Real Estate transactions- Recent amendments in Income tax & Wealth tax

Real estate transactions in recent past have attracted the attention of Central & State Governments. New provisions under Income tax, Wealth tax, Service tax, Value added tax & revised guidelines for registration are examples of attempts on the part of the Government to raise more & more revenue from real estate transactions.

In any case recent amendments in Income tax & Wealth tax by Finance Act, 2013 will lead to fresh set of litigations.

Salient Features of recent provisions regarding Real Estate are briefly discussed as under:-

DEFINITION OF ‘RURAL AGRICULTURAL LAND’ SECTION 2(1A)

• This new section is applicable with effect from 1^st April, 2013 (A.Y. 2014-15).
• Corresponding amendments in Section 2(ea) of the Wealth Tax Act has also been made to include, any land situated in any area within the distance, measured aerially.
• This New definition of measuring distance will supersede following Judicial decisions:-

(i) CIT Vs. Lal Singh (2010) 195 Taxman 420 (P&H)

(ii) CIT Vs. Satinderpal Singh (2010) 188 Taxman 54 (P&H)

(iii) Laukik Developers Vs. Dy. CIT (2007) 105 ITD 657 (Mum.)

• This table will determine the classification of land for income & wealth tax –

Population of municipality/cantonment board		Distance from local limits of municipal/cantonment board [Aerial Distance]
		URBAN LAND	RURAL LAND
>10,000 but < 1lakh		Within 2 kms	Beyond 2 kms
> 1 lakh but < 10 lakhs		Within 6 kms	Beyond 6 kms
>10 lakhs		Within 8 kms	Beyond 8 kms

• Now no notification is required for this purpose.
• In 1994, Notification No. 9447 Dated 6^th of January 1994 was issued which was amended by Notification No. 11186 Dated 28^th December 1999, classifying lands as Urban Agriculture Land, and the same was separately specified in each State and Municipality.
• Remotely located lands, which are not connected by any motor able road and not approachable, may still be considered as an Urban Land, if they are situated within the specified area.
• Population as per the last preceding census for which data published before the first day of the previous year is to be considered.
• Starting point for measurement of distance will be where the land records of relevant property is maintained.

• For measuring aerial distance, the use of GPS Technology and the logics of Longitudes and Latitudes can be applied.

EXCLUSIONS

• Agriculture land within the specified aerial distance.

FOOD FOR THOUGHT

• To determine the taxability in this section one of the criteria is population of the relevant land area.

The basis of population is as per the last preceding census for which data published before the first day of the previous year.

As regards A.Y 2014-15 the relevant date is 01/04/2013

The question is that for the above relevant date i.e. 01/04/2013 the population as per census of 2011 or 2001 will be the basis?

Since as on 01/04/2013 the census data of 2011 was not published, hence the benefit of population data of 2001 can be taken.

TRANSFER OF IMMOVABLE PROPERTY FORMING PART OF ‘STOCK IN TRADE’– SECTION 43CA

• This section is applicable with effect from 1^st April, 2013 (A.Y. 2014-15).
• It would apply to stock – in – trade of immovable property.
• Immovable property includes land or building or both.
• The above section has been incorporated to compute income of the person engaged in the business of real estate.
• The above section will be applicable even to the persons covered U/s 44AD.

However it is a different matter that a very small real estate dealer will have turnover of only one crore in a year to be covered U/s 44AD.

• When the transfer is for consideration which is less than stamp duty value then stamp duty value is deemed to be the full value for computing income under the head ‘Profits & gains of business or profession’.
• The provisions of sub-section (2) & sub- section (3) of section 50C regarding right of the assessee to protest stamp duty valuation & reference to Valuation officer is available under this section also.
• In case difference in dates of agreement for determining the value of consideration & date of registration, the value as on date of agreement to be revoked for this section.
• However, above exception shall be applied only in case consideration is received in any mode other than cash.
• It was held in the following cases that the provision of Sec. 50C would have no application & can’t be invoked in cases where immovable properties are held as stock -in- trade :-

(i) CIT v. M/S Kan Construction And Colonizers (P) Ltd [2012] 20 taxmann.com 381 (Allahabad)

(ii) K.R. Palanisamy v. Union of India [2009] 180 Taxman 253 (Mad.)

