TAX TALK-20.06.2011-THE HITAVADA
TAX TALK-20.06.2011-THE HITAVADA
TAX TALK
BY CA. NARESH JAKHOTIA
(Chartered Accountant)
“DEVELOPMENT AGREEMENT & INCOME TAX IMPLICATIONS”
Query 1]
My friend had purchased a plot in 1975. He has recently sold this plot in good locality by giving it to a developer and in exchange the builder is going to give 5 flats, considering he has 3 sons & 1 daughter and 1 flat for himself. Besides this the builder is paying some amount by cheque. What would be the position of capital gain tax levy whether all 5 flats will be considered as his single flat for purpose of capital gains tax rebate deeming having reinvested the sales proceeds in residential house property or only one of these would be qualifying for rebate and others taxed.
For illustration, suppose he has sold 5000 sq. ft. @ 4000. Thus, total notional sales proceed Rs. 2 Crore. Here he is getting 5 flats of say 800 sq. ft. each and Rs.20 Lacs by cheque. Whether the capital gain tax liability arises in such case even though small amount is received in cheque by him? How the value of 5 flats will be determined? What is the capital gain tax element? Since consideration not received in cash/cheque, but in form of flats and no savings in NHAI bonds contemplated. [vbogale48@gmail.com]
Opinion:
a. Transfer of capital asset results in capital gain tax liability even though major portion of the sale consideration is received in kind pursuant to Development agreement.
b. In the given case, your friend is (or will be, depending upon the terms in the development agreement) transferring the share of land in favor of the Builder. Against the transfer of certain share of land, he will be receiving the constructed portion (5 Flats) & small amount in cheque. The sale consideration for computing the capital gain would be higher of the following:i] The construction cost of the five flats plus the amount received by cheque ii] Stamp Duty valuation of the share of land transferred pursuant to Development Agreement. Effectively, the difference between Indexed cost of acquisition of the share of land your friend is transferring AND higher of (i) or (ii) is the amount of long term capital gain.
c. The most important mute question in such a situation is the year of taxability of such transactions.
d. It may be noted that Development agreement is not an agreement for sale simpliciter. It is an executory agreement whereby the developer undertakes to put up a superstructure on that part or portion of land retained by the owner in consideration of transfer of remaining part. Development agreement is not a sale simpliciter, because there is an element of builder’s contract with the only difference that the consideration is not cash but in kind also i.e. constructed portion on the retained land. There are no set guidelines as to the date /Year of taxable event on which the income accrues to the owner or the manner of ascertainment of the capital gains in the hands of the owner, whether on completion of contract or on transfer of undivided interest to the Builder/ prospective flat owners before the completion of construction.There are no accounting standards or guidelines or any treatise in text books on accountancy on the subject. It is not a well settled law as well.The capital gain tax liability arises in the year in which “TRANSFER” took place.Various clauses of sub-section 47 to section 2 define what is “Transfer”. Clause (v) to section 2(47) includes “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 section 53A of the Transfer of Property Act, 1882” in the purview of Transfer.Effectively, any transaction ALLOWING POSSESSION to be taken over or retained in part-performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act would come within the ambit of Section 2(47)(v) of the I-T Act. So, even if you may have granted the possession to the developer not in the capacity of buyer but only in the capacity of developer, even then it MAY BE treated as Transfer u/s 2(47)(v).With above points in mind, two permissible option as to the year of taxability of such transaction could be a) the year in which the Development agreement is signedOR b) the year in which the construction is completed and Flats are handed over to you. All depends upon the terms /conditions/ stipulations in the Development Agreement which plays a very vital role in determining the year of taxability of capital gain.I] If the Development agreement stipulates the transfer (or possession) of land to the builder at the time of handover the five constructed flats to your friend, capital gain shall be chargeable to tax in the year of completion of construction and handover of the flats to your friend. II] If the Development agreement grants an unqualified, uninterrupted and irrevocable right of possession to the developer at the time of signing the documents, then capital gain shall be chargeable to tax in the year of executing Development Agreement itself. Depending upon the year of taxability as per the wording used in the Development agreement regarding possession of the land, one need to examine the possibility of claiming an exemption u/s 54F of the I.T. Act- 1961. To take the better decision, we are elaborating the major stipulations for exemption u/s 54F as under: -
1. Benefit of exemption u/s 54F is available only to an Individual or HUF.
2. To claim an exemption, assessee has to purchase either one year before or within two year after the date of transfer, another residential house property. Alternatively, an assessee can construct the residential house property within a period of 3 years from the date of transfer.
