CRITICAL ISSUES IN REAL ESTATE TRANSACTIONS

CRITICAL ISSUES IN REAL ESTATE TRANSACTIONS
BY, CA NAVEEN KHARIWAL G MOB : ID : naveenkhariwalg & Co.,

Section 45(1) – Charging Section
Section 45(1) is the charging section of capital gains and it provides as under: Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income-tax under the head Capital gains and shall be deemed to be the income of the previous year in which the transfer takes place. naveenkhariwalg & Co.,

Some Important Definitions
naveenkhariwalg & Co.,

1. “Transfer” Transfer under Section 2(47) includes:
i) the sale‘, exchange or relinquishment of the asset; or ii) the extinguishments of any rights therein; or iii) the compulsory acquisition thereof under any law; or iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or iva) the maturity or redemption of a Zero Coupon Bond; or naveenkhariwalg & Co.,

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 co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property; naveenkhariwalg & Co.,

Explanation: For the purposes of sub-clauses (v) and (vi), ―Immovable Property shall have the same meaning as in clause (d) of Section 269UA of the Income Tax Act. naveenkhariwalg & Co.,

2) Immovable Property under Section 269 UA (d) means:
(i) any land or building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other things, such machinery, plant, furniture, fittings or other things also. Explanation: For the purposes of this sub-clause, land, building, part of a building, machinery, plant, furniture, fittings and other things‘ include any rights therein; naveenkhariwalg & Co.,

(ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building; naveenkhariwalg & Co.,

3. Meaning of Immovable property as per General Clauses Act, 1897 Sec
3. Meaning of Immovable property as per General Clauses Act, 1897 Sec. 3(26). “Immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. naveenkhariwalg & Co.,

4. Sec. 2(14): “Capital Asset”
“Capital Asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include - Stock-in-trade, Consumable stores & raw material held for the purposes of business or profession. Personal effects Agricultural Land in India which is not situated in any specified area. Gold deposit bonds issued under the gold deposit scheme,1999 notified by central government . naveenkhariwalg & Co.,

5. Long-term Capital Asset / Long-term Capital Gain
5.1 (29A) "long-term capital asset" means a capital asset which is not a short-term capital asset ; 5.2 (29B) "long-term capital gain" means capital gain arising from the transfer of a long-term capital asset ; naveenkhariwalg & Co.,

6. Short-term Capital Asset / Short-term Capital Gain
6.1 (42A) "short-term capital asset" means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer : Explanation 1.—(i) In determining the period for which any capital asset is held by the assessee— (b) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section ; naveenkhariwalg & Co.,

6. Short-term Capital Gain
6.2 (42B) "short-term capital gain" means capital gain arising from the transfer of a short-term capital asset ; naveenkhariwalg & Co.,

Business Income vs. Capital Gains
Issue No. 1 Business Income vs. Capital Gains naveenkhariwalg & Co.,

Business Income vs. Capital Gains 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.

a) Land received as gift CIT vs
a) Land received as gift CIT vs. Shashi 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.

b) Ancestral land converted into non-agricultural land CIT vs
b) Ancestral land converted into non-agricultural land CIT vs. Premji Gopalbhai (1978) 113 ITR 785 (Guj.) HC 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. naveenkhariwalg & Co.,

c) Land contributed by Partners as capital in firm Where some land, which was contributed by partners as capital and used as brick field and later given for development, upholding the finding of the Tribunal, it was held that the firm did not acquire the land, with a view to sell it at a profit. It was treated in the accounts as a fixed asset given to other for outright development without the assessee itself plotting it out, so that it had continued to be a capital asset. There was no scope, it was found, for holding it either as business or even an adventure in the nature of trade. [CIT v Mohakampur Ice & Cold Storage (2006) 281 ITR 354 (All)] naveenkhariwalg & Co.,

