Treatise on Real Estate Development Contracts
Dr. K. Shivaram & Rahul Hakani, Advocates
In this threadbare analysis of the law on real estate development contracts, the authors have, apart from referring to every conceivable problem and a plethora of important case laws, lashed out at the CBDT for its’ dereliction of duty in failing to notify even Dharavi for purposes of s. 80-IB (10). The authors have made out a strong case for filing a PIL against the lethargy of the Board.
Income-tax Act, 1961 (hereinafter referred to as ‘The Act’) is the only legislation of our country which refers 92 Central Acts and various State Legislations. To understand the various taxation issues relating to Real Estate Transactions, it is very essential to know the provisions of general law with special reference to Transfer of Property Act, Registration Act, Stamp Act, Development Control Regulations, etc. In this paper, we have made an attempt to discuss some of the very important taxation issues relating to Real Estate Transactions.
2. Development Rights
2.1 Capital Assets.
Section 2(14) of the Act defines “capital asset” mean “property of any kind”, held by the assessee whether or not connected with his business or profession, but specifically excludes ‘stock in trade’. In CIT vs. Tata Services Ltd. (1980) 122 ITR 594 (Bom.) and CIT vs. Vijay Flexible Containers (1990) 186 ITR 693 (Bom.), the court has held that the right to obtain conveyance of immoveable property is a capital asset on the same principle the Development rights are capital assets.
2.2 Development Rights – Who are entitled – Societies or members ?
Generally the consideration received is two fold i.e., partly in cash and partly in kind i.e., by way of property in the redeveloped property. Hence, it becomes important to ascertain the full value of consideration. Such transactions are thus a combination of sale and exchange. The Supreme Court in CIT vs. George Henderson and Co. Ltd. (1967) 66 ITR 622 (SC) held that in case of an exchange, the money’s worth of the property received in exchange constitutes the consideration for the property parted in exchange.
In respect of Tenants co-partnership cooperative societies, which are of the nature of “Flat Owners Societies“ in which the flats are acquired by the society from the builder on ownership basis and thereafter Society is formed, and land is conveyed to the society and individual members acquire ownership rights over the building and underneath the development rights. This concept has been recognized under Bombay Stamp Act as on the conveyance in favour of the housing societies, stamp duty paid by the purchasers of flats on ownership agreements is deducted from the stamp duty payable on the market value of the property transferred in favour of the society as per proviso to Article 25 of schedule 1 of Bombay Stamp Act. Circular no F.N.4/ 28 /68- WT dt. 10th January, 1969 and 27th January, 1969 explaining the provision of section 5(1)(iv), the Board clarified that flats vest with individual member of society and wealth tax exemption will be available to individual members. The same principle may be applicable to income tax proceedings and hence members are entitled for the Development Rights. Westwind Realtors P. Ltd. vs. DCIT (2006) 9 SOT 572 (Mum) – The common medium of ownership of residential apartments is co-operative societies. But there is no hitch if the same activity is carried out by a company either. The Income Tax Law itself has recognized the locus standi of a company through section 27(iii) to legally hold properties and at the same time allot the de facto ownership to its members. In case of Tenants co-partnership co-operative societies which are of the nature of “Plot purchased type society” i.e. in which land is acquired by the society and the building is constructed by it for allotment to members for occupation , the development rights belong to society and society may be entitled to Development Rights.
3.1 Apex Court in case of Jayant Achyut Sathe v Joseph bain D’Souza & Ors. (2006) 6 SCC 11 has held that all those buildings which were constructed prior to 1940 whether or not they are dilapidated, Regulation 33(7) of the Development Control Regulations, 1991 (DCR) would apply, hence, more than 19,000 buildings in Mumbai would qualify for redevelopment. As most of these buildings are owned by landlords, the redevelopment transactions would raise number of taxation issues in the assessment of landlords, societies, tenants and developers. Sale of TDR /FSI
3.2 In Jethalal D. Mehta vs. DCIT (2005) 2 SOT 422 (Mum.), following the judgment of Apex Court in CIT vs. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), it was held that TDR granted by DCR, 1991 qualifying for equivalent F.S.I having no cost of acquisition, sale thereof gives no rise to capital gains. In ITO vs. Lotia Court Co-operative Housing Society Ltd (2008) 12 DTR (Mumbai) (Trib ) 396, it was held that the assignment of the TDRs to the developer and in turn the additional floors to be constructed and also repairs / renovation of the building to be carried out, does not entail accruing of any income in the hands of the assessee society, who is not the owner of the plot. Even in the case of flat owners who owned the individual flats in the respective names, there is no question of taxability of receipt on account of sale of additional floor space index received by the assessee by virtue of transfer of TDRs under the Development Control Regulation for Greater Mumbai, 1991. Receipt on sale or assignment of rights to receive TDRs is not liable to tax. In New Shailaja CHS vs. ITO (ITA NO 512/M/2007. BENCH B dated 2nd Dec 2008 (Mumbai) – www.itatonline.org) where the assessee, a Co-op Housing Society became entitled, by virtue of the Development Control Regulations, to Transferable Development Rights (TDR) and the same were sold by it for a price to a builder and the question arose whether the transaction of sale receipt could be taxed. It was held that though the TDR was a ‘capital asset’, there being no ‘cost of acquisition’ for the same, the consideration could not be taxed.
