INTRODUCTION
–
Real estate transactions are one of the main source for generation and application of black money. The Government is regularly trying to plug loop holes in such transactions by inserting various provisions from time to time in the Income Tax Act and for this number of amendments have been introduced in the Income Tax Act in recent years. The most important amendments in this regard are
sections 56(2)(vii), section 50C and section 43CA which covers more or less all types of transactions related to transfer of immovable property. The Finance Act, 2013 has also introduced section 194IA
for deduction
of
tax at source in case
of sale of immovable property.
Section 56(2)(vii) of the Income Tax Act, 1961 deals with transfer of an immovable property being received by an Assessee as Capital Assets. Section 50C of the Income Tax Act, 1961 deals with consideration amount received on transfer of immovable property held as Capital
Assets. Section
43CA of the Income Tax Act, 1961 deals with consideration amount received on transfer of immovable property other than Capital Assets. Section 50C of the Income Tax Act, 1961 is applied in
case of Capital Gain whether Short Term or Long Term. Section 43CA of the Income Tax Act, 1961
has
been introduced in the Income Tax Act, 1961 by the Finance Act 2013 w.e.f. 1-04-2014. This section has made
all
the hue and cry among the
real estate dealers.
Section 56(2)(vii) of the Income Tax Act, 1961 –
"(vii) where an individual or a Hindu undivided family receives, in any previous year, from any person or persons —
“(b) any immovable
property,—
(i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
(ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration:
Provided that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the
date of
registration are not
the same, the stamp duty value on
the date of the agreement may be taken for the purposes of this sub-clause:
Provided further that the said proviso shall apply only in a case where the amount of consideration referred
to therein,
or a part thereof,
has been paid by any mode
other than cash on or before
the date of the agreement
for the transfer of such immovable
property"
Salient features
of Section 56(2)(vii)
of the Income Tax Act, 1961 –
1) The section applies only to individuals and HUFs. Transactions related to purchase of property by company, partnership
firm,
LLP,
Trust, AOP, AJP
are
out of the purview
of
this section.
2) The stamp duty value of immovable property should be more then Rs.50,000/- if property is
transferred without any consideration.
3) The difference in stamp duty value and consideration amount received should be less then Rs.50,000/- if
the immovable property is transferred without
inadequate consideration.
4) In case of point no 2 above, stamp duty value shall be treated as deemed consideration for the
purpose of Income Tax.
5) In case of point no 3 above,
stamp value shall be treated as deemed consideration for the purpose of Income Tax, if the value of stamp duty is higher than consideration value by more than
Rs.50,000/-
6) If the consideration amount has been paid by mode other than cash either partly or fully in the
year of agreement prior to the year in which the registration of the property is done, the stamp
value of the property of the year in which agreement to sell was executed shall be treated as deemed
consideration
in the year of registration
for the purpose of Income
Tax.
Section 43CA of
the Income Tax Act, 1961–
"(1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital
asset), being land or building or both, is less than the
value adopted or
assessed or assessable by any authority of
a State Government for the purpose of payment of
stamp duty in respect of
such transfer, the value so
adopted or assessed or
assessable shall, for the purposes
of computing profits and gains from transfer of such asset, be
deemed to be
the full value of the consideration received or accruing as
a result of such
transfer.
(2) The provisions of sub-section (2) and sub-section (3) of section 50C shall, so far as may be, apply in
relation to
determination of
the value adopted or
assessed or assessable under sub-section (1).
(3) Where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of
such transfer of
asset are not the same, the value referred to in sub-section
(1) may
be taken as the value assessable by
any authority of a
State Government for the purpose of
payment of stamp duty in respect of such transfer on the date of the agreement.
(4) The provisions of sub-section (3) shall apply only in a case where the amount of consideration or a part thereof has been received by any mode other than cash on or
before the date of agreement for transfer
of the asset."
Salient feature of Section
43CA of the Income Tax Act, 1961 –
1) This
section applies to trading
assets and not to capital assets.
2) The
consideration value should
be
less then stamp duty value.
3) If the consideration amount has been paid by cheque either partly or fully in the year of agreement prior to the year in which the registration of the property is done, the stamp value
of the property of the year in which agreement to sell was executed shall be treated as
deemed consideration in
the year of registration
for the purpose of Income Tax.
Controversial
Issue
–
A
controversy has arisen in respect of applicability of year of this section. Whether this section applies in the year when agreement to sale was made and possession has been given or when the
conveyance was
registered.
Let us take an example.
