The real estate business in India stands at second number after agriculture in terms of employment. The real estate sector’s contribution to the country’s GDP is 7 per cent in 2019-20
Therefore, the government of the day has
thought it appropriate to regulate the industry by bringing in new regulatory
mechanisms and instruments.
A structural reform designed to bring
about a paradigm shift in the way the real estate sector operates is the
introduction of the Real Estate Regulatory Authority (RERA), which will help in
improving transparency and efficiency, restore consumer confidence and revive
demand.
Nature of business
Real estate business is a capital-intensive activity.
Most of the activity is at the site. Usually an office is maintained at the
site and the records are kept in that site office.
Real estate can be segregated into three
broad categories –
(i)
Residential comprising developed land, residential houses and
condominiums;
(ii)
Commercial comprising office buildings, warehouses and retail store
buildings; and
(iii) Industrial which includes
factories, mines and farms, on the basis of its use.
There are various players involved in this sector such as land owners, developers, contractors, sellers/buyers and real estate agents etc.
Recommendations of Various Committees for Specific Legislative Measures
Several
Committees, set up from time-to-time by the Government of India, noted the fact
that immovable property transactions are a major source and channel for the
generation and circulation of black money and are widely used as tax evasion
measures. They recommended specific measures. Government from time-to-time
introduced various measures to deal with this problem :
(a) Kaldor’s Report on Indian-tax Reform (1956)
In para 35, it is
recommended that the Revenue Department should have the right to ask the tax
payer to name his own reserve price for the disputed item of property and to
substitute that reserve price for the market value, for purposes of the tax. If
the Revenue Department is of the opinion that the reserve price as stated by
the taxpayer is still below the true current market value of the property, it
can so advise the Central P.W.D. who can then acquire the property at the
taxpayer’s own reserve price. Tax payer who purposely under values properties
in their returns would run the risk of having the property ‘bought out’ at that
price by the State.
(b) The Wanchoo
Committee’s Interim Report (1970)
It is stated therein that the Government should have
powers to acquire immovable properties in respect of which the consideration
was understated in the sale deed, on payment of compensation to the purchaser,
equal to the amount of declared consideration and solatium of 15 per cent
thereof.
In the Final Report (para 2.197), the Committee observed that the problem of
undervaluation is not limited only to understatement of sale consideration in
the transfer deeds; there is considerable scope for tax evasion through
understatement of cost of construction of the property by the taxpayer. The
Committee recommended that the Government should consider extension of the
provisions of compulsory acquisition of immovable property in respect of which
the cost of construction was understated, after it had some experience of
acquisition of immovable properties in cases of understatement of sale
consideration.
(c) Introduction of Provisions for Acquisition in
Chapter XX - A in 1972 - Pursuant to the recommendation of Wanchoo
Committee, Chapter XX-A was incorporated in the Income-tax Act by the Taxation
Laws (Amendment) Act, 1972 :
"to
counter evasion of tax through understatement of the value of immovable
properties in the transfer deeds and also to check circulation of black money,
by empowering the Central Government to acquire the immovable properties,
including agricultural lands at prices which correspond to those recorded in
the transfer deeds in cases where the consideration declared in the instrument
of transfer was less than fair market value by at least 15 per cent, with a
view to evade tax."
(d) Chokshi Committee’s Interim Report
(1977)
In paras 164 to 167, it is commented that the
provisions of Chapter XX-A have failed to achieve their intended purpose due to
the inability of the administration to sustain the estimated market value
before the Courts. The Committee recommended that Chapter XX-A, of the
Income-tax Act should be deleted.
(e) Economic
Administrative Reforms Commission, Interim Report on Income-tax Act (Januart 1982)
It has noticed some legal devices used for placing
capital transactions beyond the application of the tax provisions like (a) to
make it appear that the transaction is one in which the contract of purchase
and sale has not been fully performed, (b) to put the transaction as one of
lease for a period less than 12 years with provision for extending the lease
further, (c) not to effect registration even when the transaction is complete,
the consideration for sale has passed and the possession of the property has
been given, (d) to transfer the property under Power of Attorney to the
transferee with all the powers which the transferor has of ownership,
possession and enjoyment, backed by a pro-note for an amount equal to the
consideration that has passed for such transaction, and (e) to transfer flats
owned by shareholders by means of transfer of shares and to contend that the
capital gains should be determined on the basis of the market value of the
shares and not of the property itself, since what has actually been transferred
is not the flat, but the shares.
(f) The Long-Term Fiscal Policy Document (December
1985) of the Finance Ministry (Para 5.29)
It is observed that the provision in Chapter XX-A,
empowering the Government to acquire an immovable property on its sale or
transfer, if the consideration recorded in the transfer deed is found to be
less than its estimated fair market value by more than 15 per cent, had not
proved to be effective and had generated a great deal of litigation and
harassment. It recommended (para 5.30) conferring on the Government a
pre-emptive right to acquire any immovable property undergoing a transfer for
consideration at a value 15 per cent above the price of consideration stated in
the transfer deed. The Government would make full payment for the property it
notifies for acquisition within 30 days of such notification. To reduce undue
uncertainty in property transactions, the Government’s pre-emptive right of
purchase would automatically lapse after 60 days of the seller’s applying for
the clearance certificate.
(g) Introduction of Pre-emptive Purchase in
Chapter XX-C in 1986
Chapter XX-C was introduced for Pre-emptive Purchase
in the background of dismal record of acquisition provisions in Chapter XX-A to
achieve its objective. The department had received lakhs of intimations of
transfer but could acquire only a few properties ‘The judicial interpretation
of Chapter XX-A had severely emasculated their potential for detecting and
curbing this tax evasion’.
(h) Finance
(No. 2) Bill, 1998 proposed capital gain on stamp duty value of the
property - The Finance (No. 2) Bill, 1998 proposed insertion of a proviso
to section 48 :-
“Provided also that where the consideration received
or accruing in respect of the transfer of a capital asset, being land or
building or both, is less than the value adopted or assessed by any authority
of a State Government for the purpose of payment of stamp duty in respect of
such transfer, the consideration so adopted or assessed shall be deemed to be
the full value of the consideration received or accruing.”
The Finance Minister, however, dropped
this proposal.
(i) Abolition of Pre-emptive Purchase
The Finance Act, 2002 inserted section 269UP, which
made pre-emptive purchase under Chapter XX-C inapplicable to transfer of
immovable property affected on or after July 1, 2002. The Finance Minister in
his Budget speech explained that in continuation with the taxpayer friendly
measures brought about by him in earlier Budgets, he proposed abolition of
provisions of Chapter XX-C, which required clearance to be obtained from
appropriate authority before registering a transfer of an immovable property.
(j) Introduction of Presumptive Gain
The Finance Act, 2002, with effect from the assessment
year 2003-04, introduced section 50C. It provides that computation of capital
gains on transfer of land or building or both, will be on the basis of its
stamp duty valuation or the fair market value, as determined by the Valuation
Officer. If the declared consideration for transfer is less than the value
adopted or assessed by any authority of the State Government for the purpose of
stamp duty payment, capital gain shall be computed on the basis of value
assessed for Stamp Duty.
Objections to Section 50C
Chambers of Commerce and Industry and tax lawyers and
practitioners have sought withdrawal of section 50C for several reasons :
(i)
It is against the
concept of real income. Capital gain is computed on basis of notional
figure, causing hardship to honest taxpayers who declare the actual paid
amount, but is assessed on a deemed amount of capital gain, that he did not
earn.
(ii)
Computation of
capital gain on the basis of notional value leads to difficulty in availing
exemption by making eligible reinvestment. The assessee would have to borrow
money to invest in specified investment and save capital gain tax.
(iii)
Stamp Duty value
is not fixed in a scientific manner by the State Government authorities. It is
fixed for a particular division, encompassing several properties whose market
value can never be the same. Guideline values were influenced by the peak rates
prevailing during 1996-97; after which the realestate market crashed
down, but Guideline value has not been reduced.
(iv)
In cases where
transactions are approved by authorities like public charity Commissioner, the
Reserve Bank of India, invoking guideline value, will lead to anomalous
situations.
(v)
Reference to
Valuation Officer and the value so estimated is prone to subjective assessment
and prolonged litigation on complex issues/disputes.
(k) White paper on black money’ published by the
Ministry in 2012
The
‘White paper on black money’ published by the Ministry in 2012 identified ‘Real
Estate’ as one of the sectors of the economy or activities more vulnerable to
the menace of black money. The Paper indicated that due to rising prices of
real estate, the tax incidence applicable on real estate transactions in the
form of stamp duty and capital gains tax can encourage tax evasion through
under reporting of transaction price which leads to both generation and
investment of black money.
§ There has been rapid urbanization in India and up-gradation of city
infrastructure by the governments resulting into growth in real estate and
resultant tax revenue.
§ A number of tax concessions have been given to this sector.
§ There are several parties involved in this sector viz. land owners,
developers, sellers, buyers, contractors and real estate agents all of whom may
be liable to pay income tax.
§ The sources of investment in real estate suggest possible transfer
of money from untaxed sources or unaccounted funds.
(l) GST for real estate sector
Report of the Task Force on Implementation of the
Fiscal Responsibility to Budget Management Act, 2003 observes that three taxes
- Cenvat on raw materials, sales tax on the works contract and stamp duty - all
constitute incentives to transact using ‘black money’. Fair taxation
of real estate with tax credits for raw materials, as is the case for
any other industry, improved tax compliance in the property tax, a reduced role
for black money and a reduced role for the criminal elements in the real estate
sector. At a conceptual level, under a VAT, sales, rentals, and rental values
of immovable property should be taxed and credit be given for the VAT embedded
in purchases. Immovable property that generates housing services should be
treated in the same manner as other service providers. The Task Force
recommended a strategy for integrating the real estate sector in the
Central-GST :
(i) Existing stamp duty should be removed to facilitate
input credits.
(ii) The Central-GST should apply to all newly constructed
properties (residential or commercial). If self-used by the person who constructed it, the Central-GST should be
applied on the cost of construction. If it is sold or transferred, the
Central-GST should be applied on the consideration received at first transfer
or sale. In both cases, credits would be obtained for the Central-GST embedded
in the raw materials used in construction.
(iii) Rental charges received in respect of immovable
property used for commercial purposes should be charged to Central-GST. Rental
charges or imputed rental values of residential properties should be exempt
from Central-GST.
(iv) All secondary market transactions in immovable
properties should be liable to GST on the difference between the sale proceeds
and the purchase price, payable by the purchaser of the immovable property.
(v) The proceeds from the levy of Central-GST on immovable
property should form part of the divisible pool.
