“JOINT DEVELOPMENT AGREEMENT WITH THE BUILDER FOR DISMANTLING OF THE HOUSE & INCOME TAX IMPLICATIONS”



TAX TALK-03.06.2013-THE HITAVADA

TAX TALK  
BY CA. NARESH JAKHOTIA
Chartered Accountant

“JOINT DEVELOPMENT AGREEMENT WITH THE BUILDER FOR DISMANTLING OF THE HOUSE & INCOME TAX IMPLICATIONS”

Query 1]
Mr.X has an old house in a city say measuring 4,000 sq ft. He enters into a joint venture with a builder "Y" for dismantling the said house & erecting 6 flats on such Land. It is agreed upon between them that each of them shall take over 3 flats after the construction is over. All the expenses including sanction of map & building these flats are borne by "Y". Now, the construction is over & each of them takes over 3 flats. Please advise under I.T. Act, how each of them shall meet their tax liabilities? Suppose the builder has spent Rs. 60 Lacs on construction of 6 flats. The sale price of each flat is say 15 Lacs i.e., Rs. 90 Lacs in total. Three flats of "Y" shall be sold by Mr. X as he is the owner of land & he himself takes over the remaining 3 flats. Please advise whether income shall be a business income or income from capital gains & how shall the taxability be met by each of them? Whether any exemption can be claimed by Mr. X?  Please Advice. [M.R.Iqbal- daver.iqbal@yahoo.com]
Opinion:
It is always advisable to have a proactive approach as far as income tax implications on any property related transactions are concerned. After the document are signed & sealed, assessee is left with very little option but to bear the consequences. Prima-facie, in your case, it appears that it is a routine development agreement between Mr. X and the builder wherein the builder-Y, against the share in land, has given 3 flats to the landlord and have acquired the rights of 3 flats.
The income tax implication, in the hands of the Landlord & the Builder, in normal course is as under:
In the Hands of the Builder:
It appears that against the land share, the builder is offering 3 constructed flats to you. All the expense (sanctioning, Legal, advertisement, construction etc) incurred by the builder will be treated as his cost for 3 flats (though the expenses are incurred for 6 flats) which is his share in the building so constructed. The difference between the sale price of the 3 flats and the construction cost is the business profit taxable in the hands of the builder. Further, if the stamp duty valuation of the each flat is higher than the actual sale price, the difference would further be treated as income in the hands of the builder in view of the new provision [Section 43CA] inserted in the Income Tax Act -1961.
In the Hands of the Landlord:
To be precise, Mr. X was the owner of a house property which is given to the builder for constructing a flat scheme. Against the House property given to the builder, the sale consideration is in the form of constructed 3 Flats. It appears that Mr. X has transferred a residential house property (& not plot or Vacant land) & the fact appears to have been duly & clearly incorporated in the document executed, as a result of which Mr. X may have an option of claiming exemption u/s 54. [If the property transferred is any property other than residential house property, then exemption is not available u/s 54, even though exemption could be claimed u/s 54F]. Exemption u/s 54 or U/s 54F is subject to various other terms, conditions & riders which were aptly covered in earlier issues of tax talk. The same may further be accessed at www.nareshjakhotia.blogspot.com.  The tough task that remains is how to compute the capital gain in such cases. It requires various supplementary details like the year/cost of acquisition & additions, the Stamp duty Valuation of the house property which is given to the Builder/ Developer,  the Market value of the 3 Flats Mr. X is getting, the contents of the development agreement etc. Further, the year of taxability & the amount of capital gain would largely be dependent on the drafting of the agreement with the builder & the terms, conditions and stipulations incorporated therein. The opinion cannot be expressed on the basis of the piece of information provided. With above basic framework, you need to approach your CA/Tax Consultant for working out the taxability on such transaction.

Query 2]
I am a senior citizen. My source of income is pension (Nationalized Bank retiree) + Interest on deposits with the Bank. The Bank deducts TDS on Interest paid. I regularly file return. For the FY 2011-12 (AY: 2012-13), I have e-filed return on 17.07.2012 through our C.A. My wife also filed return on the same day. She received her due refund within reasonable time by direct credit to her A/c but I have still not received the refund till this date.
Refund Status enquiry does not give any satisfactory information. I sent e-mails to refunds@incometaxindia.govt.in, ask@incometaxindia.govt.in, contactus@tdscpc.govt.in, but every time the mails bounced after 2-3 days with a message of mail box full. When contacted my C.A., he checked TDS TRACES form 26AS which showed correct position of tax credit in my A/c. So, my C.A. advised me to wait for more time as nothing can be done now. I am not satisfied. If the department is not functioning properly, there should be someone to whom we can complain or say about grievance. Please guide me in the matter. [A.K.Kalamkar-akkalamkar@yahoo.co.in]
Opinion:
As far as the Refunds issues are concerned, the process has been reasonably streamlined & made simpler by the Income Tax Department. However, there are instances wherein getting the refunds become cumbersome & annoying. In most of the cases, refunds are not issued for the following reasons:
a.       Incorrect entry of PAN number
b.      Change of address without proper intimation to the tax department
c.      Wrong bank account provided in the tax return
d.      Inconsistency in TDS credit with reference to 26AS (Tax Credit Status)
e.      Delayed in tax return filing or non-filing by the Tax Deductor.

The best approach in case the refund is delayed beyond a years time or so is to visit the income tax office for the follow up of the refund or send a grievance letter addressed to the concerned Income Tax Assessing Officer, with the copy of the tax return acknowledgement. If there is a severe delay, a letter could be addressed to the Jurisdictional Chief Commissioner of the Income Tax, with a copy to the Grievance Cell and the concerned Income Tax Officer wherein one can attach copies of previous letters which may have been written to the Income Tax Assessing Officer, along with a copy of the tax return filed.

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