TAXATION ISSUES IN REAL ESTATE DEVELOPMENT TRANSACTIONS

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TAXATION ISSUES IN REAL ESTATE DEVELOPMENT
TRANSACTIONS
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• Issues concerning the landowner
• Issues concerning the developer

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ISSUES CONCERNING THE LANDOWNER
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Capital Gain or Business Income ?

• Answer to this question will depend upon the
  nature of transaction. Even a solitary
  transaction could result in business income
• If a person has lived in a house for 20 years and
  then gives it for development, it is a clear case
  of capital gains.
• If a builder gives a piece of land held as stock
  in trade for development it is a clear case of
  business income.

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Development Agreements

• What is a Development Agreement
• Development Agreement with GPA
• Does it require registration ?
• Precautions to be taken while drafting the
  Development Agreement

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Development Agreement an illustration

• Total Landarea - 1000 sq yds
• Builtup Area Total Builtup area 20000 sq
  ft.
• Landowner - 40 i.e. 8,000 sq ft
• Developer -
  60 i.e. 12,000 sq ft
• Date of Development Agreement 01/01/2008
• Possession handedover to developer on 30/04/2009
  ( With/without GPA )
• Building completed Landowners share handedover
  on 10/05/2009

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When is the transfer complete

• Date of transfer to decide the year of accrual of
  capital gain

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Definition of transfer under the Income Tax Act

• Section 2 (47) (v) of the IT Act reads as under
• 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 S 53A of the Transfer
  of Property Act, 1882.

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Sec 53A of TP Act What is part performance

• Where any person contracts in writing to transfer
  any immovable property, and the transferee has,
  in part performance of the contract, taken
  possession of the property and has done some act
  in furtherance of the contract, and is willing to
  perform his part of the contract then
• the transferor shall be debarred from
  enforcing any right in respect of the property,
  other than a right expressly provided in the
  agreement.

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Point of accrual of income

• Date of execution of Development Agreement
• Date of handingover of possession
• Handingover of possession coupled with GPA in
  favour of developer
• Date of execution of first sale deed for
  developers share
• Date of execution of first sale deed for
  landowners share
• Date of handing over of Landowners builtup area

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Date of execution of Development Agreement

• Transfer would not be complete if the agreement
  is properly drafted and all clauses are kept out
  of the purview of Section 2 (47) read with
  Section 53A of the Transfer of Property Act.

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Date of handingover of possession of land

• Capital gain will not accrue provided possession
  is handedover to developer purely as a licensee
  See R Vijayalakshmi Vs Appu Hotels Ltd ( 2002)
  257 ITR 4 though given in the context of
  Chapter XXC.

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Handingover possession with GPA

• Transfer would be complete for IT purposes on the
  date an irrevocable GPA is given
• What happens if GPA is given but possession is
  not handedover or it is linked to some other
  event like permission from municipal authorities ?

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Chaturbhuj Dwarkadass case260 ITR 491

• Original Agreement dated 18/08/1994
• This was a sale agreement with a consideration of
  Rs 1.86 cr. Court held that this was a
  development agreement.
• Almost entire consideration paid by 31/3/96
• Possession given on 1/4/96
• GPA given on 12/3/99
• Capital gains tax paid for AY 1999-2000
• Dept. said capital gain in A Y 1996-97
• Court held that capital gain arose on 18/8/94
  itself.