(vi) The State performs essential asset registry functions,
and enforces property rights associated with them. These functions are
comparable to those of a depository on the markets. The registration fees can
be interpreted as user charges for these record keeping functions. States may
levy a registration fee at Rs. 200 or less per transaction in immovable
property.
The Task Force
observes that GST offers compliance compatible incentive, which can convert
this important sector into a part of the legitimate economy, with
taxation being applied as a level playing field. The integration of
the real estate sector into the Central GST may set the stage for
transforming that sector in a way that is reminiscent of the
aftermath of opening up to gold imports in the 1990s. However, the Finance
Minister in his Budget speech advises us to wait up to 2010 for major policy
action, ‘that we set April, 2010 as the date of introducing GST’.
Emergence of RERA
and understanding its certain concepts
The Real Estate Regulations Act (RERA)
was introduced in 2016 to protect the interests of the home buyers. The main
aim of RERA is to provide relief to the buyers from the possible malpractices
of unfair builders.
In order to enhance the transparency in
transactions in the real estate sector, the RERA specifies certain norms for
building and development of real estate and it has provided several rights to
the home buyers and has also specified certain rules and regulations to be
followed by all builders/ developers.
Moreover, the RERA also specifies the
creation of a Real Estate Authority and Appellate Tribunal for each state. In
case of any wrongdoing by the builder/developer, the home buyer can also file a
complaint to this authority.
Section 2 (e) of the RERA, defines an
apartment as follows:
“apartment” whether called block,
chamber, dwelling unit, flat, office, showroom, shop, godown, premises, suit,
tenement, unit or by any other name, means a separate and self-contained part
of any immovable property, including one or more rooms or enclosed spaces, located
on one or more floors or any part thereof, in a building or on a plot of land,
used or intended to be used for any residential or commercial use such as
residence, office, shop, showroom or godown or for carrying on any business,
occupation, profession or trade, or for any other type of use ancillary to the
purpose specified;
The RERA makes it mandatory for all
commercial and residential real estate projects where the land is over 500
square metres or of 8 (Eight) apartments, to register with the Real Estate
Regulatory Authority (RERA) for launching a project, in order to provide
greater transparency in project-marketing and execution.
The real estate industry uses three
different kinds of terminology while defining the area of a property and these
three kinds of phraseology are carpet area, built-up area, and super built-up
area. So, these three terms convey entirely three different things so far as
measurement of area of a property is concerned. In order to provide
transparency in property deals and to help the home buyers it has been made
mandatory for the developers to disclose the size of their apartments, on the
basis of carpet area (i.e., the area within four walls) with usable spaces,
like the kitchen and toilets.
According to the RERA carpet area is
defined as 'the net usable floor area of an apartment, excluding the area
covered by the external walls, areas under services shafts, exclusive balcony
or verandah area and exclusive open terrace area, but includes the area covered
by the internal partition walls of the apartment'.
“Single residential unit” means a
self-contained residential unit which is designed for use, wholly or
principally, for residential purposes for one family-para 2 of Notification
No.12/2017-CT (Rate) and No.9//2017-IT(Rate) both dated 28.06.2017, effective
from 01.07.2017.
An occupancy certificate (OC), issued by
the local authorities, certifies that a building is fit for occupation and has
been constructed as per the approved plan and in compliance with local law
Tamil Nadu Real
Estate Regulatory Authority holds that Rights of buyer of flat are protected
under RERA
The Tamil Nadu
Real Estate Regulatory Authority (TNRERA) in the case of K.
Balasubramaniyan v. G.K.S. Technology Park (P.) Ltd. [C. No. 001 of 2020, dated
19.04.2021] held that the sale of a common area measuring about 230 square feet
by the Builder/Developer G to two home buyers as null and void and imposed a
penalty of Rs. 5 lakhs.
In this petition B, the appellant, said
he and his wife had bought a flat in the second floor in the. builder's project
in an area in Chennai in 2019 and the building apartment had a built-up area of
a specified square feet with corresponding share in undivided portion of land
accompanying the built-up area.
The appellant alleged that the developer
sold the area specified as a common corridor measuring about 230 square feet in
the approved building area to two apartment buyers in the project for a certain
sum and sought relief against the sale.
In its response, the builder argued that
the said two home buyers bought the adjacent (opposite) flats located in the
fourth floor along with the common corridor as they wanted to enclose a small
area to connect the two flats and amalgamate into a single unit.
TNRERA ruled that as per provisions of
section 17(1) of the RERA "the developer has no right to sell the common
area to individual allottees. The Developer has no right or authority to sell
the corridor space constituting common areas under sections 2 (n)(ii) and 2(n)
(viii) of the RERA to any individual allottee as the corridor space is for the
use of all allottees to be vested and maintained by the Association of
allottees."
The Authority directed the developer to
execute a rectification deed in the jurisdictional Sub-Registrar Office
deleting the common area from the sale deed on or before a specified date and
refund the amount and restore the common order as per approved plan on or
before another specified date.
The relaxation of Foreign Direct
Investment (FDI) rules for the real estate sector, opening up of the domestic
fund industry to foreign investment, introduction of institutional frameworks
like the Real Estate Investment Trust (REIT) and Infrastructure Investment
Trust (InvIT) are expected to help raise funds to support projects and
accelerate growth. However, the REITs & InvITs have also to take off in
real terms to have a perceptible impact.
Real Estate is an ever green investment
option in India and it has always given good returns. It can be a residential
or commercial property. Real Estate gives recurring income in the form of rent
and appreciation in value in case of re-sale. As it gives good return, so
taxation, whether direct or indirect, in real estate sector has always been a
very critical issue. In the recent past, changes have been made in the
different tax laws to bring various activities, income, charges or fee etc.
under the tax regime. Government has also made various kinds of provisions in
the recent budgets to curb the generation of black money through real estate
transactions.
Legal Framework
Some
general and specific sections relating to real estate sector of the Act are
given below:
|
Section |
Brief
description |
|
23(5) |
Vacancy
allowance to real estate developers - Deemed Taxability of unsold stock of
house property after 1 two year of lying vacant |
|
28
to 44 |
These sections
provide for allowance of expenditure, depreciation, interest etc. while
computing the profits and gains from business and profession. |
|
43CA |
|
|
45(2) |
Capital gains
on conversion of capital assets into stock-in-trade |
|
45(5A) |
Gains in case
of Joint Development Agreement (JDA) |
|
50C |
Determining the full value of
consideration in cases of transfer of immovable property - Deemed capital
gain in real estate transactions |
|
50D |
Fair Market Value deemed to be full
value of consideration where the consideration received or accruing on
transfer by an assessee, of a capital asset is not ascertainable or cannot be
determined. [With effect from Assessment year 2013-14] |
|
56(2)(viib) |
It provides
that where a closely held company issue shares to a resident at a premium in
a manner that the issue price exceeds the Fair Market Value (FMV), the
difference between the issue price and FMV of such shares is to be taxed in
the hands of the company issuing the shares. |
|
56(2)(vii)(b) |
As per
provisions of this section, the excess of stamp duty valuation of immovable
property over its actual sales consideration, if it is more than Rs. 50,000,
is taxable in the hands of individual and HUF only (buyer). |
|
68 |
Introduction of
own money as unsecured loans i.e. unexplained cash credit |
|
69C |
Unexplained
Expenditure |
|
80-IB(10) |
This section
provides for deduction in respect of profits and gains to an undertaking
engaged in developing and building housing projects subject to fulfillment of
certain conditions. NOTE : Section
80-IB(10) was introduced in the Income Tax Act, 1961 in 1998 and abolished
w.e.f. 01.04.2016 |
|
80-IBA |
Deduction to
Builder/Developers for affordable housing NOTE : Project
approval by a competent authority - On or after 01.06.2016 but on or before
31.03.2022 |
|
194-IA |
It provides for
deduction of tax at source by purchaser being an Individual and HUF on sales
consideration of immovable property. |
|
194-IC |
TDS from
Payment under Specified Agreement under Section 45(5A) |
Newly constructed unsold flats by the Builders and Developers - Vacancy allowance to real estate developers - Deemed Taxability of unsold stock of house property after 1 two year of lying vacant [Section 23(5)]
§ Where the property consisting of any building or land appurtenant there to is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.
§ Afterwards the same will be taxable as Income from House Property even if the Developer has developed flats or commercial premises for sale and not for subletting. However, the Standard deduction would be allowed under Section 24(a), while computing notional income of unsold flats held as stock-in-trade.
In CIT v. Ansal Housing & Construction Ltd. (2016) 389 ITR 373
(Delhi) and in CIT v. Sane and Doshi Enterprises (2015) 377 ITR 165 (Bom.),
it has been held that Sections 22 and 23 are applicable to assesses, who are
engaged in business of construction of house property and are therefore liable
to pay tax on the annual letting value of the unsold flats as “Income from
House Property”.
NOTE :
SLP granted against High Court's ruling that
assessee, engaged in business of construction of house property, would be
liable to pay tax on ALV of flats lying unsold during year.
§ The purpose of
introduction of the said section appears two fold, one reason is to get more
tax and another reason is to penalise developer if they are not able to sale
flats which are completed so they may reduce the price and sell the same so
people will get flats at some discount and developer will be able to repay loan
taken on construction of the project.
The
annual value of such property shall be computed as under:-
|
Period |
Annual Value |
|
Up to two year from the end of the financial year in
which the certificate of completion of construction of the property is
obtained from the competent authority |
Annual value of such property shall be taken to be
nil. |
|
After the completion of aforesaid period |
Annual value of such property shall be computed as
per other provisions. |
Sections 28 to 44
Under the Income-tax Act, 1961, there is
no specific provision as such regarding taxability of income of the real estate
developers and therefore, general provisions of computation of business income
prescribed under sections 28 to 44 of the Income-tax Act shall be applicable
along with other relevant provisions of the Act. Sections 28 to 44 provide for
allowance of expenditure, depreciation, interest etc. while computing the
profits and gains from business and profession.
Expenses falling under explanation to section 37 of the Income-tax Act
§ In the case of developers and builders, it has also been noted that
documents are invariably found during the course of search operation wherein
illegal payments made to State Governments officials, Local body officials,
tehsildars, patwari, Registrars, licensing authority etc. are noted.
§ In such case, the Assessing Officer should disallow these expenses,
as such payments are hit by Explanation to Section 37 of the Income Tax Act
1961.
Sale
of immovable property held as stock-in-trade - Determining the Full value of
consideration for transfer of assets other than capital assets [Section 43CA]
Section 43CA provides that where an
immovable property, held as a capital asset or stock in trade, is transferred
at a value less than the stamp duty value (being the ready reckoner rate and
also known as circle rate), then this stamp duty value will be deemed to be the
consideration for such a transfer, if it exceeds 10% of the amount of transfer
value. Accordingly, the developer will be liable to pay tax based on such stamp
duty value.
