Atmanirbhar Bharat Package 3.0: Demand Booster For Residential Real Estate – Income Tax Relief For Developers & Home Buyers

Shashi BekalAdvocate Shashi Bekal has explained the salient features of the amendments proposed by the Atmanirbhar Bharat Package 3.0 to the Income-tax Act, 1961 to provide relief to Real Estate Developers and home buyers. He has also considered whether the restrictive nature of the proposed incentive makes it ultra vires the Constitution

Abstract

On November 12, 2020, The Hon’ble Finance Minister Nirmala Sitaraman launched the Atmanirbhar Bharat 3.0 package. Several applaudable changes introduced. An amendment to the Income tax regime inter aliachanges was proposed. The amendment is with respect to the variance in real estate transaction on account of a variance from stamp duty value of the property.The Article aims at explaining the proposed amendment in the Income-tax Act, 1961 (Act) and the chalks out a time line as to how the said provisions was inserted& how they have evolved over time.

The Article is divided into 4 Parts. Part I – Scheme of Income tax vis-à-vis AtmaNirbhar Bharat package 3.0, explains the proposal made by the Hon’ble Finance Minister. Part II – Section 43CA of the Act, was similarly introduced via Finance Act, 2013 for transactions where real estate was held as stock in trade, and subsequent amendments. Part III – Section 56 (2) (x) of the Act which was inserted via Finance Act 2017. Part IV–Denouement, is a concluding narrative, it criticizes the restrictive nature of the proposed incentive for a home buyer thereby making the proposed amendment ultra vires the Constitution.

Part I -Scheme of Income tax vis-à-vis AtmaNirbhar Bharat package 3.0

On November 12, 2020, The Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman has announced 12 key measures, as part of Government of India’s stimulus to the economy, under AatmaNirbhar Bharat 3.0. The net stimulus announced amounts to Rs 2.65 Lakh crore. 

One of the key measures inter alia is with respect to Income-tax relief for Developers & Home Buyers. According to the measure, the differential between circle rate and agreement value in real estate is taxed under the scheme ofIncome tax under Section 43 CA of the Act and the has been increased from 10 per cent to 20 per cent. This is for aprimary sale of residential unitsup to 2 Crore (from date of announcement of this scheme, till June 30 2021).Consequential relief up to 20% shall also be allowed to buyers of these units under section 56(2)(x) of the Act for the said period.The Income Tax relief provides incentive to middle class to buy homes.

3 important points can be noted down from the measure, they are:

  • The threshold for triggering notional income i.e. difference between Circle rate and Actual consideration, has been increased from 10 percent to 20 percent.
  • The same is for a primary sale of residential units up to Rs. 2 Crore.
  • The proposal is effective from November 12, 2020 to June 30, 2021.

Since the measure mentions two sections viz. 43CA and 56(2)(x) of the Act. It is imperative to understand these two sections.

Part II – Section 43CA of the Act

1. Introduction

Section 50C of the Act i.e. when a capital asset, being immovable property, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then such value (stamp duty value) is taken as full value of consideration under section 50C of the Act. This provision did not apply to transfer of immovable property, held by the transferor as stock-in-trade.

Therefore, the Finance Act, 2013, proposed to provide by inserting a new section 43CA that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head “Profits and gains of business of profession”.

Subsequently, the seller of an immovable property, irrespective of the fact that the property was held as an asset or as stock in trade was compared with the Stamp Duty Valuation and the variance was subject to tax.

2. Amendment vide Finance Act, 2018

Similar to section 50C of the Act it was proposed via Finance Act, 2018 to provide that no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration is not more than five percent of the sale consideration.

3. Amendment vide Finance Act, 2020

Finance Act, 2020 increased the safe harbour limit of 5 percent to 10 per cent.

4. Amendment vide Atmanirbhar package 3.0

The Hon’ble Finance Minister via press release dated November 12, 2020 has increased the safe harbour limit from 10 per cent to 20 per cent for primary sale of residential units up to Rs. 2 crores. This is effective from the date of the announcement to June 30, 2021.

The amendment has been made prospectively applicable from November 12, 2020 to June 30, 2021. Given the sluggishness in the economy and the fact that the lockdown was imposed prior to the beginning of the new Financial year, it would be advisable to retrospectively apply the proposed law to earlier transactions. 

To buttress this position, reference is drawn towards the decision of the Hon’ble Income tax Appellate Tribunal (Kolkata Bench) in the case of Chandra Prakash Jhunjhunwala v. DCIT (2019) 201 TTJ 831 (Kol)(Trib) wherein it was held that though the 3rd Proviso to section 50C of the Act, which provides a safe harbour of 5 per cent, applies with effect from April 01, 2019, it must be interpreted to apply since the insertion of section 50C of the Act (April 01, 2003) because it is curative and removes an incongruity and avoids undue hardship to assesseess.