(iii) Asst CIT v. Excellent Land Developers (P.) Ltd. [2010] 1 ITR (TRIB.) 563 (Delhi)

(iv) CIT Vs. Thiruvengadam Investments (P.) Ltd. (2010) 320 ITR 345 (Mad.)

This section has been incorporated to supersede the above referred judgements.

EXCLUSION

• Any immovable property held by the asseessee as ‘Capital asset’.

FOOD FOR THOUGHT

• The section provides that consideration for the property, has been made in ‘any mode other than cash’. The question arises as to whether the word ‘any mode other than cash’ will include (a) Transfer by Book Entry or (b) Transfer by way of agreement to exchange or (c) Transfer for Hundi, or Promissory Note executed for the amount of consideration.
• If an agricultural land, which is not a capital asset, is acquired and held as Stock in Trade, sale of such land may also be brought to tax under the above provision, even if it is used by the assessee for agricultural purpose, since the section starts with the words, ‘An asset other than a Capital Asset’.

• In the state of Madhya Pradesh, co-operative housing societies according to law run on no profit no loss basis. Such societies had received instalments of small amounts in cash over a period of time. No amount was received by any mode other than cash. In such cases, if the registration of plots is executed before registrar of stamps by such societies in favour of its member say in F.Y. 2013-14, the difference in guideline value & amount received may be manifold. In such cases the members will have to bear huge cost of stamp duty & substantial liability of income tax U/s 56(2)(vii)(b) on one hand & the co-operative housing society will have to bear substantial liability of income tax on ‘Deemed Profit’ U/s 43CA. As per Co-operative Act, such societies are not supposed to earn profit. How far the aforesaid provisions of Income Tax are justified in such cases?
  

TAXABILITY OF IMMOVABLE PROPERTY RECEIVED FOR INADEQUATE CONSIDERATION – SECTION 56(2)(vii)(b)

• Similar provision was introduced by the Finance (No.2) Act, 2009 effective from 1^st October, 2009. However, this provision was withdrawn retrospectively by the Finance Act, 2010. Now introduced through Finance Act, 2013.
• This section is applicable with effect from 1^st April, 2013 (A.Y. 2014-15).
• The recipient assessee should be an individual or HUF.
• Property transferred by any person other than a relative as defined under explanation (e) to section 56(2)(vii) are covered under this section.
• Immovable property includes land or building or both.
• Difference between actual sales value & stamp authority valuation shall be the income of recipient as income from other sources, if the difference exceeds Rs. 50,000/-.
• Difference in dates of agreement for determining the value of consideration & date of registration, the value as on date of agreement to be revoked for this section.
• The new provision override the decision of the Delhi High Court in the case of

• However, above exception shall be applied only in case consideration is received in any mode other than cash.

(i) CIT vs. Khoobsurat Resorts Private Limited (2012) 211 Taxmann 510 (Delhi HC).

(ii) Krishna Kumar Rawat Vs. Union of India (1995) 214 ITR 610 (Raj.)

(iii) Dinesh Kumar Mittal Vs. ITO(1992) 193 ITR 770 (All)

(iv) CIT Vs. Bhanwarlal Murawatiya (2008) CTR 489 (Raj.)

EXCLUSIONS

• Relatives as defined under explanation (e) to section 56(2)(vii) are excluded.
• If the recipient of the property is a person other individual or HUF i.e. firm, LLP, company etc. the above provisions will not be applicable.

