TAXATION ISSUES IN REAL ESTATE DEVELOPMENT TRANSACTIONS

TAXATION ISSUES IN REAL ESTATE DEVELOPMENT TRANSACTIONS

Issues concerning the landowner

Issues concerning the developer

ISSUES CONCERNING THE LANDOWNER

Capital Gain or Business Income ?

Answer to this question will depend upon the nature of transaction. Even a solitary transaction could result in business income

If a person has lived in a house for 20 years and then gives it for development, it is a clear case of capital gains.

If a builder gives a piece of land held as stock in trade for development it is a clear case of business income.

Development Agreements

What is a Development Agreement Development Agreement with GPA Does it require registration ? Precautions to be taken while drafting the

Development Agreement

Development Agreement – an illustration

Total Landarea - 1000 sq yds Builtup Area – Total Builtup area – 20000 sq ft.

Landowner - 40 % i.e. 8,000 sq ft Developer - 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 & Landowner’s share handedover on

10/05/2009

When is the transfer complete

Date of transfer to decide the year of accrual of capital gain

Definition of transfer under the Income Tax 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 be taken or retained in part performance of a contract of the nature referred to in S 53A of the Transfer of Property Act, 1882.

Sec 53A of TP Act – What is part performance

Where any person contracts in writing to transfer any immovable property, and the transferee has, in part performance of the contract, taken possession of the property and has done some act in furtherance of the contract, and is willing to perform his part of the contract then –

the transferor shall be debarred from enforcing any right in respect of the property, other than a right expressly provided in the agreement.

Point of accrual of income

Date of execution of Development Agreement Date of handingover of possession Handingover of possession coupled with GPA in

favour of developer Date of execution of first sale deed for developer’s

share Date of execution of first sale deed for landowner’s

share Date of handing over of Landowner’s builtup area

Date of execution of Development Agreement

Transfer would not be complete if the agreement is properly drafted and all clauses are kept out of the purview of Section 2 (47) read with Section 53A of the Transfer of Property Act.

Date of handingover of possession of land

Capital gain will not accrue provided possession is handedover to developer purely as a licensee – See R Vijayalakshmi Vs Appu Hotels Ltd ( 2002) 257 ITR 4 – though given in the context of Chapter XXC.

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 linked to some other event like permission from municipal authorities ?

Chaturbhuj Dwarkadas’s case260 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.

AAR Ruling in Jasbir Singh’s case294 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

Date of execution of First Sale Deed for Developer’s share

Date of execution of First Sale Deed for Landowner’s share

Date on which the Landowner’s share is handedover

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 sale consideration

Balance amount would be taxed as business income

Amount of Income

Registration Value/Market value of proportionate share in land

Cost of construction of builtup area falling to the Landowner’s share

What if the Landowner sells part of his builtup area

Whether any exemptions are available

Exemption U/s 54

Exemption can be claimed for retained residential flat/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

ISSUES CONCERNING THE DEVELOPER

Year of taxability of income Computation of income Deductions available

Year of taxability of income

Year of completion of project On a year to year basis Is AS 7 applicable to builders

Computation of income

Computation of income on a year to year basis

- Percentage of advances received

- Percentage of expenditure during the year

- What about tax audit

Computation of income on completion of project

There could be issues when some of the flats or offices spaces are registered in the names of the buyers even before the entire complex is ready

Allowability of interest on borrowed capital – should it form part of project cost or can it be claimed on year to year basis ?

ISSUES IN SERVICE TAX

Threshold exemption and other matters

Threshold exemption of Rs 10 Lakhs from F Y 08-09 Exemption linked to preceding year’s turnover Tax payable only on turnover exceeding Rs 10

Lakhs in the first year Only value of taxable services to be included in

arriving at Rs 10 lakhs amount When new services are brought into tax net in the

middle of the year

Due dates of payment

Due Date of Payment is 5th of the month succeeding the month in 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 is realised.

In all cases, for the month or quarter ended 31st March, the due date 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 be

the date of payment of tax provided the cheque is realised. ( Supreme Court decision in 25 ITR 529 )

Construction Services

Commercial or Industrial construction services

Construction of complex service

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 etc

Building should be used for commercial purposes

What is not covered

construction of building for self-use or for renting out

Developers / builders who construct and sell by 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

Abatement of tax

Abatement to the extent of 67 % of gross receipts available subject to conditions like not availing Cenvat credit on inputs or on input services

Construction of complex service

Definition covers :

a. construction of a new residential complex or part thereof

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

c. repair, alteration, renovation etc

Residential complex means a building having more than 12 residential units with common area or common facilities like lift, water etc

What is not covered

construction of building for self-use or for renting out Developers / builders who construct and sell by

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

Abatement to the extent of 67 % is available

Service Tax under the composition scheme

Builders can opt for payment of service tax at a reduced rate of 2 % ( increased to 4 % in the Finance Act 2008 ) under the composition scheme applicable to all works contracts.

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

Thank you