ofpremises for business purposes and not mere passivepossession for business purposes.

TRANSFER OF BUSINESS

ASSETS – S.43CA• Provision summarized:

– Consideration received or accrued

– On Transfer of asset other than capital asset

– Assets means land or building or both– Assets means land or building or both

– Consideration is less than value adopted /

assessed/assessable by stamp duty authority

– Stamp duty value will be considered as Full value of

consideration on transfer of asset

– DVO valuation option available as provided in

sec.50C(2) & adoption of value as per sec.50C(3)

S.43CA

• Provisions contd:– Sub-sec. (3) provides – date of agreement fixing

value of consideration for transfer of assets anddate of registration of such transfer of asset isdifferent, then-

• Stamp duty value to be adopted as on the dateof agreement and not date of registration

• Sub-sec.4 states that this option is available onlyif consideration or part of consideration isreceived on or before the date of agreement fortransfer of asset by any mode other than cash.

• Analysis of Provision of s.43CA:“TRANSFER”

– Transfer of asset other than capital asset

– Sec.50C covered cases of capital asset

– Hence, this section introduced to covertransfer of assets other than capital assets

– Definition of Transfer not provided in this– Definition of Transfer not provided in thissection

– Whether definition of Transfer as provided insec.2(47) can be applied

– Sec.2(47) applies only to transfer of capital assets

• Transfer – contd…..– Sec.2(47) is very wide and categorically refers to – ‘in

relation to capital asset’, hence, should not be applied tosec.43CA

– In such situation, definition of Transfer as per provisions ofTransfer of Property Act , 1882 (TOPA) should govern thisprovision

– Sec.5 of TOPA provides – an act by which a living personconveys property, in present or in future, to one or moreother living persons, or to himself and one or more otherother living persons, or to himself and one or more otherliving persons & living persons include company, AOP,BOI.

– Thus, as per TOPA, transfer of property impliesconveyance, which is complete by registration ofimmovable properties

– Sec.43CA also recognize date of registration of agreementfor applying stamp duty valuation and hence, the definitionof transfer as provided in TOPA should be madeapplicable

Transfer – contd….– Supreme Court in Alapati Venkataramiah v. CIT 57

ITR 185 (SC) in context of s.12B (corresponding tos.45) held as under-

• “Before section 12B of the 1922 Act, can be attracted, titlemust pass to the company by any of the modes mentioned insection 12B, of the 1922 Act i.e., sale, exchange or transfer.It is true that the word ‘transfer’ is used in addition to theword ‘sale’ but even so, in the context transfer mustword ‘sale’ but even so, in the context transfer mustmean effective conveyance of the capital asset to thetransferee. Delivery of possession of immovableproperty cannot by itself be treated as equivalent toconveyance of the immovable property.”

– However, 43CA also covers cases of stamp dutyvalue assessable and not assessed, hence,registration of agreement even if not done, stillprovision to apply (similar to sec.50C), hence,definition of TOPA may stand modified to this extent

Land or Building or both• No definition of land or building in the Income-tax Act;

• Land or Building may include part thereof;

• Land or building may also include any rights therein

• Thus, flat or unit or premises in a building, whether

residential or commercial would be includedresidential or commercial would be included

• However, since definition of capital asset excludes stock

in trade but not other business assets, possible only

stock in trade is covered u/s.43CA

• Hence, this provision mainly or rather covers only those

assessees dealing in real estate and treats the land or

building as his stock in trade and therefore does not

merely cover builders or developers

Land or Bldg. (contd.)• Whether tenancy rights included

– May not get covered since not a case of transfer of asset beingland or building - refer Smt. Kishori Sharad Gaitonde v. ITO(Mum) [ITA 1561/M/09]; Tejinder Sing (50 SOT 391) (ITAT Kol)

• However, rights in immovable property is also immpovableproperty – but, question arises whether the tenancy rightscan be shown as stock in trade of assessee

• Whether leasehold rights included• Whether leasehold rights included

– May not get covered since not transfer of asset being land orbuilding – refer decisions rendered in context of sec.50C i.e.AtulPuranik, 132 ITD 499 (Mum); Heatex Products P. Ltd. V. ACIT(Mum)(ITAT)

• However, now-a-days, builders develop (mainly in respect of

commercial space) and lease it out – whether provision of s.43CA

applies – Depends on facts – in most cases refundable security

deposit is taken, if it is a case of non-refundable deposit and small

rent, provision may get hit

Land or Bldg. (contd.)• Whether sale of FSI / TDR covered

• Under sec.50C, it has been held that sale of TDR is not land or

building and therefore not covered u/s.50C–refer-Atul Puranik (ITA

no. 3051 /Mum / 2010)

• TDR is development right granted under DCR, 1991

• FSI/TDR are benefits arising from land

• Sec.3(26) of General Clauses Act, 1897, immovable property• Sec.3(26) of General Clauses Act, 1897, immovable property

includes benefit arising out of land

• TDR/FSI would be considered as immovable property as being part

and parcel of land, hence, immovable property for the purpose of

sec.43CA

• Chheda Housing Development Corpn., a Partnership firm vs. Bibijan

Shaikh Farid & Ors. (2007) (3) MHLJ 402 (Bom.) – held FSI/TDR

are benefits arising from land hence, immovable property.