A
has sold a flat to B in Financial Year 2010 – 2011 for a consideration of Rs.50 lakhs. An Agreement to Sale was made between A and B. The possession of the flat was given by A to B during the financial year 2011 – 2012. The sale deed was executed in June 2013 and stamp duty was
paid at a value of Rs.75 Lakh by
the
buyer. A has already
booked the sale in its accounts in the year 2011 – 2012 and have filed its return of income and have paid tax there on. Now the question arises
that after insertion of section 43CA is A liable to pay further tax on difference between
consideration amount
and stamp duty value as sale
deed was executed in
the current financial year?
Section 43CA of the Income Tax Act, 1961 applies when the immovable property
is
transferred. In the
Income Tax Act, transfer in relation to capital assets has been defined in section 2(47) of the Income Tax Act, 1961. In case of trading assets, the Act is silent and therefore, we will have to look
in to the Transfer of property Act, 1882. Section 5 of the Transfer of Property Act deals with Transfer of immovable Property. The said section
is reproduced below –
“ ‘Transfer of Property’ means an act by which a living person conveys property, in present or in
future, to one
or more other living persons, or to
himself and
one or more other living persons; and
‘to transfer
property’ is to perform such act.”
In
this section living person includes a Company or Association or Body of Individuals,
whether incorporated or not, but nothing herein contained shall affect any law for the time being in force
relating to transfer of property to
or by
Companies, Associations or Bodies of Individuals.
Hence, transfer of property takes place only when it is conveyed. Section 53A of Transfer of
Property Act, 1882 is not applicable in case of section 43CA of the Income Tax Act, 1961 because it
relates to capital assets as per provision of section 2(47)
of Income Tax Act, 1961. Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of immovable property as held by the Hon’ble Apex Court in the case of Alapati Venkataramiah Vs. Commissioner of Income Tax, Hyderabad reported in 57 ITR 185. Until and unless the title of the
property is passed to the purchaser, there cannot be a sale or transfer of immovable property. Reliance can also be placed in deuces ion By: ITAT, Bench `A’, Chennai, in the case of R.Gopinath (HUF) v. ACIT, Appeal No: ITA Nos.
29
& 30/Mds/2008, decided on July 24, 2009.
As per provision of section 5 of Transfer of Property Act 1882, and also as per the above decisions, in my view in the above mentioned example, A will have to pay more tax on the difference in value
of stamp duty and consideration amount as per provision of section 43CA of the Income Tax Act,
1961 for the assessment year 2014 –
2015.
Development Agreements –
In
case of development agreement for an immovable property, Long Term Capital Gain may
arise as per section 2(47) of the Income Tax Act, 1961, if the land is capital assets, Section 43CA of the Income Tax Act, 1961 in case of development agreement at the time of possession does not apply.
We
must also look it to Section 50D of the Income Tax Act, 1961 which has come in to operation
w.e.f 01-04-2013
only in respect
of
taxability of development agreement.
Section 50D of
the Income
Tax
Act, 1961 –
“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.”
The conditions
for applicability of provision are:
Consideration
must be received or accruing – if
consideration is not received or accrued in the previous year, then provision will not apply. For example, if a consideration or part of consideration
shall be received or accrued in future, then the provision will not apply. In case a developer will
provide some of constructed area, to land owner, on completion of project, then the consideration to
be received in kind in future, is not consideration received or accrued, therefore, in such cases the
provision of Section 50D of the Income
Tax Act,
1961 will
not be applicable.
There must be transfer of capital asset – if
there is no transfer, then this section will not apply. Here transfer of capital
asset can mean a definite and absolute transfer. A transfer of some of rights for
limited purposes cannot be regarded as transfer of capital asset in the context of tax on capital gains. There should not be a situation of contingent transfer which can be revert back on some
contingencies. The transfer must be full and final. Readers are requested to go through definition of ‘transfer’ in relation to a capital asset provided in section 2(47) of the Income-tax Act, 1961 and also to see exemption from meaning of
transfer as provided in section 47 of the Act.
Consideration
should not be ascertainable or cannot be determined – thus if consideration can be
ascertained or determined, even in future, then this provision may not be applicable. For example,
if a
part of consideration will be given in kind, say some of constructed area in a project, then the
situation is one in which consideration will be received and it will be ascertainable in future so in such situation Section 50D of the Income Tax Act, 1961 may not be applicable depending on facts of the
case.
This provision is only for the purpose of computing income chargeable to tax as capital gains. This provision is not applicable in case of business income or income falling under head ‘other sources’ or income from house property’
etc.