3. Exemption is available only if the long term capital gain arises from the transfer of any capital asset other than a residential house property. If the asset transferred is a residential house property then an assessee can claim an exemption u/s 54 (and not u/s 54F).
4. The assessee has not within a period of 2 years purchase or 3 years construct any residential house other than the new house.
5. Sale consideration has to be invested in residential house property before the DUE DATE of filing the return or else it need to be deposited in the capital gain Deposit Scheme with the Nationalized bank till acquisition of house property within the prescribed period as mentioned above.
6. The assessee is not the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.
7. Exemption u/s 54F is available only in respect of investment in one residential house property. In the given case, your friend is getting 5 flats against the agreement. As per the prevailing ruling of few courts, if all the five flats your friend is getting are capable of being used as single unit, then probably he can claim the proportionate amount long term capital gain as exempt u/s 54F.
8. The quantum of exemption amount will be worked out on the following basis:a] If the amount invested is more than or equal to the net consideration then the entire capital gain. b] If the amount invested is less than the net consideration, then the amount invested x capital gain/net consideration.
9. Situations when exemption granted under section 54F may be withdrawn:
a. If the assessee transfers the new house within 3 years of its purchase/construction Consequences:Capital gain which arises on the transfer of the new house will be taken as short-term capital gain. Besides, the capital gain which was exempt under section 54F shall be treated as long-term capital gain of the year in which the new house is transferred.
b. If the assessee purchases, within a period of two years of the transfer of original asset, or constructs within a period of three years of the transfer of such asset, a residential house other the new houseConsequences: Capital gain which was exempt under section 54F shall be deemed to be income by way of long-term capital gain of the year in which another residential house is purchased or constructed.
In view of the complexity of law & heavy stake involved, we advise all our readers to obtain competent professional advice before entering into such agreements.
TAX TALK
BY CA. NARESH JAKHOTIA
(Chartered Accountant)
“DEVELOPMENT AGREEMENT & INCOME TAX IMPLICATIONS”
Query 1]
My friend had purchased a plot in 1975. He has recently sold this plot in good locality by giving it to a developer and in exchange the builder is going to give 5 flats, considering he has 3 sons & 1 daughter and 1 flat for himself. Besides this the builder is paying some amount by cheque. What would be the position of capital gain tax levy whether all 5 flats will be considered as his single flat for purpose of capital gains tax rebate deeming having reinvested the sales proceeds in residential house property or only one of these would be qualifying for rebate and others taxed.
For illustration, suppose he has sold 5000 sq. ft. @ 4000. Thus, total notional sales proceed Rs. 2 Crore. Here he is getting 5 flats of say 800 sq. ft. each and Rs.20 Lacs by cheque. Whether the capital gain tax liability arises in such case even though small amount is received in cheque by him? How the value of 5 flats will be determined? What is the capital gain tax element? Since consideration not received in cash/cheque, but in form of flats and no savings in NHAI bonds contemplated. [vbogale48@gmail.com]
Opinion:
a. Transfer of capital asset results in capital gain tax liability even though major portion of the sale consideration is received in kind pursuant to Development agreement.
b. In the given case, your friend is (or will be, depending upon the terms in the development agreement) transferring the share of land in favor of the Builder. Against the transfer of certain share of land, he will be receiving the constructed portion (5 Flats) & small amount in cheque. The sale consideration for computing the capital gain would be higher of the following:i] The construction cost of the five flats plus the amount received by cheque ii] Stamp Duty valuation of the share of land transferred pursuant to Development Agreement. Effectively, the difference between Indexed cost of acquisition of the share of land your friend is transferring AND higher of (i) or (ii) is the amount of long term capital gain.
c. The most important mute question in such a situation is the year of taxability of such transactions.
