Tax impact varies with Time, Place & Heads

TAX TALK-08.06.2015-THE HITAVADA

TAX TALK

CA. NARESH JAKHOTIA

Chartered Accountant

Tax impact varies with Time, Place & Heads

Query 1]

I purchased plot on 1^st June 2006 on installment bases for Rs. 1,05,500/- & incurred Rs. 7,500/- towards registry expenses. I have sold the said plot on 23/01/2015 for Rs. 5,84,000/-. The full amount is given on 23/02/2015 for purchase of plot. It is still not registered as Release Letter (RL) is not obtained from Nagpur Improvement Trust (NIT). Please clarify the following:

1.      What is the obligation in regards Income tax?

2.      What is the time limit to show in IT returns?

3.      Any delay in registration, how should overcome this?  [CRM Reddy-chavarajmohanreddy@gmail.com]

Opinion:

Most of the taxpayer may not know the fact that sale deed is not the only documents that give rise to taxable event in respect of property transactions. Likewise, receipt of entire consideration against sale of property may not be decisive factor for taxing the income thereon. The profit in respect of capital assets is taxable at the time of transfer. “Transfer” is a wider and broader term than mere “Sale”. For levy of income tax, “transfer” is utmost relevant. Tax impact varies with time, place, & heads of income. For the taxpayers who are not into the business of land trading / development /builder-ship, even handing over the possession of the property would amount to transfer & would attract income tax, even if the consideration for the same is not fully received or even if the sale deed is not executed.

In your specific case, it appears that you have received the entire amount against sale of plot on 23.02.2015. However, the sale deed of the plot could not be executed for some technical reasons. Since entire amount against sale of plot is received, the purchaser might have taken over the possession of the property either by executing some sort of unregistered document or through registered power of attorney etc. If so or if anyhow the possession is handed over by you in favor of the buyer, the profit on sale of plot would be liable to capital gain tax in the FY 2014-15. In such case, you would be required to show the transaction of transfer of plot in the income tax return for the FY 2014-15 only & you would be required to file your income tax return accordingly. In such case, your capital gain working would be based on the higher of actual sale consideration or government value prevailing at the time of handing over the possession of the property for levy of stamp duty. You would not be required to show the transaction subsequently again at the time of executing the sale deed of the plot & the subsequent government valuation/sale deed won’t attract additional tax burden provided that you properly document the fact of transaction in the sale deed, more particularly of handing over the possession of the property in the FY 2014-15.

If however the possession is not handed over by you to the buyer, then it would be taxable in subsequent year in which the sale deed is executed & the possession is handed over. In such case, there is no tax liability in the FY 2014-15 even though entire amount against the sale of plot is received by you. However, in such case, you may be subsequently subject to the rigor of section 50C as the government valuation of the property for levy of stamp duty shows an increasing trend year after year and your future tax liability would be dependent on the government valuation at the time of handing over of the possession/sale.

Now, what is better- whether to handover the possession of the property instantly in such case or defer the handing over the possession of the property. No standard & isolated opinion could be expressed in such case. The transaction could be planned in such a way that the tax bill of the taxpayer is minimized or linked with the cash flow of the transactions.

When the deal is finalized and entire consideration is received by the seller, then even though the sale deed cannot be executed for any reason whatsoever, it is normally advisable for the seller to handover the possession of the property by some documentary evidence so that capital gain can be booked in that year itself. This would nullify burden of Section 50C as the government valuation of the property shows an increasing trend.

But, in some cases, not handing over the possession of the property in such case could be a part of well planned tax tool by the taxpayer. For example, for saving long term capital gain tax, individual taxpayers has to invest the amount in a specified mode within specified time frame (which may vary from 6 months to 3 years). Now, this specified time frame would be commencing from the date of transfer of plot. Without repeating what has been mentioned earlier, taxpayers can plan the timing of their transactions in such a way that the condition of specified time frame is fulfilled for saving tax. While doing the property transaction, effect of income tax should not be overlooked. Right to tax planning has been recognized by the judiciary & timing of income could play an important role in managing tax impact.

[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at SSRPN & Co, 10, Laxmi Vyankatesh Apartment, C.A. Road, Telephone Exch. Square, Nagpur-440008 or email it at nareshjakhotia@ssrpn.com]