3.3 In Shakti Insulated Wires Ltd vs. Jt. CIT (2003) 87 ITD 56 (Mum.) it was held that development rights embedded in the ownership of the land are recognized as distinct from the land as per DCR and therefore constitute capital asset and FMV of development rights as on 1-4-1981 should be taken as cost of acquisition for indexation. This decision of the Tribunal has not been considered by the Tribunal in any of the subsequent judgments referred above.
3.4 Bombay High Court in Chheda Housing Development Corpn., a Partnership firm vs. Bibijan Shaikh, Farid & Ors. (2007) (3) MHLJ 402 (Bom.),Dealing with specific performance of Agreement for use of TDR, held that FSI/TDR are benefit arising from the land consequently must be held as immovable property.
The Court observed that an immovable property under the General Clauses Act, 1897 under Section 3(26) has been defined as to include benefits arising out of land. Therefore, any benefit arises out of the land, then it is immovable property.
3.5 Therefore, if TDR / FSI are considered as immovable property being part and parcel of land, can it be said that cost of TDR /FSI is nil ? Issue for consideration.
4. Transfer – S. 2 (47)
4.1 If the agreement of development enables the passing of domain and control of the immovable property by grant of an irrevocable authority or license, then even the date of agreement of development will constitute the date of transfer of the capital asset. Chaturbhuj Dwarkadas Kapadia vs. CIT (2003) 260 ITR 491 (Bom.)
4.2 Conversion of Capital Asset into stock in trade. As per section 45(2), if a capital asset is converted into stock in trade, the capital gain is taxable in the year such stock is sold, and the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of consideration received or accruing as a result of the transfer.
4.3 Conversion of Stock-in-trade into Capital Asset CIT vs. Bright Star Investments (P) Ltd (2008) 24 SOT 288 (Bom.), it was held that there is no provision similar to section 45(2) with respect to conversion of stock in trade to capital asset. It was further held that holding period is to be considered from the date of acquisition.
Kalyani Exports & Investment (P) Ltd. & Ors. vs. Dy. CIT (2001) 78 ITD 95 (Pune)(TM)(139 & 140) However, in Splendor Constructions (P) Ltd. vs. ITO (2009) 27 SOT 39 (Delhi), it was held that the period to be considered is from the date of conversion to investment. This decision has not considered the decision of the Mumbai Tribunal in Bright Star (supra).
4.4 In Ajai Kumar Sah Jagati vs. ITO (1995) 55 ITD 348 (Del.) and M/s G. G. Dandekar Machines Works Ltd. vs. JCIT, ITA No. 181/Mum/2001, Bench – F, dated 28th February, 2007, possession of only a part of property was transferred against proportionate consideration received during the relevant assessment year. It was held that capital gains arising only on the said proportion amount of consideration could be charged in the relevant year and not on the entire consideration stipulated in the sale agreement.
4.5 Valuation as on 1-4-1981
Reference to the DVO can be made under s. 55A only when the A.O. is of the opinion that the value of the capital asset claimed by the assessee is less than its fair market value and not when he was of the opinion that the fair market value of the property on 1st April, 1981, as shown by the assessee was more than its actual fair market value.
CIT vs. Daulat Mohta HUF ITA No. 1031 of 2008 dt. 22-9-2008 (Bombay High Court)
Daulat Mohata vs. ITO ITA No. 322/m/2007 Bench ‘D’ Dt. 23-7-2008.
ITO vs. Smt. Lalitaben B. Kapadia (2008) 115 TTJ 938 (Mum.) Patel India (P) Ltd. vs. Dy. CIT (1999) 63 TTJ 19 (Mum.)
Sajjankumar M. Harlalka vs. Jt. CIT (2006) 100 ITD 418 (Mum.)
Mrs. R. M. Kazeram vs. Jt. CIT (2004) 91 ITD 429 (Mum.) (TM)
Smt. Krishnabhai Tingra vs. ITO (2006) 101 ITD 317 (Pune)
5.1 Generally the consideration received is two fold i.e., partly in cash and partly in kind i.e., by way of property in the redeveloped property. Hence, it becomes important to ascertain the full value of consideration. Such transactions are thus a combination of sale and exchange. The Supreme Court in CIT vs. George Henderson and Co. Ltd. (1967) 66 ITR 622 (SC) held that in case of an exchange, the money’s worth of the property received in exchange constitutes the consideration for the property parted in exchange.
6. Block of Assets – S. 2(11)
The argument in favour of the proposition that the building is also transferred is that it cannot be said that the landlord remains the owner of the building after it is inferred that it has transferred the land to the developers under the development agreement. He is considered the owner, then he has the right to sell the building to anybody else as it is its ‘owned’ property therefore for seller he is entitled for apportionment towards the building.