Sale value of consideration [Proviso to Section
43CA(1)]
|
Assessment year |
Deemed to be full
value of consideration |
|
From Assessment year
2021-22 |
Where stamp duty value
does not exceed 10% of the consideration, the consideration so received shall
be deemed to be the full value of the consideration |
|
|
20% from 12.11.2020 to
30.06.2021 for only primary sale of residential units of value up to Rs. 2
crores. |
|
For Assessment years
2019-20 & 2020-21 |
Where stamp duty value
does not exceed 5%of the consideration, the consideration so received shall
be deemed to be the full value of the consideration |
|
Upto Assessment years
2018-19 |
Where sale value of a
land or building or both, is less than stamp duty value, then stamp duty
value will be deemed to be full value of consideration. |
Determining the full value of consideration in cases of transfer of immovable property - Deemed capital gain in real estate transactions [Section 50C]
As
per Section 50C of the Income-tax Act, 1961 when a capital asset, being land or
building or both, is transferred for a consideration which is less than the
value assessed or assessable by any authority of a State Government for the
purpose of payment of stamp duty in respect of such transfer, then such stamp
duty value is taken as full value of consideration under section 50C of the
Act.
|
From Assessment year 2021-22 |
No adjustment if variation
between stamp duty value & sale consideration does not exceed 110% [Third
proviso to section 50C]
|
|
For Assessment years 2019-20 to 2020-21 |
No adjustment if variation
between stamp duty value & sale consideration does not exceed 105% [Third
proviso to section 50C] |
|
Upto Assessment year 2018-19 |
Section 50C provided that
if the sale consideration of an immovable property is less than the value
adopted by State Government (stamp valuation authority) then such value
adopted by stamp valuation authority will be deemed to be full value of
consideration. |
NOTE : Section 50C mandates capital gain taxation, while Section 43CA taxes business income.
Capital gains on conversion of capital assets into stock-in-trade [Section 45(2)]
Section
45(2) states that conversion of the capital asset by the owner of a capital
asset into, or its treatment by him as stock-in-trade of a business carried on
by him shall be chargeable to income-tax as his income of the previous year in
which such stock-in-trade is sold or otherwise transferred by him and, for the
purpose of section 48, the fair market value of the asset on the date of such
conversion or treatment shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of the capital
asset and would determine capital gain or loss respectively.
Nature
of transaction
Conversion of capital
assets into stock-in-trade.
Year
of transfer
On the date of conversion
of investment into stock-in-trade.
Capital
Gains assessable in the hands of
In the hands of owner of
such asset.
Year
in which chargeable
Year in which sale or
transfer of stock-in-trade takes place. In other words, Capital Gain shall be computed
in the year when such converted asset is sold
Period of holding of such capital asset
The period of holding of
such capital asset shall be reckoned from the date of conversion or treatment.
Treated
as business income
The difference between
the sale price and the fair market value as on the date of conversion shall be treated
as business income and taxed income under the head ‘Profits and Gains of
Business and Profession’.
NOTE
: Business income also to be calculated in the year of sale
Essential
conditions
Section 45(2) is
applicable if the following conditions are satisfied:—
(i) To attract Section 45(2), asset should be
capital asset as defined under Section 2(14). Remember, motor cars, furniture
are not capital assets.
(ii) The conversion of a capital asset to
stock-in-trade is treated as transfer w.e.f. assessment year 1985-86. Transfer
shall be deemed to have taken place in the year in which asset is so converted
(sold) i.e., Capital gain will be computed in the year in which such converted
stock is sold.
(iii) Stock-in-trade is not a capital asset. But
conversion of capital asset into stock-in-trade is a transfer. In other words,
Section 45(2) is applicable when capital asset (not personal effect) is
converted into stock-in-trade. Asset should be converted into stock-in-trade.
If they are treated as business fixed assets, Section 45(2) is not applicable.
(iv)
Fair Market Value (FMV) on date of transfer is sale consideration.
(v)
Sale price less Fair Market Value (FMV) on date of transfer is business
income.
PROVISIONS ILLUSTRATED
Mr. “X” purchased a plot
in the year 2001 for Rs. 10,00,000 and converted it into stock-in-trade of his
business of Real Estate in the year 2021-22. The Fair Market Value of such plot
on the date of conversion is Rs. 1,00,00,000. Such Plot after conversion is
sold for Rs. 1,20,00,000 in the year 2022-23. The capital gain and business
Income shall be computed in the following manner:
SOLUTION
|
S.
No. |
Particulars |
Amount
(in Rs.) |
|
(i)
|
Sale
Consideration (F.M.V.) |
1,00,00,000
|
|
(ii)
|
Less
: Indexed Cost of acquisition 10,00,000
x 317
100 |
31,70,000 |
|
(iii)
|
Long-term
capital gain |
68,30,000
|
BUSINESS INCOME
|
S.
No. |
Particulars |
Amount
(in Rs.) |
|
(i)
|
Sale
Consideration of converted plot |
1,20,00,000
|
|
(ii) |
Less
: Cost of such plot (Treated as stock after conversion) |
1,00,00,000 |
|
(iii)
|
Business
Income |
20,00,000
|
Gains
in case of Joint Development Agreement [Section
45(5A)]
Salient features of definition of Specified Agreement
(a) It is a registered
agreement
(b) One of the two
parties to the agreement is the person who owns land or building or both.
(c) Another party to the
agreement is real estate developer.
(d) Under the agreement,
a real estate project will be developed by the developer on such land or
building or both.
(e) Consideration is
payable by the developer in the form of a share in the developed land or
building with or without cash consideration.
In other words, Joint
Development Agreement (JDA) is an arrangement in which land owner introduces
land and developer agrees to develop land for agreed consideration in cash or
kind or both.
Conditions for applicability of Section 45(5A)
Section 45(5A) is applicable if the
following conditions are satisfied: -
(i) Applicable in respect of JDA entered on or after 01.04.2017 (i.e., with
effect from Assessment year 2018-19)
(ii) Eligible Assessee
The
assessee is an individual or a Hindu undivided family. He owns land or building
or both. In other words, the provisions of section 45(5A) under collaboration
agreement will be applicable only in case the land owner is an Individual or an
HUF.
(iii) Transfer of Land/Building to Developer
The
Individual/HUF (who owns land or building or both) transfers such land or
building to developer. The subject asset is land or building or both, whether
LTCA or STCA.
(iv) JDA should be registered
Applicable only where a registered
agreement/deed is executed.
(v) Stamp duty value is taken as on the date of issue of completion certificate and not as on the date of original transfer.
(v) Specified Agreement
The
assessee has been entered into a Specified Agreement (Joint Development
Agreement) with a builder/developer for the development of a project on land
provided by him.
If
the above conditions are satisfied, the capital gains shall be chargeable to
income-tax as income of the previous year in which the certificate of
completion for the whole or part of the project is issued by the competent
authority.
Taxability
of Joint Development Agreement from the point of view of Land Owner
Land owners liable
to capital gains only when the builder completes the construction and gets the
completion certificate
As per section 45(5A),
capital gains to the land owner arise only after construction of the property
is completed and the completion certificate is obtained from the competent
authority by the builder/ developer.
Taxability of Joint Development Agreement from the point of view of Builder Developer
For the builder/developer, such property built by them will be considered as stock-in-trade. Therefore, the nature of income from the sale of such property shall be ‘Income from business and profession’.
The income will include
proceeds from sale of such property and he shall be allowed to deduct the
business expenses incurred on development of such property. The balance will be
taxable.
Fair Market Value deemed to be full value of consideration in certain cases [Section 50D]
[With effect from Assessment year 2013- 14]
Accordingly, a new section 50D has been inserted to provide as under:
“Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.”
In some recent rulings [Dana Corporation, In re (2010) 186 Taxman 187 (AAR-New Delhi); AMIANTIT International Holding Ltd., In re (2010) 189 Taxman 149 (AAR-New Delhi); Good Year Tyre & Rubber Co., In re (2011) 199 Taxman 121 (AARNew Delhi), it has been held that where the consideration in respect of transfer of an asset is not determinable under the existing provisions of the Income-tax Act, then, as the machinery provision fails, the gains arising from the transfer of such assets is not taxable.
Capital gains are calculated on transfer of a capital asset, as sale consideration minus cost of acquisition.
Cases when full value of consideration is determined on notional basis
|
Section |
Particulars |
Amount which is taken as full
value of consideration |
|
50D |
Where the consideration received
or accruing as a result of the transfer is not ascertainable or cannot be
determined |
Fair market value of the said
asset on the date of transfer (Applicable from assessment year 2013-14). |
“Fair
Market Value” : This is the price at which the property (asset) would normally
be sold, if it was sold in the open market on a particular date.
Conditions for
applicability of provision of section 50D
(i) Consideration must be received or Accruing
If consideration is not received or
accrued in the previous year, then provision will not apply.
For example, if a consideration or part of
consideration shall be received or accrued in future, then the provision will
not apply. In case a developer provides some of constructed area, to land
owner, on completion of project, then the consideration to be received in kind
in future, is not consideration received or accrued, therefore, in such cases
the provision of section 50D will not be applicable.
(ii) There must
be transfer of capital asset
If there is no transfer, then section will not apply.
Here transfer of capital asset can be regarded a definite and absolute
transfer. A transfer of some of rights for limited purposes cannot be regarded
as transfer of capital asset in the context of tax on capital gains. There
should not be a situation of contingent transfer which can be revert back on
some contingencies. The transfer must be full and final. Readers are requested
to go through definition of ‘transfer’ in relation to a capital asset provided
in section 2(47) of the Act, and also to see exemption from meaning of transfer
as provided in section 47 of the Act.
(iii) Consideration should not be ascertainable or
cannot be determined
Thus if consideration can be ascertained or
determined, even in future, then this provision may not be applicable. For
example, if a part of consideration is given in kind- say some of constructed
area in a project, then the situation is one in which consideration will be
received and it will be ascertainable in future so in such situation section
50D may not be applicable depending on facts of the case. In other words, where
the consideration received or accruing as a result of the transfer of a capital
asset by an assessee -
(a) is not ascertainable, or
(b) cannot be determined,
v
then,
for the purpose of computing income chargeable to tax as capital gains, the
fair market value of the said asset on the date of transfer shall be deemed to
be the full value of the consideration received or accruing as a result of such
transfer.
NOTE
:
§ This provision is only
for the purpose of computing income chargeable to tax as capital gains. This
provision is not applicable in case of business income or income falling under
head ‘other sources’ or “income from house property” etc.
§ Section 50C is
applicable to real estate transactions, including urban and agricultural land.
