“Roti,
Kapda aur Makan”, are 3 basic needs of a common man, out of which buying a Makan
is one of the common dreams of every Indian. Time and again various
representations have been made to the government to regularize the Real Estate
Sector to make it affordable for the common people.
So
far as Income Tax Regulations are concerned, since last two decades, which is
also the period of major economic growth of the country, Finance Ministers had
given due weightage to systemize the taxing provisions, specially related to Real
Estate Sector.
Why
Real Estate Sector is Special?
Before
moving into the topic, an interesting question pops up in my mind, regarding
reason for affection of the taxing authorities with the Real Estate Sector and
the answer may be hidden in the given statistics.
Real
estate sector in India has come a long way by becoming one of the fastest
growing markets in the world. The growth of the industry is attributed mainly
to large population base, rising income level and rapid urbanization. Currently,
the Indian Real Estate Market has a market size of approx USD 70 billion [INR
3.8 lakh crore] and is expected to touch the market size of USD 180 billion
[INR 10 lakh crore] by the year 2020. The Real Estate sector contributes approx
5% of the national GDP. As per the recent global survey, India Ranked 20th
among the top 20 Real Estate Investment markets globally with investment volume
of USD 3.5 billion [INR 19000 crore] recorded in FY 2012-13 alone. Further,
there is a huge demand – supply mismatch in the Indian Real Estate industry. As
per an estimate Indian cities have faced a shortage of approx 15 - 20 million
residential units by the end of FY 2012-13.
It is
a known fact that number of property transactions in India is not recorded as
per their actual market price. Due to these reasons, the taxing authorities are
now giving “much needed special attention” to the Real Estate Industry”
Introduction
of Deeming Fiction in Real Estate :
One of the most controversial provisions,
which had a huge impact on the taxation of Real Estate Transactions, was the introduction
of concept of “Deeming Fiction” through
Section 50C.
Section 50C was introduced by the
Finance Act 2002 with lots of hue and cry by the Industry. As per this section,
when immovable property, being land or building or both held as Capital
Asset, is transferred, at the value which is less than value adopted, assessed or assessable for the purpose of stamp duty, then the stamp
duty value will be taken as Deemed Sale Consideration
for computing capital gains.
Deeming
Fiction is constitutionally valid:
The
constitutional validity of Section 50C was challenged in the Madras High Court
[Palaniamy vs. UOI 306 ITR 61] on the ground that an income based upon the
guidelines (stamp duty value) is fanciful and imaginary and that the provision
lacked legislative competence. It was also contended that the provision is
discriminatory as between those assessee in whose case stamp duty value was
more or less than actual consideration. The arbitrary manner in which the stamp
duty value was fixed by the state authorities is evident from the variation in
values within the same area under common guidelines. It was claimed that the
procedure to challenge the guidelines before the state authorities, was
unworkable and placed an undue burden on the taxpayer.
High
Court found that any arbitrary result on application of Section 50C against the
taxpayer can be avoided by the protection offered by resources to remedies
available in the section itself. The court was also not inclined to accept that
the guidelines valuation was an arbitrary yardstick. They are fixed after
following the prescribed procedure under the Stamp Act and they are also
justifiable. Accordingly, Constitutional validity of the section 50C had been
upheld by the High Court.
Amendments
made by Finance Act 2013 (Introduction of Section 43CA):
After a
gap of 4 years, Mr. P Chidambaram had taken the charge of Finance Ministry in
August 2012. Prevalent tax loopholes were in his mind while presenting the
Finance Bill 2013. In his budget speech Mr. Chidambaram had said “Some tax avoidance arrangements have come to
notice, and I propose to plug the loopholes”.
Before
jumping into the fine print of the Amendment, it will be interesting to take a
look on a few judicial pronouncements (now overruled), which was a major cause
for amendment of so called avoidance arrangements:
a)
Indralok Hotels (p) Ltd. (122 TTJ 145)
Mumbai
In this case, the assessee company, a real estate developer, had sold
two residential flats for a consideration of INR 60 lakh & INR 40 lakh
respectively. The Stamp duty of these flats was INR 78 lakh and INR 72 lakh.
The Assessing Officer (AO), in the scrutiny proceedings, by applying the
provisions of section 50C, had taken stamp duty value of these two flats i.e.
INR 150 lakh as deemed sale consideration instead of actual sale consideration
i.e. INR 100 Lakh and added the differential amount as Deemed Business Income.