FOOD FOR THOUGHT

• The section provides that “consideration for the property, has been made in ‘any mode other than cash’. The question arises as to whether the word ‘any mode other than cash’ will include (a) Transfer by Book Entry or (b) Transfer by way of agreement to exchange or (c) Transfer for Hundi, or Promissory Note executed for the amount of consideration.
• Double Taxation: Where the land or building is a Capital Asset, transferred for a value less than the Stamp Duty Value, the notional difference amount is taxable in the hands of the Transferor as Capital Gain under Section 50C, and if the asset is held as Stock in Trade, taxable as profit and gains of business or profession, in the hands of the transferor by Section 43CA. The transferee in the same transaction is taxed on the difference amount again U/s 56(2)(vii).

Whether it amounts to ‘Double Taxation’ ?

• The cost of the buyer, in case he is liable for Income from other Source u/s. 56(2)(vii), shall be the value adopted or assessed u/s. 56(2)(vii). Same is as per u/s. 49(4). Once the assessee is liable for tax u/s. 56(2)(vii), his cost will be the value u/s. 56(2)(vii).
• Since provision of section 49(4) cannot be extended to section 32, assessee cannot account for such house property at higher value in the books of accounts and cannot claim depreciation on the enhanced value of the such house property. How far it is justified?
• If the house property is covered U/s 56(2)(vii) & taxed accordingly is used as business asset the question is whether depreciation can be claimed on enhanced value as stipulated U/s 49(4)?
• If an individual or HUF are in the business of real estate, buys the land or building at less than stamp duty value and the difference being more than Rs. 50,000/- will be taxed U/s 56(2)(vii) (b). But such individual or HUF will not be able to take advantage of the enhanced cost as per Sec. 49(4) since they have acquired the said assets as ‘Business Asset’& not as ‘Capital Asset’. How far it is justified?

INTEREST ON HOUSING LOAN – SECTION 80EE

• This section is applicable with effect from 1^st April, 2013 (A.Y. 2014-15).
• Additional benefit is available for first home buyers.
• This deduction shall be available to an individual only and not to an HUF.
• The loan should be taken from bank or a housing finance company.
• The loan should be taken for the acquisition of a residential house property.
• The amount of loan sanctioned for acquisition of the residential house property should not be more than Rs. 25 lakhs.
• The value of the residential house property should not be more than Rs.40 lakhs.
• The loan should be sanctioned by the financial institution during the period beginning on 1^st April, 2013 and ending on 31st March, 2014 .
• It is one time benefit of interest of Rs. 100,000 on acquiring first home by an individual.
• If full deduction of Rs. 1 lakh cannot be claimed by the assessee in A.Y. 2014-15, then the deduction of the balance amount of Rs.1 lakh can be claimed in the subsequent assessment year i.e. 2015-16.
• The additional deduction would mean tax benefit gets raised from Rs 1.5 lakh to Rs 2.5 lakhs.
• This additional deduction will enable tax saving up to Rs. 33,990.

EXCLUSIONS

• All other assesssee except individual are excluded.
• Loan sanctioned before 1st April, 2013 or after 31^st March, 2014 will not be eligible loan to avail the benefit.
• The value of the residential house property should not exceed Rs. 40 lakhs.
• The amount of the loan sanctioned should not exceed Rs. 25 lakhs.
• The assessee should not own any residential house property on the date of the sanction of the loan.

FOOD FOR THOUGHT

• The Section provides that, the deduction shall apply only for loan taken for the purpose of ‘acquisition of a residential house property’.

It is not clear whether the deduction is available in case of self-construction of the property by the Assessee.

• A residential house property is purchased by two persons jointly in equal ratio the value of which is Rs. 80 lakhs & a loan of Rs. 50 lakhs is also taken jointly in equal ratio to acquire such asset.

Whether the benefit of Sec. 80EE can be taken by both the persons?