However, section 50D is not limited to real estate capital assets. (Other
capital assets - Gold, works of Art, historical treasure, antique, vehicles and
software from capital of a person).
Introduction of
unaccounted money
The introduction of
unaccounted/undisclosed money in the real estate sector, focused its
examination on two important book entries - ‘share premium’ and ‘unsecured
loan’. The results of the examination are given in the succeeding paragraphs.
Share application
money pending for allotment of shares
As per section 42 of the Companies Act,
2013, the company shall allot shares within 60 days from the receipt of the
share application money. If it fails to allot the share within 60 days, share
application money shall be refunded within 15 days from the expiry of 60 days.
If the company fails to repay the application money within the aforesaid
period, it shall be liable to repay that money with interest at the rate of 12
per cent per annum from the expiry of the 60th day.
Checklist
for Verification
§ Whether share application money was either pending for allotment of
shares or due for refund beyond the period prescribed as per Companies Act ?
§ Whether share application money received was higher than the
authorized share capital ?
Thus, the possibility of routing its own
un-accounted money through share application money by the assessee cannot be
ruled out.
NOTE :
There is no provision in the Income Tax
Act to deal with the share application money which is pending for allotment of
shares for long period to prevent its misuse which is a lacuna in the Act.
Issue of shares
at high premium
Share premium is the amount paid by the
subscriber/shareholder to a company for acquiring the shares of the company
over and above the face value of the shares. Rule 11UA of Income Tax Rule, 1962
read with section 56(2)(viia) and (viib) of the Act recognized following two
methods for fair market value (FMV) of shares and securities.
§ The ‘Net Assets Value’ (NAV) method represents the value of the
business with reference to the asset base of the entity and the attached
liabilities on the valuation date.
§ The ‘Discounted Free Cash Flow’ (DCF) method values the business by
discounting its free cash flows for the explicit forecast period and the
perpetuity value thereafter.
The provisions mentioned under Rule 11UA
of the Income Tax Rules, 1962 read with section 56(2)(viib) of the Act, for
valuation of FMV of unlisted shares and equities for levy of tax on the
difference between the issue price and the FMV, are applicable only when the
entities subscribing shares at premium are residents.
Section 56(2)(vii)(b) was suitably
amended through the Finance Act, 2013, so as to tax the excess of stamp duty
valuation of immovable property over its actual sales consideration, if the
difference is more than Rs. 50,000, in the hands of the purchaser as ‘Income
from other sources’ if the purchaser was individual or HUF.
As per section 56(2)(vii)(b), if the date
of agreement and date of registration of property is not same and the amount of
sale consideration is paid in cash, in such a case fair market value prevailing
on the date of registration of property is to be taken as sale value. Further,
the difference between the actual purchase price and fair market value is to be
treated as income from other sources in the hands of buyer.
Introduction of
own money as unsecured loans i.e. unexplained cash credit [Section 68]
v Where any sum found
credited
v In the books of the
assessee maintained for any previous year,
v and the assessee offers
no explanation about
v the nature and source thereof,
v or the explanation
offered by him
v is not satisfactory in
the opinion of Assessing Officer,
v then the sum so credited
may be charged to tax as the income of that previous year
Conditions
for the applicability of section 68
The
conditions for the applicability of section 68 are:—
(i)
There
has to be credit of amounts in the books maintained by the assessee
(ii)
There
must exist books of accounts maintained by the Assessee
(iii)
Assessee
should file a valid confirmation
(iv)
Such
credit has to be a sum of money during the previous year
(v)
For
invocation of section 68, proper enquiry is needed
Test to be satisfied -
Documentation to be maintained in order to satisfy the test under section 68
Verify
:
|
Identity of the
creditor/lender |
Identity can be proved
by maintaining a record of documents such as name, address and PAN number of
the lender/creditor. |
|
Creditworthiness of
the creditor/lender |
Creditworthiness can
be proved by maintaining a record of the documents such as return of income,
wealth tax return and audited financial statement. |
|
Genuineness of the
transaction |
Genuineness of the
transaction can be proved by maintaining a record of documents such as
invoices/ vouchers, purchase orders, loan agreement (in case of loan
borrowed), bank statement, etc. |
Requirement
to prove source of source for loans and borrowings [Section 68 amended with
effect from Assessment year 2023-24]
Vide
Finance Act, 2022, with effect from Assessment year 2023-24 it was provided
that the nature and source of any sum, whether in form of loan or borrowing, or
any other liability credited in the books of an assessee shall be treated as
explained only if the source of funds is also explained in the hands of the
creditor or entry provider.
However,
this additional onus of proof of satisfactorily explaining the source in the
hands of the creditor, would not apply if the creditor is a well regulated
entity, i.e., it is a Venture Capital Fund, Venture Capital Company registered
with SEBI.
Venture
Capital Funds
Venture
capital funds are pooled investment funds that manage the money of investors
who seek private equity stakes in startups and small- to medium-sized
enterprises with strong growth potential. These investments are generally
characterized as very high-risk/high-return opportunities.
Venture capital company [Form of private equity]
Venture
capital firms are a type of investment firm that fund and mentor startups or
other young, often tech-focused companies. Similar to private equity firms,
Venture capital firms use capital raised from limited partners to invest in
promising private companies.
Unexplained
expenditure [Section 69C]
As per section 69C unexplained
expenditures are to be disallowed treating as deemed income of that particular
Assessment year. Therefore disallowance made under section 69C and added to the
assessed income. Thus, the Assessing Officers to implement the provisions of
the section 69C.
Ingredients of section 69C
(i) there is
an assessee
(ii) in any
financial year the assessee has incurred any expenditure
(iii) the assessee offers no explanation about the
source of such expenditure or part thereof or the explanation offered by him is
not, in the opinion of the Assessing Officer, satisfactory Upon satisfaction of
all the abovementioned conditions
Ø
the
amount covered by such expenditure or part thereof may be deemed to be the
income of the assessee for that financial year in which such expenditure
incurred;
AND
such
unexplained expenditure which is deemed to be the income shall not be allowed
as a deduction under any head of income.
Incurrence
of expenditure
The
first test laid down in section 69C is that an assessee must have incurred some
expenditure.
Maintenance
of Books of Accounts
Not
Compulsory
Explanation
to Assessing Officer
Assessing
Officer can ask for the source of “incurred expenditure”.
Affordable criteria and allowance of deduction [Section 80-IB(10)]
Section 80-IB(10) of the Income Tax Act, 1961 provides for hundred per cent deduction of profit derived from an undertaking engaged in the business of development or construction of housing projects subject to fulfillment of certain conditions viz.
§ completion of the project within the prescribed period,
§ size of plot of land which has a minimum area of one acre,
§ maximum built-up area of residential unit up to 1,000 sq. ft. for
Delhi and Mumbai and its outskirts within 25 Kms from its municipal limits and
1,500 sq. ft. for other areas,
§ not more than one residential unit in the housing project is
allotted to any person not being an individual.
§ non-allotment of unit to the spouse or minor children of an
individual to whom unit is allotted in the housing project, etc.
In addition, section 80AC provides that the return of income for an assessment year has to be filed before the due date specified under the Act to avail deduction under section 80-IB(10) in that assessment year. For claiming deduction under section 80-IB(10), the assessee is required to file a certificate from chartered accountant in the prescribed form 10CCB.
Deduction to Builder/Developers for affordable housing [Section 80-IBA]
In a bid to give impetus to
affordable housing, section 80-IBA was introduced in the Finance Act, 2016,
with effect from 01.04.2017 which grants profit-linked tax exemption.
To develop the affordable housing
in India, the central government had provided deduction in respect of profits
and gains from housing projects for small size of houses. Section 80-IBA of the
Act provides that,
(i) 100% of profits and gains derived from the
business of developing and building housing projects or rental housing project
(ii) The project should be approved by the
competent authority between 01.06.2016 to 31.03.2022;
(iii) It should be completed within 5 years from the
date of approval by the competent authority.
The
key regulations for claiming tax exemption under section 80-IBA of the Income Tax
Act are as under:
|
S. No. |
Particulars |
Conditions |
|
1. |
Project
approval by a competent authority |
On
or after 01.06.2016 but on or before 31.03.2022 |
|
2. |
Project
completion |
Within
five years from the date of approval |
|
3. |
Size
of a plot of land |
§ Not less than 1,000
sq. m in cities such as Delhi, National Capital Region (limited to Delhi,
Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad), Mumbai (whole of
Mumbai Metropolitan Region), Chennai, Hyderabad and Kolkata
§ Not less than 2,000
sq. m in any other place |
|
4. |
Carpet
area of a residential unit |
§ Does not exceed 60 sq. m in cities such as Delhi, Delhi National
Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram,
Faridabad), Mumbai (whole of Mumbai Metropolitan Region), Chennai, Hyderabad
and Kolkata § Does not exceed 90 sq. m in any other place
|
|
5. |
Stamp
duty value of residential unit |
Does
not exceed Rs. 45,00,000
|
|
6. |
Utilisation
of the floor area ratio |
Not
less than 90% in cities such as Delhi, Delhi National Capital Region (limited
to Delhi, Noida, Greater Noida, Ghaziabad, Gurugram, Faridabad) Mumbai (whole
of Mumbai Metropolitan Region), Chennai, Hyderabad and Kolkata Not less than
80% for any other place
|
NOTE
§ While a tax incentive has been provided by means of a tax holiday,
a company may have to pay MAT at the rate of 15% plus applicable surcharge and
cess.
§ Even an LLP which undertakes an affordable housing project, it will
also be liable to pay AMT at the rate of 18.5%^ assuming it claims deduction under
section 80-IBA.
Compliance of TDS related provisions to Real Estate sector
[1] TDS from Payment on
Transfer of Certain Immovable Property other than Agricultural Land [Section 194-IA]
§ Section 194-IA was introduced through the Finance Act, 2013
(effective from 01.06.2013) requiring that in case of transaction of immovable
property involving consideration of Rs. 50 lakh or more, TDS at the rate of one
per cent would be deducted by a buyer being an individual or HUF while making
payment(s) to seller
§ This has been done so that the non-reporting on the part of the
seller could be monitored through an alternative source and also that tax could
be collected in advance.
§ For depositing TDS with the Government by the buyer, tax deduction
account number (TAN) is not required. Instead, the buyer can deposit the tax
with the Government using his PAN.
Who
is responsible for tax deduction under Section 194-IA
Any person responsible for paying any sum to a
resident transferor by way of consideration for transfer of an immovable
property (i.e., building or part of building or any land other than
agricultural land) is liable to deduct tax at source under section 194-IA. In
other words, as per this section the buyer has to pay TDS and not the seller.
