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Real Estate Development – Guide To Implications Of Income-tax Act, Real Estate Regulatory Authority (RERA) And Goods And Services Tax (GST) Act

firoze andhyarujina

Firoze B. Andhyarujina, Senior Advocate, has provided a masterful analysis of the entire law applicable to real estate development contracts from the perspective of the Income-tax Act, 1961, the Real Estate Regulatory Authority (RERA) and the Goods And Services Tax (GST). Important judgements in support of the propositions are also cited

Part – A

Real Estate Development – Implication of Income-tax Act

(a) Finance Act, 2017

Finance Act 2017 has amended various provisions relating to immovable property, in order to appreciate the true prospective of taxation concerning real estate sector it is necessary to examine the various sections:

1. Section 2(42A)

For investments in real estate w.e.f. 1-4-2017 the holding period for Capital Gains arising from immovable property is reduced from 36 months to 24 months – proviso to section 2(42A).

The base year u/s. 55 for indexation benefit prescribed is 1-4-2001 from 1-4-1981, thereby reducing Capital Gains tax liability both by reduction of holding period and also shifting base year from 1981 to 2001. Section 48 Explanation (iii) provides that base year for computing index cost for acquisition shall be the first year in which the asset is held or 1-4-2001 whichever is later.

2. Section 23(5)

In CIT v. Ansal Housing (2016) 389 ITR 373 (Delhi)(HC) and in CIT v. Sane and Doshi Enterprises (2015) 377 ITR 165 (Bom.)(HC) courts have held that sections 22 and 23 is applicable to assessees who are engaged in business of construction of house property and are therefore liable to pay tax on the annual letting value of the unsold flats as “Income from House Property”. Section 23(5) now seeks to tax notional income in respect of house property held as stock-in-trade. Thus the developers who has unsold completed /built flats as inventory / stock-in-trade would be covered, thereby charging to tax notional rental income without actually earning the same.

Standard deduction would be allowed u/s. 24(a) while computing notional income of unsold flats held as stock-in-trade thereby the rate of effective taxation would be 24% of notional annual value of unsold flats held as stock-in-trade.

U/s. 23(5) incidence of tax would arise after period of one year from the end of financial year in which certificate of completion of construction is obtained from the competent authority.

3. Section 45(5A)

Joint Development Agreement where possession or part possession of immoveable property is given by the land owner to the developer that would trigger the transfer u/s. 2(47)(v) as on the date of handing over the possession, irrespective of the fact whether the title has been transferred or not. The position was that Capital Gains liability would arise or accrue irrespective of whether land owner had received consideration or not.

In case of specified agreement capital gains would arise in the year in which the project is completed wholly or partly and certificate of completion is obtained. Stamp duty value of land or building or both for the land owner would be as on the date of issuance of completion certificate increased by any consideration received which shall be deemed to be full value of consideration.

The full value of consideration would be regarded as cost of acquisition in the hands of land owner in the developed property and would be allowed as a deduction on subsequent transfer of the developed property by the land owner in the proportion of the area sold

Capital gains on sale of such premises will be chargeable to LTCG or STCG depending upon the holding period from the date of issuance of completion certificate. S.45(5A) applies only to a specified agreement entered by individuals and HUF and does not apply to companies, LLP and any other non-corporate entities.

ISSUE 1 : Whether 45(5A) would affect joint development agreement where land owner retains constructed premises for his own personal use. The position could be that land owners would now be liable to tax on market value of premises retained by them at the value ascribed at the time of issuance of completion certificate and would be allowed deduction on subsequent transfer.

ISSUE 2 : Where joint development agreement is based on revenue sharing model whether the benefit of 45(5A) would apply.

ISSUE 3 : Section 2(47)(5) has not been amended so as to defer tax liability of land-owner at the time of completion of the project.

It provides that capital gains on transfer of land or building or both under “ Specified agreement” by individual or HUF is chargeable to tax in the year in which completion certificate is issued for the whole or part of the project. Stamp duty valuation of assessee’s share in land or building or both will be on the date of issue of completion certificate as increased by consideration received which shall be deemed to be the full value of consideration.

4. Section 50CA

Capital Gains on transfer of any capital asset being unquoted share is to be computed with reference to fair market value of such share. U/s. 50 CA FMV of unquoted shares of company where the underlying asset is immovable property shall be now taken to be fair market value and the valuation provided under rule 11UA of IT rules shall not apply. Note any transfer of unquoted shares of a company owning immovable property prior to 1-4-2017 will be outside the purview of section 50 CA and the transfer at book value will be valid.

5. Section 56(2)(x)

Where there is transfer of immovable property without consideration (stamp duty value of which exceeds ` 50,000/-), stamp duty valuation will have to be considered; and in those cases where the transfer value is less than the stamp duty valuation the difference between stamp duty value and consideration paid would be liable to tax. Section 56(2)(x) applies only to receipt of consideration of immovable property by any person for nil or inadequate consideration and not held by him as stock-in -trade , however if there is transfer in ordinary course of business as stock-in-trade then the provisions would not apply. Land or building or both would include all types of rights attached to immovable property such as FSI, TDR, shares with occupancy rights.

ISSUE 1: Whether difference between stamp duty valuation is affected where the property devolves under auction sale, distress sale or sale through court or debt recovery Tribunal or where there is dispute and litigation.

ISSUE 2: Whether 56(2)(X) would apply to additional area allotted to members of a co-operative society at concessional rate by developer under scheme of redevelopment.

6. Section 71(3A)

Limits inter-head set off of losses under the head Income from house property in any particular assessment year to ` 2 lakhs, thus loss under the head “Income from house properties” in excess of ` 2 lakhs shall not be allowed to set off against income chargeable under any other head of income. Thus section 71(3A) provides that loss under income from house property in excess of rupees 2 lakhs cannot be set off against income from any other head.

7. Section 80-IBA

Gives impetus to affordable housing projects by expanding size of units required to be eligible for “Affordable Housing Unit” by

i. Increasing limit of 30 sq. metres in non-metropolitan cities to 60 sq. metres.

ii. Increasing size of unit in non-metropolitan and metropolitan region from built up area of 30 sq. metres and 60 sq. metres to “carpet area” to 30 and 60 sq. metres respectively.

The approval from the competent authority is defined to mean building plan and layout plan approvals. The period of completion of project is increased from 3 years to 5 years.

8. Section 92BA

From F.Y. 2016-17 onwards no compliance with respect to Specified Domestic Transfer Pricing Provisions shall be required to be made by the developer in respect of the following expenditure paid/payable to related parties on

• Purchase of construction material.
• Remuneration to directors.
• Interest on loan to related parties.
• Reimbursement of services to related parties.
• Transfer of projects from holding company to SPV. for private equity funding.
• Project management, marketing fees paid by SVP to developer
• Compensation to related party in an internal arrangement .
• Brokerage to related party.

9. Section 94B

Thin capitalisation norms for Associated Enterprise as contemplated in Base Erosion and Profit Sharing (BEPS) is introduced to prevent excessive interest deductions by Indian companies. Its effect is on foreign debt raised by real estate companies by issuance of NCDs to Foreign Portfolio Investor (FPI).

Real Estate Sector is highly capital incentive and therefore infusion of funds in the form of NCD/FCCD from oversea investors is a normal practice. Section 94B restricts interest deductibility which would adversely impact raising low cost funds by developers. FPIs are permitted to invest in listed or unlisted Non-Convertible Debentures “NCD” issued by Indian company in D-mat form .

An Indian company will not be eligible to claim deduction for interest paid to associated enterprise that exceeds 30% of Earning Before Interest, Taxes, Depreciation and Amortisation. “EBITDA of the borrowing company. Interest payments below ` 1 cr. per annum are exempt.