d) Land acquired with intention to re sell after development Ordinarily, where a person acquired land with a view to selling it later after developing it and actually divided the land into plots and sold the same in parcels, the activity could only be described as a business adventure. Generally speaking, the original intention of the party in purchasing the property, the magnitude of the transaction of purchase, the nature of the property, the length of its ownership and holding, the conduct and subsequent dealings of the assessee in respect of the property, the manner of its disposal and the frequency and multiplicity of transactions afforded valuable guides in determining whether the assessee was carrying on a trading activity and whether a particular transaction should be stamped with the character of a trading adventure. CIT V TRIVEDI (V.A.) (1988) 172 ITR 95 (BOM) naveenkhariwalg & Co.,

e) Profit Motive not sufficient by itself The Bombay High Court in Gopal C Sharma Vs CIT (1994) 209 ITR 946, held that a profit motive of the assessee selling the land without anything more by itself can never be decisive for determination of the issue as to whether the transaction amount to an adventure in the nature of trade. The conclusion of the Assessing Officer that the motive to make profit was sufficient to characterize the transaction as an adventure in the nature of trade is incorrect. naveenkhariwalg & Co.,

f) Regularity of Transaction of Purchase and Sale In the case of CIT Vs. Sohan Khan & Mohan Khan (2008) 304 ITR 194 (Raj) HC, the Honourable Rajasthan High Court has held as follows: “In our view, one of the most significant considerations would be, the regularity of transaction of purchase and sale. Mere fact, that there was a series of transactions of sale only, by selling the part of the whole land, purchased in one go, or purchased once upon a time, in piecemeal, would not render the activity of sale to be an “adventure in the nature of trade”. In the present case, there is nothing to show that the land was purchased within the parameters of “stock-in-trade”. It is not shown that the assessee is a regular dealer in real estate. It appears, that the land was purchased in 1970, which was under cloud of land ceiling laws, and after that cloud was cleared, and other adjoining lands had been developed, and since the land was not yielding any return, it was decided to be sold in piecemeal, by earmarking plots, but then nonetheless it would remain a disposal of the capital asset only, and not a transaction of any “stock-in-trade”. Obviously therefore, it is liable to be taxed only, as the capital gain.” naveenkhariwalg & Co.,

g) Purchase made with intention to re sell In the case of Sutlej Cotton Mills Supply Agency Ltd. Vs. CIT (1979) 116 ITR I SC, the Honourable Supreme Court after detailed review of case law, observed that where a purchase is made with the intention of resale, it depends upon the conduct of the assessee and the circumstances of the case whether the venture is on capital account or in the nature of trade. A transaction is not necessarily in the nature of the trade because the purchase was made with the intention of resale. The Court further held at page 712, as under: “A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment (See Leeming vs Jones (1930) 15 TC 333 (HL)] and also the decisions of this of this court in Saroj Kumar Majumdar vs CIT 37 ITR 242 (SC) and Janki Ram vs CIT 57 ITR 21 (SC)” naveenkhariwalg & Co.,

h) Land originally purchased as capital asset In Shyamala Pictures (P
h) Land originally purchased as capital asset In Shyamala Pictures (P.) Ltd. v. CIT (1983) 142 ITR 115 (Mad,), Where originally land was purchased as capital asset and it was only later on that land was converted into plots and sold for purpose of paying of debts of assessee, it was held that resultant surplus would be assessable as capital gains and not as income from adventure in nature of trade. naveenkhariwalg & Co.,

i) No change in character of the plot CIT vs. R. V
i) No change in character of the plot 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. naveenkhariwalg & Co.,

j) Character of Land – Whether adventure in nature of trade or investment in capital asset The following observations in P. M. Mohammed Meerkhan v. CIT, (1969) 73 ITR 753 (SC), are relevant : "Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the borderline that cause difficulty. If a person invests money in land, intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable, are clearly out-side the domain of adventures in the nature of trade. naveenkhariwalg & Co.,

In deciding the character of such trans-actions several factors are treated as relevant. Was the purchaser a trader and was the purchase of commodity and its resale allied to his usual trade or business or incidental to it ? Affirmative answers to these questions may furnish relevant information for determining the character of the transaction. naveenkhariwalg & Co.,

