Taxability of Real Taxability of Real Estate development Estate development transactionstransactions

Sunil AroraSunil AroraM.Com, F.C.A.M.Com, F.C.A.

Developers of Real Developers of Real EstatesEstates Transactions take place over Transactions take place over

years.years.– Pre-launchPre-launch– Booking of apartmentBooking of apartment– Buyer’s agreementBuyer’s agreement– Handing over of possessionHanding over of possession– Sale deedSale deed

When income to be recognised in When income to be recognised in the hands of the developer ?the hands of the developer ?

Taxability of real Taxability of real estate developersestate developers How the profits to be computed, How the profits to be computed,

whether:whether:– Project completion method Project completion method – % completion method% completion method

Point of time when revenue to be Point of time when revenue to be recognisedrecognised

Taxability of incomeTaxability of income

Two options:Two options:– Project completion methodProject completion method– % completion method from year to year% completion method from year to year

Held: Income assessable on yearly basisHeld: Income assessable on yearly basisSri Sukhdeodas Jalan v. CIT 26 ITR 617 (Patna)Sri Sukhdeodas Jalan v. CIT 26 ITR 617 (Patna)

Tirath Ram Ahuja Pvt Ltd v. CIT 186 ITR 428 (SC)Tirath Ram Ahuja Pvt Ltd v. CIT 186 ITR 428 (SC)

CIT v. NM Associates 256 ITR 141 (Mad)CIT v. NM Associates 256 ITR 141 (Mad) Cases pertain to contractors & not

developers

Real Estate SalesReal Estate Sales

Point of time when all significant Point of time when all significant risks and rewards of ownership risks and rewards of ownership can be considered as transferred.can be considered as transferred.– Transfer of legal title to the buyerTransfer of legal title to the buyer– Giving possession to the buyer Giving possession to the buyer

under an agreement for sale.under an agreement for sale.– Buyer’s agreement at initial stages Buyer’s agreement at initial stages

of construction?of construction?

AgreementAgreement

Agreement to sell may have the effect of Agreement to sell may have the effect of transferring all risks & rewards of ownership transferring all risks & rewards of ownership to the buyer inspite of:to the buyer inspite of:– Legal title not transferredLegal title not transferred– Possession not given to the buyer.Possession not given to the buyer.

Agreement is legally enforceableAgreement is legally enforceable Significant risk transferred Significant risk transferred

– Price risk considered to be significant riskPrice risk considered to be significant risk Buyer has legal right to sell Buyer has legal right to sell

– without any condition or without any condition or – such conditions which do not materially effect his such conditions which do not materially effect his

right right

Sellers obligationsSellers obligations

No substantial acts to complete No substantial acts to complete under the contractunder the contract

Obligation to perform substantial Obligation to perform substantial acts;acts;– Revenue to be recognised on Revenue to be recognised on

proportionate basisproportionate basis– % completion method to be adopted% completion method to be adopted– AS-7; Constructions Contracts to be AS-7; Constructions Contracts to be

followed followed

Recognition of Revenue & Recognition of Revenue & Expenses Expenses If outcome of contract can be reliably If outcome of contract can be reliably

estimatedestimated- Revenue & Costs pertaining to the contract Revenue & Costs pertaining to the contract

should be recognized by the % completion should be recognized by the % completion methodmethod

- ImplicationImplication

Total Revenue Total Revenue - -

Total Costs Total Costs - -

Profit Profit ??- Based on % of work completed Based on % of work completed

Revenue, Cost, Profits, etc.Revenue, Cost, Profits, etc.

up to the reporting date to be treated in up to the reporting date to be treated in F.S.F.S.

IssuesIssues

(1)(1) What is a reliable estimate of outcome What is a reliable estimate of outcome

of transaction ?of transaction ?

(2)(2) Revenue from contract how Revenue from contract how

ascertainedascertained

(3)(3) How to ascertain cost of the contract ?How to ascertain cost of the contract ?

(4)(4) % of work completed% of work completed

(5)(5) How to deal with expected losses ?How to deal with expected losses ?

(6)(6) If reliable estimates not possible ?If reliable estimates not possible ?

Stages of completionStages of completion

Procurement of landProcurement of land Obtaining necessary approvalsObtaining necessary approvals Preparation of necessary lay outs and Preparation of necessary lay outs and

other drawings other drawings Land developmentLand development Construction of the basic structureConstruction of the basic structure Carrying out finishing of the structureCarrying out finishing of the structure Providing basic and other amenitiesProviding basic and other amenities

Collaborations Collaborations

Old residential house:Old residential house:– Builder reconstructsBuilder reconstructs– Pays a certain amountPays a certain amount– Retains few flatsRetains few flats

Land development:Land development:– Sale proceeds to be shared Sale proceeds to be shared – Sharing of plots/ covered area, etcSharing of plots/ covered area, etc– Subsequently owner’s share also taken Subsequently owner’s share also taken

over and sold by the developerover and sold by the developer

Collaborations Collaborations

Taxation in the hands of the Taxation in the hands of the developerdeveloper

Assessable as business income being Assessable as business income being adventure in the nature of tradeadventure in the nature of trade

PM Mohd Meerakhan v. CIT 73 ITR 735 (SC)PM Mohd Meerakhan v. CIT 73 ITR 735 (SC) Taxation in the hands of the person Taxation in the hands of the person

providing land, whether:providing land, whether:– Business income Business income – Capital gainsCapital gains

Two alternativesTwo alternatives

Business income:Business income:– Section 28 to 44Section 28 to 44– Revenue recognition, etc Revenue recognition, etc

Capital gains:Capital gains:– Section 45 to 55ASection 45 to 55A– Lower rate of tax u/s 112Lower rate of tax u/s 112– Assessee entitled to various Assessee entitled to various

exemption exemption

BusinessBusiness

Section 2(13)Section 2(13)

Business includes any trade, commerce or any adventure Business includes any trade, commerce or any adventure or concerning the nature of trade, commerce or or concerning the nature of trade, commerce or manufacture;manufacture;

The word Business is one of wide import and it means an The word Business is one of wide import and it means an

activity carried on continuously and systematically by a activity carried on continuously and systematically by a person by the application of his labour or skill with a view person by the application of his labour or skill with a view to earning an income. Barendera Prasad v. I.T. Officer AIR to earning an income. Barendera Prasad v. I.T. Officer AIR 1981 SC 1047,1953.1981 SC 1047,1953.

The concept business must potulate continuity of The concept business must potulate continuity of transactions. A single transaction of storage for sale does transactions. A single transaction of storage for sale does not constitute a business.not constitute a business.

R.P.Gupta v. State of Orissa AIR 1967 Ori 29,30R.P.Gupta v. State of Orissa AIR 1967 Ori 29,30

Capital AssetCapital Asset

Capital asset means property of any kind held Capital asset means property of any kind held by an assessee,whether or not connected with by an assessee,whether or not connected with his business or profession, but does not include-his business or profession, but does not include-

Any stock in trade, consumable stores or raw Any stock in trade, consumable stores or raw materials held for the purposes of his business materials held for the purposes of his business or profession;or profession;

Personal effects, that is to say, movable Personal effects, that is to say, movable property including wearing apparel and property including wearing apparel and furniture, but excluding jewellery held for furniture, but excluding jewellery held for personal use by the assessee or any member of personal use by the assessee or any member of his family dependent on him.his family dependent on him.

Circular No.4/ 2007Circular No.4/ 2007

Associated Industrial Development Company 82 ITR 586 Associated Industrial Development Company 82 ITR 586 (SC)(SC)

Whether a particular holding of shares is by way of Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether position to produce evidence from its records as to whether it has maintained any distinction between those shares it has maintained any distinction between those shares which are its stock-in-trade and those which are held by which are its stock-in-trade and those which are held by way of investment. way of investment.

H.Holck Larsen 160 ITR 67 (SC)H.Holck Larsen 160 ITR 67 (SC) Transactions in shares whether investment or trading is a Transactions in shares whether investment or trading is a

mixed question of law & factmixed question of law & fact

Fidelity Northstar Fund and OthersFidelity Northstar Fund and Others 288 ITR 641 (AAR)288 ITR 641 (AAR)

Authority for Advanced Authority for Advanced RulingsRulings Fidelity Northstar Fund and OthersFidelity Northstar Fund and Others

288 ITR 641 (AAR)288 ITR 641 (AAR) 3 principles:3 principles:

– How shares valued/ held in the books How shares valued/ held in the books – Magnitude, etc; finding ratio Magnitude, etc; finding ratio

between purchase & sales & holdingbetween purchase & sales & holding– Intention to derive income by way of Intention to derive income by way of

dividendsdividends

Supreme CourtSupreme Court

G.Venkataswamy Naidu & Co v. CITG.Venkataswamy Naidu & Co v. CIT (1959) 35 ITR 594 (SC)(1959) 35 ITR 594 (SC)

Criteria to ascertain nature of income:Criteria to ascertain nature of income:

Purchase/Sale allied to or incidental to his usual trade.Purchase/Sale allied to or incidental to his usual trade. Nature & quantity of purchase and salesNature & quantity of purchase and sales Repetition of the transactionRepetition of the transaction Test of intention;-only for resaleTest of intention;-only for resale -no intentions for holding the -no intentions for holding the

property for property for himself or enjoying or using it.himself or enjoying or using it.