Ambit of “Associated Enterprises” is wide to cover SPV of developer set up by an offshore PE Fund largely formed by equity and large debt in the form of compulsory convertible debentures. Offshore private equity investor or FPI will also qualify as associated enterprise. Interest paid in excess of 30% is permitted to be carry forward for period of 8 years. Thin capitalisation norms come into effect from FY 2017-18. The provision would apply where debt is availed from foreign entities but will not apply to borrowings made from nationalised banks and FI in India.

10. Section 194-IB

Individuals and HUF (other than those liable for tax audit u/s. 44AB) responsible for paying to a resident rental income exceeding ` 50,000/- per month or part of month during the previous year shall deduct an amount equal to 5% as TDS. Explanation to section 194-IB states “Rent” means any payment, by whatever name called, under any lease, sublease, tenancy or any other agreement or arrangement for use of any land or building or both. Sections 194-I and 194-IB will not be applicable where rent is directly paid by developer for procuring temporary alternate accommodation in a redevelopment project since rent is not paid by developer to member or tenant for use of any land or building. However when the society member or tenant pays rent directly to the owner for use of temporary alternate accommodation he shall be liable to deduct TDS u/s. 194-IB where monthly rental exceeds Rs 50,000/- , Requirement to obtain TAN is dispensed with.

11. Section 194LD

NCD issued by Indian Real Estate Company to FPI and complying with requisite condition are characterised as Rupee Denominated Corporate Bond. Interest on NCD payable to FPI were earlier taxed at the rate of 20% is reduced to 5%. Further there is reduction in withholding tax to 5% on interest payable to non-resident on NCDs. There is also exemption of Capital Gains on transfer of Rupee Denominated Corporate Bonds “Masala Bonds” u/s. 194LC.

(b) Capital gains

1. Amount received on surrender of tenancy

1.1 “Long Term Capital Asset”. Is defined in sec. 2(29A) of the IT Act as an asset which is not a short term capital asset and “short term capital asset” is defined in sec 2(42A) to mean a capital asset held for not more than 36 month immediately preceding the date of its transfer the expression “Held by the Assessee” means the date from which the assessee acquired the right or got hold of and started enjoying the assets.

1.2 The word “HELD” in sec. 2(42A) is not confined or restricted to ownership of the property or the assets. Capital assets can consist of rights other than ownership rights in an asset, like leasehold rights, allotment rights etc. The sequitur therefore is that the word “HELD or HOLD” is not synonymous with right over the assets as an owner.

1.3 Sec. 116 of Transfer of Property Act, 1882 provides that where a tenant after the end or determination of the lease remains in possession of the property and rent is accepted by the lessor that is the landlord, then in absence of a agreement to the contrary, the lease is treated as renewed from year to year, month to month as the case may be. In such cases rent is paid and accepted, therefore u/s. 106 of the Transfer of Property Act notice of termination has to be issued.

1.4 In CIT v. Frick India Ltd. (2014) 369 ITR 328 (Delhi)(HC) the Assessing Officer was of the view that the amount received on surrender of tenancy rights is short term capital gains the logic behind the finding of the AO was that the tenancy after the initial period that is 3 years by way of written instrument month-month-month thus the tenancy rights were extinguish on the last day of each month and a fresh or a new tenancy was created resulting into short term capital gains. The Delhi High Court held that the tenancy rights were continuously held for 14 years and the consideration received was long term capital gains.

1.5 In Madhu Kaul (Ms.) v. CIT (2014) 363 ITR 54 (P&H)(HC) it was held that for the purpose of calculating the period of holding one has to look and take into account the date since the assessee got “ beneficial interest” in the property. Similar view is also taken in CIT v. K. Ramakrishnan (2014) 363 ITR 59 (Delhi)(HC).

1.6 In CIT v. Shrimati Rama Rani Kalia (2013) 358 ITR 499 (All)(HC) drew a distinction between holding of an asset and nature of title. It stated the conversion of lease hold rights into freehold by way of improving the title over the property would not affect the taxability of the gain from such property. Thus even if there is change of user by the premises are held for more than 36 months the amount received on surrender of tenancy would be Long Term Capital Gains.

2. Relinquishment of sub-tenancy rights

When there is relinquishment of sub-tenancy rights the same are assessable as capital gains and not under the head Income from other sources. In this connection reference is made to the case of CIT v. D. P. Sandu Bros. (2005) 273 ITR 1(SC). In this case lease agreements was for 50 years there was surrender of tenancy rights to the lessor and consideration was received the SC held that income derived from a source falling under a specific head has to be computed under the appropriate sec. A tenancy right is a capital asset and its surrender would attract sec 45 and the gains derived would be assessable only under the head Capital gains. It was further observed that if the income cannot be taxed u/s 45, it cannot be taxed at all.

3. Property on inheritance – Indexed cost of acquisition of previous owner to be taken

3.1 Indexed cost of acquisition is defined Explanation to section 48 as an amount which bears to the cost of acquisition the same proportion as the cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the first year in which the assets was held by the assessee or for the year beginning on the first day of April 1981 whichever is later.

3.2 Section 49 deals with cost with reference to certain modes of acquisitions one such mode is succession, inheritance, devolution in which case the cast of acquisition of the assets shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by cost of any improvement. Therefore when an asset is acquired by way of inheritance the cost of acquisition of the assets should be calculated on basis of cost of acquisition in the hands of previous owner which has to be calculated on the basis of index cost of acquisition.

3.3 In CIT v. Manjula J. Shah (2013) 255 ITR 474 (Bom.)(HC) it was held that asset acquired through succession, index cost of acquisition had to be computed with reference to the year in which the previous owner first held the assets. And not the year in which the assessee actually becomes the owner of the assets through succession.

4. Valuation – Section 50C – Distress sale

The assessee objected to the value by Stamp Valuation Authority. The Assessing Officer instead of referring to the Valuation Officer estimated the capital gains in Appadurai Vijayaraghavan v. JCIT (2014) 369 ITR 486 (Mad.)(HC) it was held that once an assessee makes a specific request then the Assessing Officer should refer the matter to Valuation Officer in terms of section 50C(2). The court further held that as the assessee was in various financial difficulties and there was distress sale those factors should also be considered. That the AO had estimated Capital Gains Tax which was not correct. The court also held that when a claim is made it amounts to assertion and the AO was bound to refer the matter to the valuation cell.

5. Investment of capital gains in residential house – Section 54F

It is settled law that a house consisting of several units would constitute a residential house this view was reiterated by Delhi High Court in CIT v. Geeta Duggal (2011) 357 ITR 153 (Delhi)(HC). Recently the SC has dismissed the department’s SLP holding that a house consisting of several units would constitute a residential house for the purpose of exemption u/s. 54 See (2015) 371 ITR 369 (St.)

6. Agreement superseded by another agreement – Real income theory

6.1 In CIT v. Shooriji Vallabhdas and Company (1962) 46 ITR 144 (SC), the SC observed at p. 148 as under :

“INCOME TAX is a levy on INCOME. No doubt the INCOME TAX takes into account two points of time at which the liability to tax is attracted, viz. the accrual if the income or its receipt but the substance of the matter is the income. If income does not result at all there cannot be a tax, even though in book keeping an entry is made about a “hypothetical income” which does not materialise where income has, in fact, being received and is subsequently given up in such circumstances that it remains the income of the recipient even though given up, the tax may be payable where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor recipe of income, even though an entry to that effect might, in the circumstances have been made in the books of account.”

6.2 In CIT v. Chemosys Ltd. (2015) 371 ITR 427(Bom.)(HC), the assessee was the owner of two plots of land he entered into development agreement with developer. Under the development agreement the developer was to develop the second plot for a consideration of Rs 16.11 crores and construction of 18 thousand sq.ft. of built up area free of cost.