Threshold
Limit
Rate
of TDS
TDS is to be deducted at the rate of 1% of such sum
(consideration) paid or credited to the resident or the stamp duty value of
such property, whichever is higher. If the PAN number of the seller is not
available then the TDS is required to be deducted @ 20%.
Non-applicability of TDS under section
194-IA
§ TDS provisions of
section 194-IA shall not apply if a person acquires rural agricultural land in
India.
§ In case the
consideration paid for the transfer of immovable property and the stamp duty
value of such property are both less than fifty lakh rupees, then no tax is to
be deducted.
§ The provisions of
section 194-IA is not applicable where section 194LA regarding compulsory
acquisition is applicable. Since tax deduction at source for compulsory
acquisition of immovable property is covered under section 194LA, the
provisions of section 194-IA do not get attracted in the hands of the
transferee in such cases.
Consequences
of non-compliance by the payer of immovable property for non-deduction or
non-payment and non-filing of Form 26QB
(i) Interest
if there is a non-deduction or late deposit after deduction of tax [Section
201]
(ii) Fee for default in
furnishing statement [Section 234E]
(iii) Penalty for failure to furnish statements of TDS (26QB)
[Section 271H]
(iv) Penalty for non-issuance of TDS
Certificates [Section 272A(2)(g)]
If
the deductor is not able to provide the certificate within due date, then a
penalty of Rs. 500/- for every day during which the failure continues per day
of delay per certificate has to be paid. Remember that penalty cannot exceed
the TDS amount deducted for the quarter.
[2] TDS from Payment under Specified Agreement
under Section 45(5A) [Section 194-IC]
As
per section 194-IC of Income Tax Act, 1961 inserted by the Finance Act, 2017,
with effect from 01.04.2017, any person responsible for paying to a resident
any sum by way of consideration (not being consideration in kind) under a joint
development agreement under ection 45(5A), is responsible for tax deduction
under section 194-IC.
Meaning
of specified agreement under Section 45(5A)
Specified
agreement under section 45(5A):-
(i) It means a
registered agreement in which a person owning land or building or both, agrees
to allow another person to develop a real estate project on such land or
building or both.
(ii) The
consideration, in this case, is a share, being land or building or both in such
project; Part of the consideration may also be in cash.
In other words, Joint Development Agreement “JDA” is
an arrangement in which land owner introduces land and developer agrees to
develop land for agreed consideration in cash or kind or both.
Who
is responsible for tax deduction
Any person responsible for paying to a resident any
sum by way of consideration (not being consideration in kind) under a joint
development agreement, is responsible for tax deduction under section 194-IC.
Time
of tax deduction
Tax is deductible at the time of credit of such sum to
the account payee or at the time of payment thereof in cash or by issue a
cheque/draft or any other mode, whichever is earlier.
Threshold
limit
NIL
Rate
of deduction
Tax
is deductible at the rate of 10 per cent. If PAN of recipient is not available,
tax is deductible at the rate of 20 percent.
Consequences
of non-compliance of TDS provisions
(i) Interest
if there is a non-deduction or late deposit after deduction of tax [Section
201]
(ii) Fee for default in
furnishing statement [Section 234E]
The late fee under section
234E of Rs. 200 for every day during which the failure continues will be levied
subject to the amount of tax.
(iii) Penalty for failure to furnish statements of TDS (26QB)
[Section 271H]
(iv) Penalty for non-issuance of TDS
Certificates [Section 272A(2)(g)]
If
the deductor is not able to provide the certificate within due date, then a
penalty of Rs. 500/- for every day during which the failure continues per day
of delay per certificate has to be paid. Remember that penalty cannot exceed
the TDS amount deducted for the quarter.
Issue of On-Money
- Charging of on money on the sale of flats/ properties.
What is on-money
“on-money” is the the difference between the actual sale value and the value shown in the sale deed.
For example, if on a seized page “40% in
C” is written, a logical inference may be drawn that 40% of the sale
consideration has been received in cash.
In appropriate cases, if the facts
suggest, the existence of the business practice of charging of on-money
throughout the year can reasonably be presumed following the ratio laid down by
the Hon’ble Supreme Court in the case of CST v. HM Esufali, HM Abdulali (1973)
90 ITR 271(SC).
The Assessing Officer for investigating
all such cases of on-money should follow a systematic and organized approach.
Firstly, the data of booking of all the flats/ plots, as per the regular books
of account should be arranged date-wise along-with the rate charged. It is
pertinent to note here that the data should be arranged on the basis of the
date of allotment of the immovable property and not on the basis of the date on
which the immovable property is registered, as the actual rate at which
transaction is carried out is finalized at the time of allotment/ booking and
the on-money is also generally charged at the time of booking/ allotment of the
property. If there is substantial variation in the rate of booking of the
flats/ plots in a particular period, it prima-facie indicates that the assessee
might have charged on-money.
As a second step, the actual rate of the
flats/ plots should be worked out. The data relating to the actual rate of the
flat can be easily obtained from various brochures, advertisements, website,
project launch documents, seized documents etc. of the assessee. To work out
the actual base rate of the flats, the extra rate charged for floorrise, view
premium etc. should be removed
Lastly, as a third step, the difference
between the actual base rate and the rate recorded in the regular books of
accounts should be worked out. This exercise should be done for all the flats
for which booking is being done by the assessee. The existence of the business
practice of receipt of on money throughout the relevant years can be reasonably
presumed, if the above factual data supports the view.
For example, if the base rate of a flat
in a project is Rs. 15,000 per square feet and a flat is booked in the regular
books of accounts at Rs. 12,000 per square feet. Then, the on-money for the
flat works out to Rs. 3,000 per square feet. Thus, on money should be
calculated for each flat by using the actual base rate of Rs. 15,000 per square
feet.
It has been observed that Assessing
Officer, while quantifying the on-money, usually applies a flat GP rate on the
total turnover, which is factually and legally not tenable. The GP rate
addition is not tenable in law especially in search cases, where assessments
under Section 153A/153C are to be made on the basis of seized incriminating
documents only. Thus, the on-money should be worked out by following the above
explained approach.
Section 69 : Purchase consideration is alleged to be
undervalued - Addition of undisclosed income can
be made where sale consideration of asset is underaccounted; no such addition
can be made where purchase consideration is underaccounted - Deletion of
addition is held to be justified
Assessee’s company BT purchased land for consideration of Rs.
1.57 crores. One Vatika group took over company BT and showed investment of Rs.
4.95 crores on account of purchase of land. This was done within a year of
purchase of land by assessee. Assessing Officer opined that actual purchase
price was Rs. 4.95 crores while assessee declared lesser purchase value at Rs.
1.57 crores, and later on through sale consideration received unaccounted
money. On appeal by the revenue the Court held that since this was not a
case where assessee accounted for lesser sale consideration but this was a case
of under accounted purchase consideration accordingly no addition could be made
on account of undisclosed income. Order of Tribunal is affirmed. [In favour of
assessee] (Block period 1998-99 to 2003-04) – [PCIT(C) v. Virender Kumar
Bhatia (2020) 268 Taxman 412
: (2019) 112 taxmann.com 379 (Del.)]
Unexplained money – On money -
Loose documents – There was no reliable or independent evidence to come to the
conclusion that the assesee had accepted on-money in the sale of the
constructed properties – Deletion of addition by the Tribunal is upheld
Dismissing the appeal of the
revenue the Court held that ; there was no reliable or independent evidence to
come to the conclusion that the assessee had accepted on-money in the sale of
the constructed properties. Accordingly the deletion of addition by the
Tribunal is upheld.—[PCIT v. Nishant Construction ( P) Ltd (2019) 260 Taxman
366: 101 taxmann.com 179 (Guj)]
NOTE :
SLP of revenue is dismissed - PCIT v. Nishant
Construction (P) Ltd (2019) 260 Taxman 365 (SC)
Unexplained investments –
‘On-Money’ – Sale of land – Burden is on the Department to show that ‘on-money’
consideration passed to the seller from the purchaser – Opportunity to
cross-examine the witnesses was not provided to the assessee – Addition was
deleted
Tribunal deleted the addition of
‘on-money’ said to have been received in respect of the land of the assessee
holding that unless it was established by the Department, that as a matter of
fact, the consideration passed to the seller from the purchaser, the Department
had no right to make any additions, especially since none of the witnesses were
examined and the assessee was not provided an opportunity to cross-examine
them.—[Sunita Dhadda v. DCIT (2012) 148 TTJ 719 (ITAT Jaipur) [High
Court affirmed the order of the Tribunal – D. B. ITA. No. 197 of 2012 dated
31.07.2017. On appeal by the Department SLP rejected – SLP (C) No. 9002
of 2018, dated 28.03.2018; CIT v. Sunita Dhadda (2018) 403 ITR 309 (St.) (SC)]
Section 69C “On Money”: If the
unaccounted expenditure incurred is from the ‘on-money’ received by the
assessee, then, the question of making any addition under section 69C does not
arise because the source of the expenditure is duly explained. It is only the
‘on-money’ which can be considered for the purpose of taxation. Once the ‘on
money’ is considered as a revenue receipt, then any expenditure out of such
money cannot be treated as unexplained expenditure, for that would amount to
double addition in respect of the same amount. - [CIT v. Golani Brothers
(2018) 300 CTR 245 (Bom.)]
SLP dismissed against High Court ruling that in absence of any tangible material available to prima facie show that assessee had received any money in cash on account of sale consideration of land, re-opening notice merely on basis of one Sauda Chitthi seized from third party but not acted upon, was unjustified
Section 69, read with sections 45 and 147, of the Income-tax
Act, 1961 - Unexplained investments (On money transactions) - Re-opening notice
was issued against assessee on basis of one 'sauda chitthi' seized during
search of premises of one RV. As per sauda chitthi, assessee had sold land for
sale consideration of higher amount. However, sale consideration in sale deed
executed by assessee in favour of one PK was for sale consideration of much
lesser amount. Therefore, Assessing Officer held that difference of two sale
amounts had escaped assessment by way of long-term capital gain. However, it
was to be noted that assessee was not signatory to sauda chitthi. Even
concerned persons who signed said sauda chitthi were not owners of land sold -
Sauda chitthi was not acted upon. Person who purchased land from assessee was
also not signatory to sauda chitthi. High Court by impugned order held that
since there was no tangible material available to prima facie show that
assessee had received additional sale consideration in cash, formation of
opinion that assessee had sold land for higher amount was only on surmises and,
therefore, re-opening notice was unjustified. Special Leave Petition against
said impugned order was to be dismissed. [In favour of assessee] (Related
Assessment year : 2009-10) - [ITO v. Chintan Jadavbhai Patel (2018) 254
Taxman 226 : 91 taxmann.com 426 (SC)]
Unexplained investments –
“On-Money” – No addition can be made on the basis of the documents found from
premises of third party neither the name of assessee was mentioned nor any
evidence was found for purchase of any property
Allowing the appeal of the
assessee, the Tribunal held that; no addition under Section 69 can be made in
case of assessee on basis of documents being found from premises of third party
where neither name of assessee was mentioned nor any document was found
evidencing fact that assessee had paid any cash as on-money to said party for
purchase of any property.