Total effect of all the relevant factors & circumstancesTotal effect of all the relevant factors & circumstances

Judicial precedentsJudicial precedents

Raja Bahadur Visheshwara Singh v. CIT Raja Bahadur Visheshwara Singh v. CIT (1961) 41 ITR 685 (SC)(1961) 41 ITR 685 (SC)

Raja Bahadur Kamakhya Narian Singh v. CIT Raja Bahadur Kamakhya Narian Singh v. CIT (1970) 77 ITR 253 (SC)(1970) 77 ITR 253 (SC)

Dalhousie Investment Trust Co. Ltd v. CIT Dalhousie Investment Trust Co. Ltd v. CIT (1968) 68 ITR 486 (SC)(1968) 68 ITR 486 (SC)

CIT v. H.Holck Larsen (1986) 160 ITR 67 (SC)CIT v. H.Holck Larsen (1986) 160 ITR 67 (SC) CIT v. Sugar Dealers (1975) 100 ITR 424 (All.)CIT v. Sugar Dealers (1975) 100 ITR 424 (All.)

Draft Instructions dt Draft Instructions dt 16/5/200616/5/2006

Whether the purchase and sale of securities was allied Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or to his usual trade or business/was incidental to it or was an occasional independent activity.was an occasional independent activity.

Whether the purchase is solely with the intention of Whether the purchase is solely with the intention of resale at a profit or for long term appreciation and/or resale at a profit or for long term appreciation and/or for earning dividends and interest.for earning dividends and interest.

Whether scale of activity is substantial.Whether scale of activity is substantial. Whether transactions were entered into continuously Whether transactions were entered into continuously

and regularly during the assessment year.and regularly during the assessment year. Whether purchases are made out of own funds or Whether purchases are made out of own funds or

borrowings.borrowings. The stated objects in the Memorandum and Articles of The stated objects in the Memorandum and Articles of

Association in the case of a corporate assessee.Association in the case of a corporate assessee. Typical holding period for securities bought and sold.Typical holding period for securities bought and sold.

Draft Instructions dt Draft Instructions dt 16/5/200616/5/2006

Ratio of sales to purchases and holding.Ratio of sales to purchases and holding. The time devoted to the activity and the extent to The time devoted to the activity and the extent to

which it is the means of livelihood.which it is the means of livelihood. The characterization of securities in the books of The characterization of securities in the books of

account and in the balance sheet as stock in trade or account and in the balance sheet as stock in trade or investments.investments.

Whether the securities purchased or sold are listed or Whether the securities purchased or sold are listed or unlisted.unlisted.

Whether investment is in sister/related concerns or Whether investment is in sister/related concerns or independent companies.independent companies.

Whether transaction is by promoters of the company.Whether transaction is by promoters of the company. Total number of stocks dealt in.Total number of stocks dealt in. Whether money has been paid or received or whether Whether money has been paid or received or whether

these are only book entries.these are only book entries.

Principle of Principle of ConsistencyConsistency Janak S. Rangamala v. ACIT Janak S. Rangamala v. ACIT (2007) 11 SOT 627 (Mum)(2007) 11 SOT 627 (Mum)

– Magnitude of transactions alone not relevantMagnitude of transactions alone not relevant– Determination on the basis of books of accountsDetermination on the basis of books of accounts– Intention to be the decisive factorIntention to be the decisive factor– Unless material change; principle of consistency to be Unless material change; principle of consistency to be

appliedapplied

Tribunal cannot give different decisions for different Tribunal cannot give different decisions for different yearsyears

Arihant Builders & Developers 277 ITR 239 (MP)Arihant Builders & Developers 277 ITR 239 (MP)

Revenue did not challenge decisions in earlier yearsRevenue did not challenge decisions in earlier years CIT v. Vikas Chemicals (India) 196 CTR 12 (P&H)CIT v. Vikas Chemicals (India) 196 CTR 12 (P&H)

Final outcomeFinal outcome

Intention and the treatment in Intention and the treatment in accounts are two important factors accounts are two important factors for determining the nature of incomefor determining the nature of income

Principle of consistency Principle of consistency No single criterion is decisive, total No single criterion is decisive, total

effect of the facts and circumstances effect of the facts and circumstances of each case to be considered to of each case to be considered to determine the nature of income.determine the nature of income.

Whether business or Whether business or capital gainscapital gains Depending upon facts & circumstances of Depending upon facts & circumstances of

the casethe case Assessable as business income being Assessable as business income being

adventure in the nature of tradeadventure in the nature of tradePM Mohd Meerakhan v. CIT 73 ITR 735 (SC)PM Mohd Meerakhan v. CIT 73 ITR 735 (SC)

Land divided into plots and sold Land divided into plots and sold

thereafterthereafterCIT v. Kasturi Estates Pvt Ltd 62 ITR 578 (Mad)CIT v. Kasturi Estates Pvt Ltd 62 ITR 578 (Mad)

CIT v. Mlm Mahalingam Chettiar 107 ITR 236 (Mad)CIT v. Mlm Mahalingam Chettiar 107 ITR 236 (Mad)

Capital gainsCapital gains

Year of taxability?Year of taxability? Full value of consideration Full value of consideration

received on transfer of capital received on transfer of capital asset?asset?

Year of taxabilityYear of taxability

Section 45Section 45 Any profits or gains arising from the Any profits or gains arising from the

transfer of a capital asset effected in transfer of a capital asset effected in the previous year shall………………be the previous year shall………………be chargeable to income tax under the chargeable to income tax under the head ‘Capital gains’ and shall be head ‘Capital gains’ and shall be deemed to be the deemed to be the income of the income of the previous year in which the transfer previous year in which the transfer took placetook place

Transfer Transfer

Section 2 (47)Section 2 (47) Transfer in relation to a capital asset, Transfer in relation to a capital asset,

includes:includes:(i)(i) The sale, exchange or relinquishment of The sale, exchange or relinquishment of

the asset; orthe asset; or(ii)(ii) The extinguishment of any rights therein; The extinguishment of any rights therein;

oror(iii)(iii) …………………………… ……………………………..(iv)(iv) …………………………………………………………....(v)(v) any transaction involving the allowing of any transaction involving the allowing of

the possession of any immovable property the possession of any immovable property to be taken or retained in part to be taken or retained in part performance of a contract of the nature performance of a contract of the nature referred to in section 53A of the Transfer referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); orof Property Act, 1882 (4 of 1882); or

Collaboration Collaboration agreementsagreements Possession;Possession;

– Whether in part performance of agreement to sell, orWhether in part performance of agreement to sell, or– Only for carrying out constructionOnly for carrying out construction

Point of time when right to transfer devolves Point of time when right to transfer devolves on the builderon the builder

Whether any extinguishment of any rights in Whether any extinguishment of any rights in the property is taking place on entering into the property is taking place on entering into the MOU / collaboration agreementthe MOU / collaboration agreement

Year of taxability in the case of collaboration agreement?Vemanna Reddy (HUF) v. ITO (2008) 114 TTJ 246 (ITAT-Vemanna Reddy (HUF) v. ITO (2008) 114 TTJ 246 (ITAT-

Bang)Bang)

Mode of Computation Mode of Computation of Capital Gainsof Capital GainsSection 48Section 48

Full value of the consideration received or Full value of the consideration received or accruingaccruing as a result of transfer of capital as a result of transfer of capital asset less.asset less.

(i)(i) expenditure incurred wholly & expenditure incurred wholly & exclusively in connection with exclusively in connection with such transfer.such transfer.

(ii)(ii) the cost of acquisition of the the cost of acquisition of the asset & the cost of improvement asset & the cost of improvement there to.there to.

Consideration Consideration

Immediate Immediate Deffered Deffered Not in existenceNot in existence

A transfer of property may take A transfer of property may take place not only place not only in praesenti in praesenti but also but also in future, but the property must be in future, but the property must be in existence.in existence.

CIT v. Atam Prakash & Sons 12 DTR (Del) 1CIT v. Atam Prakash & Sons 12 DTR (Del) 1

Provat Kumar Mitter v. CIT 41 ITR 624 (SC)Provat Kumar Mitter v. CIT 41 ITR 624 (SC)

Consideration in kindConsideration in kind

Full value of consideration:Full value of consideration:– FMV of the assetFMV of the asset– Cost of the assetCost of the asset

How the FMV of asset to be How the FMV of asset to be computed?computed?

How the cost to be ascertained?How the cost to be ascertained?

Full value of Full value of considerationconsideration The charging section and the The charging section and the

computation provisions together computation provisions together constitute an integrated code. When constitute an integrated code. When there is a case to which the computation there is a case to which the computation provisions cannot apply at all, it is provisions cannot apply at all, it is evident that such a case was not evident that such a case was not intended to fall within the charging intended to fall within the charging section.section.