The matter ultimately travelled to ITAT.
Hon’ble ITAT held that section 50C w.r.t. concept of deemed sale
consideration shall be applicable only for transfer of ‘Capital Assets’ for
calculating capital gains. In the given case the residential flats are shown as
‘Stock in Trade’ and income thereof is taxable under Business Income and
accordingly deleted the addition made by the AO.
b)
Kan Construction & colonizers (p) Ltd.
(70 DTR 169) Allahabad HC:
Assessee Company, a Real Estate Developer, had some plot of land which
was shown as stock in trade. During the previous year assessee sold some plot
of land for a consideration of INR 80 lakh and offered the income under
Business Head. The AO had treated the said plot of land as capital assets and
thereby applying the provisions of section 50C, had taken stamp duty value as
sale consideration for calculating capital gains. Appellate authorities had
deleted the addition made by the AO, against the department preferred an appeal
before High Court.
Hon’ble High Court held that if the asset is held
as stock in trade, the profits and gains from the sales is liable to be taxed
as profits and gains from business and not as capital gains. Section 50C has no
application where transfer of immovable property is on account of sale of
stock.
c) CIT
vs. Mukesh & Kishore 33 Taxmann.com 87 (Gujarat HC):
In this case the assessee had sold a plot of land, which was held by
them as stock in trade. The Stamp duty value of the land was 2.2 times more
than the stamp duty value. AO had made the assessment based on stamp duty value. Matter ultimately travelled
to High Court. High Court had held that as the land was held as stock in trade
& the profit is taxable under business head, section 50C will not be
applicable as the same was applicable only in case of transfer of capital
assets.
Amendment
made by the Finance Act 2013 to counter [overrule / nullify] the above
judgments, as is clear from the Memorandum Explaining the Finance Bill 2013
read as under:
“Currently, when a capital asset, being immovable property, is
transferred for a consideration which is less than the value adopted, 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 value (stamp duty value)
is taken as full value of consideration under section 50C of the Income-tax
Act. These provisions do not apply to transfer of immovable property, held by
the transferor as stock-in-trade.
It is proposed to provide by inserting a
new section 43CA that where the consideration for the transfer of an asset
(other than capital asset), being land or building or both, is less than the
stamp duty value, the value so adopted or assessed or assessable shall be
deemed to be the full value of the consideration for the purposes of computing
income under the head “Profits and gains of business or profession”.”
Presently
when a capital asset (other than stock in trade) is sold for a consideration,
which is lower than the stamp duty value, then the stamp duty value is
considered as deemed sale consideration for the purpose of computing capital
gains. From the definition of capital assets, as given in section 2(14), ‘Stock
in Trade’ is specifically excluded.
Finance
Act 2013, vide insertion of section 43CA, has adopted concept of deemed sales
consideration being stamp duty value, on the transactions of land or building
or both, held as ‘stock in trade’, transferred by builders / real estate
developers. Sub section (1) says that where the consideration for transfer of
an asset (other than capital asset), being land or building or both, is less
than the stamp duty value, then the stamp duty value shall be the deemed sale
consideration for calculating income under the head “Profits & gains of
business or profession”. Sub section (2)
states that for calculating stamp duty value under this section, provisions of
sub section (2) & (3) of section 50C will be applicable. Sub section (3)
states that where the date of sale agreement (for fixing final consideration)
and the Registration date are not the same, then the value may be taken as
value for payment of stamp duty, on the date of the agreement, provided the
seller has received, on or before the agreement date, full or partial
consideration from the buyer, other than cash. This Section is introduced w.e.f. 1 April 2013 and will apply to
all transactions effected on or after this date.
Amendments
made by Finance Act 2013 in Section 56(2)(vii):
Earlier, when any immovable
property is received by an individual or HUF without consideration, the stamp duty value of which exceeds
INR 50,000, then the stamp duty value is chargeable to tax in the hands of the
individual or HUF as Income from Other Sources.
Earlier Immovable received for Inadequate Consideration was not
covered in the section, which is now taken into consideration by the Amendment.