6.1 Where land and building transferred were used for business, an important issue arises as to whether the new constructed area received can be added to the block of assets. The new constructed area will not be a building used for the purpose of the business. If it is not an asset which will be used as a “building” for purpose of the business it may not become a part of the block of assets. If the property is let out and income is chargeable under the head “income from house property“, can it be said that the building is used for the purpose of business and can be considered as part of block of asset? Issue for discussion.
6.2 The concept of block of assets in the scheme of the Act is vis-à-vis allowing depreciation in the computation of business income. If an asset is not put to use for the purposes of the business, depreciation may not be allowed. The new constructed area may be held as an “investment”, which may not be eligible for depreciation.
6.3 For the purposes of redevelopment the old building has to be demolished. Such building may be a part of block of assets. Issue arises as to whether indexed cost of structure can be deducted to arrive at the long term capital gains on sale of land. Indexation u/s. 48 is allowed only in respect of cost of acquisition or cost of improvement of the capital asset transferred. Therefore, one may contend that only the land is transferred and not the building, which will be demolished to enable the development of land, hence the cost of structure can not be taken in to consideration and only index cost of land will be considered. Issue for consideration.
6.4 The argument in favour of the proposition that the building is also transferred is that it cannot be said that the landlord remains the owner of the building after it is inferred that it has transferred the land to the developers under the development agreement. He is considered the owner, then he has the right to sell the building to anybody else as it is its ‘owned’ property therefore for seller he is entitled for apportionment towards the building.
6.5 The argument to the contrary is that he transferred only the land and merely permitted the developer to demolish the building to enable the developer to develop the vacant land and hence he cannot apportion the cost to the building. Issue for consideration.
6.6 Capital Gains – Depreciation has been claimed and allowed – S. 50, 54E.
Fiction created in sub-ss. (1) and (2) of s. 50 is restricted only to the mode of computation of capital gains contained in ss. 48 and 49 and does not apply to other provisions and therefore an assessee is entitled to exemption under s. 54E in respect of capital gain arising on the transfer of a long-term capital asset on which depreciation has been allowed.
CIT vs. ACE Builders (P) Ltd. (2006) 281 ITR 210 (Bom.) / ACE Builders (P) Ltd. vs. ACIT (2001) 76 ITD 389 (Mum).
CIT vs. Assam Petroleum Industries (P) Ltd. (2003) 262 ITR 587 (Gau.)
CIT vs. Legal Heirs of late Dr. (Mrs. S. R. Pandit ITA No. 144/2007 dt. 30-8-2005 (Bombay High Court)
7. Expenditure S. 37 & 48
7.1 Compensation paid to tenants/lessee can be reduced from full value of consideration In CIT vs. A. Venkataraman and others (1982) 137 ITR 846 (Mad.) and Naozar Chenoy vs. CIT (1998) 234 ITR 95 (AP) it was held that the compensation paid to tenants to enable handing of vacant possession of property transferred were allowable as deduction. Similarly, compensation paid to hutment dwellers on assessee’s land to enable sale of vacant land was allowed as deduction in computation of capital gains in CIT vs. Miss Piroja C. Patel (2002) 122 Taxman 752 (Bom.)
8. Conversion of tenancies into ownership
8.1 Whenever redevelopment of the tenanted properties take place tenants prefer to convert their tenancies into ownership basis by paying 100 months rent. In Dr. D. A. Irani vs. First ITO (1984) 7 ITD 160 (Bom.) (SB), Assessee was initially in occupation of flat as a tenant. Later he acquired it by purchase from the original owners with all the rights and interest therein including occupancy right. There was a union of the interests of the lessor and the lessee and tenancy was extinguished. It was held that Flat sold within 4-5 months thereafter was short-term capital gain.
8.2 A tenancy for tenancy is a transfer by way of ‘exchange’ and the moneys worth of the new tenancy received in exchange constitutes the consideration for the old tenancy parted in the exchange. In CIT vs. D.P. Sandu Bros Chembur (P) Ltd ( 2005) 273 ITR 1 (SC) the apex court held that tenancy right is a capital asset as the cost of acquisition being nil no capital gain tax could be charged. After the amendment to section 55(2) w.e.f. 1-4-1995 if the tenant has not paid any cost for acquiring the tenancy the cost will be nil. In case the tenant gets alternative accommodation on ownership basis he may be liable to capital gains tax on the value of the ownership rights which he gets. In case if he is not owning any other house property he may be entitled to the benefit of section 54 F of the Income-tax Act subject to other conditions.
9. Housing Projects – S. 80IB(10)
9.1 The expression “housing projects” has not been defined in section 80IB.
The Concise Oxford Dictionary, Sixth Edition, gives its meaning in noun form as a “plan, scheme, planned undertaking.”
As per Chamber’s Twentieth Century Dictionary (Revised edition) project means “a scheme of something to be done; a proposal for an undertaking; an undertaking.”
From a reading of the above, it emerges that a project must be a planned affair or a scheme of something undertaken to be done.