There had been a search
in the case of Panchsheel Group i.e. Ashray. During the course of the search,
the profit & loss account showed that the assessee firm had paid on money
of Rs. 7,60,00,000 for purchase of the property from Ashray. The Assessing
Officer concluded that the assessee had bought development rights of the land
from Ashray. The sum of Rs. 2,60,00,000 (correct figure Rs. 2,10,00,000) was
paid and during the assessment year 2007-08 and, the balance sum of Rs. 5
crores would have been paid in the assessment year 2010-11. The Assessing
Officer therefore, added the sum of Rs. 2,60,00,000 in assessment year 2007-08
and Rs. 5 crores in assessment year 2010-11. The Commissioner (Appeals)
confirmed said addition. On appeal:
From profit & loss account seized from Ashray, it is
noted that neither there was any date nor the name of the assessee mentioned,
which may prove that the assessee has paid a sum of Rs. 7,60,00,000 in cash to
Ashray. Nowhere in these documents it was mentioned that Ashray received a sum
of Rs. 7,60,00,000 in cash. The addition has been made merely on the basis of
the statement of one of the Director of Ashray. When the assessee's partners
were cross-examined in this regard, they categorically denied that they have
paid any cash. In view of the decision of High Court in the case of CIT v.
Continental Warehousing Corporation (Nhava Sheva) Ltd. (2015) 374 ITR 645 : 58
taxmann.com 78/232 Taxman 270, no addition can be made in the case of the
assessee on the basis of documents being found from the premises of the third
party where neither the name of the assessee nor the fact that the assessee has
paid any cash of Rs. 7,60,00,000. Even otherwise also it is an undisputed fact
that the documents on the basis of which the Assessing Officer has made the
addition in the case of the assessee were found during the course of the search
conducted at the premises of Ashray. Since these documents have been found
during the course of search conducted in the case of Ashray, if the Assessing
Officer wanted to make addition, the assessment should have been completed in
the case of the assessee only under section 153C read with section 143(3). No
assessment has been completed under section 153 read with section 143(3)
neither any satisfaction that these documents belong to the assessee was
brought on record by the Assessing Officer of Ashray. Therefore, on this basis
also the addition made in the case of the assessee cannot be sustained. (Related Assessment
years 2007-08, 2010-11) - [Regency Mahavir Properties v. ACIT (2018) 169 ITD
35 : 89
taxmann.com 444 : 64 ITR(T) 628 (ITAT Mumbai)]
Cash credits – “On-Money” received
by an assessee for sale of agricultural land has to be treated as “agricultural
income” and exempted from tax if the facts show that the assessee has no other
source for the receipt
Dismissing the appeal of the
Revenue, the Tribunal held that the assessee is an aged person, who had settled
down in his native place. He was engaged in agricultural activities on his
retirement and there is nothing on record to suggest that the assessee along
with his wife were in a position to generate
unaccounted income of Rs. 39 lakhs other than on-money on account of
sale of agricultural land. The payment of on-money is an unfortunate practice
in most part of our country, and none can deny this factual situation. It is
the case of the assessee that the buyers were insisting on reducing the sale
consideration to be disclosed in the sale deed for the purpose of reducing
stamp duty payment. This contention of the assessee cannot be totally brushed
aside. I also place reliance on the order of the Cochin Bench of the Tribunal
in the case of ITO v. Dr. Koshy George (2009) 317 ITR (AT) 116 (ITAT Cochin),
wherein it was held by the Tribunal that any surplus money arising to an
assessee on sale of agricultural land would partake the character of
agricultural income itself. (Related Assessment year 2013-14) - [ITO v.
Abraham Varghese Charuvil – Date of Judgement : 26.04.2017 (ITAT Cochin)]
Revenue cannot tax both “On-Money” and Expendiiture
out of it as same amounts to double addition
If the unaccounted expenditure is
determined, then, necessarily the question which would arise for consideration
before the Tribunal is whether the Assessing Officer was justified in making
addition under Section 69C for the years under consideration. The Tribunal, in
para 39 of the order under challenge, found that the explanation as derived
from the records and placed by both can be traced to the ‘on-money’ received at
the time of booking/sale of shops. The statement of the senior partner is
referred. The senior partner admitted that the sums have been received as
‘on-money’ and at the stage aforesaid. Therefore, both the amounts, namely the
‘on-money’ as well as the unexplained expenditure cannot be brought to tax,
according to the Tribunal. If the unaccounted expenditure so incurred was from
the ‘on-money’ received by the assessee, then, the question of making any
addition under Section 69C does not arise because the source of the expenditure
is duly explained. It is only the ‘on-money’ which can be considered for the
purpose of taxation. That is what the Tribunal therefore concluded and once the
‘on-money’ is considered as revenue receipt, then any expenditure out of such
money cannot be treated as unexplained expenditure, for that would amount to
double addition in respect of the same amount.—[CIT v. M/s. Golani Brothers
- Date of Judgement : 29.08.2017 (Bom.)]
In absence of any independent
material to come to conclusion that assessee has paid extra consideration for
purchase of property over and above what was stated in sale deed of property –
Mere report of DVO cannot form sale basis to make addition under section 69 of
the Act
Allowing the appeal of assessee the
Court held that the basis of the addition is only valuation report of the
District Registrar under the Stamp Act and the Departmental valuer. As such,
there is no independent material which had come on record for such purpose. The
payment of additional stamp duty may be on the basis of the valuation of the
valuer of the Stamp Act authority but same ipso facto cannot be said to
be a valid ground to initiate the proceedings under section 69 of the Act.
Under such circumstances, the addition made by the Assessing Officer and
further upheld by the CIT(A) as well as by the Tribunal, cannot be sustained.
Hence the High Court ruled in favour of the assessee. (Related Assessment year
2006-07)—[S. S. Jyothi Prakash v ACIT (2016) 240 Taxman 741 (Karn.)]
Investment in property could not be held as
unexplained as same was acquired at a price stated in sale deed
Where revenue failed to bring any
material on record to show that assessee had paid any amount higher than amount
stated in registered deed of sale of plots, impugned addition made under
section 69B was to be deleted.
Section 69B of the Income-tax Act,
1961. Undisclosed investments (Land) - Assessment years 2006-07, 2008-09 and
2010-11. One ‘S’ entered into agreement to sell various plots of land with ‘V’.
Some of plots were disputed lands which could not be transferred to ‘V’ due to
pending civil suits. Said plots were ultimately transferred by ‘S’ to assessee.
In case of search carried out at premises of ‘S’, certain documents were seized.
On basis of seized documents, Assessing Officer opined that assessee had paid
certain amount over and above amount specified in agreement to sell which
represented unexplained investment. Tribunal found that assessee was not a
party to seized agreement of sale which was basis of making entire addition. Moreover,
revenue could not bring any material on record to show that assessee paid actually
any amount more than amount stated in registered deed of sale. Revenue even
failed to establish any link between assessee and ‘V’, through whom money was
allegedly paid to sellers of plots. Tribunal thus deleted addition made by
Assessing Officer. Findings recorded by Tribunal being findings of fact, same
did not require any interference. [In favour of assessee] - [PCIT v. Ajay
Surendrabhai Patel (2016) 69 taxmann.com 309 (Guj.)
Unexplained investments – Payment
of On-Money for purchase of property – Handwritten loose document found at the
premises of a third party does not bear the date of the alleged payments and
the name of the assessee hence no addition is to be made
Handwritten loose document found at
the premises of a third party which does not bear the date of the alleged
payments and the name of the assessee cannot be the basis for making addition
on account of payment of on-money for purchase of property in the absence of
any corroborative material to suggest that the assessee has actually paid
on-money. (Related Assessment year : 2003- 04)—[Smt. K. V. Lakshmi Savitri
Devi v. ACIT (2012) 148 TTJ 517 : (2011) 60 DTR 148 (ITAT Hyderabad)]
Tax
Investigations
Purchases
§ Among the areas needing investigation, purchases come first.
Purchases are usually made by the head office but goods are received and stored
at site. In order to keep control, the assessee has to keep proper records.
§ The Assessing Officer can call copies of Purchase orders, Goods
inward register, Suppliers’ bills and challans, Stock register, and Ledger
containing the account of the supplier for an in-depth verification of
purchases.
§ He can use the basic tools of investigation such as
cross-verification of copies of account by calling for the assessee’s account
in the books of the supplier and comparing the accounts entry by entry.
Purchase of land
§ Purchase of land is another important area where builders try to
inflate the cost of land through long term planning.
§ As soon as they start negotiation for purchase of large tract of
land, they set up a number of sister concerns.
§ The land is shown as first purchased by a sister concern at a very
low price.
§ Subsequently when the project is announced, the assessee who is
promoting the project buys the land from such sister concerns at a very high
price.
§ Thus, a large part of the profit is siphoned off to such sister
concerns.
§ The Assessing Officer should investigate this thoroughly and if
enough evidence is available, try to assess the entire profit in the hands of
the assessee promoting the project.
§ However, if the evidence collected is not sufficient to hold the
sister concerns as benamis, it should at least be ensured that the profits
earned by all the sister concerns from the transactions are assessed to tax.
Expenditure
§ In real estate business, the flats and houses are sold even before
they are constructed. Generally they are sold at a unit price, say, Rs. 1500
per sq. ft. Since sales are made prior to the construction of the building, the
sale price is based on estimations. Firstly, the cost of land, cost of
construction, other overhead expenses are estimated.
§ The assessee for his own benefit maintains the data for each
completed project. He may divide the cost of each completed project into cost
of material, labour, direct expenses and overheads for his own calculations and
estimates.
§ For the reasons mentioned above, the assessee usually maintains
separate accounts for each project. The Assessing Officer should ask the
assessee to produce such accounts and verify the same. He can make comparison
of costs between different projects such as-cost per sq. ft. or even unit cost
for each component of cost e.g. cost of cement or iron or labour per sq. ft. of
constructed area.
§ The Assessing Officer can also make such comparison between
different assessees also to see whether there is any inflation or suppression
of expenditure in the construction. It is not advisable to make any additions
merely based on such comparisons. A successful Assessing Officer has to pursue
matters further, e.g. by verifying the purchase or expenditure voucher relating
to that particular item and prove inflation or suppression of expenditure
beyond any doubt.