What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold ? If the commodity purchased is generally the subject matter of trade and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resaleable? What are the incidents associated with the purchase and resale ? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and sale repeated ? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture ?” naveenkhariwalg & Co.,

k) Land Received on basis of Will What was necessary was to find out the intention of the assessee at the time of the purchase of land. Where the land was never purchased by the assessee. She acquired the same on the basis of a will on the death of her husband. She sold the same in parcels because the huge area could not be sold in one transaction. Such an activity could not amount to trade or business within the meaning of the Act. CIT V Sushila Devi Jain (2003) 259 ITR 671 (P&H) naveenkhariwalg & Co.,

Issue No. 2 Property vs. Business Income a) Where the main business of the assessee is deriving rental income from letting out of properties, and the same is enunciated as the principal business in the Memorandum of Association, the same would be chargeable to tax as "Business Income" - Chennai Properties and Investments Ltd; vs. CIT(2015) 373 ITR 673 (SC) On the other hand, where the main objective of the assessee is construction and development of properties and the unsold property held as stock in trade is let out, then the rental income derived out of it shall be chargeable only under the head "Income from House Property" - New Delhi Hotels Ltd. vs. ACIT (2014) 360 ITR 187(Del); Azimganj Estate (P) Ltd. vs. CIT (2013) 352 ITR 82 (Cal); East India Housing and Land Development Trust Limited (1961) 42 ITR 49 (SC). naveenkhariwalg & Co.,

Rental Income from Unsold Portion of the Property held as Stock in trade Sane & Doshi Enterprises [TS-224-HC-2015(BOM)] Conclusion: HC upholds ITAT's order, rental income from unsold portion of the property, constructed by assessee (a real estate developer), assessable as income from house property, not business; Rejects Revenue's stand that income was received from business asset (unsold flats) shown as closing stock and hence income be treated as 'business'; Rules that, once income derived from 'property', treatment given in books as stock-in-trade would not alter the character of income; Upholds ITAT's reliance on SC ruling in East India Housing and Land Development Trust Ltd., distinguishes Revenue's reliance on SC rulings in Universal Plast Ltd. and Maheshwari Devi Jute Mills Ltd.; Further, upholds granting Sec 24(b) deduction for interest paid on partners' capital, which was utilized for construction of property

b) In the case of a local authority for planning, development and improvement of cities, the income derived by way of rent before sale of such property shall be assessable under the head "Income from House Property" – CIT vs. Haryana Urban Development Authority (2010) 322 ITR 061 (P&H). naveenkhariwalg & Co.,

c) It is necessary to find out what the primary object of the assessee is while letting-out the property. If it is found that the main intention is for simply letting-out of property or any portion thereof, the resultant income must be assessed as "Income from House Property". If, on the other hand, the main intention is found to be the exploitation of the immovable property by way of commercial activities, then it shall be regarded as business income. Accordingly, income derived from shopping malls/business centres is to be assessed under the head "Profits and Gains from Business or Profession" and not "Income from House Property" - CIT vs. Goel Builders (2011) 331 ITR 344 (All). naveenkhariwalg & Co.,

d) Amenity charges can be taxed under the head "Income from Other Sources" only in cases where it is collected independent of rent from building. In case where composite income is received towards rent and amenities, the bifurcation of portion attributable to rent and amenities does not arise and the entire income shall be charged to tax under the head "Income from House Property” CIT vs. Shambhu Investment P. Ltd. (2003) 263 ITR 143 (SC). naveenkhariwalg & Co.,

e) An assessee in lodging house business lets out his building to a bank on a long-term lease. It was decided that while lodging is a business, however, letting- out of building to the bank on a long-term lease could not be treated as business. Therefore, the rental income from the bank has to be assessed as "Income from House Property" - Joseph George and Co. vs. ITO (2010) 328 ITR 161 (Ker.). naveenkhariwalg & Co.,

f) Act of letting out incidental to assessee’s business
The property is let-out in order to enable the carrying on of the assessee’s business in a better and efficient manner. The act of letting-out is incidental to the carrying on of assessee’s business. Therefore, income is incidental to the business activity carried and assessable u/s. 28 as business income. The citations for the above case studies are as follows; CIT vs. National Newsprint and Paper Mills Ltd. (1978) 114 ITR 388 (MP); ACIT vs. Hindustan Machine Tools Ltd., (1980) 121 ITR 798 (Kar); CIT vs. Admiralty Flats Motel (1982) 133 ITR 895 (Mad); naveenkhariwalg & Co.,

g) Rental income from Malls and Business Centre (i) 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. naveenkhariwalg & Co.,

