background material on 2nd session

8/3/2019 Background Material on 2nd Session

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TAXATION ISSUESIN REAL ESTATE

DEVELOPMENTTRANSACTIONS


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Issues concerning the landowner

Issues concerning the developer


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ISSUES CONCERNING THELANDOWNER


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Capital Gain or Business Income ?

Answer to this question will depend upon thenature of transaction. Even a solitarytransaction could result in business income

If a person has lived in a house for 20 yearsand then gives it for development, it is a clearcase of capital gains.

If a builder gives a piece of land held asstock in trade for development it is a clearcase of business income.


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Development Agreements

What is a Development Agreement

Development Agreement with GPA Does it require registration ?

Precautions to be taken while drafting theDevelopment Agreement


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Development Agreement an

illustration

Total Landarea - 1000 sq yds

Builtup Area Total Builtup area 20000 sq ft.

Landowner - 40 % i.e. 8,000 sq ftDeveloper - 60 % i.e. 12,000 sq ft

Date of Development Agreement 01/01/2008

Possession handedover to developer on 30/04/2009 (With/without GPA )

Building completed & Landowners share handedover on10/05/2009


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When is the transfer complete

Date of transfer to decide the year of accrual

of capital gain


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Definition of transfer under the IncomeTax Act

Section 2 (47) (v) of the IT Act reads as

under: Any transaction involving the allowing of the

possession of any immovable property to betaken or retained in part performance of a

contract of the nature referred to in S 53A ofthe Transfer of Property Act, 1882.


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Sec 53A of TP Act What is part

performance

Where any person contracts in writing to transfer anyimmovable property, and the transferee has, in part

performance of the contract, taken possession of theproperty and has done some act in furtherance ofthe contract, and is willing to perform his part of thecontract then

the transferor shall be debarred from enforcing anyright in respect of the property, other than a rightexpressly provided in the agreement.


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Point of accrual of income

Date of execution of Development Agreement

Date of handingover of possession

Handingover of possession coupled with GPA infavour of developer

Date of execution of first sale deed for developersshare

Date of execution of first sale deed for landownersshare

Date of handing over of Landowners builtup area


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Date of execution of Development

Agreement

Transfer would not be complete if the

agreement is properly drafted and all clausesare kept out of the purview of Section 2 (47)read with Section 53A of the Transfer ofProperty Act.


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Date of handingover of possession of

land

Capital gain will not accrue provided

possession is handedover to developerpurely as a licensee See R VijayalakshmiVs Appu Hotels Ltd ( 2002) 257 ITR 4though given in the context of Chapter XXC.


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Handingover possession with GPA

Transfer would be complete for IT purposes

on the date an irrevocable GPA is given What happens if GPA is given but

possession is not handedover or it is linkedto some other event like permission from

municipal authorities ?


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Chaturbhuj Dwarkadass case

260 ITR 491

Original Agreement dated 18/08/1994

This was a sale agreement with a consideration of Rs 1.86 cr.

Court held that this was a development agreement. Almost entire consideration paid by 31/3/96

Possession given on 1/4/96

GPA given on 12/3/99

Capital gains tax paid for AY 1999-2000 Dept. said capital gain in A Y 1996-97

Court held that capital gain arose on 18/8/94 itself.


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AAR Ruling in Jasbir Singhs case

294 ITR 196

Original collaboration agreement June 2005

Supplementary Agreement 15/09/2005

Provisional License for construction 8/3/2006

Final License 26/5/2006

Irrevocable GPA 8/5/2006

Final Payment 08/03/2007 AAR held that capital gain arose when GPA was

given on 08/05/2006


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Date of execution of First Sale Deed for

Developers share Date of execution of First Sale Deed for

Landowners share

Date on which the Landowners share is

handedover


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Conversion of land into stock-in-trade

U/s 45 (2) if land is converted into stock-in-

trade, it shall be taxed in the year of sale. Market value on the date of conversion

would be treated as full value of saleconsideration

Balance amount would be taxed as businessincome


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Amount of Income

Registration Value/Market value of

proportionate share in land Cost of construction of builtup area falling to

the Landowners share

What if the Landowner sells part of his

builtup area


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Whether any exemptions are available

Exemption U/s 54

Exemption can be claimed for retained residentialflat/flats or new purchases & construction

Exemption U/s 54EC

Exemption is available for investment in REC &NHAI bonds with an upper limit of Rs 50 lakhs.

Exemption U/s 54F


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ISSUES CONCERNING THE

DEVELOPER

Year of taxability of income

Computation of income Deductions available


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Year of taxability of income

Year of completion of project

On a year to year basis Is AS 7 applicable to builders


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Computation of income

Computation of income on a year to year

basis- Percentage of advances received

- Percentage of expenditure during theyear

- What about tax audit


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Computation of income on completionof project

There could be issues when some of the flats

or offices spaces are registered in the namesof the buyers even before the entire complexis ready

Allowability of interest on borrowed capital

should it form part of project cost or can it beclaimed on year to year basis ?


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ISSUES IN SERVICE TAX


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Threshold exemption and other

matters

Threshold exemption of Rs 10 Lakhs from F Y 08-09

Exemption linked to preceding years turnover

Tax payable only on turnover exceeding Rs 10Lakhs in the first year

Only value of taxable services to be included inarriving at Rs 10 lakhs amount

When new services are brought into tax net in themiddle of the year


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Due dates of payment

Due Date of Payment is 5th of the month succeeding the monthin which the value is realised.

For Individuals, Sole proprietors and Partnership Firms it is 5th

of the month succeeding the quarter in which the value isrealised.

In all cases, for the month or quarter ended 31st March, the duedate is 31st March.

For e-payment the due date is 6th instead of 5th.

The date of deposit of cheque into the bank is deemed to bethe date of payment of tax provided the cheque is realised. (Supreme Court decision in 25 ITR 529 )


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Construction Services

Commercial or Industrial constructionservices

Construction of complex service


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Commercial or Industrial construction

services

Definition covers :

a. construction of a new building or civil structure

b. construction of pipeline or conduit

c. completion and finishing services like plastering,painting, flooring, carpentry etc

d. repair, alteration, renovation etcBuilding should be used for commercial purposes


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What is not covered

construction of building for self-use or forrenting out

Developers / builders who construct and sellby executing sale deeds

- If construction agreements are entered into,

service tax is leviable However, service tax is leviable on

contractors who are engaged by the builder


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Abatement of tax

Abatement to the extent of 67 % of grossreceipts available subject to conditions likenot availing Cenvat credit on inputs or oninput services


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Construction of complex service

Definition covers :

a. construction of a new residential complex or partthereof

b. completion and finishing services like plastering,painting, flooring, carpentry etc

c. repair, alteration, renovation etc

Residential complex means a building having morethan 12 residential units with common area orcommon facilities like lift, water etc


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What is not covered

construction of building for self-use or for renting out

Developers / builders who construct and sell byexecuting sale deeds

- If construction agreements are entered into, servicetax is leviable

However, service tax is leviable on contractors whoare engaged by the builder

Abatement to the extent of 67 % is available


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Service Tax under the composition

scheme

Builders can opt for payment of service tax ata reduced rate of 2 % ( increased to 4 % inthe Finance Act 2008 ) under thecomposition scheme applicable to all workscontracts.


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Central Government is planning to introduceGoods and Services Tax (GST) by April 1,2010.


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Thank you

background material on 2nd session

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