Since the housing project is required to be approved by a local authority, it would be fair to construe that the scheme or plan of the housing project must be in keeping with schemes laid down by the approving local authority. If there is convenience shops within the project, same can be considered as Housing Project.
The view taken by us also finds support from CBDT circular F. No. 205/3/2000/ITA II dt. 4-5-2001. This circular is the reply given by the CBDT to a query posed by the Maharashtra Chamber of Housing Industry in a representation made by it to CBDT. Here the CBDT has clarified that “any project which has been approved by a local authority as housing project should be considered as adequate for purpose of Section 80IB(10)”.
9.2 One of the issues for consideration is whether assessee must be the owner of the land on which the housing project is constructed is now settled by the Special Bench in Radhe Developers & Ors. vs. ITO & Ors. (2008) 23 SOT 420 (Ahd). In this case, land was not registered in assessee’s name. Contention of the Revenue was that in order to claim deduction under S. 80IB(10) the assessee must be the owner of the land on which the housing project is constructed. It was held that there is no such condition in the provisions of S. 80IB(10). Deduction under S. 80IB is allowable to an undertaking developing and building housing project, whether it is developed by it as a contractor or as an owner. It was also held that the term ‘contractor’ is not contradictory to the term ‘developer’.
In this case another important issue before the bench was whether the profit earned by assessee including sale of Extra-FSI which was unutilised, was eligible for deduction. It was held that there is no condition as to FSI under the scheme of S. 80IB(10) It is not mandatory requirement to fully utilize permissible FSI. In the facts of the case, it was held Development agreement with the land-owners makes reference to land area only. Also, sale deeds executed in favour of buyers of the residential houses are for sale of plot of land. In both the documents assessee has not acquired or relinquished rights with reference to FSI. There is no question of selling unused FSI to the individual buyer or calculating profitability on FSI as the same is not contemplated under S. 80IB(10).
Calculation given in the approved plan is for the maximum permissible FSI. By giving such calculation it is not mandatory to make construction to the fullest extent of maximum permissible FSI. Therefore, deduction could not be denied to the assessee on the ground that the profits earned by the assessee are not for developing and building housing project done but for sale of extra FSI which has not been utilized for developing and building the housing project.
9.3 However, an issue may arise in a case where an undertaking developing and building housing project is engaged as a sub-developer and all the sanctions are obtained by the developer whether the sub-developer would be eligible for the deduction or main developer or both. In Saroj Sales Organisation vs. ITO ( 2008 ) 115 TTJ 485. the tribunal held that the sub-developer is eligible for deduction.
9.4 Another issue which arises is whether the benefit of extension of the date of completion of project upto 31st March, 2003 were applicable to the Asst. Year 2001-02 and subsequent years only. In Dy. CIT vs. Ansal Properties & Industries Ltd. (2008) 22 SOT 45 (Del.) it was held that the Contention of Revenue that the amendments made in S. 80IB(10) by the Finance Act, 2000 extending the date of completion of project upto 31st March, 2003 were applicable to the Asst. Year 2001-02 and subsequent years and the assessee in the instant case for the Asst. Year 2000-01 was not eligible to avail the benefit of the said amendments is not acceptable.
9.5 Many times developers under a single sanctioned plan construct separate wings for houses for higher strata of the society (which do not fulfill necessary conditions) along with low cost houses. Whether the assessee would lose deduction on eligible units due to ineligible units This issue came to be decided in Saroj Sales Organisation vs. ITO (2008) 115 TTJ 485 (Mum.) / (2008) 3 DTR 494 (Mum) wherein it was held that Assessee having completed the construction of various wings of the building under the approved plan in two different blocks under different certificates of commencement, was eligible for deduction under S. 80IB(10) in respect of one block in respect of which claim for deduction was made and which satisfied the requirement of S. 80IB(10); claim could not be denied by clubbing the two blocks especially when the second block had been kept separate by the assessee and for which deduction under S. 80IB(10) was not claimed.
10. Slum Development
One derives the support from the subsequent Amendment by the Finance (No.2) Act 2004. The proviso was inserted in clause (b) whereby the restriction of size of plot was relaxed with view to rationalize the provision. It is submitted that the proviso was inserted to make the provision workable and avoid the difficulty. Interpretation should be made to bring effective result and avoid unjust result or discrimination. The proviso was inserted to cure the defect.
In the city of Mumbai, there are innumerable slum rehabilitation projects which are carried out by various undertakings engaged in development of housing projects.
These projects are approved by the Government of Maharashtra as Slum Rehabilitation project (SRA Project)
These SRA projects has to be in strict compliance of various rules and Act, which is again guided by the Circulars and Notification, therefore, the developer has no say in its implementation and execution.
S. 80IB(10) provides for a deduction of the profits of an undertaking developing and building housing project. One of the condition laid down is the project size should be more than one acre. However, by Finance (No.2) 2004, the legislature has removed the restriction of the project size by a proviso due to difficulties faced to developer in getting an area of one acre for development of a single society within the entire slum project.
