Caiptal Gains tax query - Urgent reply

[yameen]

Hi,
   
      The land belongs to '' X '' and he has entered into an agreement with ''Y''(who is a builder)
the contract is to construct the apartments and give 41% of apartments to me and he must take over 59% of apartments and for this a power of attorney is executed and as per income tax provision and a case law of Jabasir singh sarkaria (2007) (AAR)  its held that tax need to be paid the moment power of attorney is executed and to avoid such tax in power of attorney a clause need to be made stating that the power is given to builder only on completion and not otherwise

           My question is to know  tax planning of 59% i.e.., can X transfer it to his wife or daughter and claim exemption and how can i make the documents so has to give right on the property only after completion of the project and not otherwise
         
         Need a urgent reply

Regards
Yameen Ahmed

[ashutosh majumdar]

See, the problem arises because the law (s. 2(47)(v) &(vi) of the Income-tax Act) deems (a) the handing over of possession or (b) the enjoyment of property to amount to a "transfer".

The language of the section is as follows:

(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company or other association of persons or by way of any agreement or any arrangements or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

As you can see, the language is very wide. Now, even if you do not execute a POA, the fact of the matter is that the developer will enter upon the land, demolish the existing structures and build a new building. Surely, this amounts to "allowing of the possession of any immovable property to be taken" and has the "effect of transferring, or enabling the enjoyment of, any immovable property".

Also, by the time the AO takes up your case for scrutiny, considerable development on the land will have taken place. So, your arguing that you have not given any rights to the builder will be of no avail. If you do so, you will only embroil yourself in fruitless and expensive litigation.

The ruling in Mr. Jasbir Singh Sarkaria 221 CTR 100, 294 ITR 196 analyzes this position very well and there is also a judgement of the Bombay High Court on the same point in Chaturbhuj Dwarkadas Kapadia (260 ITR 491).  You can also read an article on this by K.K.Ramani in BCAS (http://bcasonline.org/articles/artin.asp?369)

I would urge you to reconcile yourself to the prospect of paying capital gains tax and explore how you can minimize that by investing in s. 54EC bonds etc.

[satyanveshi]

Apart from the case laws cited above, the issue was decided against you in the following decisions.  202 taxman 531, 43 ITCL(I) 85, 23 DTR 140, 47 sot 180, 106 ITD 388, 122 ITD 388 and finally 89 ITD 73. The only case law in your favour is 331 ITR 211 wherein it was held that the person is eligible for deduction u/s 54/54F in respect of all the flats received. I hope you will go through the decisions cited above and take a decision as to how to proceed further. But dont forget that these days IT people will not leave any case till a decision is given by Apex Court. Even if Apex Court  decides the issue in favour of public at large,  there is every possibility that a retrospective amendment will be brought into the statute by the law makers. Ergo, you are advised to estimate cost of litigation and risk involved before finalising the issue.

Best of luck.......................

[ashutosh majumdar]

Even if Apex Court  decides the issue in favour of public at large,  there is every possibility that a retrospective amendment will be brought into the statute by the law makers. Ergo, you are advised to estimate cost of litigation and risk involved before finalising the issue.

LOL. Very sensible advice indeed. There is no point fighting the Govt these days as Vodafone and others have realized.

[yameen]

   Sir thanks a lot for your replies but i have another question here it follows

          For instance Mr.X gets 20 flats and he is already holding two houses so can he transfer this land to his major son(he has no house) then can he sell that 41% shareholding and invest in another property and avail 54F exemption?

         Another if i want to pay capital gains now on which amount he pay?

[satyanveshi]

your query is, if  Mr X gives the land in question for development as gift to his son and the son in turn offers  the same for development, then the one of the solutions to the query is share of the son received from the builder is exempted from capital gains tax as per the Karnataka High Court decision 331 ITR 211. With regard to the second query, the cost of the super structure received by the land owner is the sale consideration to be considered for computing the capital gains. Since this value is highly arbitary, in the finance Act, 2012 an amendment has been brought that in such type of situations, the market value of the land foregone by the land owner should be considered as sale consideration.

[yameen]

 no sir development will be done by another person say "Y" and he in turns give the developed share to X but since to minimize tax can X transfer the land in the name of X's son because X can not avail deduction U/s 54F so at least his son can avail deduction U/s54F ??Can X do that and avail deduction U/s54F for all 20 Flats??

    Sir can you please provide me the exact section of finance act 2012 where its stated that land value shall be taken as sale consideration? Pl sir

[ashutosh majumdar]

If the owner transfers the land to his son, the following will be the consequences:

(i) stamp duty will be payable on the gift depending on the local laws;

(ii) the gift will not be taxable u/s 56(2) as it is to a "relative";

(iii) the cost of the land to the father will be taken as the cost of acquistion in the hands of the son u/s 49;

(iv) the period of the father's holding will be taken to be the son's holding to  make it a "long-term capital asset";

(v) If the son enters into the development agreement after he acquires the land from the father, then the capital gains will be taxable in his (the son's) hands;

(vi) the son will be entitled to the deduction u/s 54F if he fulfills its conditions.

I don't see any downside to your proposal other than that of the double oincidence of stamp duty - one at the time of gift and the second time at the time of the POA/ conveyance.

To your query to Satyenveshi, S. 50C provides that the stamp duty valuation shall be deemed to the consideration if it is higher than the actual consideration received by the transferor.

[yameen]

 Sir X is transferring the property to his son only to avail exemption U/s/54F because X cant avail it can he do so. And if he himself(X) gets 20 Flats then what is the value of sale consideration is it cost of the flat (incurred to developer) only or its land cost + cost of the flats incurred by developer

Thanks in advance

[ashutosh majumdar]

I now see what satyenveshi was referring to. It is not s. 50C but is s. 50D which reads as follows:

"50D. Fair market value deemed to be full value of consideration in certain cases.—

Where the consideration received or accruing as a result of the transfer of a capital asset
by an assessee is not ascertainable or cannot be determined, then, for the purpose of
computing income chargeable to tax as capital gains, the fair market value of the said
asset on the date of transfer shall be deemed to be the full value of the consideration
received or accruing as a result of such transfer."

So, the consideration being received by you i.e. the value of the 20 flats are not capable of being ascertained. So, the FMV of the land will be taken to be the consideration.

[yameen]

 Ok sir if then its the case then FMV for the land is only Rs.800/- per square feet but when i get the cost of flats after completing the project the value will be much much more then that of FMV of land so if i pay capital gains now then my liability ceases/completed

[ashutosh majumdar]

.... if i pay capital gains now then my liability ceases/completed

No, because when you sell the flats, the difference between the FMV of the land (which will be the cost of the flats) and the sale consideration of the flats will be assessable to tax in the year of transfer of the flats.

So, at the EOD, you do pay tax on the entire gain. The only advantage is that the difficulty of estimating the gains is done away with.

[yameen]

 sir please clarify one thing should i pay tax on entering into agreement with builder for 59% of land....i.e.., when we enter into agreement for JDA then on giving Power of Attorney should i pay tax on 59% ?

[ashutosh majumdar]

sir please clarify one thing should i pay tax on entering into agreement with builder for 59% of land....i.e.., when we enter into agreement for JDA then on giving Power of Attorney should i pay tax on 59% ?

The JDA & the POA are really the same taxing event - i.e. the allowing of possession/ enabling the enjoyment of property. So, you can execute both together (as they are meant to be) and pay tax on the resultant capital gains.

[yameen]

  Thanks a lot for all the knowledge shared by the members for solving my query i would never forget this favor done by all the members especially Majumdar

Regards
Yameen