Memorandum explaining finance bill 2013 clears the intention of the statute,
which reads as under:
The existing provision
does not cover a situation where the immovable property has been received by an
individual or HUF for inadequate consideration. It is proposed to amend the
provisions of clause (vii) of sub-section (2) of section 56 so as to provide
that where any immovable property is received for a consideration which is less
than the stamp duty value of the property by an amount exceeding fifty thousand
rupees, the stamp duty value of such property as exceeds such consideration,
shall be chargeable to tax in the hands of the individual or HUF as income from
other sources.
Considering the fact that there may be a time gap between the date
of agreement and the date of registration, it is proposed to provide that where
the date of the agreement fixing the amount of consideration for the transfer
of the immovable property and the date of registration are not the same, the
stamp duty value may be taken as on the date of the agreement, instead of that
on the date of registration. This exception shall, however, apply only in a
case where the amount of consideration, or a part thereof, has been paid by any
mode other than cash on or before the date of the agreement fixing the amount
of consideration for the transfer of such immovable property.
As per the amended provision, immovable property received for
a consideration, by an Individual or HUF, which is less than the stamp duty
value by INR 50,000; then the difference between the stamp duty value
and such consideration, shall be taxed as income from other sources in the
hands of recipient individual or HUF.
Areas
of Concern / Controversial Issues:
a) Now
deeming fiction will be applicable even if the land / building is not
registered with the concerned Government authorities as the transfer takes
place on the basis of the mere agreement for sale.
b) The
deeming fiction will make an adverse impact on genuine real estate
transactions. Many a times the assessee is required to sell the property for a
price much lower than the stamp duty value due to certain urgencies. There is
no provision in the act to cover situations like distress sale.
Recently Chennai ITAT in
case of ACIT vs. MIL Industries Ltd
[33 Taxmann.com 120] had held that misfortunes happened to the assessee or
difficulties faced by the assessee or matters of distress sale etc. shall not
be considered for exclusion of application of section 50C and stamp duty value
only shall be taken for calculating capital gains.
c) Law
has not provided any tolerance band for non applicability of deeming fiction. Kolkata ITAT in a recent Judgement of Heilgers Development & Constructions
co. (p) ltd vs. DCIT [32 Taxmann.com 147] had held that even if there is a
marginal difference between the actual sale consideration and the stamp duty
value due to gap between the agreement date and the registration date, then
also the stamp duty value will be taken for calculating capital gains.
d) The
Amendment will lead to Double Taxation
in certain cases. For e.g. If a property sold by Real Estate Developer (say for
INR 40 lakh) is less than the stamp duty value (say INR 50 lakh), then INR 10
lakh will be taxed as business income in the hands of developers.
Consequently, buyer is getting property for INR 40 lakh, which is less
by INR 10 lakh from stamp duty value and accordingly INR 10 lakh will be taxed
in the hands of buyer u/s 56(2)(vii) as income from other sources.
e) Normally
there is a time gap [3 – 5 years or more] between the launch of a particular
project and completion of the project. Real Estate Developers sell the product
throughout the construction period and receive the payment progressively. As
per section 43CA stamp duty value [if it is higher] shall be considered as
deemed sale consideration. The sale consideration, accordingly, will vary
drastically and financials of the company will not reflect the true position of
its profitability.
f) There
will be an uphill task for Real Estate Developers to prepare their books of
accounts by considering the new provision. Normally Real Estate Developers are
following either percentage completion method or project completion method for
accounting of revenue. In case of project completion method, income is offered
for taxation only when the project is completed. In case of percentage
completion method, the income is offered based on % completion of the project. Once
the income is calculated on the basis of stamp duty value, can they defer the
income by applying percentage completion method? There is no clarity on the
same.
In case of transaction below stamp duty value, are they required to
record the transaction at stamp duty value or on actual value? If they record
the transaction at actual value then for income tax purpose they have to
prepare a separate set of accounts incorporating deeming values.
In metro cities, Real Estate Developers are selling the flats /
inventory on basis of letter of allotment [mainly in cases where the buyer is
purely an investor]. The agreement for sale and final registration is done only
after possession or at the time of subsequent sale. As per section 43CA, it
will result into a higher profitability in the hands of the Developers as well
as Investors.
g) No corresponding
amendment has been proposed in section 50C where there is a time gap between the
agreement date and the registration date.
h) Consider
a situation where assessee had earlier converted the land [held as capital assets]
into stock in trade and the sale is made after 1 April 2013. As per the new
provision the assessee has to calculate the business profit based on stamp duty
value, which will impact the taxability. Similar kind of situation will be
faced by assessee who had converted the properties / flats purchased before the
introduction of section 43CA as stock in trade. They have to pay much higher
tax on the final profit.
i)
The Stamp duty value as on the date of the
agreement shall be taken for calculating profit, only if the amount of consideration or part thereof [other
than cash] has been received on or before the date of agreement of sale. There
is an ambiguity regarding the taxability of certain individual buyers who had
already booked their flats and are waiting for completion of the construction
so they can get the registration and possession. Further ‘part consideration’ has not been defined which leads to confusion.