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.” (ii) Mumbai Tribunal in case of M/s Omsagar Engineering Pvt. Ltd. vs. ACIT, ITA No. 2989/Mum/03, Bench–K, dated , held that income from service centre is to be treated as business income. naveenkhariwalg & Co.,

iii) CIT vs. Pateshwari Electrical & Associated Industries (P) Ltd
iii) 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 guesthouse, by the assessee to a bank to be used as a training centre was a part on 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. naveenkhariwalg & Co.,

iv) CIT vs. Sarabhai (P) Ltd. (2003) 263 ITR 197 (Guj
iv) 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. naveenkhariwalg & Co.,

Rent Received from Building Constructed on Lease Hold Land S
Rent Received from Building Constructed on Lease Hold Land S.Premalatha [TS-440-HC-2014(AP)] Conclusion HC rules that rental income received by assessee from building constructed on leasehold land is assessable as business income and not house property income; Construction of building on land taken on lease was for purpose of business and not with intention to own it, lease did not lead to conferment of ownership rights on assessee; States that Transfer of Property Act maintains clear distinction between ownership & lease, hardly any circumstances where lease can metamorphosise or transform into ownership, unless parties to transaction take required steps under law; Howsoever pervasive control of lessee over property maybe, lessee cannot become owner under such lease and time period of lease cannot change character of rights, states HC; Expresses inability to concur with Karnataka HC ruling in D.R. Puttanna Sons

Income from Leasing of Commercial Property Keyaram Hotels P Ltd [TS-741-SC-2015] Conclusion: SC dismisses assessee's SLP against Madras HC judgement, HC had held that rental income derived from leasing of commercial property was taxable as 'income from house property'; Revenue had assessed the rental income under the head of 'income from house property' on the ground that assessee was not engaged in any business activity; HC had applied the ratio laid down by SC in East India Housing and Land Development Trust Ltd wherein it was held that "where the owner of the property exploited the property by leasing out the same and realised income byway of rent, the same was to be assessed under the head 'Income from house property' and not as "business income"; HC had also referred to principles laid down by SC in Universal Plast Ltd., Guntur Merchants Cotton Press Co. Ltd; Thus, applying SC decision in East India Housing to the facts established by the AO that assessee was not engaged in any business activity, HC had ruled that income received from letting out of the property was assessable as 'income from house property' and not business income

Tamil Nadu Tourism Development Corporation Ltd
Tamil Nadu Tourism Development Corporation Ltd. [TS-570-HC- 2014(MAD)] Conclusion: HC rules that income of assessee (Govt. undertaking engaged in tourism activities) from leased hotel units is assessable as 'business income' and not 'income from house property'; States that assessee gave special right / privilege to franchisees / lessees to undertake a particular business in assessee's property on receipt of franchisee fee, thus, income in nature of business; Also notes that contract between assessee & franchisees shows that assessee continued to be in business of tourism activities, though not directly, but through franchisees and received income as franchisee fee; Upholds Tribunal's findings that assessee did not treat the let out properties as non-business assets which points out assessee's intention to earn business income; Rejects assessee's reliance on co-ordinate bench ruling in Keyaram Hotels (P) Ltd, as distinguishable on facts HC MAD

Letting -Business Income or Income from House Property Toyota Techno Park India (P) Ltd. [TS-190-HC-2014(KAR)] Conclusion: HC upholds ITAT order directing taxation of income from letting out of building by Toyota Techno Park India (assessee) to tenants as "Business Income" and not "Income from House Property"; Follows co-ordinate bench ruling in Velankani Information Systems, wherein HC had held that if renting of building and provision of facilities are inseparable and intention is to carry on business of letting out commercial property, then rental income falls under head "Business Income"; Assessee engaged in business of developing, operating, maintaining industrial park and providing infrastructure facilities to different companies as its business, therefore, rental income to be taxed under head "Business Income"