In
case of Joint Development Agreements where development rights for identified land are
exchanged for a specified
percentage of built up area in the project, there is no way of determining the value of consideration at the time the development rights are transferred. However, post the
proposed amendment, the FMV of the development rights or the built up area may be determined
and
the gains shall be liable to capital gains tax. The basis which the FMV is required to be determined has
not
been specified.
Therefore,
the insertion of Section 50D may have significant
implications.
When the incidence of capital
gain
tax arises?
The point where the capital gain is deemed to accrue will purely depend on the terms of Joint
Development Agreement. Where the agreement is of such nature that possession is given in part
performance of a contract, the liability of capital gain tax will arise on the handing over of such possession to the builder.
If
the possession is not transferred but deferred until the construction is completed, the liability to capital gain tax will arise
in the year in which the developer completes the construction.
Applicability of Capital
Gain if Development
Agreement breaks
down –
If
the developer is liable for the breaking down of joint development agreement, then either
the landowner will get compensation from the developer for the breach of contract or developer have to do specific performance as per the terms of the Joint Development Agreement, in both cases
landowner will acquire. And, for charging what landowner has acquired from the developer under
capital gain tax, it should first come under the definition of “capital asset”. Reliance can be placed in
CIT vs Vijay Flexible Containers [1990] 186 ITR 691 (Bom.) and K. R. Srinath vs ACIT, [2004] 141 Taxman 268 (Mad).
TDS on sale
of immovable
property –
The Finance Bill, 2013 has introduced a new section 194-IA providing for TDS @ 1% to be
deducted by purchaser. In case valid PAN of seller is not available, tax deduction will be at higher rate of 20%. This is applicable w.e.f. June 01, 2013 for sale of immovable property (other than agricultural land) where consideration is Rs. 50 Lakhs and above. The purchaser is exempt from the obligation to obtain TAN,
which
is otherwise mandatory for
all
Deductors.
Agriculture Land
and TDS –
It
may be noted that the Agricultural Land has been excluded from the ambit of this new provision, however all agricultural lands are not excluded and that the agricultural land which is comprised within the jurisdiction of a municipality having population between 10,000 to 1,00,000 as well as
land which is not more than 2 Kilometres or has population between 1,00,000 to 10,00,000 as well as land which is not more than 6 Kilometres or population above 10,00,000 as well as land which is not more than 8 Kilometres of the local limits of any municipality would come within the purview
of making compliance as per the above section 194LA and thus in respect of this category of
agricultural land the formalities of TDS are required
to be
complied with.
CBDT has issued Notification No. 39/2013 on 31st May 2013 amending rules to simplify procedure for
complying
with provisions of this new section.
“In exercise of the powers conferred by section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of
Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—
1. (1) These rules
may be called the Income-tax (Fifth Amendment)
Rules, 2013.
(2)
They shall come into
force on the date of their publication
in the Official Gazette.
2. In
the Income-tax Rules, 1962,
(hereinafter referred
to as the said rules) in rule 30,–
(a)
after sub-rule (2),
the following sub-rule shall be inserted, namely:—
“(2A) Notwithstanding anything contained in sub-rule (1) or sub-rule (2), any sum deducted under section 194-IA
shall be
paid to
the credit of the
Central Government within
a period of seven days from the end of the month in
which the deduction is
made and shall be accompanied
by a challan-cum-statement in
Form No.26QB.”;
(b)
after sub-rule (6),
the following sub-rule shall be inserted, namely:—
“(6A) Where tax deducted is to be deposited accompanied by a challan-cum-statement in Form No.26QB, the amount of tax
so deducted shall be
deposited
to the credit of
the Central Government by remitting it electronically within the time specified in sub-rule (2A)
into the
Reserve Bank of India or the State Bank of
India or any authorised bank.”;
(c)
after sub-rule (7), the following
sub-rules shall
be inserted, namely:–
“(7A)
The Director General of
Income-tax
(Systems) shall specify the procedure,
formats and standards for the purposes of
remitting the amount electronically to the Reserve Bank of India or the
State Bank of
India or
any authorised bank and shall be
responsible for
the day-to-day administration in relation to
the remitting of
the amount electronically in the manner so specified.”;
3. In rule 31 of the said rules,–
(a)
after sub-rule (3),
the following sub-rule shall be inserted, namely:—
“(3A) Notwithstanding anything contained in sub-rule (1) or sub-rule (2) or sub-rule (3), every person responsible