For e.g. Mr. A had bought a flat which is under construction and
registration is pending. Possession of the flat will be given by 30 Sept 2013.
As per agreement for sale dated 1 Jan 2011, the consideration for sale is INR
75 lakh; however the stamp duty value at the time of registration is INR 2
crore. Till 1 Jan 2011, the assessee had paid an amount of INR 5 lakh to the
developer and further INR 40 lakh had been paid till 31 Mar 2013. As per the
plain language of the section, the stamp duty value as on 1 Jan 2011 shall be
taken as deemed sale consideration as the assessee had made part payment. The said interpretation is
highly litigation prone.
j)
The word “other than cash” may be interpreted in
a different manner. Any payment by way of book entry can be considered as valid
payment under this section. Further payment through bearer cheque can be a
sufficient compliance. Clarification on these issues is necessary to prevent
dispute.
k) Let’s
take the case of transfer of business undertaking on slump sale basis, where no
separate consideration is paid for land or building. Can deeming fiction be
invoked? Prima facie the answer is no due to non identifiable consideration for
land or building. However, the same may be disputed by the department.
l)
In case of contribution of stock in trade in to
the partnership business, provisions of section 43CA may not be invoked as the
consideration for transfer is indeterminable. The same principle is given by SC in Sunil Siddharthbhai vs. CIT 156 ITR 509. It will be interesting to
see that how the department will take up this issue.
m) Can
transfer of leasehold rights will be covered under the mischief of the deeming
fiction. As per plain language of the section, it is clear that it will be
applicable only in case of transfer of assets being land or building or both. Kolkata ITAT in DCIT vs. Tejinder Singh [ITA/1459/Kol/2011] had held that section
50C does not apply to transfer of tenancy / leasehold rights. Still the issue
is litigation prone.
n) Is
the deeming fiction applicable on the Transferable Development Rights (TDR) ? Mumbai
ITAT in ITO vs. Prem Ratan Gupta had
held that section 50C does not apply to transfer of FSI and TDR. However after
the introduction of 43CA, the issue may be subject to litigation.
Can
assessee challenge the Stamp duty value?
In
case of transactions covered u/s 50C & 43CA, statute provides an option to
the assessee to challenge the stamp duty value as deemed sale consideration and
ask for a reference to the Departmental Valuation Officer [DVO]. When
requested, the AO is duty bound to make a reference to DVO. In case the value
adopted by the DVO is higher then the stamp duty value then the Stamp duty
value will be the full value of consideration. A question arises here is
whether the AO is duty bound to wait for the report of the DVO? The answer is
no. In case of time barring assessments, they generally pass the order without
waiting for DVO’s report.
In
case of transaction covered u/s 56(2)(vii), assessee cannot challenge the stamp duty value. This will cause great hardships to the
assessees.
Conclusion:
The
intention of the statute for introduction of the concept of deeming fiction is
that the people dealing in Real Estate should report the transaction honestly.
After the introduction of Section 50C, the said object had been achieved to a
certain extent. However, many a times, due to unavoidable circumstances,
genuine transactions fall under the purview of this section. Law has not
provided any safeguard to the genuine assessees. Extension of Deeming concept on Real Estate
Developers has made their life more difficult for common man. Real Estate
Developers may pass on the cost of additional Tax / compliance burden on to the
buyers. VAT, Service Tax, Stamp Duty & now this Deemed tax, is effectively
pinching the common man for buying his dream home.
Disclaimer:
The information contained in
this write up has been carefully prepared, but it has been written in general
terms and should be seen as broad guidance only. It cannot be relied upon to
cover specific situations and one should not act, or refrain from acting, upon
the information contained therein without obtaining specific professional
advice. SBR & CO. or its partners do not accept or assume any liability or
duty of care for any loss arising from any action taken or not taken by anyone
in reliance on the information in this publication or for any decision based on
it.
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