6.2.1.1 Thereafter a tripartite agreement was entered into between the developer and new buyers bought plot of land for a total consideration of Rs 29.11 crores. The assessee for A.Y. 2007-08 offered 16.11 crores and the balance of Rs 13 crores in A.Y. 2008-09 being the difference between Rs 29.11 crores and Rs 16.11 crores

6.2.1.2 The assessee pointed out that the consideration in the form of constructed area of 18 thousand sq.ft. was neither received nor has accrued and therefore there is no occasion to bring it tax. The AO held that capital gains would be payable on the market value of 18 thousand sq.ft.

6.2.1.3 It was held that there was no dispute as to transfer of property but the issue was relating to quantum of sale consideration for the purpose of computing capital gains. In this case the concept of “Real Income Theory” was invoked and it was held that no income arouse on account of 18 thousand sq.ft. On constructed area since the income had neither accrued nor received which could be brought to tax.

6.2.1.4 It was further observed that the first development agreement was not acted upon and it was super seeded/ modified by tripartite agreement. This was the position when the return was filed. Therefore on application of real income theory it was held that no income was accrued or received by the assesse.

6.3 In Kalpataru Constructions v. DCIT (2007) 13 SOT 194 (Mum)(Trib.) It was held that where consideration to be received originally was 1.25 crores, finally settled at rupees 1 crore then such subsequent settling of consideration at RS 1 crores though arrived at subsequent year would “Relate back to an earlier assessment year. Thus the theory of doctrine of relation back was applied.

6.4 In CIT v. Shivsagar Estates (AOP) (1993) 204 ITR 1(Bom)(HC) the theory of real income was applied to the facts of the case and income which had not accrued could not be brought to tax.

7. Difference between short term and long term capital gains – In the light of reassessment under S. 147 and 148

7.1 Issue for consideration is that land is held on lease for more than 3 years. There is conversion from leasehold into freehold and transferred thereafter. There question is whether the gains assessable are long term or short term capital gains. The difference between short term and long term capital asset is the period over which the property has been held by the assessee it has nothing to do with the nature of the title over the property. Conversion of the rights of the lessee from leasehold to freehold is only an improvement of the rights over the property and this would not have any effect on the taxability of capital gains from such property.

7.2 In Amar Nath Agrawal v. CIT (2015) 371 ITR 183(All)(HC) the petitioner already had rights as owner of the property subject to covenant of the lease the property was taken on lease by petitioners father in 1958 the conversion of the rights from leasehold to freehold was done as per the rules issued by the State Government by introducing the policy for conversion of leasehold land into free land. The conversion was only an improvement of the rights over the property which the petitioner enjoyed and this would not have any effect on the availability of capital gains from such property. Since the property was held by the petitioner for more than 3 years the taxability would be as long term capital gains.

7.3 In CIT v. V.V. Modi (1996) 2018 ITR 1 (Karn)(HC) is on the footing that the assessee was allotted a site by the Bangalore Development Authority. The assessee had no transferable right. Subsequently a sale agreement was executed pursuant to which the asseesee became the owner and landlord. Thereafter within a period of 3 years the land was sold. The Karnataka High Court held that the assessee sold the land within 3 years from the date of becoming the owner.

7.4 In CIT v. Dr. D. A. Irani (1998) 234 ITR 850 (Bom.)(HC), the petitioner sold the property within 3 years and thus there was short term capital gains liability.

7.5 In this connection in Amar Nath Agrawal v. CIT (2015) 371 ITR 183(All)(HC) the issue arose of liability to capital gains in reassessment notice u/s. 147,148 after a period of 4 years. It was laid down by the Allahabad High Court that two conditions must be satisfied before the AO can issue notice u/s. 148 of the IT Act after 4 years namely he must have reason to believe that the income has escaped assessment and he must have reason to believe that such escarpment was by reason of omission or failure by part of assessee fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled the notice is without jurisdiction. Section 149 provides time limit for issuance of notice u/s. 148 with a further condition that income chargeable to tax has escaped assessment amounts to or is likely to amount ` 1 lakh or more for that year. Approval and satisfaction is to be recorded by the competent authority u/s. 151. In this connection reference is also invited to Jagdishbhai Govindlal Patel v. ITO (2015) 371 ITR 419(Guj)(HC)

8. Income from house property or business income

8.1 Assessee’s main business is of construction and selling properties and letting it out. The rental income it receives is income from business or house property. This is a very tricky issue. A company has its main object of owning or subletting the properties and the only income that it derives is rental income. It must be borne in mind that when the main object is letting out property and deriving income therefrom the income is income from business/income from house property/ income from other sources.

8.2 There are some cases where Service Charges are received against services of electricity, air-condition, security and the same have to be considered as Business income – Dhanrajgir Buisness Pvt. Ltd. v. ACIT – ITA No. 6802/ Mum/2010-AY 200-08.

8.3 Now the issue stands settle by the Supreme Court in Chennai Properties & Investments Ltd. v. CIT (2015) 373 ITR 673 (SC) in which SC held that the main objectives is to acquire properties and to let out those properties then the rental income received therefrom is business income. The SC referred to the judgment the Sultan Brothers which is a Constitutional bench judgment. It was categorically laid down that if letting the properties is the business of the assessee then the income derived is income from business.

8.4 In this connection attention is also invited to the decision Karanpura Development Co. Ltd. v. CIT (1962) 44 ITR 362(SC). Where at page 377 it was held that a company formed with the specific object of acquiring properties not with the view of leasing them but to sell them or turn them to account even by way of leasing them out as an integral part of business, cannot be said to treat them as land owner but as trader. It was further laid down that in deciding whether a company dealt with its properties as owner one must see not to the form which it gave to the transaction but to the substance of the matter. The court further held that where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner the company is not treating them as properties to be enjoyed in the shape or rents which they yield but as a kind of circulating capital leading to profits of business which profits may be either enjoyed or put back in to the business to acquire more properties for further profitable exploitation.

8.5 In S.G Mercantile Corp v. CIT (1972) 83 ITR 700(SC) it was laid down that ownership of property and leasing it out may be done part of business or it may be done as land owner. Whether it is one or other must necessarily depend upon the object with which the act is done. But a company formed with the specific object for acquiring properties not with the view of leasing them as property but to sell them or turning them to account even by way of leasing then the income is to be treated as business income.

Time of Transfer

1. Booking rights

1.1 Issue for consideration is whether provisional booking of property amongst to acquisition of a new capital asset. In Gulshan Malik v. CIT [2014] 223 Taxman 243 (Delhi)(HC). The facts were that the assessee booked a flat and was a recipient of a provisional allotment letter. Subsequently the transaction was converted in to a written agreement to sell. It was held that even booking rights or rights to purchase apartment or to obtain its letter was a capital asset.

1.2 The court held that acquisition can be way of agreement, arrangement or any other manner which establishes that it is not conveyance of the property or the doctrine of part performance, which results in enforceable rights, for the purpose of Income Tax. The scheme of the act could sit beyond doubt that even rights or interest in a property is kinds of properties that are transferable capital asset. Thus, booking rights or rights to purchase apartment is a capital right that can be transferable.

1.3 In CIT v. R.L. Sood (2000) 245 ITR 727 (Delhi)(HC), wherein the investment in a flat irrespective of delivery of possession by the builder has been held to be an investment in purchase of construction of a new flat.

1.4 In Saleem Fazelbhoy v. DCIT (2007) 106 ITD 167(Mum.)(Trib.) was held that investment incurred towards improvement of new house purchase to make it habitable would go towards amount invested for purchase of new asset.

1.5 Thus booking rights or rights to purchase an apartment or even a letter giving rights in a capital asset and is transferable irrespective of delivery of possession of the flat.

2. Allotment letter

2.1 Allotment letter is issued and payment of first instalment is made. Allottee obtains a right to hold the property and the period of holding is to be reckoned from the date of allotment. Identification of a particular flat and delivery of possession are consequential acts. Sale of flat 3 years after date of allotment letter and payment of first instalment amongst to long term capital gains.