CIT v. BC Srinivasa Setty 128 ITR 294 (SC)CIT v. BC Srinivasa Setty 128 ITR 294 (SC)

Collaboration Collaboration agreementagreement Whether repurchase of a part of Whether repurchase of a part of

the property sold will entitle the property sold will entitle assessee to claim benefit u/s 54assessee to claim benefit u/s 54

Held, yesHeld, yes CIT v. Phiroze H. Patel (1994) 205 ITR CIT v. Phiroze H. Patel (1994) 205 ITR

377 (Bom)377 (Bom)

Understatement of Understatement of considerationconsideration What is the recourse available with What is the recourse available with

the AO ?the AO ? Can AO refer to the Valuation Officer Can AO refer to the Valuation Officer

for ascertaining FMV of the for ascertaining FMV of the transferred capital asset ?transferred capital asset ?

What are the consequences if the What are the consequences if the Valuation Officer arrives at a value Valuation Officer arrives at a value higher than the stated higher than the stated consideration ? consideration ?

Reference to Valuation Reference to Valuation OfficerOfficer Section 55A of the Income tax Act, 1961Section 55A of the Income tax Act, 1961 Specific powers to the AO for referring to the Specific powers to the AO for referring to the

Valuation Officer if in the opinion of AO the Valuation Officer if in the opinion of AO the value of the capital asset as claimed by the value of the capital asset as claimed by the assessee is less than the FMV of the asset.assessee is less than the FMV of the asset.

Reference only for the purpose of ascertaining Reference only for the purpose of ascertaining FMV for the purpose of Chapter IV of the ActFMV for the purpose of Chapter IV of the Act

Applicable in the case of seller of a capital assetApplicable in the case of seller of a capital asset Not just immovable property but all capital Not just immovable property but all capital

assetsassets

Understatement of Understatement of considerationconsideration

Whether valuation report is an Whether valuation report is an evidence sufficient for making evidence sufficient for making addition?addition?

Whether addition on the basis of Whether addition on the basis of valuation report can be made in valuation report can be made in the hands of buyer or seller ?the hands of buyer or seller ?

Understatement of Understatement of considerationconsideration Section 52(2):Section 52(2): FMV of the asset transferred exceeds the stated FMV of the asset transferred exceeds the stated

consideration by 15% than FMV be taken as the consideration by 15% than FMV be taken as the full value of consideration for the transfer.full value of consideration for the transfer.

K.P. Verghese V. ITO.(1981) 131 ITR 597 (SC)K.P. Verghese V. ITO.(1981) 131 ITR 597 (SC) Onus on the revenue to show that the FMV of Onus on the revenue to show that the FMV of

the asset exceeds the stated consideration but the asset exceeds the stated consideration but also that the consideration had been also that the consideration had been understated and the assessee had actually understated and the assessee had actually received more than what was declared by him.received more than what was declared by him.

Section 52 deleted from the statute by The Section 52 deleted from the statute by The Finance Act,1987 Finance Act,1987

ConsequencesConsequences

K.P. Verghese v. ITO (1981) 131 ITR 597 K.P. Verghese v. ITO (1981) 131 ITR 597 (SC)(SC)

CIT v. George Handerson & Co. Ltd (1967) CIT v. George Handerson & Co. Ltd (1967) 66 ITR 622 (SC)66 ITR 622 (SC)

CIT v. Gillander Arbuthnot & Co ( 1973) 87 CIT v. Gillander Arbuthnot & Co ( 1973) 87 ITR 407 (SC)ITR 407 (SC)

CIT v. Rakesh Kumar, SLP (civil) No. 3330 / CIT v. Rakesh Kumar, SLP (civil) No. 3330 / 1982 (1988) 171 1982 (1988) 171 ITR (ST) 47 (SC)

Understatement of Understatement of considerationconsideration Expert valuer confirming the valuation as Expert valuer confirming the valuation as

per the sale deedper the sale deed Valuation officer of the department arrived Valuation officer of the department arrived

at a higher valueat a higher value Lordships Sabyasachi Mukherji and Lordships Sabyasachi Mukherji and

S.Ranganathan JJ. Dismissed departments S.Ranganathan JJ. Dismissed departments special leave petition against the orders of special leave petition against the orders of the Delhi High Court holding that no the Delhi High Court holding that no understatement of value was provedunderstatement of value was proved

CIT v. Rakesh Kumar 171 ITR (ST) 47 (SC)CIT v. Rakesh Kumar 171 ITR (ST) 47 (SC)ACIT v. Shakti Bldrs (2005) 93 ITD269(ITAT-DEL)ACIT v. Shakti Bldrs (2005) 93 ITD269(ITAT-DEL)

Understatement of Understatement of considerationconsideration

AO can substitute actual sale AO can substitute actual sale consideration in place of stated consideration in place of stated consideration, if there is evidence consideration, if there is evidence to show that the assessee had to show that the assessee had indeed received higher amountindeed received higher amount

Inderpal Singh Ahuja v. CIT (2006) 103 ITD 271 Inderpal Singh Ahuja v. CIT (2006) 103 ITD 271 (ITAT-Asr)(ITAT-Asr)

Section 55ASection 55A

Fair market value of the property Fair market value of the property cannot be substituted in place of cannot be substituted in place of the full value of consideration u/s the full value of consideration u/s 48 48 CIT v. Smt Nilofer I. Singh 309 ITR 233 CIT v. Smt Nilofer I. Singh 309 ITR 233

(Del)(Del)

Dev Kumar Jain v. ITO 309 ITR 240 (Del) Dev Kumar Jain v. ITO 309 ITR 240 (Del)

Understatement by the Understatement by the buyerbuyer Reference in the case of property Reference in the case of property

purchased or constructed, etcpurchased or constructed, etc Addition by the AO u/s 69, 69B, 69A of Addition by the AO u/s 69, 69B, 69A of

the Act which fall in Chapter VI which is the Act which fall in Chapter VI which is outside the purview of section 55Aoutside the purview of section 55A

Amiya Bala Paul 262 ITR 407 (SC)Amiya Bala Paul 262 ITR 407 (SC)

Section 142A introduced by The Finance Section 142A introduced by The Finance (No. 2) Act, 2004 w.r.e.f. 15-11-1972(No. 2) Act, 2004 w.r.e.f. 15-11-1972

Section 142ASection 142A

Introduced by The Finance (No. 2) Act, 2004 but made Introduced by The Finance (No. 2) Act, 2004 but made

effective from 15-11-1972effective from 15-11-1972

To estimate the value of any investment referred to in To estimate the value of any investment referred to in

section 69, 69B or 69A of the Act:section 69, 69B or 69A of the Act:

– Unexplained investmentUnexplained investment

– Amount of investment, etc not fully disclosed in books of Amount of investment, etc not fully disclosed in books of

accountaccount

– Unexplained money, etcUnexplained money, etc

Applicable in the case of purchase or construction of Applicable in the case of purchase or construction of

property property Restricted to issues referred to in section 69, 69B & 69ARestricted to issues referred to in section 69, 69B & 69A

Consequences of Consequences of higher valuation by higher valuation by DVODVO Section 142A(3) Section 142A(3)

On receipt of the report from the On receipt of the report from the Valuation Officer, the Assessing Valuation Officer, the Assessing Officer may, after giving the Officer may, after giving the assessee an opportunity of being assessee an opportunity of being heard, take into account such heard, take into account such report in making such assessment report in making such assessment or reassessmentor reassessment

Section 142ASection 142A

Addition made only on the basis of higher Addition made only on the basis of higher value arrived by the DVOvalue arrived by the DVO

Section 69B invoked by the AO merely on the Section 69B invoked by the AO merely on the basis of assumptions & presumptions without basis of assumptions & presumptions without bringing any material on recordbringing any material on record

Onus of showing unexplained investment in Onus of showing unexplained investment in the hands of assessee remained undischargedthe hands of assessee remained undischarged

Addition deletedAddition deletedITO v. Smt Suman Kapoor ITA No. 2193 (Del) ITO v. Smt Suman Kapoor ITA No. 2193 (Del)

20092009Ashok Soni v. ITO 102 TTJ 964 (ITAT- Del)Ashok Soni v. ITO 102 TTJ 964 (ITAT- Del)

Gaylord Builders v. ITO (ITAT-DEL)Gaylord Builders v. ITO (ITAT-DEL)

Section 142ASection 142A

Reference only for the purpose of Reference only for the purpose of making assessment or reassessmentmaking assessment or reassessment

There is a difference between making a There is a difference between making a reassessment and opening for reassessment and opening for reassessment reassessment

Reassessment invalidReassessment invalidITO v. Vijeta Educ. Society 118 ITD 382 (ITAT-Lko)Manjusha Estate Pvt Ltd v. ITO 314 ITR 263 (Guj)