As a result in most of the cases a developer undertakes several projects which are within the slum project but are not adjacent and they are more than one acre only cumulatively. Hence, eligibility of deductions in such situation is an important issue. When the competent authority for the slum rehabilitation holds that it is one project, can the Assessing Officer take the view that it is not one project, condition of one acre has to be satisfied for each permission and not combined together.
One derives the support from the subsequent Amendment by the Finance (No.2) Act 2004. The proviso was inserted in clause (b) whereby the restriction of size of plot was relaxed with view to rationalize the provision. It is submitted that the proviso was inserted to make the provision workable and avoid the difficulty. Interpretation should be made to bring effective result and avoid unjust result or discrimination. The proviso was inserted to cure the defect.
In Allied Motors (P) Ltd. vs. CIT (1997) 224 ITR 677 (SC) it was held that A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section to give the section a reasonable interpretation requires to be treated as retrospective in operation.
However even if the proviso is read as retrospective, assessee may be denied deduction as the SRA projects require approval of the CBDT and CBDT has not approved a single slum Rehabilitation Project till date.
11. Completion of Project
11.1 As per the requirement of section 80(IB)(10), the project is required to be completed by 31-3-2008. For the purpose, whether occupation certificate obtained from the appropriate authority to the effect that the development is as per the approval and is ready for occupation is sufficient or will the department insist on any other certificate like completion certificate from appropriate authorities?
11.2 In our opinion, the occupation certificate given by the BMC would be sufficient proof that the housing project is completed. Even in Dy. CIT vs. Ansal Properties & Industries Ltd. (2008) 22 SOT 45 (Del.) it was considered sufficient. But, occupation certificates are sometimes given building wise. If all the buildings constructed by the developer have occupation certificates before 31-3-2008, may be sufficient compliance.
11.3 If, by any reason, the occupation certificate was not granted or disputed, despite the fact that the project is completed, some other proof like the architect certificate may also help. It is preferable that the certificate should elaborately describe the completed project item wise. For example, the architect’s certificate must describe the buildings that have been completed, the utilities like water, electricity that are functional, the areas kept readily available to surrender to the BMC for reservation, setback, roads, etc.
11.4 When, construction is duly completed before 31-3-2008, but the sale of some flats take place in the subsequent year, whether deduction u/s. 80IB would be available in the subsequent years from the incomes from such sales?
In our opinion generally, in incentive provisions granting tax holidays, there is always a specification as to the number of years the tax holiday can be enjoyed. But, in S. 80IB, there is no specification as to the number of years the tax holiday is available. As on date, it appears that once an approved project is completed before the cut off date fixed as per section 80-IB and other eligibility conditions are also fulfilled, there is no terminal year for claiming the tax holiday.
11.5 In our opinion generally, in incentive provisions granting tax holidays, there is always a specification as to the number of years the tax holiday can be enjoyed. But, in S. 80IB, there is no specification as to the number of years the tax holiday is available. As on date, it appears that once an approved project is completed before the cut off date fixed as per section 80-IB and other eligibility conditions are also fulfilled, there is no terminal year for claiming the tax holiday.
11.6 The assessee will be entitled to deduction u/s. 80IB in respect of the income from the sale, provided that the Legislature has not made any amendment curtailing the availability of the deduction up to A.Y. 2009-10 or deleted the provisions of section 80IB w.e.f. 1-4-2010. It is settled principle in law that as regards income tax provisions, the law that is to be applied is the law that is in force on the first day of the assessment year.
A useful reference can be made to the decision of the Supreme Court in the case of Reliance Jute & Industries Ltd. vs. CIT (1979) 120 ITR 921 (SC).
12.1 Whether terrace areas allotted to some flat owners for exclusive use should be clubbed with the built up areas of the flat to ascertain whether the maximum built up of the flat is less than 1000 sq. ft built up area in order to satisfy the eligibility condition in clause [c] of section 80IB?
12.2 In our opinion a terrace is known as a paved outdoor area adjoining a residence. It adjoins the residence externally and is not part of the structure that composes the residential unit. A residential unit is enclosed in walls which stretch from the floor level to the roof; it has windows and is topped by a roof. A residential unit has provisions for amenities and security of the residents.
A terrace, on the other hand, hardly has the features of the residential unit. It is open to the sky and the height of its wall boundaries are no where similar to that of the residential unit. Windows are virtually non existent.
Both terrace and residential units can exist independently and can be used in mutually exclusive manner by the residents. A terrace may provide more beneficial enjoyment to the residential unit, but so does a garage or an open garden. A terrace independently is not competent to be used for habitable purposes.
13. Several Housing Projects
Some of the assessee’s have a division which carry out several housing projects. In such projects difficulty arise as to preparing separate balance sheets for each project as the resources are common. Rule 18BBB requires separate report [10CCB] for each “Undertaking or Enterprise” of the Assessee should be accompanied by Profit & Loss account and Balance Sheet of the undertaking or enterprise as if the undertaking or the enterprise was a distinct entity. Reading Rule 18BBB and section 80IB together means “undertaking” and “housing projects” mean two different things. Can it be interpreted that the requirement of Rule 18BBB is met if Balance Sheet of a Division [being treated as “Undertaking or Enterprise} covering various “Housing Projects” is common.