2.2 The mere fact that possession is delivered later does not detract from the fact that the allottee was conferred a right to hold the property on the issuance of an allotment letter. The payment of balance instalments, identification of a particular flat and delivery of possession are consequential acts that relate back to and arise from the rights conferred by the allotment letter.

2.3 In Vinod Kumar Jain v. CIT (2012) 344 ITR 501(P&H)(HC). The issue arose whether capital gains arising from allotment of a flat the possession of which was delivered later whether the period of long term capital gains is to be considered from the date of allotment, possession or conveyance. After considering sec 2(29A), 2(42A) read with section 54 it was held that allotment letter confers rights and the period is to be taken into consideration from the date of allotment letter.

2.4 Attention is invited to Circular No. 471, dated October 15, 1986 reported in (1986) 162 ITR (St.) 41. It was laid down that allottee gets title to the property on issuance of allotment letter and the payment of instalments in only follow-up action and taking the delivery of possession is only formality. If there is failure on the part of the Delhi Development Authority to deliver the possession of the flat after completing the construction, the remedy for the allottee is to file a suit for recovery of possession.

3. Attachment of property

3.1 In Lachmandas and Sons v. DCIT (2014) 363 ITR 315(Ker.)(HC) the issue arose regarding time of transfer where there was attachment of the property with the bank. In this case an MOU for acquisition of property which was under attachment by a bank was entered into 2001. Property was sold in 2005. The payment was made in 2004 and the property was sold in 2006. The AO held that there was no right to purchase acquired by virtue of MOU of 2001, unless the terms and conditions of the MOU were completely fulfilled. It was held that as per the MOU the property would not be transferred either in the name of the assessee or its nominee till the entire amount agreed upon in terms of MOU was paid. Thus the right accrued only on complete payment of the amount that is in 2005 and hence the gains were short term capital gains.

3.2 Reference may be made to the decisions in J. K. Kashyap v. ACIT (2008) 302 ITR 255 (Delhi)(HC) and to CIT v. Vijay Flexible Containers (1990) 186 ITR 693 (Bom.)(HC) for the proposition that if a assessee is a party to the document then it is necessary to be considered from the date on which the document is entered into and it could be long term capital gains.

4. Part consideration paid

4.1 In CIT v. Cochin Stock Exchange (2014) 363 ITR 382(Ker.)(HC) issue arose of time of transfer of immovable property in an agreement of sale of land to developer. Part consideration was paid and buyer put in possession of land. Buyer also given power of attorney to sell portions of land, It was held if a transaction involves allowing possession to be retained in part performance of a contract as in section 53A of the T.P. Act it would amount to transfer.

4.2 The execution of the sale deed was deferred. The builder had stepped into the shoes of the purchaser and the registered instruments were created subsequently and the idea of keeping alive the agreement and execution of power of attorney in favor of the builder was only for the purpose of avoiding duplication of registered instruments and payment of stamp duty.

5. Propositions

5.1 In Jitendra Mohan v. ITO (2007) 11 SOT 594(Delhi)(HC) it has been held that it is the date of allotment which is relevant for the purpose of computing a holding period and not the date of registration of the conveyance deed.

5.2 Section 47 of Registration Act lays down that registration of a document operates retrospectively.

5.3 In Gurbax Singh v. Qartar Singh (2002) 254 ITR 112(SC). It was held that registration of a document would relate back to the date of its execution – also M. Syamala Rao v. CIT (1998) 234 ITR 140(AP)(HC).

Related issues

1. When does income accrue

1.1 Sometimes there is supply of electrical equipment to customers. In some cases a certain percentage is paid only upon certification of quality confirming to specifications. In such cases the question arises when does income accrue.

1.2 In many construction contracts certain payments are made at a later stage when the product is duly certified. Part amount of consideration is paid but a small percentage say 10% is retained to be paid on satisfaction of quality and specification. That eventuality admitted does not take place within the relevant assessment year. Though an assessee may claim a particular amount as of right, it could not be treated as his income, unless the corresponding obligation was either accepted or fastened upon. Therefore the income arises only on approval and certification.

1.3 In Seth Pushalal Mansinghka Pvt. Ltd. v. CIT (1967) 66 ITR 159 (SC) it was explained that the words “Accrued” and “arise” and “Actual receipt” has different implications. It is pointed out that an assessee can be set to have received the income only when the corresponding right has accrued to him. However recently CIT v. Excel industries Ltd. (2013) 358 ITR 295 (SC). The SC added a further dimension and held that income accrue not only when it is due, but also it is accompanied by a corresponding obligation on the part of the other party to pay the sum.

1.4 In Civil construction contracts sums are retained for payment after expiry of defect-free period. The right to receive the amount is contingent upon there being no defects in such circumstances it was held in CIT v. Shanker Constructions (2015) 371 ITR 320 (T & AP)(HC) that accrual of income would be on receipt basis after the defect free period expires, notwithstanding the fact that assessee follows mercantile system of accounting. In this case 2.5% was retained to be paid after the expiry of the defect/free period the court held that the right to receive the amount was contingent upon there not being any defect in the work, during the stipulated period thus the amount could be set to have accrued only after the expiry of the defect free period.

2 Carry forward of loss

2.1 Return is filed in time showing positive income in assessment AO determined loss.
The loss can be carried forward and set off
u/s. 80.

2.2 In CIT v. Shrinivsa Builders (2014) 369 ITR 69 (Karn.)(HC) the Assessing Officer issued notice u/s. 154 of the IT Act to rectify the order and to withdraw the benefit of carry forward of business loss. It was held that the business loss was determined by the AO. This being the factual position the assessee was entitled to the benefit of carry forward of business loss. Whether the loss determined by the AO was liable to carry forward or not was a debatable issue and rectification was not valid.

2.3 Advance sale of room rights: In CIT v. Pancard Clubs Ltd. (2015) 370 ITR 45 (Bom.)(HC) the assessee was engaged in running of hotels, resorts and clubs it offered holiday schemes for card members who were entitled to utilise room nights in assessees’s hotels and resorts they were entitled to surrender the unutilised room nights and received back proportionate deposit and also premium.

The assessees showed advance amount of sale of nights as a liability and income accrued only on actual utilisation of room nights. Provision for utilisation of room nights on pro rata as well as expenses and commission were provided.

It was held by the Bombay High Court that the method of accounting was correctly followed by the assessee customers were entitled to surrender the room nights and therefore the same was correctly shown as a liability. When a customer opted for surrender value, he is paid in cash or may opt to buy or utilise other products and services. Thus the conclusion that the assessee incurred liability and no income accrued to the assessee on receipt of advance was correct.

In Taparia Tools Ltd v. JCIT (2003) 260 ITR 102(Bom.)(HC), it was held that a capital receipt does not become revenue receipt just because some expenditure is incurred on the same. In Siddheshwar Sahakari Karkhana v. CIT (2004) 270 ITR 1 (SC) it was held that the concept of deposit denotes that the amount received has to be refunded coupled with the right to demand the refund which is contingent in nature and in these circumstances there is an obligation on the part of the assessee to refund the advance and thus it cannot be treated as a trading receipt.

1. Spread over of construction cost – with reference to section 69

1.1 Assessee purchased house property, demolished it and constructed a new house. The issue arose on cost of construction. The assessing officer referred the matter to Department Valuation Officer u/s. 142A who fixed the cost of construction at very high figure. The difference was taxed as unexplained investment u/s. 69 B. The CIT (A) reduced the addition to a lesser figure and spread the addition over various assessment years

1.2 Spreading the cost of construction over 2 or 3 years is perfectly valid and justified. More particularly if the assessee has accepted the claim that the construction cost to be spread over then the order of spreading over is a finding or a direction and the same should be considered.