FMV ascertained by FMV ascertained by DVO DVO No addition can be made only on the basis No addition can be made only on the basis

of FMV of the asset acquired butof FMV of the asset acquired but Addition can be made u/s 69B in case Addition can be made u/s 69B in case

inference can be drawn on the basis of inference can be drawn on the basis of material on record that the assessee has material on record that the assessee has invested more amountinvested more amount

Addition to the stated consideration made Addition to the stated consideration made u/s 69B held to be valid & the finding of u/s 69B held to be valid & the finding of ITAT regarding value of the property upheld ITAT regarding value of the property upheld being a finding of factbeing a finding of fact

Smt Amar Kumari Surana v. CIT (1996) 89 Taxman 544 Smt Amar Kumari Surana v. CIT (1996) 89 Taxman 544 (Raj)(Raj)

Valuation for Stamp Valuation for Stamp DutyDuty Actual consideration < Value for Stamp DutyActual consideration < Value for Stamp Duty Actual consideration that passed between Actual consideration that passed between

the parties is a question of fact to be the parties is a question of fact to be determined in each case having regard to the determined in each case having regard to the

facts & circumstances of the case.facts & circumstances of the case. Dinesh Kr Mittal v. ITO (1992) 193 ITR 770 (All) Dinesh Kr Mittal v. ITO (1992) 193 ITR 770 (All)

Section 50C introduced by The Finance Act, Section 50C introduced by The Finance Act, 2002 w.e.f. 1-4-2003 2002 w.e.f. 1-4-2003

Section 50CSection 50C

Value for the purpose of stamp duty, Value for the purpose of stamp duty, deemed to be the full value of the deemed to be the full value of the consideration from transfer of the capital consideration from transfer of the capital asset for calculating capital gainsasset for calculating capital gains

Applicable in the case of seller of a Applicable in the case of seller of a capital asset being land &/or building. capital asset being land &/or building.

In case the value is disputed before the In case the value is disputed before the AO and the stamp duty valuation has not AO and the stamp duty valuation has not been disputed; the AO may refer to a been disputed; the AO may refer to a Valuation Officer for ascertaining FMVValuation Officer for ascertaining FMV

Consequences of Consequences of higher valuation by higher valuation by DVODVOSection 50CSection 50C Consequences in case value arrived at Consequences in case value arrived at

by the Valuation Officer is:by the Valuation Officer is:– less the than stamp duty valuationless the than stamp duty valuation– more than the stamp duty valuationmore than the stamp duty valuation

Issues in section 50CIssues in section 50C

Section 50C applicable only to the seller but Section 50C applicable only to the seller but 142A may be invoked to make addition in the 142A may be invoked to make addition in the hands of the buyers. hands of the buyers.

Section 56(2)(vii) introduced by the Finance Act, Section 56(2)(vii) introduced by the Finance Act, 2009 w.e.f. 01/10/09 to tax the difference in the 2009 w.e.f. 01/10/09 to tax the difference in the hands of the buyer.hands of the buyer. Provision retrospectively Provision retrospectively withdrawn by The Finance Act, 2010withdrawn by The Finance Act, 2010

Not applicable in the case of trading assetsNot applicable in the case of trading assetsInderlok Hotels Pvt Ltd v. ITO 122 TTJ 145 (Mum)Inderlok Hotels Pvt Ltd v. ITO 122 TTJ 145 (Mum)

In case the stamp duty valuation is disputed In case the stamp duty valuation is disputed before the concerned authority; Section 155(15)before the concerned authority; Section 155(15)

Issues in section 50CIssues in section 50C

Whether difference can be Whether difference can be reflected as additional funds in reflected as additional funds in the hands of the seller?the hands of the seller?

Can the seller avail exemption u/s Can the seller avail exemption u/s 54/ 54EC by investing additional 54/ 54EC by investing additional amount?amount?

Effect of exemption u/s 54F?Effect of exemption u/s 54F?

Section 50C / 56(2)(vii)Section 50C / 56(2)(vii)

Section 50C is constitutionally valid.Section 50C is constitutionally valid.K.R. Palanisamy v. UOI decided on 5/8/2008 K.R. Palanisamy v. UOI decided on 5/8/2008

(Mad)(Mad) Provision yet to be tested in the light of Provision yet to be tested in the light of

decision in the case of K.P. Verghese V. decision in the case of K.P. Verghese V. ITO.(1981) 131 ITR 597 (SC). ITO.(1981) 131 ITR 597 (SC).

Valuation report of the DVO to be Valuation report of the DVO to be reconsidered in the light of objections reconsidered in the light of objections by the assessee.by the assessee. Ravi Kant v. ITO (ITA No. 3671 of 2006) dt Ravi Kant v. ITO (ITA No. 3671 of 2006) dt

13/7/07 (Delhi)13/7/07 (Delhi)

Section 56(2)(vii)Section 56(2)(vii)

Introduced by the Finance Act, 2009 Introduced by the Finance Act, 2009 w.e.f. 01/10/09w.e.f. 01/10/09

Applicable only to individual or a HUFApplicable only to individual or a HUF Receives any immovable property:Receives any immovable property:

– Without considerationWithout consideration– Consideration which is less than the stamp Consideration which is less than the stamp

duty value of the property duty value of the property (Clause deleted (Clause deleted by The Finance Act, 2010)by The Finance Act, 2010)

Difference upto Rs50,000 to be ignoredDifference upto Rs50,000 to be ignored

Section 56(2)(vii)Section 56(2)(vii)

Property acquired as a trading Property acquired as a trading asset?asset?

Exemption in case received from Exemption in case received from relative, etcrelative, etc

Reference to DVOReference to DVO

55A55A : For assessment of capital gains : For assessment of capital gains 142A142A : For ascertaining value of any : For ascertaining value of any

investment referred to in section 69, 69B or investment referred to in section 69, 69B or 69A 69A

50C50C : In case stamp duty valuation is more : In case stamp duty valuation is more than the stated consideration & the assessee than the stated consideration & the assessee does not accept the same for assessment of does not accept the same for assessment of capital gains.capital gains.

56(2)(vii) 56(2)(vii) : In case of receipt of any : In case of receipt of any immovable property without consideration immovable property without consideration

ConclusionConclusion

AO can refer such cases to Valuation OfficerAO can refer such cases to Valuation Officer FMV determined by the DVO/ Stamp duty value FMV determined by the DVO/ Stamp duty value

may may result in addition: result in addition: – u/s 69B in the hands of the buyeru/s 69B in the hands of the buyer– u/s 50C in the hands of the selleru/s 50C in the hands of the seller– u/s 56(2)(vii) in the hands of the recipient of the propertyu/s 56(2)(vii) in the hands of the recipient of the property

Decision of ITAT in this regard may be very crucial Decision of ITAT in this regard may be very crucial because the value of the asset is a finding of fact because the value of the asset is a finding of fact

Case of the assessee needs to be properly built Case of the assessee needs to be properly built and arguedand argued

Profit on sale of property Profit on sale of property used for Residence used for Residence Section 54Section 54

Basic ConditionsBasic Conditions-- Individual or HUFIndividual or HUF-- Transfer of long term capital assetTransfer of long term capital asset-- buildings or lands appurtenant theretobuildings or lands appurtenant thereto-- Residential houseResidential house-- The income of which is chargeable under the head “income from house property”The income of which is chargeable under the head “income from house property”

Compliance for exemptionCompliance for exemption-- Purchase a residential housePurchase a residential house

- one year before- one year before- two year after- two year after

the date of transferthe date of transfer-- constructed a residential houseconstructed a residential house

- with in period of 3 year- with in period of 3 yearafter the date of transferafter the date of transfer

-- Restriction on transfer of new assetRestriction on transfer of new asset

Exemption U/s 54Exemption U/s 54

Capital Gains > Cost of the newCapital Gains > Cost of the new

residential houseresidential house

- diff liable to tax u/s 45.- diff liable to tax u/s 45.

Capital Gains < Cost of the newCapital Gains < Cost of the new

residential houseresidential house- No taxability u/s 45.- No taxability u/s 45.