Letting -Business Income or Income from House Property Krishna Land Developers Pvt. Ltd. [TS-594-ITAT-2012(Mum)] Conclusion: Income from IT park assessable as 'business income' and not 'income from house property'; Intention is to exploit property through complex commercial activities and not simply invest in property, Commerce Ministry's approval requiring maintenance of various facilities considered; Assessee also eligible for Sec 80IA(4) deduction

Golflink Software Park Pvt Ltd [TS-252-ITAT-2011(Bang)] Conclusion: Lease rental income received by Developer from Technology Park taxable as 'Business Income' and not income from 'House Property'

Agricultural Land in India
Issue No. 3 Agricultural Land in India naveenkhariwalg & Co.,

Section 2(14) "capital asset" means……… (iii) agricultural land in India, not being land situate— (a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand 11[***] ; or naveenkhariwalg & Co.,

[(b) in any area within the distance, measured aerially,— (I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or (II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or (III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh. naveenkhariwalg & Co.,

Explanation.—For the purposes of this sub-clause, "population" means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;] naveenkhariwalg & Co.,

Agricultural Land in India
Land Situated in “Specified area” Land situated outside the “Specified area” Income from land is agricultural income; ii) Income from farm house in the immediate vicinity is regarded as agricultural income, only if land is assessed to land revenue; Income from farm house in the immediate vicinity is treated as agricultural income; Treated as capital asset u/s 2(14); Not a capital asset; iv. On transfer, capital gains tax is attracted. Exemption can be availed under sec. 10(37), 54B, 54EC, 54F Subject to conditions. On transfer, not liable to capital gains tax. naveenkhariwalg & Co.,

a) What is the test that determines land is agricultural land?
Agricultural Land - Issues a) What is the test that determines land is agricultural land? The Gujrat HC in CIT v Siddhartha J. Desai 139 ITR 628 (Guj)(1983) has laid down the following tests for determining whether the land is agricultural or not: a) Whether, the land was classified in the revenue records as agricultural and whether it was subjected to payment of land revenue? b) Whether, the land was actually or ordinarily used for agricultural purposes at or about the relevant time? c) Whether, such user of the land was for a long period or whether it was of temporary character or by way of stop gap arrangement? naveenkhariwalg & Co.,

d) Whether the income derived from the agricultural operations carried on in the land bore any rational proportion to the investment made in purchasing land? e) Whether the land, on the relevant date, had ceased to be put to use? If so, whether it was put to an alternative use? Whether such lessor and/ or alternative user was of permanent or temporary nature? f) Whether the land, though entered in revenue record, had never been actually used for agriculture, i.e., it had never been ploughed or tilled? g) Whether the owners meant or intended to use it for agricultural purposes? naveenkhariwalg & Co.,

Agricultural Land - Issues
b) It was held that the purchaser who had no intention of carrying on agricultural operations, the seller assessee should not loose the benefit as long as he had been using the land for agricultural purposes. [M.S. Srinivasa Naicker V ITO 292 ITR 0481 (Mad)[2007]]. c) Where land was shown as agricultural land in the revenue records and was never sought to be used for non agricultural purposes by the assessee till it was sold, it was held that such land has to be treated as agricultural land even though no agricultural income is shown by the assessee as the assessee stated that the agricultural income derived by sale of coconut grown on the land was just enough to maintain the land and there was no surplus. [CIT v Debbie Alemao 46 DTR 341 (Bom.)(2010)] naveenkhariwalg & Co.,

The land should be described as agricultural land in the revenue records. Smt. SarifabibiMohmed Ibrahim vs. CIT(1993) 204 ITR 631 (SC) CWT vs. OIC (Court of Wards) (1976) 105 ITR 133 (SC) d) Agricultural land not covered under specified urban area and therefore not a capital asset. [Ramjibhai P. Chaudhry v DCIT 314 ITR (AT) 0259 ITAT – Ahm.] [2009]

