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8/3/2019 Background Material on 2nd Session
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TAXATION ISSUESIN REAL ESTATE
DEVELOPMENTTRANSACTIONS
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Issues concerning the landowner
Issues concerning the developer
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ISSUES CONCERNING THELANDOWNER
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Capital Gain or Business Income ?
Answer to this question will depend upon thenature of transaction. Even a solitarytransaction could result in business income
If a person has lived in a house for 20 yearsand then gives it for development, it is a clearcase of capital gains.
If a builder gives a piece of land held asstock in trade for development it is a clearcase of business income.
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Development Agreements
What is a Development Agreement
Development Agreement with GPA Does it require registration ?
Precautions to be taken while drafting theDevelopment Agreement
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Development Agreement an
illustration
Total Landarea - 1000 sq yds
Builtup Area Total Builtup area 20000 sq ft.
Landowner - 40 % i.e. 8,000 sq ftDeveloper - 60 % i.e. 12,000 sq ft
Date of Development Agreement 01/01/2008
Possession handedover to developer on 30/04/2009 (With/without GPA )
Building completed & Landowners share handedover on10/05/2009
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When is the transfer complete
Date of transfer to decide the year of accrual
of capital gain
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Definition of transfer under the IncomeTax Act
Section 2 (47) (v) of the IT Act reads as
under: Any transaction involving the allowing of the
possession of any immovable property to betaken or retained in part performance of a
contract of the nature referred to in S 53A ofthe Transfer of Property Act, 1882.
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Sec 53A of TP Act What is part
performance
Where any person contracts in writing to transfer anyimmovable property, and the transferee has, in part
performance of the contract, taken possession of theproperty and has done some act in furtherance ofthe contract, and is willing to perform his part of thecontract then
the transferor shall be debarred from enforcing anyright in respect of the property, other than a rightexpressly provided in the agreement.
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Point of accrual of income
Date of execution of Development Agreement
Date of handingover of possession
Handingover of possession coupled with GPA infavour of developer
Date of execution of first sale deed for developersshare
Date of execution of first sale deed for landownersshare
Date of handing over of Landowners builtup area
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Date of execution of Development
Agreement
Transfer would not be complete if the
agreement is properly drafted and all clausesare kept out of the purview of Section 2 (47)read with Section 53A of the Transfer ofProperty Act.
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Date of handingover of possession of
land
Capital gain will not accrue provided
possession is handedover to developerpurely as a licensee See R VijayalakshmiVs Appu Hotels Ltd ( 2002) 257 ITR 4though given in the context of Chapter XXC.
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Handingover possession with GPA
Transfer would be complete for IT purposes
on the date an irrevocable GPA is given What happens if GPA is given but
possession is not handedover or it is linkedto some other event like permission from
municipal authorities ?
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Chaturbhuj Dwarkadass case
260 ITR 491
Original Agreement dated 18/08/1994
This was a sale agreement with a consideration of Rs 1.86 cr.
Court held that this was a development agreement. Almost entire consideration paid by 31/3/96
Possession given on 1/4/96
GPA given on 12/3/99
Capital gains tax paid for AY 1999-2000 Dept. said capital gain in A Y 1996-97
Court held that capital gain arose on 18/8/94 itself.
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AAR Ruling in Jasbir Singhs case
294 ITR 196
Original collaboration agreement June 2005
Supplementary Agreement 15/09/2005
Provisional License for construction 8/3/2006
Final License 26/5/2006
Irrevocable GPA 8/5/2006
Final Payment 08/03/2007 AAR held that capital gain arose when GPA was
given on 08/05/2006
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Date of execution of First Sale Deed for
Developers share Date of execution of First Sale Deed for
Landowners share
Date on which the Landowners share is
handedover
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Conversion of land into stock-in-trade
U/s 45 (2) if land is converted into stock-in-
trade, it shall be taxed in the year of sale. Market value on the date of conversion
would be treated as full value of saleconsideration
Balance amount would be taxed as businessincome
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Amount of Income
Registration Value/Market value of
proportionate share in land Cost of construction of builtup area falling to
the Landowners share
What if the Landowner sells part of his
builtup area
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Whether any exemptions are available
Exemption U/s 54
Exemption can be claimed for retained residentialflat/flats or new purchases & construction
Exemption U/s 54EC
Exemption is available for investment in REC &NHAI bonds with an upper limit of Rs 50 lakhs.
Exemption U/s 54F
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ISSUES CONCERNING THE
DEVELOPER
Year of taxability of income
Computation of income Deductions available
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Year of taxability of income
Year of completion of project
On a year to year basis Is AS 7 applicable to builders
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Computation of income
Computation of income on a year to year
basis- Percentage of advances received
- Percentage of expenditure during theyear
- What about tax audit
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Computation of income on completionof project
There could be issues when some of the flats
or offices spaces are registered in the namesof the buyers even before the entire complexis ready
Allowability of interest on borrowed capital
should it form part of project cost or can it beclaimed on year to year basis ?
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ISSUES IN SERVICE TAX
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Threshold exemption and other
matters
Threshold exemption of Rs 10 Lakhs from F Y 08-09
Exemption linked to preceding years turnover
Tax payable only on turnover exceeding Rs 10Lakhs in the first year
Only value of taxable services to be included inarriving at Rs 10 lakhs amount
When new services are brought into tax net in themiddle of the year
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Due dates of payment
Due Date of Payment is 5th of the month succeeding the monthin which the value is realised.
For Individuals, Sole proprietors and Partnership Firms it is 5th
of the month succeeding the quarter in which the value isrealised.
In all cases, for the month or quarter ended 31st March, the duedate is 31st March.
For e-payment the due date is 6th instead of 5th.
The date of deposit of cheque into the bank is deemed to bethe date of payment of tax provided the cheque is realised. (Supreme Court decision in 25 ITR 529 )
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Construction Services
Commercial or Industrial constructionservices
Construction of complex service
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Commercial or Industrial construction
services
Definition covers :
a. construction of a new building or civil structure
b. construction of pipeline or conduit
c. completion and finishing services like plastering,painting, flooring, carpentry etc
d. repair, alteration, renovation etcBuilding should be used for commercial purposes
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What is not covered
construction of building for self-use or forrenting out
Developers / builders who construct and sellby executing sale deeds
- If construction agreements are entered into,
service tax is leviable However, service tax is leviable on
contractors who are engaged by the builder
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Abatement of tax
Abatement to the extent of 67 % of grossreceipts available subject to conditions likenot availing Cenvat credit on inputs or oninput services
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Construction of complex service
Definition covers :
a. construction of a new residential complex or partthereof
b. completion and finishing services like plastering,painting, flooring, carpentry etc
c. repair, alteration, renovation etc
Residential complex means a building having morethan 12 residential units with common area orcommon facilities like lift, water etc
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What is not covered
construction of building for self-use or for renting out
Developers / builders who construct and sell byexecuting sale deeds
- If construction agreements are entered into, servicetax is leviable
However, service tax is leviable on contractors whoare engaged by the builder
Abatement to the extent of 67 % is available
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Service Tax under the composition
scheme
Builders can opt for payment of service tax ata reduced rate of 2 % ( increased to 4 % inthe Finance Act 2008 ) under thecomposition scheme applicable to all workscontracts.
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Central Government is planning to introduceGoods and Services Tax (GST) by April 1,2010.
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Thank you
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