2. Conversion of firm into company

2.1 The firm was converted into Pvt. Ltd. and the entire assets and liability were taken over by the company. The partners were issued shares by the company corresponding to the value of their shares in the firm. AO was of the view that transfer of assets from the firm to company attracted capital gains u/s. 45 of the IT Act.

2.2 In CIT v. United Fish Nets (2015) 372 ITR 67 (T&PA)(HC) it was held that u/s. 45(4) distribution must result in some tangible act of physical transfer of properties or tangible act of conferring exclusive rights vis-à-vis an item of property, if not it cannot be inferred that there was any distribution of assets.

2.3 The shares of the shareholders were defined as per the partnership deed the change being transformation of share in the partner to proportionate shares of the company reflected in the form of share certificates, but beyond this there was no physical distribution of the assets or allocation or even distribution of monetary value, hence the provisions of sec. 45 are not attracted at all.

PART – B

Real Estate Regulatory Authority (RERA)

1. Preface

Parliament had on May, 2016 passed the landmark Real Estate Regulatory Authority (RERA Act) requiring the Centre and the States to regulate residential and commercial projects to protect the interest of buyers.

Out of 36 States, 24 States have put in place either permanent or interim regulator. More than 18600 projects have been registered in 8 big States, Maharashtra registered 13000 projects out of which 12500 are “ongoing projects” that is those projects where the work has started before RERA came into effect, but are yet to get completion certificate. For ongoing projects the deadline was 31st June 2017. The law requires all ongoing and new projects to register with RERA. Haryana registered 502 projects, Madhya Pradesh 1500 and Karnataka 1150 projects. In Uttar Pradesh 1850 ongoing projects were registered. The UP regulator covers Noida and Greater Noida where there are several projects which are coming up. Recently the insolvency proceedings against Jaypee Infratech left more than 30,000 people homeless and deprived of their savings. Violation of the guidelines invite penalty up to 10% of the project cost.

On various regulatory issues on a case to case basis the penalty varies from R 10,000/- to Rs 10,00,000/-. Focus of RERA is to bring transparency by getting real estate projects registered with the regulatory authority. Hence the section 2(zn) comprehensively defines “real estate project”, It also defines section 2(zk) the term promoter.

2. Registration

Scope and coverage of RERA contemplates regulation of only registered projects and consequently projects which are not registered or could not be registered for any reason or those projects which are exempted from registration fall outside the scope of RERA, the authority under RERA can therefore entertain those complaints of projects which are registered under the Act.

The Act makes it mandatory for promoters to register their projects with regulatory authority of the State. On furnishing application, the authority shall register within 30 days. If the authority fails to take a decision within 30 days then the project is deemed to have been registered and the authority shall within 7 days thereof furnish registration number, login ID and password to the promoter. There are provisions for withdrawal of application, there is power of cancellation/revocation by the authority and registration is valid for period declared which in certain circumstances can be extended. Act exempts certain projects from registration.

1) Where area of land does not exceed 500 sq. meters. 2) Number of flats in all phases is less than 8. 3) Where completion certificate/ occupation certificate is received before the Act came into force. 4) There is a repair or renovation or redevelopment which does not involve any sale or new allotment of flats. S3(1) projects which are developed outside the planning area are not required to be registered, however as per second proviso to S 3(1), If the authority thinks it necessary interest of the alottees even projects developed beyond the planning area could be registered.

Form A under Rule 3(3) makes it mandatory for registration and disclosure by promoter of all projects launched in last 5 years, whether completed or not and disclosure of all pending litigations. The Act provides multiple registration and thereby increases the burdern on the promoter, Thus if there are various phases each phase will have to be registered separately.

3. Ongoing projects

As per section 3 of RERA all ongoing projects which have not obtained completion certificate or where occupation certificate CC/OC is not issued on the date when the Act came into force on 1st May 2017 and up to 3 months thereafter are required to be registered.

The term ongoing project is not defined in the Act or the Rules. However ongoing projects would mean projects which have not yet been completed and are in different stages of development. Ongoing projects are required to be registered; however if the projects plans are not approved and if there is no booking or sale then the project cannot be called ongoing. Similarly, where construction has not started at all and no booking has taken place it cannot be regarded as ongoing project. If only booking has taken place but construction has not started it could be regarded as ongoing project. Where advertisement is invited, construction has started but there is no booking at all and no sale then it may not be regarded as ongoing project. This is based on the fact that important criteria are occupation certificate to be obtained, but where construction has not started at all then it cannot be regarded as an ongoing project. If there is no sale or booking then RERA would not come into picture since as per the preamble the object is protecting the interest of consumers on sale of plot, apartment or building in a real estate project.

4. Deposit of 70% realisation in separate bank account

Promoter is required to deposit 70% of the amount realised from allottees in a separate bank account, which can be withdrawn to cover land cost and cost of construction. The idea is that the money received from the allottees of a particular project is utilised only for the benefit of that particular project only and that the funds are not transferred/ channelised/ shifted to any other projects, thus ensuring compliance of time and avoiding delay. The withdrawal is also restricted not to exceed the amount proportionate to the completion of the project as certified by the architect, engineer and chartered accountant, who certifies the withdrawal of the amount and the purpose and the usage of the same. The time frame for making the deposit is not mentioned in the Act or Rules. In my opinion it is not necessary that 70% of each individual receipt is to be deposited immediately. A common bank account to collect the totality is sufficient and from there 70% can go to a separate earmarked bank account. The account is to be self-maintained and is not an escrow account neither does it require approval of authority for withdrawal section 4(2)(1)(D) provides that funds can only be used for construction and land cost. As per the proviso the promoter can withdraw in proportion to the percentage of completion of project and amounts certified by engineer, architect and chartered accountant.

5. For alteration consent of 2/3rd allottees

It is the duty of the promoter to develop according to the approved plans and specifications and also provide amenities and common areas. The promoter cannot make any alteration or addition other than specified in the plan unless he obtains previous consent of at least 2/3rd of the allottees. Minor structural and architectural changes as certified by architect and engineers or necessary alteration in allottees flat would be permissible. Under the Act the rights of the allottees are restricted to his flat, apartment or plot but if in the middle of the project the promoter gets increase in FSI due to change in law and any other factor, still the promoter shall be required to obtain the consent of 2/3rd allottees before submitting plans with increased FSI. This would create hardships on the promoters.

6. Rights & obligations of allottees

Chapter IV of RERA lays down rights, duties and obligation of allottees which are summarised:

A) Rights

• Section 19(1) – Information to be furnished putting information in public domain details of promoters, projects, agents architect, engineer. This is to be r/w section 4(2) where details are required to be furnished by application for registration r/w section 34(1) to display for public viewing on website.

• Section 19(2) – Time scheduled of completion and handing and possession details of development work water, sanitation, electricity and amenities.

• Section 19(3) – Right to claim possession as per sale agreement executed.

• Section 19(4) – Failure to give possession entittles the allottee to claim refund of the amount with interest, the rate of interest prescribed is 2% above the highest marginal cost of lending of SBI, and compensation as determined by adjudicating authority.

• Section 19(5) – To have documents and plan including that of common areas and of the plot.

B) Responsibilities

• S19(6)-To make timely payment specified in agreement including registration charges municipal taxes ground rent maintenance etc.

• Section 19 (7) – For delay in making payment liability arises towards interest payments being 2% above SBI’s highest marginal cost of lending.

• Section 19(9) – To participate in formation of society or association.

• Section 19(10) – To take physical possession of flat/ apartment within 2 months of occupation certificate.

• Section 19(11) – To extend all possible support for registering conveyance and title.

7. Sections 6, 7and 8 constitutional aspect

Section 6 deals with extension of period of registration, which can be granted on application made by promoter due to force majeure, section 7 deals with cancellation thus the entire project is taken away on grounds mentioned in a), b), c), d). Section 8 deals with lapse and revocation of registration and further provides that the remaining project shall be completed by competent authority or allottees or in any other manner as determined by the authority.