[G.M Omer Khan vs CIT (1992) 196 ITR 269 SC]
Agricultural Land - Issues e) Jurisdictional Municipality has to be considered for calculating the distance. [DCIT v. Capital Local Area Bank Ltd 29 SOT (ASR)(2009) & Srinivas Pandit HUF v. ITO 39 SOT 350 (Hyd.)(2010)] f) Population of municipality has to be taken into account and not population of any area within the municipality to see whether a land falls under the definition of capital asset. [G.M Omer Khan vs CIT (1992) 196 ITR 269 SC] naveenkhariwalg & Co.,

g) The land should be used for agricultural purposes prior to the date of sale. However, if the land transferred is not used for agricultural purposes, the nature of surrounding lands can determine the nature of the land transferred. • Kalpaka Oil Mills vs. CIT (1986) 160 ITR 604 (Ker) • Jagwansh Kumar vs. UOI (1987) 176 ITR 283 (Allhd)

CWT vs. Shashiben (2007) 288 ITR 319 (Guj)
Just because the land is not used for agricultural purposes for a temporary period, it will not cease to be an agricultural land. The Transferor of the land should not use, or obtain sanction for conversion to use, the land, for any other purposes, from the competent authority. The land which is otherwise agricultural will not change its character merely on the basis of the purpose for which the purchaser acquired the property. CWT vs. Shashiben (2007) 288 ITR 319 (Guj) M.S.SrinivasaNaickervs. ITO (2007) 292 ITR481 (Mad) Agricultural Land - Issues

Issue No. 4 SALE OF LAND AND BUILDING UNDER COMPOSITE AGREEMENT
If land is held for more than 36 months but the building constructed thereon is less than 36 months old as on the date of transfer, land becomes long term whereas the building is short term. Similar situation arises where depreciation has been claimed on the building and therefore gain arising from transfer of building shall be regarded as short term capital gains u/s 50. In either case, the gain arising on transfer of land shall be computed as long term capital gain and the gain arising from the transfer of the super structure shall be treated as short term capital gain. CIT Vs Vimal Chand Golecha 201 ITR 442 (Raj) CIT Vs DR.D.L.Ramachandra Rao (1999) 236 ITR 51 (Mad) CIT Vs C.R. Subramanian(2000)242ITR 342(Kar) CIT Vs Estate Of Omprakash Jhunjhunwala (2002) 254 ITR 153 (Cal) The Statesman Ltd v Asst.CIT (2007)295ITR(AT)388(Kol-Trib) CIT Vs. Citi Bank N.A. (2003) 261 ITR 570(Bom) naveenkhariwalg & Co.,

Issue No. 5 DEDUCTION OF LIABILITY ATTACHED TO PROPERTY
In case of self created mortgage the amount paid to discharge the liability due to the mortgagee cannot be added to the actual cost nor can be reduced from the sale consideration. R.M.Arunachalam Vs CIT 227 ITR 222 (1997) (SC) CIT Vs Attili Narayana Rao (2001) 252 ITR 881 (SC) CIT Vs Roshanbabu Mohammed Hussein Merchant 275 ITR 231(Bom) naveenkhariwalg & Co.,

Where a mortgage was created by the previous owner during his life time and the same was subsisting on the date of his death, the successor obtains only the mortgagor‘s interest in the property and by discharging the mortgage debt he acquires the mortgagee‘s interest in the property and therefore, the amount paid to clear off the mortgage is the cost of acquisition of the mortgagee‘s interest in the property which is deductible as cost of acquisition under Section 48. Jagadishchandran, V.S.M.R Vs. CIT (1997) 227 ITR 240(SC) N.Vajrapani Naidu Vs. ITO (1989) 28 ITD (MAD – TRI) naveenkhariwalg & Co.,

Issue No. 6. Amount received on damage/destruction of any Capital asset from an Insurance company-Section 45(1A) Section 45(1A) has been inserted w.e.f to nullify the Supreme Court judgement in the case of Vania Silk Mills (p) Ltd. vs. CIT (1991) 191 ITR 647 in which it was held that asset has to exist in the process of transfer. naveenkhariwalg & Co.,

Notwithstanding anything contained in sub-section (1),
Section 45(1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of— (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), naveenkhariwalg & Co.,

shall be chargeable to income-tax under the head "Capital gains" and
then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation.—For the purposes of this sub-section, the expression "insurer" shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938). naveenkhariwalg & Co.,