14. Business Income vs. Capital Gains
14.1 Whether a purchase and sale transaction of a land is an adventure in the nature of trade or not depends on the facts and circumstances of each case. It is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not.
14.2 Land received as gift
CIT vs. Shahsi Kumar Agrawal (1992) 195 ITR 767 (All)
Assessee sold the same after plotting it out in order to secure a better price and because he was staying in a different place in connection with his official duties and not able to use it for agricultural operations. Surplus received from sale was not assessable as income from an adventure in nature of trade.
14.3 Ancestral land converted into non agricultural land
CIT vs. Premji Gopalbhai (1978) 113 ITR 785 (Guj.)
Land divided into several plots and sold as and when purchaser was available. Assessee is not dealer in land.
Ram Saroop Saini, HUF vs. Asst. CIT (2007) 15 SOT 470 (Del.)
It was held that fact that the assessee got the land converted into non-agricultural land before selling it is neither determinative nor conclusive to ascertain the nature of the transaction. It is the totality of the circumstances which have to be borne in mind to determine the character of the transaction.
14.4 CIT vs. R. V. Gupta (2002) 258 ITR 261 (Delhi) Assessee constructed six flats on land allotted to him and to his brother by DDA long ago and sold four flats, retaining the remaining two flats for their own use. It was held that the assessee was in service; no change in the character of the said plot had been effected from the years 1971 to 1989; there was no material on record from where it could be said that the assessee ever had the intention to exploit the plot as a commercial venture. Merely because six flats had been constructed, out of which four were sold to friends, it would not show that it was an adventure in the nature of trade.
15. Property vs. Business Income
15.1 With several malls and business centres emerging, taxability of rental income arising therefrom is an important issue. Supreme Court in Shambhu Investment (P) Ltd. vs. CIT (2003) 263 ITR 143 (SC) has held that income derived from letting assessable as income from property and not business income. In this case assessee was letting out furnished premises on monthly rent basis to various parties along with furniture, fixtures, light, air-conditioners, etc., for being used as “table space”. Under the agreement assessee is also providing services like watch and ward staff, electricity, water and other common amenities to the occupiers. These services are not separately charged. Entire cost of property already recovered by way of interest-free advance by the assessee. Only intention was to let out the portion of premises to respective occupants. It was held that income derived from letting rightly held assessable as income from property and not business income.
15.2 However, in PFH Mall & Retail Management Ltd. vs. ITO (2008) 110 ITD 337 (Kol.) after considering Shambhu Investment (P) Ltd. it was held that income derived by assessee from shopping malls/business centres was assessable as business income and not as income from house property. It held that “The fact that the apex Court held that the income earned by Shambhu Investment (P) Ltd. is assessable as property income has no relevance in the facts and circumstances of the present case. Because in that case the facts showed that the main intention was to earn rental income. That was why the entire cost of the property was recovered from the tenants by way of interest-free advance. In the instant case, on the other hand, the assessee had taken bank loans to finance his projects like any other businessman. As discussed hereinabove, every action of the present assessee appears to be with the sole object of commercial exploitation of the premises.”
Mumbai Tribunal in case of M/s Omsagar Engineering Pvt. Ltd. vs. ACIT, ITA No. 2989/Mum/03, Bench–K, dated 30-11-2006, held that income from service centre is to be treated as business income.
CIT vs. Pateshwari Electrical & Associated Industries (P) Ltd. (2006) 282 ITR 61 (All) (After considering Shambhu Investments) Letting out of all the rooms of a property, used as a guest-house, by the assessee to a bank to be used as a training centre was a part of running of the lodge business and, therefore, income from such leasing was assessable as business income and necessary expenditure incurred thereon was allowable as business expenditure.
CIT vs. Sarabhai (P) Ltd. (2003) 263 ITR 197 (Guj.) When property has been let out not only as property but with services which is a complex letting, the income cannot be said to be derived from mere ownership of house property but may be assessable as income from business. If the owner of a property carries on upon the property some activities which result in profits and gains arising, not from the ownership of the property but from the owner’s use thereof, letting various services to the tenants, those profits and gains may be chargeable u/s. 28 as income from business, apart from the assessment u/s. 22 in respect of income from house property.
16. Full Value of Sale Consideration – S. 50C
16.1 Section 50C is inserted to prevent large scale undervaluation of the real value of the property in the sale deed so as to defraud Revenue. Constitutional validity of S. 50C has been upheld by the Madras high court in K. R. Palanisamy & Ors. vs. UOI & Ors. (2008) 219 CTR 323 (Mad.).