These provisions are extremely harsh and goes against the builders for e.g. project sold out 80% and at that stage there is revocation then the project is handed over to another builder to complete the project thus on one hand there is confiscation of property which is taken over and there is no provision given for compensation to the builder or the Act is silent as regards to the bank account. On close reading of section 7(4) revocation of registration would amount to property being taken away without compensation and section 7(4)(b)(c) talks about freezing the bank account there is no provision for refund of the excess amount on revocation of registration.

Sections 6 ,7, 8 are therefore confiscatory in nature and no compensation at the same time is provided nor any provision is provided in the Act concerning distribution of excess amount in the designated bank account. Post confiscation there is no provision as to how the amount can be recovered/ received from the account this is to be read with Rule 5 which deals with withdrawal of the amount. Would it imply that since the registration is cancelled the project is confiscated, the amount in the bank account would now go to the new promoter?

In absence of any compensation to promoter and no modality prescribed for the amounts in the bank account the legislation suffers as “unreasonable legislation”.

Section 8 states that on lapse or revocation of registration the authority may hand over the remaining development work to be carried out by 1) Competent authority. 2) Association of alottees. 3) Any other manner determined by the authority. This creates controversy namely can the development of the remaining project undertaken by allottees or competent authorities be regarded as “promoter” within the meaning of section 2(zk) of the Act. It appears that they would not be covered under the Act.

Another controversy that the authority gives the project to the competitor then the balance money in the account would go to the new promoter and what would be the element of profit and the balance to be given to the original promoters. Further if the second promoter appointed also defaults then the account would be operated by whom;. Whether new bank account or same bank account is required when default is committed. Thus there is no provision on a situation where the project is handed over to the second promoter and no provision is made in the Act regarding operation of bank account, element of profit and how to compensate the first promoter.

On receipt of complaint Section 7 provides for cancellation the authority shall debar the promoter from A) assessing its website, B) Debar from carrying out development work C) Direct bank account to be frozen and D) Protect the interest of the allottees and public interest and issue necessary directions, but there is no mechanism of recovery of compensation and balance of profit to the original promoter. Hence there is unreasonable restriction placed on the builder and further there is no provision to compensate. It is settled principle of law that if compensation is not given on acquisition, the acquisition fails Rajiv Sarin v. State of Uttarakhand (2011) 8 SCC 708 more particularly para 69, 78, 82 and 83 to bring home the point that if the property is acquired without compensation it infringes Article 14, 19 and 308 A of the constitution.

Attention is also invited to K. T. Plantations Pvt. Ltd. v. State of Karnataka (2011) 9 SCC 1 (SC) where at pg. 192 the difference between no compensation vs. nil compensation was pointed out by the Court, therefore there must be a mechanism of compensation when the project is taken over otherwise the legislation suffers from unreasonable restriction on right to carry out business. It is also pertinent to point out that the Act itself is dealing with regulation and development of real estate hence it is regulatory, regulatory provisions must necessary be reasonable otherwise they are hit by Article 19(1) (g) further there is discrimination also between promoters where on cancellation and revocation the project is handed over to second developer the second developer completes the balance of project and gets the profits and the amount in the bank and therefore the provision is also hit by Article 14 of the Constitution.

Sections 6, 7, 8 and 71 in my opinion suffers on the ground of unreasonable restrictions on the rights of promoters thereby violating fundamental rights. Take a case where attachment of bank account is made and insolvency proceedings are invoked. Section 89 of RERA overrides Insolvency Act and other claims. The Act does not bring out a balance between the builder and the allottee.

The Act is for promotion of real estate sector and the preamble talks of efficient and transparent manner to protect interest of consumers of real estate and to establish adjudicating mechanism the act therefore does not consider the interest of the builders hence to this extent the Act can be regarded as arbitrary based on Cellular Operators Association v. Telecom Regulatory Authority (2016) 7 SCC 703(SC) more particularly para 45 and para 96 pg. 760.

Moment RERA comes into effect penalty would be attracted. This is retrospective as to how the Court should consider a retrospective amendment was spelt out in Hitendra Vishnu Thakur v. State of Maharashtra (1994) 4 SCC 602 (SC) para 23 at pg. 633.

Observations

A) Builder originally fixes time say 3 to 5 years to complete the project, there is extension of time for one year, the question is whether period of one year is adequate or not. Argument is that the provisions can be misused or there may be circumstances where there is a dispute between partners/ directors of the construction company and suit is filed and injunction obtained in such a situation whether one year time limit is adequate or not?

B) Under section 8 registration lapses and the project is handed over to a) Agency, b) Allottees, c) competent authority may do it on its own or appoint another builder. In such a case where there is a lapse then there is no sale of flat by original promoter who is barred, this is harsh provision and time limit is also unreasonable in genuine cases.

C) Section 7 revocation – show cause notice and hearing is required and discretion is given to the authority to adjudicate under section 4, the promoter is specifically debarred implication is on revocation to debar/ not to allow the promoter to continue and he is declared as defaulter.Take the case where 60 – 70% project is completed and there is default and revocation. Act does not state anything about accounts and the balance amount to be paid, what about the past work done there is no mechanism that after completion of the project the profit and the balance amount in the bank account would be handed over to the promoter who committed the default.

D) On default the name of the defaulter – promoter is put on website, what about brand name / reputation? The provision is harsh when registration is cancelled why penalise the builder by publishing the photograph on website this can affect the brand image in the entire country . One thing that is required to be added is that on revocation promoter is debarred but there is no provision for restoring him back to the project also there is no clarity that after lapse what is the position of promoter for unsold flats. He can’t deal with the unsold flats as registration has lapsed and his right is totally lost after extension is granted.

8. Section 18

Section 18 deals with return of amount and compensation and interest. It applies to on-going projects. Agreement is before the date when RERA came, registration provides for extension of time but section. Interest starts from date of registration issue is whether such interest is penalty? It amounts to retrospective legislation since the agreement is extended and if interest is not paid in full by the promoter then he would invite himself to the provision of section 7. Thus breach of contract would apply retrospectively to pay intrest. The proposition which emerges that no provision which changes rights of parties can be retrospective and penalty cannot be retrospective.

Section 18(1)(b) provides for revocation and corresponding account is frozen – section 7(4) (c). The project is taken over however the promoter shall still be liable after the project is taken over for payment of interest. The interest provision continues even when he is out of the project the liability continues which is interest every month till handling over possession thus it will result into a situation where the builder becomes personally liable “ for Interest. The Act does not provide that on revocation, liability to interest ceases and is not provided on losing the project how can interest continue. This would be against Article 19(6) test of reasonableness r/w Article 19(1) (g).

Observation: Act provides for granting of interest a) on withdrawal from the project by the promoter b) delayed possession for which interest is to be paid. Issue for consideration is applicability of new timeline after the act comes in to force for interest by enacting the payment of interest. The Act alters the clauses of the agreement which is already entered into by the parties. Thus, overwriting the contract already entered into without the consent of the parties. Further issue is whether interest is mandatory in all cases. On interpretation of 1st proviso to section 18 (1)(a) and Section 71 gives adjudicating authority power to adjudicate under section 18 on interest thus the same remedy can be enforced before Consumer Court which is now brought under the umbrella of RERA. Instead of interest starting from the date of entering the agreement it could be from the date when the law came in to force. Asking the builder to pay interest from the date of entering agreement would mean retrospective effect and the provisions can be “read down”. For protection of home-buyers the act provides that a builder is liable to return the amount if possession is not given on the date mentioned in the agreement. In such an eventuality the builder has to return the amount with interest and compensation if the buyers withdraws from the project, he is also liable to pay interest per month till possession is handed where buyer chooses to continue and stay on with the project. The legislature has power in public interest to legislate and grant interest to protect the interest of genuine buyers. The Government can therefore have power to change obligations under existing contract to grant interest and to that extent the effect is “retroactive” application on pending unfinished contracts.