Applying the same principle, the new safe harbour limit of 20 percent  maybe made applicable to section 43CA of the Act with retrospective effect from April 01, 2014.

Part III – Section 56 (2) (x) (b) of the Act

1. Erstwhile introduction as 56 (2)(vii) of the Act

Transfer of immovable property without any consideration to an individual or HUF for an amount exceeding Rs. 50,000/- was brought within the scope of Income from other sources vide Finance Act, 2009.

However, the same has limitations with respect to the nature of tax payer and it was only applicable for transactions without consideration.

2. Amendment vide Finance Act 2017

Since the existing definition of property for the purpose of this section includes immovable property, jewellery, shares, paintings,etc. These anti-abuse provisions are currently applicable only in case of individual or HUF and firm or company in certain cases.Therefore, receipt of sum of money or property without consideration or for inadequate consideration does not attract theseanti-abuse provisions in cases of other assessees.

In order to prevent the practice of receiving the sum of money or the property without consideration or for inadequate consideration, it is proposed to insert a new clause (x) in sub-section (2) of section 56 of the Act so as to provide that receipt of the sum of money or the property by any person without consideration or for inadequate consideration in excess of Rs. 50,000 shall be chargeable to tax in the hands of the recipient under the head "Income from other sources".

This makes the inadequate consideration taxable in the hands of the buyer of the property.

Section 56 (2) (x) of the Act is triggered for an immovable property when any person receives from any person or persons on or after April 1, 2017: without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property or in case of a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than 5 per cent of the consideration or Rs. 50,000 whichever is higher.

3. Amendment vide Finance Act, 2020

Finance Act, 2020 increased the safe harbour limit of 5 percent to 10 per cent.

4. Amendment vide Atmanirbhar package 3.0

The Hon’ble Finance Minister via press release dated November 12, 2020 has increased the safe harbour limit from 10 per cent to 20 per cent for primary sale of residential units up to Rs. 2 crores as a consequential relief to section 43C of the Act. This is effective from the date of the announcement to June 30, 2021.

Therefore, the relief is not available to a buyer who purchases a house/ residential unit from a seller who held the same as a capital asset. The language of the relief is clear with the use of the term “consequential relief” and excluding section 50C of the Act.

Part IV–Denouement

The Real estate sector has suffered a lot with the policies of the government, from demonetization to GST; under the Scheme of Income tax laws with Notional rent etc.

The SDVs have been revised and currently the circle rates are higher than the fair market value at various places. Buyers and Sellers have been facing severe consequences.

Thus, the present provisions of section 43CA, 50C and 56 of the Act which aim at double taxing notional income, provide for safe harbour of five per cent. On account of representations, the Finance Act, 2020 increased the same to 10 per cent. Referring to the observations made by the Hon’ble Tribunal in Chandra Prakash Jhunjhunwala (Supra), it is advisable to issue such clarifications as the same would provide a much-needed boost to the real estate sector. 

Albeit, the relief is appreciated as the relief said to be with a view to provide an incentive to middle class to buy homes. However, restricting the incentive for an individual by imposing a fetter i.e. only on purchase of a residential property from a real estate developer is arbitrary,ultra vires and violative of Article 14 of the Constitution of India.

The possible argument that the same is to move the unsold residential units of a real estate developer is deluded of a reasonable classification. TheHon’ble Supreme Court in the case of State of West Bengal v. Anwar Ali Sarkar, AIR 1952 SC 75has held that to pass the test of permissible classification two conditions must be fulfilled. They are:

  • The classification must be founded on an intelligible differentia which distinguishes those that are grouped from others are left out of the group, and
  • The differentia must have a rational relation to the object sought to be achieved by the Act.

There is no intelligible differentia as to why a middle-class home buyer is restricted from buying a residential unit from a 3rd person or a second-hand seller.

Further, given the impact of the pandemic on the economy, there is a higher probability of a distress sale where the seller is in dire need of funds. In such case, the buyer will not be able to avail any benefit under the Income tax Act. This proposed amendment is restrictive and arbitrary as the buyer is only benefitted when the purchase is made from a real estate developer and not a third party. Unidentical treatment in an equal situation amounts to inequality.

A Writ Petition can be tried  challenging the discriminatory, arbitrariness and restrictive nature of the Income tax relief in not extending the tax incentive to a home buyer who is purchasing a home from someone other than a real estate developer. Without prejudice, there is a lack of reasonable classification in holding that the said relief is with a view to aid real developers in clearing unsold inventory, as the same amounts to inequality.

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