§ Wages constitute a major item of the total
cost of the project. Usually labourers are employed by way of sub-contract.
§ The general tendency is to avoid verification of the expenditure
under wages as it is time-consuming.
§ However, the assessee may be asked to produce the contemporary
evidence such as wages register or muster Roll for verification.
§ Generally, the expenditure on wages would be more in the initial
stages and less towards the completion of the project. The following techniques
may be used to check the correctness of the claim:
(i)
Whether the payments are made at regular
intervals. Generally wages are paid daily or weekly. Irregular payments may be
verified.
(ii)
Availability of cash - Wages are generally paid by cash. The cash book should be
verified to see whether there are adequate balances for making payments. Cash
receipts in the site cash book as transfer from head office should be
cross-checked. Look for cash credits introduced to account for payment of
wages. If there is an inflation of wages, it is likely that such credits are
also bogus.
(iii)
Wages outstanding - By the very nature of this expenditure, the amount of wages
outstanding cannot be more than the average daily wages or the average weekly
wages, as the case may be. If the amount of wages outstanding is more, further
verification and analysis is required.
Work-in-Progress
§ This is a figure which the assessee can manipulate to either
suppress or inflate the profits.
§ The usual argument that if the closing figure of work-in-progress
is disturbed, the corresponding opening figure of the next year will have to be
increased and hence there will be no benefit to revenue, should not deter the
Assessing Officer from making proper investigation on this issue, if otherwise
called.
§ There is a definite benefit to revenue in that if the tax is not
collected, the assessee can postpone his liability perpetually, by the
manipulation of the figures of the closing work-in-progress.
§ The work-in-progress should be valued at least at cost plus
percentage of profit.
§ If it is valued below cost, the assessee should be asked to explain
and necessary additions should be made, if required.
§ The assessee should be asked to explain the basis of valuation of
work-in-progress. Some assessees continue to show a few of the flats in each
project as work-in-progress even though the project is completed. Getting the
account of each project and work-in-progress separately would prevent such
practice.
Sales:
§ It is common knowledge that there is a big difference between the
market price and the sale price recorded in the registered sale documents of
housing plots, houses and flats, since both the buyer and seller are interested
in suppressing the price.
§ The task of the Assessing Officer is difficult and the Assessing
Officer should tap the various available sources of information.
§ The advertisements appearing in the news paper mentioning the
market price of the flats is an important piece of evidence. Sometimes,
advertisements are placed by brokers and property consultants.
§ Quite often the real estate businessmen themselves advertise the
market price of the flat/ houses, through brouchers. Even if the flats/ houses
advertised do not belong to the assessee concerned, the data can be used to
compare the price disclosed in the books by the assessee.
§ If the advertised flats are situated in the same locality and the
quality of construction is similar, the advertised price can be used as a
yardstick to measure as to whether the price disclosed is genuine or not.
NRI Gifts/ Share Capital in New Companies
§ The Assessing Officer may examine the return of the promoters,
their wives, children and other close relatives for the period during which
bulk of the flats are sold. Look for instances, where amounts are introduced by
way of NRI gifts, agricultural income, loans etc..
§ The Assessing Officer should also look for new companies/ firms of the promoters or their family members where fresh capital by share-holders/ partners are introduced.
§ Coordinated investigation of such gifts/ credits etc., along with evidences of suppression of sale price of flats might yield good results.
Residuary Rights of Builders
The builder retains some rights even after the
projects are completed and fully sold out. Such rights include:
(i)
Right of maintaining the flats/ houses
and collecting the charge for the same till a society is formed.
(ii)
Sale of parking lots.
(iii)
Unexploited FSI.
(iv)
Terrace rights including the right to put
up hoardings.
(v)
Right to use unoccupied land which can be
leased out for commercial purposes.
(vi)
Rent from Community Hall when it is
leased for purposes like marriages, etc.
The Assessing Officer should see whether
the value of these rights has been disclosed in the accounts and in the return.
If not, the same should be evaluated and included in the taxable income.
Sale
of allotted car park to another allottee illegal
In
a significant order, the Tamil Nadu Real Estate
Appellate Tribunal in the case of T. Aananthi v. G.K.S. Technology (P) Ltd.
ruled that builders cannot sell open parking space or stilt car park areas
separately. The cost of construction, i.e., the sq ft rate, (which, apart from
apartment, includes the cost of common areas) should include one car parking
space.
In this case it was noted that the
authority-Chennai Metropolitan Development Authority [CMDA]- had sanctioned 109
car parks for 87 apartments but the builder made 152 car parks and that the
allegation of the appellant was that the car park allotted to her was sold to
another resident.
The three-member Tribunal, after hearing all the
parties, through a detailed order found the builder guilty by observing that
"We find that it is a fit case where the builder has violated the approved
plan, created extra car parks and sold the same at exorbitant rates. In this
connection, we direct the CMDA to take necessary action and file a report of
the action taken within 4 months."
The Tribunal also directed the Builder to allot car
park to the appellant which was originally promised and was an integral part of
her apartment. – [Tamil Nadu
RealEstate Appellate Tribunal in the case of T. Aananthi v. G.K.S. Technology
(P) Ltd. [Appeal No.11 of 2020 order dated 10.02.2020]
Appropriate Method for Taxability of Real Estate Developers
Income-tax Act does not prescribe any
specific method to be adopted to compute taxable income of real estate
developer. There is no specific provision under the Income-tax Act in this
regard and therefore, business income of the real estate developer is to be
computed and assessed in accordance with the normal provisions of computation
of business income prescribed under the Act.
Accounting of
construction contracts
For those who carry on construction
business, the assessable profits derived is computed under the head “Profits
and gains of business or profession”. Accounting Standard 7 (issued in December
1983), originally recognised two methods of computation namely the completed
contract method and percentage of completion method. Besides, the Standard was
applicable not only for construction contracts but also to enterprises
undertaking construction activities on their own account as a venture of
commercial nature where the enterprise has entered into agreement for sale. Accounting
Standard 7 was revised in 2002 to recognise only percentage of completion
method for accounting of income. Thus, completed contract method has been
de-recognised. The Accounting Standard 7 (AS-7) issued by the Institute of
Chartered Accountants of India states that there are two methods of accounting
for construction contracts:
(i) Percentage of Completed Method.
In view of the peculiarity of the real estate
project i.e. it takes several years in development and completion of project,
it is more appropriate to follow Percentage of Completion Method (PCM) for
revenue recognition.
The
percentage of completion method is an accounting method in which the revenues
and expenses of long-term contracts are recognized as a percentage of the work
completed during the period. This is in contrast to the completed contract
method, which defers the reporting of income and expenses until a project is
completed. Under Percentage of
Completion Method, revenue is recognized as per the stage of completion of the
project on year to year basis during the development of the project.
The underlying principle for adoption of
Percentage of Completion Method for revenue recognition is that in case of real
estate project, generally, significant risks and rewards of ownership of
property are transferred to the buyer at the time of entering into binding sale
agreement. Once sale agreement is entered, the developer effectively acts for
the buyer in the capacity as contractor.
For example, a project that is 20% complete
in year one and 35% complete in year two would only have the incremental 15% of
the revenue recognized in the second year. The recognition of income and
expenses on this work-in-progress basis applies to the income statement, but
the balance sheet is handled the same way as the completed contract method.
NOTE
§ The percentage of completion method reports
revenues and expenses in terms of the work completed to date.
§ This method can only be used if payment is
assured and estimating completion is relatively straightforward.
§ The percentage of completion method has been
misused by some companies to boost short-term results.
Conditions to use the percentage of completion method
There are two main conditions for the use of
the percentage of completion method.
(a) First, collections by the company must be
reasonably assured;
(b) second, the company must be able to
reasonably estimate costs and the rate of project completion.
(a) Features of Percentage of Completion Method
1.
Revenue
is recognized in the financial statement on year to year basis as per the stage
of completion of the project at the end of each year.
2.
There
remains consistency of profit to be reflected in the profit and loss account
every year.
3.
Revenue
is recognized in the financial statement even before property comes into
existence and physical possession of property is handed over by the developer.
4.
Income
is recognized on estimated basis by estimating the total project revenue to be
earned and total project expenses to be incurred in future.
(b) Tax
Implications of Percentage of Completion Method
1.
Taxable
income is resulted & offered to tax consistently on year to year basis.
2.
Tax
liability is discharged by the assessee on year to year basis and it is not
accumulated to be paid in one go.
3.
Tax
authorities prefer this method as it results into early collection of tax.
(ii) Completed Contract Method
Features
of Completed Contract Method (CCM)
1. Revenue is recognized in the financial
statements only on completion of the project.
2. There does not remain consistency in the
income to be recognized in the financial statement of the real estate developer
on year to year basis. In some year(s), there may be huge income recognized
while in other years, there may not be any income reflected in profit and loss
account.
3. Income is recognized in the profit and loss
account on actual basis and not on estimated basis from year to year as is
recognized in the case of Percentage of Completion Method (PCM).
4. Such inconsistency of profits/financial
performance reflected in the financial statement may create hardship in getting
the credit limits from the banks/financial institutions or raising public funds
by way of other means.
(b) Tax
Implications of Completed Contract Method
1. Under Completed Contract Method, no taxable
income is generated in the year(s) when project is under development.
2. Assessee may prefer to follow Completed
Contract Method to defer the tax liability.
3. Due to deferment of taxable income, sometimes
assessee may lose the benefit of set off of brought forward losses, as
unabsorbed business losses brought forward from earlier year(s) may lapse.
4. There shall remain uncertainty till the
completion of project regarding claiming of deduction under section 80-IB or
under any other provisions of the Act.
5. Tax authorities do not appreciate the
adoption of this method as it results into deferment of payment of tax
liability.