New AssetNew Asset

-- Not to be transferred with in a period of 3 Not to be transferred with in a period of 3 years of its purchase or construction as the years of its purchase or construction as the case may becase may be

- In case transferred:In case transferred:

Gain to be short term capital gainGain to be short term capital gain

Cost of acquisition depends upon extent of Cost of acquisition depends upon extent of exemption availed at the time of its exemption availed at the time of its acquisitionacquisition

-- if fully exhausted if fully exhausted - Nil - Nil

-- Otherwise Otherwise - Balance - Balance

Profit on sale of capital asset other Profit on sale of capital asset other than residential house than residential house

Section 54FSection 54F

Basic ConditionsBasic Conditions-- Individual or HUFIndividual or HUF-- Transfer of long term capital assetTransfer of long term capital asset- Other than residential houseOther than residential house

Compliance for exemptionCompliance for exemption-- Purchase a residential housePurchase a residential house

- one year before or- one year before or- two year after- two year after

the date of transfer orthe date of transfer or-- constructed a residential houseconstructed a residential house

- with in period of 3 year- with in period of 3 yearafter the date of transferafter the date of transfer

-- Eligibility as well as other conditions to be fulfilledEligibility as well as other conditions to be fulfilled

Conditions for section Conditions for section 54F54F Assessee should not own more than one Assessee should not own more than one

residential house other than the new asset on residential house other than the new asset on the date of transfer of the original assetthe date of transfer of the original asset

Should not purchase/ construct any other Should not purchase/ construct any other residential house within two years / three years residential house within two years / three years respectively of the transfer of the original assetrespectively of the transfer of the original asset

Restriction only for RH where income chargeable Restriction only for RH where income chargeable under the head “Income from house property”under the head “Income from house property”

New asset not to be transferred before three New asset not to be transferred before three years from the date of its purchase/ construction, years from the date of its purchase/ construction, in case transferred LTCG exempted earlier to be in case transferred LTCG exempted earlier to be taxed in the year of saletaxed in the year of sale

Exemption U/s 54FExemption U/s 54F

Net consideration > Cost of the newNet consideration > Cost of the new

residential houseresidential house- Proportionate diff liable to tax u/s 45.- Proportionate diff liable to tax u/s 45.

Net consideration < Cost of the newNet consideration < Cost of the new

residential houseresidential house- No taxability u/s 45.- No taxability u/s 45.

Diff between 54 & 54FDiff between 54 & 54F

Transfer of residential house ; any other capital Transfer of residential house ; any other capital assetasset

Restriction on ownership of one residential house Restriction on ownership of one residential house at the time of transfer u/s 54Fat the time of transfer u/s 54F

Net sale consideration to be invested for Net sale consideration to be invested for exemption u/s 54Fexemption u/s 54F

Restriction on purchase within 2yrs / construction Restriction on purchase within 2yrs / construction within 3yrs of any other residential house u/s 54Fwithin 3yrs of any other residential house u/s 54F

In case sale of new asset within 3 yrs:In case sale of new asset within 3 yrs:– Section 54: Cost of acquisition of the asset to be Section 54: Cost of acquisition of the asset to be

adjusted with the amount of exemption availedadjusted with the amount of exemption availed– Section 54F: LTCG taxable in the year of sale of the new Section 54F: LTCG taxable in the year of sale of the new

asset asset

Cost of plotCost of plot

Whether cost of plot for the Whether cost of plot for the purpose of construction of purpose of construction of residential house is considered for residential house is considered for benefit u/s 54/ 54F ?benefit u/s 54/ 54F ?

Cost of land is the integral part of Cost of land is the integral part of the cost of residential housethe cost of residential house

Circular No. 667 dt 18/10/1993Circular No. 667 dt 18/10/1993

Issues in section 54/ Issues in section 54/ 54F54F Benefit restricted for either Benefit restricted for either

purchase or construction of a purchase or construction of a residential house or both can be residential house or both can be considered jointly ?considered jointly ?

Benefit available for both jointlyBenefit available for both jointly BB Sarkar v. CIT 132 ITR 150 (cal)BB Sarkar v. CIT 132 ITR 150 (cal)

Purchase of more than Purchase of more than one houseone house Whether benefit u/s 54 is Whether benefit u/s 54 is

available for purchase of more available for purchase of more than one house ?than one house ?

Section 54/54F : “a residential Section 54/54F : “a residential house”house”

Whether “a” here denotes “one”Whether “a” here denotes “one”

Purchase of more than Purchase of more than one houseone house Benefit restricted to only one houseBenefit restricted to only one house

KC Kaushik v. ITO (1990) 185 ITR 499 KC Kaushik v. ITO (1990) 185 ITR 499 (Bom) (Bom) not applicable being not on this issuenot applicable being not on this issue

5 residential flats in the same complex 5 residential flats in the same complex allowed: allowed:

KG vyas v. ITO 16 ITD 195 ( ITAT- Mum)KG vyas v. ITO 16 ITD 195 ( ITAT- Mum) The controversy and the judicial precedents The controversy and the judicial precedents

above was on section as it stood before above was on section as it stood before amendment by The Finance Act, 1982 where amendment by The Finance Act, 1982 where benefit was restricted to “a house property benefit was restricted to “a house property for the purpose of his own residence”for the purpose of his own residence”

Purchase of more than Purchase of more than one houseone house The General Clauses Act, 1897:The General Clauses Act, 1897:

Section 13(2):Section 13(2): “words in the singular shall “words in the singular shall

include the plural, and include the plural, and vice versa”vice versa”

The article “a” is not necessarily a singular The article “a” is not necessarily a singular

term. It is often used in the sense of any, and term. It is often used in the sense of any, and

when so used it may be applied to more than when so used it may be applied to more than

one individual object- one individual object- National Union Bank v. National Union Bank v.

Copeland 4NE 794Copeland 4NE 794

Purchase of more than Purchase of more than one houseone house

Held allowed only for one flat;Held allowed only for one flat; Gulshanbanoo R. Mukhi v. JCIT (2002) 83 ITD Gulshanbanoo R. Mukhi v. JCIT (2002) 83 ITD 649 (ITAT- Mum)649 (ITAT- Mum)

Held: Not allowable except in the case Held: Not allowable except in the case of adjacent & contiguous flats;of adjacent & contiguous flats; ITO v. ITO v. Mrs Sushila M. Jhaveri 107 ITD 327 (ITAT- Mrs Sushila M. Jhaveri 107 ITD 327 (ITAT- Mum. SB)Mum. SB)

Adjacent flatsAdjacent flats

Several self occupied dwelling units which were contiguous and situated in the same compound and with in the common boundary having unity of structure should be regarded as one residential house

Shiv Narain Choudhary v. CWT 108 ITR 104 (All)Shiv Narain Choudhary v. CWT 108 ITR 104 (All) Two adjacent flats; Held allowable; Two adjacent flats; Held allowable;

D. Anand Basappa v. ITO 309 ITR 329 (Karnatka)D. Anand Basappa v. ITO 309 ITR 329 (Karnatka)

Land & buildingLand & building

Land purchased in 1991Land purchased in 1991 Residential house constructed thereon Residential house constructed thereon

in 1995in 1995 Sold in 1996Sold in 1996 Whether gain is short term or long Whether gain is short term or long

termterm CIT v. lakshmi b Menon (2003) 184 CTR 52 CIT v. lakshmi b Menon (2003) 184 CTR 52

(Ker)(Ker)

Capital gains to be determined seperatelyCapital gains to be determined seperately

Execution of sale deedExecution of sale deed

Payment made but sale deed could not Payment made but sale deed could not be executed with in 2yrs; whether be executed with in 2yrs; whether assessee is entitled to benefit u/s 54 ?assessee is entitled to benefit u/s 54 ?

Legal transfer not mandatory, Legal transfer not mandatory, payment of consideration coupled with payment of consideration coupled with taking over of possession is more taking over of possession is more importantimportant

CIT v. Dr Laxmichand (1995) 211 ITR 804 (Bom)CIT v. Dr Laxmichand (1995) 211 ITR 804 (Bom)CIT v. Shahzada Begum (1988) 175 ITR 397(AP)CIT v. Shahzada Begum (1988) 175 ITR 397(AP)

New house in wife’s New house in wife’s namename Capital gains from sale of residential Capital gains from sale of residential

house property in the name of husbandhouse property in the name of husband New residential house purchased in the New residential house purchased in the

name of wifename of wife Exemption u/s 54 allowableExemption u/s 54 allowable

CIT v. V.Natrajan (2006) 287 ITR 271 (Mad)CIT v. V.Natrajan (2006) 287 ITR 271 (Mad) New house in the name of adopted sonNew house in the name of adopted son Exemption u/s 54F not to be allowedExemption u/s 54F not to be allowed

Prakash v. ITO 173 Taxman 311 (Mum)Prakash v. ITO 173 Taxman 311 (Mum)

Section 54FSection 54F

Pre condition that assessee should not Pre condition that assessee should not own more than 1 residential houseown more than 1 residential house

Share in a joint property is ‘owned Share in a joint property is ‘owned wholly or partly’ whereas in section 54F wholly or partly’ whereas in section 54F the word is ‘owned’the word is ‘owned’

For denial of exemption u/s 54F the For denial of exemption u/s 54F the assessee should own a complete assessee should own a complete residential house and does not include residential house and does not include shared interest in a residential houseshared interest in a residential house

ITO vs Rasik Lal N Satra (2006) 98 ITD 335 (Mum)ITO vs Rasik Lal N Satra (2006) 98 ITD 335 (Mum)

Acquisition of share in Acquisition of share in propertyproperty Assessee purchases 15% share in Assessee purchases 15% share in

the residential house property in the residential house property in which he was already stayingwhich he was already staying

Exemption u/s 54 cannot be Exemption u/s 54 cannot be denied denied

CIT vs Chandan ben Magan Lal (2000) 245 ITR CIT vs Chandan ben Magan Lal (2000) 245 ITR 182 (Guj)182 (Guj)

CIT vs TN Arvinda Reddy (1979) 120 ITR 46 CIT vs TN Arvinda Reddy (1979) 120 ITR 46 (SC) (SC)

Whether residence Whether residence necessary necessary Basement of a residential house purchased Basement of a residential house purchased

for claiming exemption u/s 54F of the Act.for claiming exemption u/s 54F of the Act. It is not necessary that a person should It is not necessary that a person should

reside in the house to call it a residential reside in the house to call it a residential house. If it is capable of being used for the house. If it is capable of being used for the purpose of residence than the requirement purpose of residence than the requirement of the section is satisfied.of the section is satisfied.