9. Penal provisions

There are various provisions which levy penalties and even prosecution which are contained in Chapter VIII of RERA embodied in sections 59 to 68.

10. Guiding principles

There are some guiding principles in section 72 which are provided for deciding the quantum of compensation or interest by the adjudicating authority however this may be applicable even for levy of penalty and even for deciding issues on prosecution. The principles are –

1) Whether there is disproportionate gains or unfair advantage.

2) The quantum of loss caused by default.

3) The repetitive nature of offence.

4) Any other act in furtherance of dispensing justice.

Penalty on offences other than S. 3&4: Section 61 gives power to the authority to levy penalty for contravention by the promoter of any provisions of the Act, Rules and Regulations (excluding section 3 & section 4 of the Act). The penalties for contravention of the following which are summarised below:

• Section 11(1) – Failure to create web page and give details.

• Section 11(2) – Failure to give registration number and website address in advertisement.

• Section 11(3) – Relevant Information not given at time of booking / allotment.

• Section 11(4)(b) – Not obtaining/make available CC or OC.

• Section 11(4)(c) – Not obtaining lease certificate on leasehold land.

• Section 11(4)(d) – Not providing and maintain essential services.

• Section 11(4) (e) – Non-formation of society or association.

• Section 11(4)(g) – Nonpayment of outgoings till possession given.

• Section 11(4)(h) – After execution of agreement creates mortgage or charge.

• Section 11(6) – Non-maintaining details as required by authority.

• Section 13 – Accepts more than 10% of price without registered agreement.

• Section 14(1) – Not developing and completing project as per sanctions/ layout plans.

• Section 14(3) – Not rectifying defects within 5 years.

• Section 15 – Transfers majority interest of project without consent of 2/3rd allottees.

• Section 16 – Not obtaining insurance as notified.

• Section 17 – Not executing registered conveyance deed to allottees – section 17(11).

• Section 18 – Failure to complete project in time or give possession.

11. Offences by promoter

Penalties and even imprisonment is provided in sections 59 & 60 for violation of sections 3 & 4. For non-registration of a project the penalty could go up to 10% of the cost of the project. For noncompliance of orders, decision or directions concerning registration there can be imprisonment up to 3 years and/or fine up to 10 % of the cost of the project. Section 64 provides similar penalty for contravention of orders of appellate authorities. S 60 furnishing false and incorrect information as per section 4 would attract penalty up to 5 % of the cost of the project.

Offences by Allottees: Penalty is also levied upon allottees under section 67 for contravention of any order of RERA which could extend up to 5% of the cost of the building or apartment. If the allottee contravenes order or directions of Tribunal there can be u/s. 68 imprisonments up to 1 year or fine for everyday of default which may extend up to 10% of the building / apartment

12. Compounding of offence

Section 70 provides a silver lining whereby offences punishable with imprisonment may be compounded on payment as may be determined by by the adjudicating authority.

13. Repeal and Override

Sections 88 and 89 provide that the provisions of RERA will be in addition to and not in derogation to any law currently in force. Thus, what RERA seeks to achieve is that its regulations are in addition to the existing laws and the basic philosophy is to protect the home buyers. RERA specifically overrides all existing applicable laws for the time being in force it is pertinent to point out that at present that only one State statute is specifically repealed namely Maharashtra Housing (Regulation and Development) Act, 2012. Once the Act is repealed it no longer survives – sections 6 and 8 of General Clauses Act 1897. However in all cases rights and liabilities incurred prior to repeal can be enforced. It may be noted that section 89 which is an overriding provision will also override any other laws of the state which are inconsistent with the provisions of RERA .This is clear from Article 254 of the constitution of India which provides in the event of a conflict between the central and the state act on the same subject the central act would prevail. This is further substantiated by the “Doctrine of Occupied field” which states that when a particular subject of Concurrent List on which the state has a law and subsequently if a central statute comes in to effect and thereby field gets occupied by both the central and state legislation then, the central legislation will prevail and anything which is contrary to the central legislation,the state laws would automatically get overruled.

14. Reference by Supreme Court to Bombay High Court

The Supreme Court on 4-9-2017 directed the Bombay High Court to decide challenges to validity of various RERA provisions, which are intended to protect the rights of home buyers and regulate the housing sector. Various petitions were filed in different High Courts questioning the provisions of the act. This was necessitated as different High courts gave conflicting orders on the interpretation of the act. The major issues more particularly

a) Its applicability to projects not completed by 31st May 2017- challenge to mandatory registration of ongoing projects.

b) Penal provisions including imprisonment.

c) The composition and qualification of members of the regulatory board.

d) The power of the regulator to imprison developers, despite the fact that the regulator is only a judicial officer.

e) Validity that without RERA registration even advertising is prohibited.

f) Retrospective application as it applies to ongoing projects yet to receive completion certificate.

At the time when this paper was finalised the hearing of various petitions was going on in Hon’ble High Court.

15. Issues

1. Developer has obtained development rights from landlord who were in actual possession. Subsequently dispute arose amongst the family members of the land owners. The dispute led to stoppage of the construction. In such an event is the developer liable when he is ready and willing to perform his part of the contract?

2. Developer obtained Commencement Certificate for only six floors out of the proposed 12, but the flats sold were above sixth floor. What could be the argument where CC is obtained.

3. Because of disputes home buyers have filed complaint with Consumer Court asking compensation and damages. What would be the position of complaint in Consumer Court after RERA coming into existence?

4. Non-handing of possession of the flat and construction not completed, suit is filed in High Court ad-interim injunction is granted. What would be the effect of interim injunction/ interim relief after RERA coming in to effect.

5. High Court directs municipal co-operation not to issue OC and CC to projects in a locality this may arise because in a PIL, the obstruction would be to road or water. The granting of stay of occupation and commencement certificate by High Court would definitely affect the completion of project in such a situation can RERA come in to play?

6. Conflicting differences between RERA and state laws. RERA being a Central legislation states may have to amend the laws to bring it in tune with RERA.

7. While interpreting RERA and State laws beneficial provision or a less harsh provision could be applied or not?

8. Projects are required to be registered, however for certain reasons the project which require registration is not registered by the promoter. Whether such projects which are not registered though registrable whether regulatory authority has power to subject them to provisions of RERA.

9. On-going projects have time till 30th July 2017 to register, however take the case where the Act came into force on 1st May 2017 time to register is up to 31st July 2017, in this interregnum period the OC/ CC has been obtained thereby the project is said to be completed and therefore registration is not required the impact and the scope of the interregnum period is required to be discussed.

10. Builders enter into agreement with various authorities and municipalities, question arises whether the state or authority or municipal corporation or a Government recognised agency can be termed as co-promoter and if regarded as co-promoter whether liability and responsibilities and penalties would arise on such authorities.

11. Where there is redevelopment by an existing society, whether the co-operative society in a redevelopment plan can be regarded as co-promoter.

12. Continuing the issue further there is redevelopment but certain additional flats/ apartments are sold by the builder to outsiders. It may be noted that the builder is involved in sale and not the society the flats are also allotted to the flat owners, the society is only a medium and facilitator. In such an instance is the society a co-promoter?

13. In a case of a development the landowner gives his land to the developer. The developer as a promoter develops and builds. The land owner is a co-promoter as he is deemed to have jointly developed the property. Issue for consideration is whether separate bank account or individual bank accounts are required to deposit 70% of realisation or two separate accounts or common account . Further issue arises that the land owner has only given the land and is not responsible to incur any cost or expenses in the project. Would it imply that the land owner who assuming has a separate bank account is forced to block his realisation till OC/CC is received?

14. The act provides that ‘Apartment or Building’ shall be used for any residential or commercial use including showroom, godown to carry out profession or trade, however “industrial” is not used. Thus it implies that industrial construction is outside the scope of RERA .