Rules on treatment of variation in real-estate value & expenditures, post-occupation certificate
Mumbai ITAT rejects the maximum rate applied by the
Revenue to estimate sale value of the flats sold at varied rates by the
Assessee, engaged in real estate business and observes that “factors
like total area, extra accessible and useable area of particular unit and
location and ventilation of the unit etc., does have variation in the price and
the premium paid”; ITAT directs the Revenue to apply the weighted
average rate of all the units for estimating the value of sales, except for one
unit which is incomparable and thus, to be valued at actual; Upholds CIT(A)
order deleting disallowance of construction expenditure incurred after the
issue of occupation certificate (OC) and observes from the perusal of the
nature of expenditure incurred that it has no connection with OC; ITAT finds
that as per the letter issued by Engineer, ‘major works’ are required to be
carried out to receive such OC; ITAT opines “it is not necessary
that the entire building should be ready and constructed and that no work would
be pending on the receipt of OC”; ITAT observes that if some work is
completed but it is not of proper quality or specifications, then the Assessee
builder is responsible to again make it and also majority of the expenses were
for maintenance which would not affect the occupancy of the building; Further,
holds that disallowance of entire interest expenditure on loans on the
basis that Assessee diverted advance to its sister concern at lower interest
rate, is not justified and restricts the disallowance to the extent of
differential interest rates of the loans given to the sister
concern; Assessee is a builder and developer and during Assessment year 2011-12, Assessee sold some units and
a building constructed by it; Revenue made following additions: (i) Rs. 46.75
Cr on account of suppressed sales of flats arising from variation of rates,
(ii) construction expenditure of Rs. 21.56 Cr incurred after the issue of
occupation certificate and (iii) Rs. 2.05 Cr disallowance of interest
expenses under Section 36(1)(iii) on account of advance made to sister concern;
Similar addition were made for Assessment year 2013-14 and Assessment year
2014-15; CIT(A) deleted the addition on account of suppressed sale of flats and
construction expenses and restricted the disallowance of interest expenditure
to the extent of loans given to the sister concern;
On addition for suppressed
sale of flats
ITAT notes that the Assessee sold flats at varied
rates ranging from Rs.13,513/- per sq. ft to Rs. 27,951/- per sq. ft., in the
same project; Further notes that the Revenue determined the sale cost of each
unit at Rs.27,951 per sq. ft., which is the highest price at which some units
were sold; Observes that some variation in the rates per unit depending upon
the various factors can be justified, however such huge variation in the prices
cannot be accepted, just the same way, Revenue’s action to affix the rate
per sq. ft. at the highest rate, is
also not justified; In order to forge a midway, ITAT compares the agreement
rates with weighted average rate of all the units sold which is computed at
Rs.17,172 per sq. ft.; Directs the Revenue to apply rate of Rs. 17,172 per sq. ft
to all the units/flats sold, except for one unit, which is a shop cum garage,
which is to be calculated at actual price as it is not comparable with other
units.
On disallowance of
construction expenditure
ITAT notes that the Revenue disallowed it on the
ground that the expenses are incurred after issue of occupation certificate
(OC), as after the issuance of OC, the construction is said to be completed and
no expenses can be incurred after that and thus, it would be disallowed under
Section 37(1); Observes that it is not necessary that the entire building
should be ready and constructed and that no work would be pending on the
receipt of OC; Further observes that the said expenses are mostly for maintaining
building during the course of defect liability period, when the Assessee was
responsible to replace any damages in the building construction work; Notes
that most of the expenses are towards the nature of butler services,
housekeeping and cleaning services which are in the nature of maintenance and
that such nature of work would not have affected the occupancy of the building
by the occupants; Opines that the said expenses cannot be disallowed merely
because the same were incurred after the OC and upholds CIT(A) order deleting
the construction expenditure; Regarding construction expenditure being on
higher side, ITAT observes that allegation of Assessing Officer is baseless
since Assessee submitted complete details of construction cost and also earned
huge profits.
On disallowance of
interest expenditure
ITAT notes that the Revenue disallowed the entire
interest expenditure on the ground that that the interest-bearing funds were
diverted by the Assessee to its sister concern at a lower interest rate;
Observes that the total loans to the sister concern only amounted to Rs. 7.4 Cr
as compared with the rest of the borrowings from other parties of Rs. 60.27 Cr,
thus holds that the disallowance of entire interest by the Revenue is not
justified; Opines that, “disallowance in such a case at the most can be
made in respect of differential interest rates of loans given to sister
concern” and upholds CIT(A) order restricting the disallowance of
interest expenditure to the extent of loans given to the sister concern instead
of disallowance of entire loan taken from various parties.
On disallowance of interest
under Section 14A
For Assessment year 2012-13, ITAT notes that CIT(A)
deleted the disallowance on the ground that Assessee has sufficient own funds
to make the investment; Holds that the issue stands covered by the Supreme Court
ruling in South Indian Bank Ltd. v. CIT (2021) 438
ITR 1 : 322 CTR 465 : 283 Taxman 178 : 205 DTR 337 (SC), and upholds CIT(A) order deleting the same.
[In favour of Both,
Partially] (Related Assessment
year : 2011 -12) – [DCIT v. Mighty Construction
(P) Ltd. [TS-522-ITAT-2023(Mum)] – Date of Judgement : 25.08.2023 (ITAT Mumbai)]
Sum incurred on staff/sales
team promoting assessee’s construction project is allowable as revenue expenses
The following
substantial questions of law are proposed :
(a)
Whether on the facts and
in the circumstances of the case an in Law, the Hon’ble ITAI was correct in
holding that expenses in respect of Sales Support Services and Management Fee
had no direct nexus with the project and was not subject to proportionate
disallowance as per Accounting Standards AS-7?
(b)
Whether on the facts and
in the circumstances of the case and in Law, the Hon’ble ITAT was correct in
deleting the proportionate disallowance on account of Sales Support Service and
allocation of management fee even though the Assessee was following Project
Completion Method of Accounting (AS-7) and the project was completed upto
26.32% and had offered income to the extent of 26.32% but had claimed these
expenses in full?
Assessee was a builder
engaged in business of real estate. During relevant year, assessee had
undertaken construction of a residential project and had debited certain sums
on account of sales support services and management expenses, respectively -
Assessing Officer noted that assessee was following project completion method
of accounting and project was completed only upto 26.32 per cent. He therefore,
held that only 26.32 per cent of debited amounts related to sales support
services and management expenses should be allowed as a deduction. On appeal,
Commissioner (Appeals) held that these expenses were incurred towards day to
day expenditure incurred on project staff and sales team, which was necessary
for exhibition or promotion of a construction project. He therefore, held that
these expenses were purely revenue in nature and there was no justification for
restricting expenditure of project to 26.32 per cent only. Tribunal upheld
order of Commissioner(Appeals). Since lower authorities came to a factual finding
that expenses incurred by assessee on salary of office employees/management
fees did not have any direct nexus with project and could not be disallowed on
proportionate basis because such expenditure fell in category of expenditure
incurred for running of day to day business, no substantial question of law
arose for consideration. [In favour of assessee] (Related Assessment
year : 2010-11) – [PCIT v. Samudra Developers (P) Ltd. (2023) 155 taxmann.com 629 (Bom.)]
Absent profit distortion, rejects Revenue's change
in accounting method for real-estate developer
Pune ITAT upholds project completion method adopted
by real-estate developer and observes that “there has to be some kind of
ambiguity or distortment of arriving at the profit element through Project
Completion Method so for the Department to say that only Percentage Completion
Method is the correct way to arrive at the correct profit”; ITAT reads the
Guidance Note on Accounting for Real Estate Transactions (Revised 2012) wherein
both the standard of accounting i.e. Project Completion Method and Percentage Completion
Method can be adopted and there is no binding obligation on such developers and
builders to adopt only a particular method of accounting; Further, ITAT notes
that the same AO in past two years i.e. Assessment year 2013-14 and AY 2014-15
has accepted the project completion method, thus, remarks that “when he has
accepted Project Completion Method for Assessment years 2013-14 and
2014-15 then he should have brought out distinctly any mistake or fallacy or
distortion caused to the profits by adopting Project Completion Method and
therefore insisting to apply the Percentage Completion Method. But the AO has
not given any such findings”; Relies on Supreme Court ruling in CIT v. Bilahari Investment (P) Ltd. (2008) 299 ITR 01 (SC) and observes that “ the rule of law in adopting the
accounting standard in case of builder and developer is absolutely clear and
precise, so that it is only in those case where the Department records a
finding that the method adopted by the assessee results in distortion of profit,
the Department can insist on substitution of the existing method”; Assessee
is a builder and developer and has been following Project Completion Method of
accounting for the purposes of revenue recognition; During the course of search
in Financial year 2014-15, statement of managing
partner was recorded wherein he admitted that company will adopt percentage
completion method from Financial year 2015-16; Revenue held that even for
instant year i.e. Assessment year 2015-16, the correct method for revenue
recognition should be Percentage Completion Method and not Project Completion
Method, thus, made an addition of Rs. 1.12 Cr; ITAT notes that in the statement
recorded, it was admitted to adopt percentage completion from Financial year
2015-16 but not for the instant year i.e. Assessment year 2015-16 for which
already Project Completion Method has been adopted; ITAT finds that there is an
apparent discrepancy in the finding of the Assessing Officer; CIT(A) upheld the
assessment order basis that the Assessee agreed to follow the same during the
course of search operation and filed return of income for Assessment year
2016-17 by following Percentage Completion Method; ITAT observes that CIT(A)
approach cannot be termed as valid interpretation since the admission was from
next year and for the year under consideration when Assessee has already
adopted such Project Completion Method and no distortion or ambiguity in
arriving at profit has been pointed out by Revenue; ITAT observes that in
absence of pointing out any such disparity or distortion in the profit element while
adopting the Project Completion Method, the Revenue cannot impose on the
Assessee to adopt only the Percentage Completion Method; Relies on Karnataka High
Court ruling in Prestige Estate Projects (P) Ltd. (2020)
TaxCorp (DT) 82901 (Karn.) wherein it observed that “when the Department has accepted in the
previous years, in the light of guidance note applicable to developers a
certain method of accounting and the profit arrived at is revenue neutral, then
in such scenario, the substantive question of law has to be answered in favour
of the assessee and against the Revenue”; Concludes that Revenue has not
pointed out any distortion in the profit then the finding arrived at has
to be revenue neutral, thus, Revenue cannot insist on the adoption of
Percentage Completion Method, more so, when it has already accepted Project
Completion Method previous consecutive Assessment year 2013-14 & 2014-15;
Thus, deletes the addition. [In favour of assessee]
(Related Assessment year :
2015-16) – [S.S. Group, 9, Siddhivinayak v. ACIT(C), Pune [TS-593-ITAT-2023(PUN)]
– Date of Judgement : 05.10.2023 (ITAT Pune)]
Assessee-company was
engaged in real estate sector. Assessee treated interest income on bank
deposits as part of its business income. Assessing Officer assessed interest
income declared by assessee as income under head ‘Income from other sources’. An
assessee should demonstrate that there is business compulsion to make deposits
or advance loans to support its claim that interest income forms part of its
business profits. Since assessee had failed to demonstrate business compulsion
for making deposits with banks, interest income be assessed under head ‘Income
from other sources’. [In favour of revenue] (Related Assessment years : 2012-13
and 2014-15) – [Bengal Shriram Hitech City (P) Ltd. v. ACIT (2021) 191 ITD
466 : 131 taxmann.com 241 : 86 ITR(T) 719 (ITAT Bangalore)]
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