Amit Gupta v. DCIT (2006) 6 SOT 403 (Delhi)Amit Gupta v. DCIT (2006) 6 SOT 403 (Delhi)Mahavir Prasad Gupta (2006) 5 SOT 353 (Del)Mahavir Prasad Gupta (2006) 5 SOT 353 (Del)

Purchase of residential Purchase of residential house outside Indiahouse outside India Whether assessee entitled to Whether assessee entitled to

exemption u/s 54/ 54Fexemption u/s 54/ 54F Held: No, Income Tax Act, 1961 applies Held: No, Income Tax Act, 1961 applies

only to India only to India Leena J Shah v. ACIT (2006) 6 SOT 721 (Ahd)Leena J Shah v. ACIT (2006) 6 SOT 721 (Ahd)

Held: Yes, section 54 does not impose Held: Yes, section 54 does not impose

any bar on acquisition outside Indiaany bar on acquisition outside India Prema P Shah v. ITO 100 ITD 60 (ITAT) Prema P Shah v. ITO 100 ITD 60 (ITAT)

(Mum.)(Mum.)

Construction whether Construction whether before or after the date before or after the date of transferof transfer Whether construction of house property can Whether construction of house property can

be completed before the date of transfer of be completed before the date of transfer of the original assetthe original asset

Held, NoHeld, No Smt Shantaben P.Gandhi (1981) 129 ITR 218 (Guj)Smt Shantaben P.Gandhi (1981) 129 ITR 218 (Guj) CIT v. JR Subramanya Bhat (1987) 165 ITR 571 CIT v. JR Subramanya Bhat (1987) 165 ITR 571

Whether it can be started before the date of Whether it can be started before the date of

transfertransfer Held, YesHeld, Yes CIT v. HK Kapoor (1998) 150 CTR 128 (All) CIT v. HK Kapoor (1998) 150 CTR 128 (All)

Payment for SFS/ Payment for SFS/ CGHS flat CGHS flat Whether to be taken as Whether to be taken as

construction or purchase of construction or purchase of residential houseresidential house

To qualify for constructionTo qualify for construction Circular No. 471 dt 19-10-1986Circular No. 471 dt 19-10-1986 Circular No. 672 dt 16-12-1993Circular No. 672 dt 16-12-1993

Purchase/ constructionPurchase/ construction

Property being developed by the builder under Property being developed by the builder under collaboration agreementcollaboration agreement

Assessee to get some portion of the dwelling unitAssessee to get some portion of the dwelling unit Whether time limit of 2 yrs or 3 yrs would apply ?Whether time limit of 2 yrs or 3 yrs would apply ? The case would fall under purchase of property The case would fall under purchase of property

by way of constructionby way of constructionITO v. Abbas Ali Shiraz (2006) 5 SOT 422 (Bang.)ITO v. Abbas Ali Shiraz (2006) 5 SOT 422 (Bang.)

Construction may be by a third partyConstruction may be by a third partyCIT v. Uma Budhia (2004) 141 Taxman 39 (Kol.)CIT v. Uma Budhia (2004) 141 Taxman 39 (Kol.)

Payment to a builder for purchase of flat not an Payment to a builder for purchase of flat not an agreement of construction but sale by the builderagreement of construction but sale by the builder

PK Datta v. ITO 100 TTJ 133 (ITAT Pune)PK Datta v. ITO 100 TTJ 133 (ITAT Pune)

Construction with in 3 Construction with in 3 yearsyears

Assessee has made payments out of Assessee has made payments out of the capital gains with in the stipulated the capital gains with in the stipulated time time

Builder failed to hand over the Builder failed to hand over the property with in the prescribed time property with in the prescribed time

Exemption u/s 54/ 54F cannot be Exemption u/s 54/ 54F cannot be denieddenied

CIT vs RC Sood (2000) 108 Taxman 227 (Del)CIT vs RC Sood (2000) 108 Taxman 227 (Del)

CIT vs Ms Hille JB Wadia (1995) 216 ITR CIT vs Ms Hille JB Wadia (1995) 216 ITR

Incomplete houseIncomplete house

Capital gains invested in construction of Capital gains invested in construction of residential house with in the stipulated residential house with in the stipulated timetime

More funds required to complete the More funds required to complete the construction in a particular mannerconstruction in a particular manner

Assessee entitled to exemption as the Assessee entitled to exemption as the utilization of the capital gains is completeutilization of the capital gains is complete

CIT v. Sardarmal Kothari 302 ITR 286CIT v. Sardarmal Kothari 302 ITR 286

Ajay Goyal v. ITO (ITA No 493 of 2004 dt 9-5-2005)Ajay Goyal v. ITO (ITA No 493 of 2004 dt 9-5-2005)

Transformation of an Transformation of an assetasset Assessee books a flat / becomes member of a Assessee books a flat / becomes member of a

CGHS in 2001CGHS in 2001 Possession of the flat is given to the assessee Possession of the flat is given to the assessee

in 2004in 2004 Flat sold in 2005Flat sold in 2005 Capital gain; whether long term or short termCapital gain; whether long term or short term

Flat is only an incidental right flowing from the Flat is only an incidental right flowing from the shareholding in the CGHSshareholding in the CGHS

CIT vs Jindas Parchand Gandhi (2005) 279 ITR 552 (Guj)CIT vs Jindas Parchand Gandhi (2005) 279 ITR 552 (Guj) Flat booked with the builder

ACIT v. Sharad Thadani 104 TTJ 567 (ITAT Lko)ACIT v. Sharad Thadani 104 TTJ 567 (ITAT Lko)

Link capital gain & Link capital gain & investmentinvestment Capital asset sold resulting in long term capital Capital asset sold resulting in long term capital

gains and sale proceeds utilized for business.gains and sale proceeds utilized for business. New residential house property purchased after New residential house property purchased after

getting the same financed from bankgetting the same financed from bank Other stipulations for exemption compliedOther stipulations for exemption complied Whether assessee entitled to deduction u/s 54Whether assessee entitled to deduction u/s 54 Exemption u/s 54F not admissibleExemption u/s 54F not admissible

Milan Sharad Ruparel v. ACIT 121 TTJ 770 (Mum)Milan Sharad Ruparel v. ACIT 121 TTJ 770 (Mum) Ajit Vaswani v. (2001) CIT 117 Taxman 123 Ajit Vaswani v. (2001) CIT 117 Taxman 123

(Delhi) (Mag.)(Delhi) (Mag.)

Death of the assesseeDeath of the assessee

Legal heirs entitled to exemption if Legal heirs entitled to exemption if conditions satisfiedconditions satisfiedCV Ramanathan (1980) 155 ITR 191 (Madras)CV Ramanathan (1980) 155 ITR 191 (Madras) Mir Ghulam Ali Khan (1987)165 ITR 228 (AP) Mir Ghulam Ali Khan (1987)165 ITR 228 (AP)

Deposit in Capital Gains Scheme A/C Deposit in Capital Gains Scheme A/C inherited by the legal heirsinherited by the legal heirs

No obligation to utilize the same for No obligation to utilize the same for purchase or construction of the purchase or construction of the residential house because the same is residential house because the same is not income but estate devolving upon not income but estate devolving upon the legal heirs. the legal heirs.

Circular No. 743, dt 13-7-1989Circular No. 743, dt 13-7-1989

Benefit u/s 54/ 54FBenefit u/s 54/ 54F

Benefit only for new construction or for Benefit only for new construction or for remodeling & renovation also coveredremodeling & renovation also covered

Benefit not restricted to new construction Benefit not restricted to new construction alonealone

CIT v. ar Mathavan pillai (1996) 219 ITR 696 (Ker)CIT v. ar Mathavan pillai (1996) 219 ITR 696 (Ker)CIT v. Narsimhan PV (1990) 181 ITR 101(Mad)CIT v. Narsimhan PV (1990) 181 ITR 101(Mad)

Mere extension of old existing house Mere extension of old existing house would not mean construction. The would not mean construction. The construction must be real one and not a construction must be real one and not a symbolic construction.symbolic construction.CIT v. Pradeep Kumar (2006) 153 Taxman 138 CIT v. Pradeep Kumar (2006) 153 Taxman 138

(Madras)(Madras)

Indexation Indexation

Father purchased house property for Rs1.16 lac Father purchased house property for Rs1.16 lac in the year 1983. in the year 1983.

Father died in the year 2004 and son Mr. X Father died in the year 2004 and son Mr. X inherits the property.inherits the property.