• Sale of TDR was held to be part of housing project and entitled to

80IB(10) deduction – Sonasha Ent. (Mum)(ITAT), ITA No.4911-

12/Mum/2010, order dated 31/10/2011

Development Agreement

• Whether development rights covered• Except for case where such rights are treated as

stock in trade, it will fall within the definition of capital asset u/s.2(14)

• Arif Akhatar Hussain v. ITO [2011] 140 TTJ 413 • Arif Akhatar Hussain v. ITO [2011] 140 TTJ 413 (Mum)

– Held, transfer of development rights is transfer of capital assets and therefore provisions of section 50C will be applicable

• Taking this into consideration, let us now considervarious situations as to whether there could beimplications of sec.43CA

Development AgreementA) Landowner reserves all rights with him and only allows

for construction of building and pays for amount of

construction

– Irrespective of whether the landowner is trader or dealer

in real estate, in such case, there may not be ‘transfer’

u/s.43CAu/s.43CA

– It would be rather a case of contract whereby the

contractor is only given rights of development and paid

for the same

– The owner of land and building would then be the same

person.

– Conversely, even if the contractor is builder or developer,

provisions of sec.43CA may not apply to him since he is

not transferring land or building but merely constructing


B) Land owner getting fully paid up as per agreed amount

and no further rights in constructed building

– In such cases, generally there is irrevocable POA entered forland as well as clauses are put in respect of conveyance ofland to the ultimate society, etc.

– Thus, there would be transfer of land as well as potentials ofland i.e. FSI, etc. and hence, if the landowner is dealing ortrading in land or otherwise, provisions of sec.43CA may beapplicable

– If the landowner is not treating the asset as stock in trade,then sec.50C would apply to him as held in Arif Akhatar case,supra, Mumbai ITAT.


C) Land owner getting compensated partlyby cash and party by constructed area

– Here again there is transfer of land andbuilding

– Constructed area is given free of cost i.e. it is– Constructed area is given free of cost i.e. it ispart of overall consideration

– Same situation as per (B) above and thevalue as assessed by Stamp duty authoritiesfor such type of agreements will be theconsideration for 43CA / 50C


D) Land owner getting compensated fully byconstructed area

– Here also there will be transfer of land and building

– Constructed area is given free of cost i.e.consideration for transfer of development rights

– Same outcome as in (C) earlier– Same outcome as in (C) earlier

– Further 43CA will be applicable when the buildersells to third parties

• Food for Thought: Constructed area agreementto be given to landowner again registered –what happens

Redevelopment Agreement• Here issue arises with respect to existing owners of flat

vis-à-vis redeveloped new flats received by them

– Existing flat owners getting extra area

– Agreement is made generally as

• ‘Permanent Alternate Accommodation on Ownership Basis’

• However, it is new flat received with extra area hence may be• However, it is new flat received with extra area hence may betreated as transfer

• Flat owner would be getting free of cost but there is elementof stamp duty on such agreements

• Both section 43CA as well as section 56 may apply one tothe seller and other to the buyer

• In books of builder, there is no sale reflected for such flatsand it only goes as part of overall cost of construction,however, registered agreement may be called for

SRA Projects

- In SRA projects, slums are given free ofcost constructed flats of abt 260 sq. ft.carpet area

- These agreements are made on Rs.100/-- These agreements are made on Rs.100/-

stamp paper and there is no element of stamp

duty on it

- Hence, provisions of sec.43CA may not apply

- To this extent, there is no sale as far as books

of account is concerned

Transfer of asset into

partnership firm, etc.

• Dealer in land joins hands with another builder /

developer for joint construction and sale thereof

• 45(3) may not apply in such a case since 45(3)

applies to transfer of capital asset and landapplies to transfer of capital asset and land

being stock in trade, is outside scope of capital

asset

• In such situation, it may be considered as

transfer of land, being stock in trade into PF,

hence, 43CA applicable

• Possible solution may be Joint Venture

Cancellation of Agreement• Cases of cancellation of agreement

– First time agreement entered into with builder, 43CA applies andsale value accounted in books of account as per agreement, butonly for taxation purposes, AO applies stamp duty valuation

– Such agreement gets cancelled either in the same year of insubsequent year

– It may be treated as purchase of flat by builder at the price paidto the seller (i.e. to the person cancelling the agreement)

– Second sale of the same asset – On second sale again 43CAwill be applicable

– Issue is – what is the cost to be taken against the sale of sameasset second time – will the same be amount assessable to taxat the time of first sale i.e. whether the differential value beadded to cost of purchase of asset upon cancellation

• Reference to Jaipur ITAT in Gyan Chand Batra v. ITO [2010] 6 ITR (Trib.)

