Open Letter to FM-“Suspend Section 43CA & Section 56(x) of the Income Tax Act to enable Sick Real Estate Companies to revive”.
The Finance Minister last week announced measures to boost the ailing economy and the measures were well accepted by the market. She had promised to bring in much awaited measures to give boost to the Real Estate Sector which has become sick. Certainly, the Real Estate Sector needs a bigger dose of corrective measures and concessions to bring out this sector from the red. One of the Demands of the Real Estate Sector is to “Suspend Section 43CA & Section 56 (x) of the Income Tax Act.”
The Government, particularly the Hon’ble Finance Minister, should understand the dilemma in which the Builder/ Developer is currently in. The Real Estate Sector is facing acute Liquidity crunch. It is an undisputed fact that the Real Estate Sector is passing through the worst time- gripped with acute recession, low demand, rising inventory and discounted/desperate sales. On the financial front, the cheques issued by them against supply of goods and services are being dishonored by its bank leading to multiple proceedings under S 138 of the Negotiable Instruments Act 1881. Because of Delayed Payments to the MSMEs towards supply of goods & services, numerous proceedings under Chapter V of the MSME Act 2006 have been instituted against them. Because of Liquidity crunch coupled with dwindling sales and mounting unsold inventory, the completion of the Real Estate Projects are being delayed leading to complaints and penal action under RERA. Due to cash crunch the installments of Bank Loans/ Project Finance are being delayed leading to fear of Loans becoming NPA and the fear of vesting of the properties of the developer with the Bank/ Financial Institution under SARFAESI Act 2002 is looming large.
Under these adverse circumstances, the Builder/ Developer is under acute financial pressure and is prepared to sell his inventory as ‘ Distress Sale’. His negotiating power has fallen and he succumbs to the wishes of the new customer’s bargaining power, provided he is getting instant payment. In such a situation he is forced to sell the property at the actual existing price or at a discount to the existing market price, depending on the business expediency and fund requirements. The consideration at which the sale deeds are being executed is thus the actual market value of the demised immovable property whereas the buyer is constrained to pay stamp duty as per the prevalent circle rates, which are merely guidelines and do have no legal binding force.
Thus, one of the areas where we want the attention of the Finance Minister is Section 43CA of the Income Tax Act which reads as under:
Special provision for full value of consideration for transfer of assets other than capital assets in certain cases.
43CA. (1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer:
[Provided that where the value adopted or assessed or assessable by the authority for the purpose of payment of stamp duty does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration.]
(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far as may be, apply in relation to determination of the value adopted or assessed or assessable under sub-section (1).
(3) Where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same, the value referred to in sub-section (1) may be taken as the value assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer on the date of the agreement.
(4) The provisions of sub-section (3) shall apply only in a case where the amount of consideration or a part thereof has been received [by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account] 49[or through such other electronic mode as may be prescribed] on or before the date of agreement for transfer of the asset.
From the plain reading of the above section it is clear that only 5% relaxation has been given vis-a-vis the market value arrived as per the existing circle rates of the properties. It would not be out of the place to mention that the prices of Real Estate have fallen down by more than 30% throughout the country and ironically only in a few selected cities the circle rates have been reduced while in most of the cities across India the circle rates have been retained since the last 3-4 years despite the drastic fall in the actual market prices. Thus the Real Estate Developer & the buyer is forced to pay Income Tax on this notional income which none of them have earned. Since the Real Estate Developer is debt redden and has poor liquidity, he is forced to sell the properties at the existing depressed market rate and the buyer is forced to pay stamp duty on the existing circle rates, which are exorbitantly high, giving rise to taxable notional income although neither the buyer has paid any amount in cash to the developer nor the developer has received any amount in cash nor the buyer has paid anything over and above the consideration but is mandated to pay additional Income Tax from their own pocket. This is against the well settled principles of “Real Income” as propounded by the Apex Court in a number of cases.
It is pertinent that there are a catena of cases decided by the Hon’ble Supreme Court of India where in they have categorically held that the circle rates are merely guidelines and do not have a binding effect on the actual valuation of the immovable property. Ramesh Chandra Bansal Vs. D.M./Collector Ghaziabad (1999) RD 499, State of Punjab Vs. Mohabir Singh (1996) (1) SCC 609, Jawajee Nagnatham Vs. Revenue Divisional Officer, Adilabad, Andhra Pradesh (1994) (4) SCC 595, P. Ram Reddy & Others Vs. LAO, Hyderabad Urban Development Authority, Hyderabad & Others. (1995) (2) SCC 305, Land Acquisition Officer, Eluru & Others Vs. Jasti Rohani (Smt.) and another (1995) (1) SCC 717, Paminder Singh and Others Vs. Union of India and others (1995) (5) SCC 310, U.P. Jal Nigam, Luknow through its Chairman and another Vs. Kalra Properties (P) Ltd., Lucknow and others (1996) (3) SCC 124, Krishi Utpadan Mandi Samiti, Sahaswan, District Badaun Vs. Moh. Ibrahim and others (2004) (2) AWC 1829 (SC), Union of India Vs. Pramod Gupta (D) by LRs and others (2005) (12) SCC 1 & R.Sai.Bharathi Vs. J.Jayalalitha (2004) (2) SCC 9 are the leading cases which have laid down that the Circle Rates are mere guidelines and do not have a binding force.
That it has been held in a number of cases by the Hon’ble Apex Court and various High Courts that the deviation of 15% between the actual value and the estimated value is permissible and does not call for any addition in income or for imposition of penalty. It would be pertinent to refer to section 269C of the Income tax Act which reads as under:
“Immovable property in respect of which proceedings for acquisition may be taken.
269C. (1) Where the competent authority has reason to believe that any immovable property of a fair market value exceeding one hundred thousand rupees has been transferred by a person (hereafter in this Chapter referred to as the transferor) to another person (hereafter in this Chapter referred to as the transferee) for an apparent consideration which is less than the fair market value of the property and that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with the object of—
(a) facilitating the reduction or evasion of the liability of the transferor to pay tax under this Act in respect of any income arising from the transfer; or
(b) facilitating the concealment of any income or any moneys or other assets which have not been or which ought to be disclosed by the transferee for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or this Act or the Wealth-tax Act, 1957 (27 of 1957),
the competent authority may, subject to the provisions of this Chapter, initiate proceedings for the acquisition of such property under this Chapter :
Provided that before initiating such proceedings, the competent authority shall record his reasons for doing so:-
Provided further that no such proceedings shall be initiated unless the competent authority has reason to believe that the fair market value of the property exceeds the apparent consideration therefore by more than fifteen per cent of such apparent consideration.
(2) In any proceedings under this Chapter in respect of any immovable property,—
(a) where the fair market value of such property exceeds the apparent consideration therefore by more than twenty-five per cent of such apparent consideration, it shall be conclusive proof that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer ;
(b) where the property has been transferred for an apparent consideration which is less than its fair market value, it shall be presumed, unless the contrary is proved, that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with such object as is referred to in clause (a) or clause (b) of sub-sections (1).”
If the FM really wishes to give some relief to the ailing Real Estate Industry than it should suspend Section 43CA & Section 56(x) of the Income Tax Act w.e.f. 1.4.2019 till the time the real Estate Sector revives and the market prices normalise.
INDER CHAND JAIN, Email ID. firstname.lastname@example.org, Mob: 9319215672