Mr. X sells the property in Nov,05 for Rs5.00 lacs.Mr. X sells the property in Nov,05 for Rs5.00 lacs. Cost Inflation Index:Cost Inflation Index:

– 1983-84: 1161983-84: 116– 2004-05: 4802004-05: 480– 2005-06: 4972005-06: 497

Taxability under the head capital gains:Taxability under the head capital gains:– Short term/ long termShort term/ long term– Cost of acquisitionCost of acquisition– indexationindexation

Capital asset acquired u/s Capital asset acquired u/s 4949

Explanation (iii) to Section 48:Explanation (iii) to Section 48: Indexed cost of acquisition means an amount which Indexed cost of acquisition means an amount which

bears to the cost of acquisition the same proportion bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee first year in which the asset was held by the assessee or for the year begining on the 1-4-81 which ever is or for the year begining on the 1-4-81 which ever is later.later.

Date from which indexation to be done ?Date from which indexation to be done ? From the date of acquisition of the previous owner; From the date of acquisition of the previous owner;

Pushpa Sofat 81 ITD 1 (ITAT-Chd)Pushpa Sofat 81 ITD 1 (ITAT-Chd) From the date of inheritence; From the date of inheritence; Kishore Kanungo 102 Kishore Kanungo 102

ITD 437 (ITAT-Mum)ITD 437 (ITAT-Mum) Decision of SB of Mumbai tribunal in favour of the Decision of SB of Mumbai tribunal in favour of the

assessee; DCIT v. Manjula J. Shah 16 CPT 645assessee; DCIT v. Manjula J. Shah 16 CPT 645

Indexation Indexation

Capital asset acquired during the FY 1993-94Capital asset acquired during the FY 1993-94 Payment for the aforesaid asset made in Payment for the aforesaid asset made in

instalments from 1993-94 to 1996-97instalments from 1993-94 to 1996-97 Indexation ?Indexation ? Indexation on the value of the asset from the Indexation on the value of the asset from the

date of acquisition of the asset and not from date of acquisition of the asset and not from the date of actual payments made by the the date of actual payments made by the assesseeassesseeCharanbir Singh Jolly v. ITO (2006) 5 SOT 89 (Mum.)Charanbir Singh Jolly v. ITO (2006) 5 SOT 89 (Mum.)

Lata G. Rohra v. DCIT 21 SOT 541 (Mum)Lata G. Rohra v. DCIT 21 SOT 541 (Mum)

Capital Gains Tax Capital Gains Tax SchemeSchemeSection 54(2)/ 54F(4)Section 54(2)/ 54F(4)-- Amount to be utilised before the date of Amount to be utilised before the date of

furnishing of return u/s 139 furnishing of return u/s 139 -- Unutilized amount of capital gains to be Unutilized amount of capital gains to be -- Deposited in an account underDeposited in an account under-- Capital Gains Scheme Capital Gains Scheme -- Before the date of furnishing ITR u/s 139(1)Before the date of furnishing ITR u/s 139(1)-- Proof of such deposit to be furnished alongwith Proof of such deposit to be furnished alongwith

the ITR.the ITR.-- Withdrawal for purchase/construction of new Withdrawal for purchase/construction of new

house.house.-- Unutilized amount chargeable to tax as the Unutilized amount chargeable to tax as the

income of the previous year in which the period income of the previous year in which the period of three years expires.of three years expires.

Capital Gains SchemeCapital Gains Scheme

Funds given as advance instead of Funds given as advance instead of depositing in the Capital Gains Schemedepositing in the Capital Gains Scheme

Later received backLater received back Property purchased during the stipulated Property purchased during the stipulated

timetime Whether benefit u/s 54 or 54F will be Whether benefit u/s 54 or 54F will be

available to the assesseeavailable to the assessee ““Deminimus non curat lex”Deminimus non curat lex” Rupali R Desai v. ACIT (2005) 273 ITR 109 (ITAT- Rupali R Desai v. ACIT (2005) 273 ITR 109 (ITAT-

MUM)MUM)Mukesh G. Desai (HUF) v. ITO 120 TTJ 792(mum)Mukesh G. Desai (HUF) v. ITO 120 TTJ 792(mum)

Capital Gains SchemeCapital Gains Scheme

Money not deposited before the due Money not deposited before the due

date of filing ITR u/s 139(1)date of filing ITR u/s 139(1)Exemption u/s 54F not availableExemption u/s 54F not available

Taranbir Singh Sahni v DCIT(2006)5 SOT 417 Taranbir Singh Sahni v DCIT(2006)5 SOT 417 (Delhi)(Delhi)

Exemption available in case utilised before filing of ITR even u/s 139(4)

CIT v. Rajesh Kumar Jalan 286 ITR 274 CIT v. Rajesh Kumar Jalan 286 ITR 274 (Gauhati)(Gauhati)

Nipun Mehrortra 110 ITD 520 (ITAT- Banglore)Nipun Mehrortra 110 ITD 520 (ITAT- Banglore)

Agricultural Land Agricultural Land

What is agricultural land?What is agricultural land?– Whether agricultural or not is Whether agricultural or not is

essentially one of fact & essentially one of fact & circumstances of each case; circumstances of each case; Sarifabib Mohamed Ibrahim v. CIT Sarifabib Mohamed Ibrahim v. CIT (1993) 204 ITR 631 (SC)(1993) 204 ITR 631 (SC)

– Determining factors; Determining factors; CIT v. CIT v. Siddharth J. Desai (1983) 139 ITR Siddharth J. Desai (1983) 139 ITR 628 (Guj)628 (Guj)

Agricultural landAgricultural land

Rural agricultural land not a capital Rural agricultural land not a capital asset u/s 2(14)asset u/s 2(14)

Compulsory acquisition not liable Compulsory acquisition not liable to tax u/s 10(37)to tax u/s 10(37)

Exemption of capital gains from Exemption of capital gains from sale of land in case other sale of land in case other agricultural land purchased with in agricultural land purchased with in 2 yrs u/s 54B 2 yrs u/s 54B

Agricultural LandAgricultural Land

Capital asset (Section 2 (14))Capital asset (Section 2 (14))– Municipality having population of 10k Municipality having population of 10k

or moreor more– Within the notified area (not being Within the notified area (not being

more than 8 KM from local limits)more than 8 KM from local limits) Notification No. SO 10(E) dt Notification No. SO 10(E) dt

6/1/1994 as amended by 6/1/1994 as amended by Notification No. SO 1302 dt Notification No. SO 1302 dt 28/12/199928/12/1999

Implications Implications

Agricultural land held as stock in Agricultural land held as stock in tradetrade

How the distance to be measured? How the distance to be measured? Distance to be taken by approach Distance to be taken by approach road and not as a straight line; CIT road and not as a straight line; CIT v. Satinder Pal Singh ITA No. 646/ v. Satinder Pal Singh ITA No. 646/ 2009 dt 07-01-2010 (Pb & Hy)2009 dt 07-01-2010 (Pb & Hy)

Whether nearest municipality or as Whether nearest municipality or as per revenue records?per revenue records?

Agricultural landAgricultural land

Section 10(37)Section 10(37) Agricultural land belongs to Indvl/ HUFAgricultural land belongs to Indvl/ HUF Land used for agriculture for the past 2 yrs Land used for agriculture for the past 2 yrs

by the assessee or his parentsby the assessee or his parents Compulsory acquisition under any law Compulsory acquisition under any law oror The consideration for transfer is determined/ The consideration for transfer is determined/

approved by C.Govt./ RBIapproved by C.Govt./ RBI Consideration / compensation is received on Consideration / compensation is received on

or after 1/4/2004or after 1/4/2004 Asset may be short term or long term capital Asset may be short term or long term capital

assetasset

Exemption of capital gains on land Exemption of capital gains on land used for Agricultural purposesused for Agricultural purposes

Section 54BSection 54B1.1. Land used for agricultural purposes for the Land used for agricultural purposes for the

last 2 years by assessee or his parents.last 2 years by assessee or his parents.2.2. Land purchased for agricultural purposes Land purchased for agricultural purposes

with in a period of 2 years from transfer.with in a period of 2 years from transfer.3.3. Capital gains to the extent utilized for the Capital gains to the extent utilized for the

new asset exempt.new asset exempt.4.4. New asset not to be transferred for a period New asset not to be transferred for a period

of 3 years of 3 years 5.5. In case transferred cost of acquisition to be In case transferred cost of acquisition to be

after adjusting capital gains exemption after adjusting capital gains exemption availedavailed

6.6. Unutilized amount to be deposited in the Unutilized amount to be deposited in the capital gains scheme a/ccapital gains scheme a/c

IssuesIssues

Section 54BSection 54B Exemption only to individualExemption only to individual The asset may be short term or long termThe asset may be short term or long term Land purchased may be in urban areaLand purchased may be in urban area Vendee may have purchased the land for any Vendee may have purchased the land for any

other purposeother purposeCIT v. Savita Rani (2004) 270 ITR40 (P&H)CIT v. Savita Rani (2004) 270 ITR40 (P&H)

Compulsory acquisition of agricultural land; Compulsory acquisition of agricultural land; Period of 2 yrs from the date of receipt of Period of 2 yrs from the date of receipt of compensation or enhanced compensation as compensation or enhanced compensation as the case may bethe case may beCIT v. Janardhan Dass (2008) 170 Taxman 113 ( All)CIT v. Janardhan Dass (2008) 170 Taxman 113 ( All)

Agricultural LandAgricultural Land

Capital asset:Capital asset:– Section 2(14)Section 2(14)– Section 10(37)Section 10(37)– Section 54BSection 54B

In case the same is held as stock In case the same is held as stock in trade?in trade?