147 (Jp.)

Investor – Allotment, etc.• Cases of investor flats i.e. investors are allotted flats,

which are later either sold by them to third party or to

builder

– On launching project, investors book flats at price which is lowerthat stamp duty price – what happens when investor cancelssuch booking subsequently at market value which is equal to ormore than stamp duty value?

– What happens if the investor sells the rights to third party atmarket price and the builder is confirming party to the agreementwhich is registered subsequently?

– What happens in above situations where the construction ofbuilding is yet to commence or has commenced and partlycompleted but not fully

– What happens if the project launched finally does not go throughfor whatever reasons and the project is abandoned

• What will be the situation where the investors are allotted flats /rights in flats much prior to AY 14-15, however, all the aforesaidsituation happens in AY 14-15

• Provision requires amount paid otherwise in cash prior to date ofagreement – what happens if the date of agreement entered into isone day or couple of days prior to payment in cheque – Furtherwhether it is date of payment or date of actual encashment ofcheque in bank account of the builder / developer

• Any implication of a case of conversion of capital asset into stock in• Any implication of a case of conversion of capital asset into stock intrade and the said stock in trade is sold / transferred in AY 14-15

• What happens where the flat is sold earlier to date of amendment,possession also given, BMC taxes, other charges also levied –however agreement is registered in AY 2014-15 – whetherprovisions of 43CA applicable

• What happens in the earlier case whether the purchaser has alreadysold the asset in his balance sheet and is offering income fromhouse property in respect of the same – will this make anydifference

• Issues on Year of Taxability

– In case of percentage completion method of

accounting followed

– In case of project completion method followed

– In above situations, when will be sale recognized and

taxed

• AS-7 not applicable

• AS-9 applicable

• Sale to be recognized when

• 43CA – deeming provisions – whether taxability deemed tobe income in year of agreement / registration of agreementOR still can be said to be taxable only as per the method ofaccounting followed

• What happens if in between the completion of project, theearlier sale is cancelled and new sale takes place in respectof same property.

• Constitutional Validity of Provision of sec.43CA– Whether valid

– Whether can be challenged

– Earlier Legislature brought similar provisions by way of sections52(2) and Chapter XX-C but omitted from Statute

– K.P. Varghese v. ITO 131 ITR 597 (SC) – provision of sec.52(2)can be invoked only if revenue establishes that there is understatement of consideration

• Sec.52(2) provided that if fair market value of property transferred• Sec.52(2) provided that if fair market value of property transferred

exceeded sale consideration by more than 15% than

• department could adopt the fair market value for computation of

capital gain

• No other condition was provided

• As the section provided, the assessee could not even prove that

consideration recorded is the correct consideration

• In the case before the Supreme Court, the difference was more than

15% and therefore the AO added the difference to capital gain

• Constitutional Validity of Provision of sec.43CA– A. Sanyasi Rao 219 ITR 330 (SC) – provision of sec.44AC was

read down by the SC• S. 44AC was inserted to provide that business income for specified business

of country liquor, timber, etc shall be deemed to a specified percentage of

purchase price in auction and under new S. 206C tax shall be collected at

source at the time of collection of purchase price.

• It was provided that normal computation provisions of S. 28 to 43C will not

apply and income shall be deemed to be specified percentage

• Assessee could not demonstrate that its income was lower than the• Assessee could not demonstrate that its income was lower than the

specified percentage

• The hon’ble Supreme Court, though upheld the constitutional validity, it was

held that

• tax can be collected at source at specified percentage u/s. 206C,

• but provisions of S. 44AC which provided that income shall be deemed at

specified percentage was read down, and

• it was held that in assessment, the assessee will have a right to demonstrate

his income is lower.

• Constitutional Validity of Provision of sec.43CA

– Impact of above two decisions-

• All subsequent legislative action of deeming income

• though deem income• though deem income

• but it provides an option to the assessee to demonstrate thatincome is not what is deemed.

• The trend in recent years is that presumptions provided

are more rule based

• no discretion to the Assessing Officer

Thank You

CA Reepal Tralshawala

[email protected]

deemed taxation on builders & developers • provisions contd: – sub-sec. (3) provides –...

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