for deduction of tax under
section 194-IA
shall furnish the certificate of
deduction of tax
at source in
Form No.16B to
the payee within fifteen days from the due date for furnishing the challan-cum-statement
in Form No.26QB under rule 31A after generating and downloading the same from the web portal specified by
the Director General of Income-tax (System)
or the person
authorised by him.”;
(b)
after sub-rule (6),
the following sub-rule shall be inserted, namely:—
“(6A) The Director General of
Income-tax
(Systems) shall specify the procedure,
formats and standards
for the purposes of generation
and download
of certificates and shall be responsible for the day-to-day administration in relation to
the generation and download of
certificates from the web portal specified
by him or the person authorised
by him.”;
4. In rule 31A of the said rules, after sub-rule (4), the following sub-rule shall be inserted, namely:—
“(4A) Notwithstanding anything contained in sub-rule (1) or sub-rule (2) or sub-rule (3) or sub rule (4), every person responsible for deduction
of tax under section 194-IA shall furnish to the Director
General of Income-tax
(System)
or the person authorised by the Director General of
Income-tax
(System) a
challan-cum-statement in
Form No.26QB electronically
in accordance
with the procedures, formats and standards specified under
sub-rule (5) within seven days from the end
of the month
in which the
deduction is made.”;
5. In
Appendix-II of the
said rules,—
(a) after
Form No.16AA,
the following Form
shall be inserted,
namely:—
FORM 16B”
TDS on compulsory acquisition of Immovable Property –
In respect of compulsory acquisition of immovable property, TDS is also required to be made on
compensation amount exceeding Rs 2,00,000/- @10% as per provision of section 194LA of the Income Tax Act, 1961. This section does not apply in case of compensation received for agriculture
land.
Hardship
in Let out
Property –
Sections 43CA of the Income Tax Act, 1961 and section 50C of the Income Tax Act, 1961 create
problems for genuine Assessees. If a person has a building which is occupied by tenants, cannot
fetch market price if sold. Such property can hardly fetch 25% value of the stamp duty value. Such
property owner may have to
pay
tax more than consideration amount being received by him. In
future, no one would be able to sell the litigated or let out property. The Finance minister should look in to such problems and should make the appropriate amendment to remove genuine hardship to the immovable property owner.
Hardship
in claiming exemption u/s 54 or 54F –
In case of long term capital gain on sale of residential house, if the sale consideration is invested in buying another residential house, no capital gain tax will be charged as per provision of section 54 of the Income Tax Act, 1961. But I would like to mention one case in which in spite of availing exemption u/s
54 the
Assessee has to bear
tax
liability.
Mr. A is owner of a residential flat. The acquisition value of said house was for say Rs.25,00,000/-and it's index cost was Rs 50,00,000/-. X sales that flat at Rs.73,00,000/- and buys another flat at Rs.75,00,000/- to claim exemption u/s 54F of the Income Tax Act, 1961. The stamp duty of flat sold is
Rs.85,00,000/- and stamp duty value of the house purchased is Rs.90,00,000/-. He will have to bear tax liability on Rs.13,00,000/- u/s 50C of the Income Tax Act, 1961 and Rs.15,00,000/-u/s56(2)(vii) of the Income Tax Act, 1961 plus proportionate tax on capital gain tax for not investing entire sales consideration in new house. Even if he does not claim any exemption he will
pay
much less tax. So even if the exemption u/s 54 or 54F of the Income Tax Act, 1961 is claimed, the
Assessee may not
get any benefit due
to
insertion of these sections such as 50C and 56(vii).
Conclusion –
Some of the state governments are revising value of stamp duty continuously and also without looking at real market value in the particular locality. The market price in a particular locality of immovable property may differ due to various factors but the stamp duty value remains the same in
a particular locality. The state Government should not think about its own revenue but should also take
other factors in to account regarding
location
of
the property.
The assessee should be careful in selling or buying immovable properties. The Assessee should also look in to TDS on sale of immovable property exceeding Rs.50,00,000/-. In light of all the
provisions discussed above, it reveals that all types of Assessees are covered by the above
mentioned provisions related to Real Estate transactions excepting in case of
Companies, Partnership Firm, LLP, Trusts etc., where if an immovable property is bought, stamp
duty
value has no significance and as such immovable property can be bought at a price below stamp duty value. We hope in the next Finance Bill the Finance Minister may cover the transfer of
immovable property by persons other than individuals and HUFs under the purview of section
56(2)(vii) of the Income
Tax Act, 1961 or section
43CA
of the Income
Tax Act, 1961.
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