TAX TO BE DEDUCTED AT SOURCE ON TRANSFER OF IMMOVABLE PROPERTY – SECTION 194 – IA

• The Union Budget, 2012 contained a similar provision in section 194LAA which was withdrawn and now the Finance Act, 2013 has the same provision in section 194-IA.
• This section is applicable w.e.f. 1^st June, 2013 like other provisions of T.D.S.
• Applicable on any person being transferee (other than person referred to in Sec. 194 LA regarding payment of compensation on acquisition of certain immovable property).
• Land should be other than rural agriculture land.
• Transferor (seller) should be resident in India.
• Any person who is transferee(purchaser) is required to deduct tax before payment.
• Deduction has to be made at the time of making payment or credit whichever is earlier.

Thus, even at the time of giving earnest money or an advance money or an installment, tax will be required to be deducted and deposited in accordance with the provisions of the Act.

• Rate of TDS is 1% of the purchase consideration.
• If PAN is not provided by seller TDS will be deducted @ 20%.
• Purchase consideration (apparent consideration) paid or payable should be more than 50 lakhs.
• Immovable property means any land (other than agricultural land) or any building or part of a building.
• A simple one page challan in Form No. 26QB for payment of TDS has been prescribed containing details of transferor and transferee regarding their PAN, category of PAN, status of PAN, full name & address, mobile no., email id, complete address of property transferred, total amount of consideration, date of agreement/booking details of payment etc.
• The transferee would not be required to obtain any Tax Deduction and Collection Account Number (TAN) or to furnish any TDS statement.
• The transferor would get credit of TDS like any other pre-paid taxes on the basis of information furnished by the transferee in the challan of payment of TDS.
• Notification dt. 31/05/2013 & rules 30 & 31 are relevant for this section.

EXCLUSIONS

• No deduction if purchase consideration less than 50 lakh rupees.
• No deduction if purchase consideration is less than 50 lakh rupees & guideline value is more than 50 lakhs.

• Sale of rural agriculture land covered U/s 2(14) is excluded.
• No requirement to obtain TAN by the transferee.
• Purchase of immovable property from the non – resident transferor covered U/s 195, hence not covered under this section.
• The facility of obtaining certificate from Assessing Officer U/s 197 prescribing nil rate or lower rate of TDS not available.
• Payees declaration for non deduction U/s 197A is not admissible.
• No surcharge, education cess or SHEC shall be added to above rates of TDS.

FOOD FOR THOUGHT

• If sale agreement is executed before 01/06/2013 for an apparent consideration of

Rs. 80 lakhs for which Rs. 40 lakhs were paid before 01/06/2013 & balance payment & registration of sales deed is executed after 01/06/2013.

Whether above provisions of TDS will be applicable? If Yes then on what amount?

• If the apparent consideration of any immovable property is Rs. 80 lakhs & the purchaser & seller are two persons in equal ratio each paying & receiving Rs. 40 lakhs whether the above provisions of TDS will be applicable?
• It has to be examined how far answer given to Q.21 in circular no. 715 dt. 08/08/1995 is relevant in this context. For ready reference the same is reproduced as under :-

Question 21: Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?

Answer: Under section 194-I, the tax is deductible from payment by way of rent, if such payment to the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.

• At present there is no responsibility under Income Tax Act of the registering authorities in Sec. 194 – IA to verify the payment of TDS which was there in the dropped Sec. 194 –LAA of Union Budget, 2012.

WEALTH TAX ACT

• The definition of ‘agricultural land’ has been amended in Income Tax Act & corresponding amendments have been made in Wealth Tax Act also.
• Land classified as agricultural land in the records of the Government and used for agricultural purposes, will not be treated as an ‘asset’ under Section 2(ea) with retrospective effect from the A.Y. 1993-94.

Consequently, such land will not be chargeable to wealth-tax, even if such land is situated in an urban area.

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Author :-

CA Govind Agrawal

M.Com, LL.B.,(Hons.), FCA.

Email Id: gbagrawal@hotmail.com