d. It may be noted that Development agreement is not an agreement for sale simpliciter. It is an executory agreement whereby the developer undertakes to put up a superstructure on that part or portion of land retained by the owner in consideration of transfer of remaining part. Development agreement is not a sale simpliciter, because there is an element of builder’s contract with the only difference that the consideration is not cash but in kind also i.e. constructed portion on the retained land. There are no set guidelines as to the date /Year of taxable event on which the income accrues to the owner or the manner of ascertainment of the capital gains in the hands of the owner, whether on completion of contract or on transfer of undivided interest to the Builder/ prospective flat owners before the completion of construction.There are no accounting standards or guidelines or any treatise in text books on accountancy on the subject. It is not a well settled law as well.The capital gain tax liability arises in the year in which “TRANSFER” took place.Various clauses of sub-section 47 to section 2 define what is “Transfer”. Clause (v) to section 2(47) includes “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 section 53A of the Transfer of Property Act, 1882” in the purview of Transfer.Effectively, any transaction ALLOWING POSSESSION to be taken over or retained in part-performance of the contract of the nature referred to in Section 53A of the Transfer of Property Act would come within the ambit of Section 2(47)(v) of the I-T Act. So, even if you may have granted the possession to the developer not in the capacity of buyer but only in the capacity of developer, even then it MAY BE treated as Transfer u/s 2(47)(v).With above points in mind, two permissible option as to the year of taxability of such transaction could be a) the year in which the Development agreement is signedOR b) the year in which the construction is completed and Flats are handed over to you. All depends upon the terms /conditions/ stipulations in the Development Agreement which plays a very vital role in determining the year of taxability of capital gain.I] If the Development agreement stipulates the transfer (or possession) of land to the builder at the time of handover the five constructed flats to your friend, capital gain shall be chargeable to tax in the year of completion of construction and handover of the flats to your friend. II] If the Development agreement grants an unqualified, uninterrupted and irrevocable right of possession to the developer at the time of signing the documents, then capital gain shall be chargeable to tax in the year of executing Development Agreement itself. Depending upon the year of taxability as per the wording used in the Development agreement regarding possession of the land, one need to examine the possibility of claiming an exemption u/s 54F of the I.T. Act- 1961. To take the better decision, we are elaborating the major stipulations for exemption u/s 54F as under: -
1. Benefit of exemption u/s 54F is available only to an Individual or HUF.
2. To claim an exemption, assessee has to purchase either one year before or within two year after the date of transfer, another residential house property. Alternatively, an assessee can construct the residential house property within a period of 3 years from the date of transfer.
3. Exemption is available only if the long term capital gain arises from the transfer of any capital asset other than a residential house property. If the asset transferred is a residential house property then an assessee can claim an exemption u/s 54 (and not u/s 54F).
4. The assessee has not within a period of 2 years purchase or 3 years construct any residential house other than the new house.
5. Sale consideration has to be invested in residential house property before the DUE DATE of filing the return or else it need to be deposited in the capital gain Deposit Scheme with the Nationalized bank till acquisition of house property within the prescribed period as mentioned above.
6. The assessee is not the owner of more than one residential house (other than the new asset) on the date of transfer of the original asset.
7. Exemption u/s 54F is available only in respect of investment in one residential house property. In the given case, your friend is getting 5 flats against the agreement. As per the prevailing ruling of few courts, if all the five flats your friend is getting are capable of being used as single unit, then probably he can claim the proportionate amount long term capital gain as exempt u/s 54F.
8. The quantum of exemption amount will be worked out on the following basis:a] If the amount invested is more than or equal to the net consideration then the entire capital gain. b] If the amount invested is less than the net consideration, then the amount invested x capital gain/net consideration.
9. Situations when exemption granted under section 54F may be withdrawn:
a. If the assessee transfers the new house within 3 years of its purchase/construction Consequences:Capital gain which arises on the transfer of the new house will be taken as short-term capital gain. Besides, the capital gain which was exempt under section 54F shall be treated as long-term capital gain of the year in which the new house is transferred.
b. If the assessee purchases, within a period of two years of the transfer of original asset, or constructs within a period of three years of the transfer of such asset, a residential house other the new houseConsequences: Capital gain which was exempt under section 54F shall be deemed to be income by way of long-term capital gain of the year in which another residential house is purchased or constructed.
In view of the complexity of law & heavy stake involved, we advise all our readers to obtain competent professional advice before entering into such agreements.
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