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AAR Ruling in Jasbir Singhs case294 ITR 196

• Original collaboration agreement June 2005
• Supplementary Agreement 15/09/2005
• Provisional License for construction 8/3/2006
• Final License 26/5/2006
• Irrevocable GPA 8/5/2006
• Final Payment 08/03/2007
• AAR held that capital gain arose when GPA was
  given on 08/05/2006

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• Date of execution of First Sale Deed for
  Developers share
• Date of execution of First Sale Deed for
  Landowners share
• Date on which the Landowners share is handedover

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Conversion of land into stock-in-trade

• U/s 45 (2) if land is converted into
  stock-in-trade, it shall be taxed in the year of
  sale.
• Market value on the date of conversion would be
  treated as full value of sale consideration
• Balance amount would be taxed as business income

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Amount of Income

• Registration Value/Market value of proportionate
  share in land
• Cost of construction of builtup area falling to
  the Landowners share
• What if the Landowner sells part of his builtup
  area

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Whether any exemptions are available

• Exemption U/s 54
• Exemption can be claimed for retained
  residential flat/flats or new purchases
  construction
• Exemption U/s 54EC
• Exemption is available for investment in
  REC NHAI bonds with an upper limit of Rs 50
  lakhs.
• Exemption U/s 54F

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ISSUES CONCERNING THE DEVELOPER

• Year of taxability of income
• Computation of income
• Deductions available

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Year of taxability of income

• Year of completion of project
• On a year to year basis
• Is AS 7 applicable to builders

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Computation of income

• Computation of income on a year to year basis
• - Percentage of advances received
• - Percentage of expenditure during the
  year
• - What about tax audit

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Computation of income on completion of project

• There could be issues when some of the flats or
  offices spaces are registered in the names of the
  buyers even before the entire complex is ready
• Allowability of interest on borrowed capital
  should it form part of project cost or can it be
  claimed on year to year basis ?

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ISSUES IN SERVICE TAX
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Threshold exemption and other matters

• Threshold exemption of Rs 10 Lakhs from F Y
  08-09
• Exemption linked to preceding years turnover
• Tax payable only on turnover exceeding Rs 10
  Lakhs in the first year
• Only value of taxable services to be included in
  arriving at Rs 10 lakhs amount
• When new services are brought into tax net in the
  middle of the year

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Due dates of payment

• Due Date of Payment is 5th of the month
  succeeding the month in which the value is
  realised.
• For Individuals, Sole proprietors and Partnership
  Firms it is 5th of the month succeeding the
  quarter in which the value is realised.
• In all cases, for the month or quarter ended 31st
  March, the due date is 31st March.
• For e-payment the due date is 6th instead of 5th.
• The date of deposit of cheque into the bank is
  deemed to be the date of payment of tax provided
  the cheque is realised. ( Supreme Court decision
  in 25 ITR 529 )

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Construction Services

• Commercial or Industrial construction services
• Construction of complex service

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Commercial or Industrial construction services

• Definition covers
• a. construction of a new building or civil
  structure
• b. construction of pipeline or conduit
• c. completion and finishing services like
  plastering, painting, flooring, carpentry etc
• d. repair, alteration, renovation etc
• Building should be used for commercial purposes

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What is not covered

• construction of building for self-use or for
  renting out
• Developers / builders who construct and sell by
  executing sale deeds
• - If construction agreements are entered
  into, service tax is leviable
• However, service tax is leviable on contractors
  who are engaged by the builder

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Abatement of tax

• Abatement to the extent of 67 of gross
  receipts available subject to conditions like not
  availing Cenvat credit on inputs or on input
  services

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Construction of complex service

• Definition covers
• a. construction of a new residential complex
  or part thereof
• b. completion and finishing services like
  plastering, painting, flooring, carpentry etc
• c. repair, alteration, renovation etc
• Residential complex means a building having more
  than 12 residential units with common area or
  common facilities like lift, water etc

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What is not covered

• construction of building for self-use or for
  renting out
• Developers / builders who construct and sell by
  executing sale deeds
• - If construction agreements are entered
  into, service tax is leviable
• However, service tax is leviable on contractors
  who are engaged by the builder
• Abatement to the extent of 67 is available

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Service Tax under the composition scheme

• Builders can opt for payment of service tax at a
  reduced rate of 2 ( increased to 4 in the
  Finance Act 2008 ) under the composition scheme
  applicable to all works contracts.

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• Central Government is planning to introduce Goods
  and Services Tax (GST) by April 1, 2010.

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• Thank you