Conversion of capital asset Conversion of capital asset into stock in tradeinto stock in trade Section 45(2)Section 45(2)

Fair Market Value of the assetFair Market Value of the asset

on the date of conversionon the date of conversion

to be deemed to beto be deemed to be

full value of consideration.full value of consideration.

Capital Gains deemed to be income of Capital Gains deemed to be income of the year in which such stock in trade is the year in which such stock in trade is sold.sold.

Conversion of stock in Conversion of stock in trade into a capital assettrade into a capital asset

How capital gains to be ascertained ?How capital gains to be ascertained ? How the period for which asset is How the period for which asset is

held to be calculated ?held to be calculated ? Date on which asset was acquired Date on which asset was acquired

will be the date of purchase of the will be the date of purchase of the assetasset

Kalyani Exports & Investments Pvt Kalyani Exports & Investments Pvt Ltd v. CIT (2001) 78 ITD 95 (Pune)Ltd v. CIT (2001) 78 ITD 95 (Pune)

Family arrangementsFamily arrangements

Whether transfer of property in family Whether transfer of property in family settlement is chargeable to capital settlement is chargeable to capital gains tax?gains tax?

Family arrangements made voluntarily Family arrangements made voluntarily to resolve the disputes among to resolve the disputes among members of a family did not amount to members of a family did not amount to transfer.transfer.

No capital gain arises from the No capital gain arises from the transactiontransaction

CIT vs AL Ramanathan 245 ITR 494 (Madras)CIT vs AL Ramanathan 245 ITR 494 (Madras)

Family settlementFamily settlement

Bona fide settlements to resolve family disputes and rival claims.Bona fide settlements to resolve family disputes and rival claims. Fair & equitable distribution of propertiesFair & equitable distribution of properties Voluntary and not induced by fraud, coercion or undue influenceVoluntary and not induced by fraud, coercion or undue influence Arrangement may even be oral Arrangement may even be oral A document containing the terms & recital of the family arrangement A document containing the terms & recital of the family arrangement

requires registrationrequires registration Registration not mandatory for Memorandum prepared after the Registration not mandatory for Memorandum prepared after the

arrangement has already been done for the purpose of record or arrangement has already been done for the purpose of record or court court

Settlement without registration may not be accepted as evidence but Settlement without registration may not be accepted as evidence but the same can be admissible as a corroborative evidence of the the same can be admissible as a corroborative evidence of the transaction.transaction.

Disputes:Disputes:– Should be bonafideShould be bonafide– May be present or possible May be present or possible – May not involve legal rightsMay not involve legal rights

Kale v. DDC AIR 1976 SC 807Kale v. DDC AIR 1976 SC 807

Family ArrangementsFamily Arrangements

Cost of acquisition in the hands of Cost of acquisition in the hands of the member receiving the asset the member receiving the asset after the settlementafter the settlement

Cost to the previous owner and Cost to the previous owner and not the amount mentioned in the not the amount mentioned in the family settlement deedfamily settlement deed

CIT v. Shanti Chandran (2003) CIT v. Shanti Chandran (2003) 127 Taxman 475 (Mad)127 Taxman 475 (Mad)

Mode of Computation Mode of Computation of Capital Gainsof Capital Gains

Section 48Section 48Full value of the consideration received Full value of the consideration received or accruing as a result of transfer of or accruing as a result of transfer of capital asset less.capital asset less.

(i)(i) expenditure incurred expenditure incurred wholly wholly & exclusively in connection & exclusively in connection with such transfer.with such transfer.

(ii)(ii) the the cost of acquisition of the cost of acquisition of the assetasset & the & the cost of cost of improvementimprovement there to. there to.

Interest on borrowingsInterest on borrowings

Revenue expenditureRevenue expenditure Allowable u/s 57 or u/s 24 of the ActAllowable u/s 57 or u/s 24 of the Act Balance interest can be taken as allowable Balance interest can be taken as allowable

deduction for calculation of capital gainsdeduction for calculation of capital gains CIT v. Mithlesh Kumari (1973) 92 ITR 9 (Del) CIT v. Mithlesh Kumari (1973) 92 ITR 9 (Del)

Addl CIT v. K.S.Gupta (1979) 119 ITR 372 Addl CIT v. K.S.Gupta (1979) 119 ITR 372 CIT v. Mithreyi Rai (1989) 152 ITR 247 (Ker) CIT v. Mithreyi Rai (1989) 152 ITR 247 (Ker) Vasanji Sons & co Pvt Ltd (1975) 99 ITR 148 (Del)Vasanji Sons & co Pvt Ltd (1975) 99 ITR 148 (Del)

K. Rajagopala Rao 252 ITR 459 (Mad.)K. Rajagopala Rao 252 ITR 459 (Mad.)

Forfeiture of earnest Forfeiture of earnest moneymoney Capital asset acquired in FY 1995-96 Capital asset acquired in FY 1995-96

for Rs.10 Lacsfor Rs.10 Lacs Advance of Rs.3 lacs received during Advance of Rs.3 lacs received during

FY 2005-06 against sale of the said FY 2005-06 against sale of the said property for Rs.25 lacsproperty for Rs.25 lacs

Buyer could not make the payment of Buyer could not make the payment of balance amount and the earnest balance amount and the earnest money is forfeited.money is forfeited.

Treatment ?Treatment ?

Advance money receivedAdvance money received

Section 51Section 51

- Advance money received & Advance money received &

retainedretained

- To be deducted from the cost or To be deducted from the cost or

FMV in computing cost of FMV in computing cost of

acquisitionacquisition

IssueIssue

Whether advance money received & Whether advance money received & retained is to be deducted from cost of retained is to be deducted from cost of acquisition or indexed cost of acquisition or indexed cost of acquisitionacquisition

Section 48 amended wef 1-4-1993 Section 48 amended wef 1-4-1993 consequential amendment to section consequential amendment to section 51 not done51 not done

Advance received more than cost of Advance received more than cost of acquisition acquisition

Treatment of advanceTreatment of advance

Cost of acquisition : Rs.5 lacsCost of acquisition : Rs.5 lacs Advance forfeited : Rs.25 lacsAdvance forfeited : Rs.25 lacs Treatment ?Treatment ? Excess over cost of acquisition is a Excess over cost of acquisition is a

capital receiptcapital receipt Travancore Rubber & Tea Co. Ltd. 243 ITR 158 Travancore Rubber & Tea Co. Ltd. 243 ITR 158

(SC)(SC) Subsequent sale whether cost of Subsequent sale whether cost of

acquisition to be NIL or negative figure?acquisition to be NIL or negative figure? Held: NIL Smt Sunita N. Shah (2005) 94 ITD Held: NIL Smt Sunita N. Shah (2005) 94 ITD

492 (Mum)492 (Mum)

Treatment in the hands of Treatment in the hands of payerpayer

Whetherbusiness

yes No

Business expenditure

Capital loss

Whether allowable

76 ITR 471 (SC)156 ITR 509 (SC)

Short term capital Short term capital gainsgains The assessee sells a plot of land for Rs 1.4 Cr The assessee sells a plot of land for Rs 1.4 Cr

which was acquired for Rs 1.0 Cr resulting in short which was acquired for Rs 1.0 Cr resulting in short term capital gains from sale of property Rs 40 lacs.term capital gains from sale of property Rs 40 lacs.

1 lac shares of Rs 10 each subscribed in a pvt ltd 1 lac shares of Rs 10 each subscribed in a pvt ltd company at a premium of Rs 50 eachcompany at a premium of Rs 50 each

The said pvt ltd company issues bonus shares 1:5The said pvt ltd company issues bonus shares 1:5 Original 1 lac shares are now sold for Rs 10 each Original 1 lac shares are now sold for Rs 10 each

resulting in short term capital loss of Rs 50 lacs resulting in short term capital loss of Rs 50 lacs Whether gain of Rs 40 lacs above be offset against Whether gain of Rs 40 lacs above be offset against

loss of Rs 50 lacsloss of Rs 50 lacs Ensure to be out of section 94(8)Ensure to be out of section 94(8)

Sunil AroraSunil AroraA-1/118, Safdarjung Enclave,A-1/118, Safdarjung Enclave,N.Delhi-110029N.Delhi-110029Ph: 011-26711114-17Ph: 011-26711114-17saa@airtelmail.insaa@airtelmail.in