15. Land stands in the name of the promoter who is debarred and registration cancelled. Then how is the land to be transferred to the new promoter – there is no mention in the Act.

16. Case Laws

Runwal Homes

The complainant had paid 97% of total consideration of the flat, which was ` 1.74 crore. It was stipulated in the agreement that the flat had to be given on or before August 2016. The developer failed to deliver flat by that date. The State Housing Regulator ordered developer to pay back ` 1.94 crores with interest, developer to pay interest at SBI’s highest marginal cost of lending rate plus 2% from 1st May 2017 till payment.

Characteristics

1) The complainant further contended that under subvention scheme promoted by the developer up to August 2016 there was tripartite agreement.

2) The builder’s contention was that the project was in advance stage of completion.

3) The developer also showed his willingness to provide interior works by 2017.

Builder’s contention was that the RERA did not have jurisdiction as the Act came in to effect in May 2017. It was also contended that the delay was beyond the control because authorities did not grant approvals sanctions and permissions on time.

In this case judgment delivered on 13-10-2017 the authority awarded the consideration and for stamp duty and registration charges. Thus, in this ruling RERA regulator ordered the builder to pay to the buyer for delay in handling possession of the flat.

Nirmal Lifestyle Kalyan Pvt. Ltd.

In this case two residents booked two flats in 2013 in a residential project of Nirmal Lifestyle by paying ` 6.10 lakhs and ` 6.20 lakhs for flats worth ` 30 Lakhs. As the home buyers had financial problems, the complainants cancelled the booking in 2014 and sought refund. Nirmal Lifestyle paid ` 1 lakh to them but did not pay the balance amount.

After the complaint was filed before Maharashtra Real Estate Regulatory Authority “MahaRERA”, Nirmal Lifestyle issued two cheques for the balance amount. This is an instance where RERA creates a platform for the builder and the home buyers to resolve disputes through negotiations. MahaRERA passed an order on 23-10-2017 whereby the builder was forced to refund the booking amount to the complainant. This case lays down two important issues namely. 1) That refund was made almost after three years from date of cancellation of booking of flats and prior to RERA coming into force and 2) provides a forum for stakeholders to come together to resolve disputes through negotiations.

17. Conclusion

The main object is to protect home buyer’s interest and at the same time to ensure higher investments in real estate, more particularly in affordable housing sector. However there is need to bring about relaxation of norms for REIT and ECB. There is also need to remove MAT steps should be taken for rationalisation of RERA provisions in all States across the country. There is also need to bring about exemption from tax and stamp duty for transfer to REIT .

As many private firms companies and private entities are involved in real sector development it would be imperative that a mechanism be formed for proactive disclosure by private entities involved in public work. Thus, making it answerable to the public. The need is towards proactive disclosures by private entities which is already in UK and Canada. This would be more relevant where there is public, private partnership. In this regard section 2(h) of the RTI Act would require an amendment to bring private entities involved in public work to provide “Information” under RTI Act .

PART – C

Goods and Services Tax

Expanding Goods and Services Tax (GST) to real estate sector is a move aimed at checking tax evasion and cash based transactions. The real estate sector generates maximum amounts of criticism for tax evasion and cash generation but is outside GST. There is a strong move to bring Real Estate into GST at the time of writing this paper there is no GST on real estate sector.

Under construction flats from buyers are already under GST. Inclusion of the entire “value chain” will mean that land purchased will face indirect tax instead of stamp duty. In other words with GST coming into play stamp duty is subsumed.

Builders would get input tax credit for GST paid on steel, cement, paint, sanitary ware, electrical fittings etc. If land purchased is also brought under GST then the credit base will go up and will benefit the buyer. In other words, there is already GST levied on inputs such as cement, steel, paint, fittings etc. Tax on these inputs are eligible for input tax credit and the benefit has to be shared with the buyer. Thus this move will benefit consumers who will have to pay one final tax on the whole product.

If land is included under GST the base credit will increase resulting in benefit to the buyers and more importantly tax will be uniformed across state. Moreover many developed international GST / VAT jurisdictional States are still struggling to find the right mechanism to tax all aspects of real estate sector.

It must be appreciated that housing and real estate sector is the largest creator of jobs. The Government must realise that taxing certain house materials as luxuries under rate
of 28% is unproductive and may affect job creation.

In conclusion there are three returns every month with multiple complicated entries that have to be matched with every buyer and seller with whom business is transacted. India needs to learn a lesson from Singapore. GST F5 form in Singapore is a simple quarterly online form with 14 boxes to be filled. It is simple and Singapore has only one GST rate at 7% flat. This is what India requires for simplifying GST and for ease of doing business.

[Source: Article printed in Souvenir of 20th National Convention 2017 held from 1st to 3rd December, 2017 at Jabalpur (2017) AIFP Journal December, 2017 Pg. No. 9]
Reproduced with permission from the AIFTP Journal
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org
3 comments on “Real Estate Development – Guide To Implications Of Income-tax Act, Real Estate Regulatory Authority (RERA) And Goods And Services Tax (GST) Act
  1. Ashok Gosar says:

    Please clarify about GST on TDR purchase, on the constructed area given by builder to land lord , tenants and what should be value on GST to be levied if at all

  2. vswami says:

    IMPROMPTU

    On Random Selected:

    PART A
    Section 2(42A)
    “…………………..Section 48 Explanation (iii) provides that base year for computing index cost for acquisition shall be the first year in which the asset is held or 1-4-2001 whichever is later.”

    The referred amendment, as viewed independently, is shrouded with mystery /imponderable of its kind.
    For thoughts shared look up >
    https://www.facebook.com/swaminathanv3/posts/1516530678423213

    While attention has been repeatedly drawn to the Revenue, besides to the ICAI- whose idea / initiative lead to the said amendment , out of sheer courtesy, personally, through well-intended Feedback –e’ mails, besides to the ICAI, the puzzle has remained to be solved /set right,till date!

    Capital gains / Booking rights …..

    Allotment letter

    “2.1 Allotment letter is issued and payment of first instalment is made. Allottee obtains a right to hold the property and the period of holding is to be reckoned from the date of allotment. …… “.
    ………..
    2.3 In Vinod Kumar Jain v. CIT (2012) 344 ITR 501(P&H)(HC)……”

    Also refer the SC Judgment in Sanjeev Lal’s Case –

    https://indiankanoon.org/doc/35491903/ ;

    And the critique,- in paragraphs – “EPILOGUE” and “Conclusion” – (2014)226 TAXMAN pg. 150, 151.

    Also of contextual relevance,is the last Post on FB > https://www.facebook.com/swaminathanv3/posts/1528865900523024?pnref=story

    (May anyone, if care to,look through the Link, within)

    PART B
    14. Reference by Supreme Court to Bombay High Court

    “….At the time when this paper was finalised the hearing of various petitions was going on in Hon’ble High Court.”

    For an Update, see, –
    https://www.facebook.com/swaminathanv3/posts/1527622140647400?pnref=story

    (Also, for addl.Input- within)

    PART – C
    ON RERA Code- Google Search for see personal Blogs @swamilook

    On ST/ GST,for areas of controversy personally identified and shared, as no-less mystifying, see related Posts on FB/LInkedin- for a sample >

    NOTE: One thinks the referred controversies are no less mystifying; in that, how does one reconcile the two observations :-

    “….There is a strong move to bring Real Estate into GST …” AND

    ” Under construction flats from buyers are already under GST….”.

    To be explicit, one is unclear as to, apart from GST on ‘ongoing projects”,if already covered for levy, what is still left to be covered and roped in the indirect tax net?!

    See >
    https://www.facebook.com/swaminathanv3/posts/1528865900523024?pnref=story

    https://www.facebook.com/swaminathanv3/posts/1526914250718189?pnref=story

    (OPEN to EDIT /Add MORE)

    courtesy

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