16.2 Reference to DVO – Not Discretionary
In Meghraj Baid vs. ITO (2008) 114 TTJ 841 (Jd) / (2008) 4 DTR 509 (JD) it was held that in case the AO does not agree with the explanation of the assessee with regard to lower consideration disclosed by him then he should refer the matter to DVO for getting its market rate established as on date of the sale to arrive at the correct sale consideration. If this provision is read in the sense that if the AO is not satisfied with the explanation of the assessee then he ‘may’ or ‘may not’ send the matter for valuation to the DVO then in that case this provision would be rendered redundant. In ITO vs. Smt. Manju Rani Jain (2008) 24 SOT 24 (Del.) Assessing Officer having taken market value adopted for stamp duty purposes as full value of consideration for purposes of computing capital gains in place of stated consideration, CIT(A) was justified in directing the Assessing Officer to first refer the properties to valuation cell and then do so in view of provisions of S. 50C(2).
16.3 Effect of DVO Valuation
Ravi Kant vs. ITO (2007) 110 TTJ 297 (Del.)
Where apparent consideration of land and/or building as shown in the document of transfer is less than the stamp duty valuation fixed by State Government, it is the latter which shall prevail for computation of capital gains. In case the assessee claims that the value fixed for stamp duty purposes is higher than fair market value, the Assessing Officer shall refer the matter to DVO under S. 50C(2) for determination of fair market value, which if less than the stamp duty valuation, shall be considered as fair market value; but if higher than the stamp duty valuation, the stamp duty valuation shall be treated by virtue of S. 50C(3), to be the fair market value. Assessing Officer cannot disregard the valuation fixed by DVO.
In Jitendra Mohan Saxena vs. ITO (2008) 117 TTJ 974 (Luck.) it was held that as the valuation arrived at by the DVO was higher than that adopted by stamp valuation authority, Assessing Officer was justified in adopting stamp valuation as full value of consideration.
In this case it was further held that Report of approved valuer is alien to the provisions of S. 50C. In case of variation between approved valuer’s report and that of DVO, there is no provision in the Act to make a reference to a third valuer.
16.4 No Registration- 50C Not Applicable
In Navneet Kumar Thakkar vs. ITO (2007) 112 TTJ 76 (Jd) / (2008) 110 ITD 525 (Jd.) it was held that S. 50C embodies the legal fiction by which the value assessed by the stamp duty authorities is considered as the full value of consideration for the property transferred. It does not go beyond the cases in which the subject transferred property has not become the subject-matter of registration and the question of valuation for stamp duty purposes has not arisen. It was further held that the value adopted or assessed by the stamp valuation authorities has to be of the very same property, which is the subject-matter of transfer. The language of this section provides in unambiguous terms that the value adopted or assessed by the stamp valuation authority has to be substituted with the sale consideration of “such property”. It is wholly irrelevant to consider the assessed value of another property for stamp duty purposes as full value of consideration.
16.5 Section 50C does not apply to buyer for invoking S. 69B
ITO vs. Optec Disc Manufacturing (2008) 11 DTR 264 (Chd.)(Trib) it was held that Adoption of different value for stamp duty purposes cannot by itself distract from the consideration stated in the sale deed. Fiction created under S. 50C is applicable only for computing capital gains in the hands of seller and does not apply to buyer for invoking S. 69B.
16.6 Business Income
Provisions of section 50C cannot be applied where the income from transfer is business income. M/s. Inderlok Hotels Pvt. Ltd. vs. ITO, ITA No. 4376/M/2008, Bench “I”, dt. 5-2-2009
16.7 Development Right
Section 50C applies to land and building or both. In Section 269A(e) the definition of immovable property is very wide. It covers rights of the nature referred to in clause (b) of sub-section (1) of section 269AB. It may be possible to take a view that section 50C cannot be applied to development rights.
17. Joint Venture Business
17.1 We have been witnessing a new and different trend in relation to the Real Estate Development. Earlier, a builder would go for outright purchase of a piece of land from the landlord and develop the same at his own cost and risk. The scenario in this regard is undergoing a change. Now the landlord also desires to have a share in the profit of the project being undertaken by the builder and developer. On his part, the builder and developer desire(s) to share his risk in the development of the project. This change in the trend in relation to Real Estate Development is giving rise to a new concept of joint venture between the landlord and the builder/developer for the purpose of development of immovable properties. It is often the case, that the builder/developer is either a limited company or a partnership firm, whereas the landowner is either an individual, a Hindu undivided family or a partnership firm. The joint venture business is assessed as an Association of Persons for the purposes of taxation under the Income-tax Act, 1961.
17.2 Whether share of a member in the income of a joint venture business, taxed in the status of an Association of Persons, will again be liable to tax in his hands.
At the outset it may be stated here that an incentive deduction like deduction under section 80IA(4)(iii) or section 80IB(10), etc. of the Act, will also be available to an Association of Persons, if all the other relevant conditions are fulfilled. As per the second proviso, where no income-tax is chargeable on the total income of an Association of Persons/Body of Individuals, the share of a member computed as aforesaid shall be chargeable to tax as part of his total income. In this context, the meaning of the expression “where no income-tax is chargeable on the total income of the Association of Persons/Body of Individuals”, is relevant. The aforesaid expression means, incomes which do not form part of the total income. In this connection, it may be stated that a deduction or relief under section 80-IA, section 80-IB, section 80-I and section 80J, cannot be said to be income, profits and gains, not includible in the total income. In support of this proposition, reliance may be placed on the judgement in the case of ITO vs. Stumpp, Schuele & Somappa (P) Ltd. (1977) 106 ITR 399 (Kar.). This judgement of the Karnataka High Court was affirmed by the Apex Court in the case of ITO vs. Stumpp, Schuele & Somappa (P) Ltd. (1991) 94 CTR 160 (SC) / (1991) 187 ITR 108 (SC). Thus, the deductions available under sections 80IA and 80IB do not pose any problem in this respect. Otherwise also, if the total income of an Association of Persons is entitled to deduction under section 80IA or section 80IB, then the question of any tax liability on the share of a member in the income of the Association of Persons, will not arise, as the income of the Association of Persons or Body of Individuals would be nil and consequently share of the member includible in the total income would also be nil.
17.3 Whether share of a member (company) in the income of an Association of Persons, is required to be disclosed in the profit and loss account of such company.
One view could be “not required to be shown in the profit and loss account”. share of a company in the income of an Association of Persons does not form part of the result of the working of the company and further the same will also not constitute a transaction of the business of the company. Therefore, the share of a company in the income of an Association of Persons will not be includible in ‘book profit’ of the company and accordingly, Minimum Alternate Tax may not be applicable in respect of the same.
18. Accounting of Construction Contracts
18.1 Project Completion Possible
CIT vs. Bilahari Investments (P) Ltd. (2008) 299 ITR 1 (SC)
Recognition/identification of income under the 1961 Act, is attainable by several methods of accounting. Project completion method is one such method.
CIT vs. Advance Construction Co. (P) Ltd. (2005) 275 ITR 30 (Guj.)
Assessee-contractor having offered profits for tax on the basis of percentage completion method which is a standard accounting practice and has been constantly followed by the assessee in subsequent years, the same could not be rejected and impugned amount which has been deducted in working out the profit is not chargeable to tax in the year under consideration, same having been offered for taxation in later years
18.2 Disclosure in the course of Search – Whether income be taxed on completion of project.
Dhanvarsha Builders & Developers (P) Ltd. vs. DCIT (2006) 102 ITD 375 (Pune) – Assessee following project completion method. Undisclosed income in the form of ‘on money’ should be taxed in the respective assessment years as per method of accounting followed by the assessee.
18.3 Finance Cost Indirect Cost and Revenue CIT vs. Lokhandwala Construction Inds. Ltd. (2003) 260 ITR 579 (Bom.)
Construction project undertaken by the assessee-builder constituted its stock-in-trade and the assessee was entitled to deduction under s. 36(1)(iii) in respect of interest on loan obtained for execution of said project. Wall Street Construction Ltd. & Anr. vs. JCIT (2006) 101 ITD 156 (Mum.) (SB) – Assessee following project completion method of accounting, the interest identifiable with that project should be allowed only in the year when the project is completed and the income from that project is offered for taxation.
ITO vs. Panchavati Developers (2008) 115 TTJ 139 (Mum.) – Assessee following project completion method, and advertisement expenses of the two projects being allocable to individual project, such advertisement expenses have to be capitalized as work-in-progress to be allowed deduction in the year of completion of project.
JCIT vs. K. Raheja (P) Ltd. (2006) 102 ITD 414 (Mum.) – Even though assessee was following competed contract method for returning its income, its claim of finance cost as a period cost in nature of interest was allowable in the year in which it was incurred or accrued, in accordance with AS – 7 issued by the ICAI.
DCIT vs. Thakker Developers (2008) 6 DTR 238 (Pune) – CIT vs. Advance Construction Co. (P) Ltd. (2005) 275 ITR 30 (Guj.)
Assessee following ‘modified project completion method’ which was accepted in the past, AO could not be allowed to partially detract from the same by making disallowance of part of interest and loan processing fee in respect of a particular project and allowing the balance of the interest, thereby creating an anomalous position and deviating from the rule of consistency.
It is very unfortunate that the CBDT has not issued any notification specifying the slum project. Dharavi of Mumbai which is considered as biggest slum of Asia was also not notified by the Board. The Federation may forward a representation to the Hon’ble Finance Minister and Chairman, CBDT. If there is no response, the Federation may request the Builders Association to approach the High Court by filing PIL.
Because of recession many housing projects may not be completed within specified time of four years from the end of financial year in which the housing project has been approved, hence, Federation may make a representation to extend the completion of project till 2012.
Delegates and readers may e-mail the issues or views on the subject, which may help us to understand the various issues for discussion. We are thankful to Mr. Anil Kumar Singh and organizers for giving us an opportunity for presenting the paper on the subject of “Real Estate Transactions – Some Important Issues – Income-tax Act, 1961”.
[Reproduced with permission from the Paper presented at AIFTP’s Two Day National Tax Conference held on 7th and 8th March, 2009 at Varanasi]