Meaning of FMV Sec 2(22B) "fair market value", in relation to a capital asset, means - (i) the price that the capital asset would ordinarily fetch on sale in the open market on the relevant date ; and (ii) where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act ; naveenkhariwalg & Co.,

Profits and Gains Business and Profession.
Issue No. 7 7.1 Conversion of capital Asset in to Stock in Trade – Sec. 45(2) CONVERSION OF CAPITAL ASSETS INTO STOCK-IN-TRADE (SECTION 45{2}): Conversion by the owner of a capital asset into stock-in-trade or treatment by him of such asset as stock-in-trade of business carried on by him will be taxable as follows: capital gains‘ Profits and Gains Business and Profession. The incidence of tax on capital gains and business profit will arise only in the year when such stock in trade is sold or otherwise transferred. Fair Market Value of the capital asset on the date of conversion XXXX (-) value shown in the books Sale Value XXXX (-) Fair Market Value as on the date of conversion naveenkhariwalg & Co.,

Pros and Cons of Conversion
Ensure that the Fair Market Value as on date of conversion is on the higher side as the tax rate on capital gain is much less than that of business income. Further the indexation benefit is available on the capital gains. However, if the assessee has got carry forward business loss or unabsorbed depreciation from any business being carried on or which was carried on by him, it is better to reduce the Fair Market Value on date of conversion so that the business profit becomes more. It is be noted that the proviso to Section 72(1)(i) which provided that the business in which the carry forward loss arose should be carried on in the year of set off was removed with effect from 01/04/2000. naveenkhariwalg & Co.,

7.2 Conversion of stock-in-trade into Capital Asset – A converse situation In CIT vs. Bright Star Investments (P) Ltd. (2008) 24 SOT 288 (Bom.) it was held that IT Act does not contain a provision similar to section 45(2) with respect to conversion of stock- intrade to capital asset. It was further held that holding period is to 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)/ 122 TTJ 34 it was held that the period to be considered from the date of conversion to investment. This decision has not considered the above decision of the Mumbai Tribunal in Bright Star

Transfer by way of Capital Contribution-Sec 45(3)
Issue No. 8 Transfer by way of Capital Contribution-Sec 45(3) • Any profit / gain from transfer of a capital asset by a person to a firm or other AOP or BOI, by way of capital contribution. • Chargeable in P.Y. in which such transfer took place. • Full value of consideration – amount recorded in the books of firm / AOP / BOI as value of capital asset. naveenkhariwalg & Co.,

[DLF Universal Ltd. v DCIT (2010) TIOL 16 ITAT –D – L – SB]
Stock in trade introduced as capital contribution, it no more retain its character as SIT, and therefore provision of section 45(3) shall apply. Consequently, the gains on such transfer are taxable u/s 45(3). [DLF Universal Ltd. v DCIT (2010) TIOL 16 ITAT –D – L – SB] Assessee having converted his proprietary concern into a partnership firm, revalued the assets and straightway credited the capital accounts of the partners by the revalued figures at the end of the same previous year, section 45(3) is clearly applicable and the said value has to be taken to be the full value of consideration and not the amount credited to the capital account of the assessee. [Dharamshibhai B. Shah v ITO (2009) 32 DTR (Ahd ‘B’) ™ 106, [2010] 001 ITR (Trib) 0536 (ITAT – Ahd)] naveenkhariwalg & Co.,

Section 50C Vis-à-vis Section 45(3) As the introduction of an immovable property by a partner to a firm does not require registration the provisions of Section 50C will not have any application to such a transfer. Further as Section 45(3) deems that the consideration for transfer is the amount recorded in the books of the firm, the value adopted or assessed by a Stamp Valuation Authority will not arise in such a case. naveenkhariwalg & Co.,

8.1 INTRODUCTION OF IMMOVABLE PROPERTY AS CAPITAL CONTRIBUTION INTO A FIRM OR ASSOCIATION OF PERSONS (AOP) OR BODY OF INDIVIDUALS (BOI) AND ITS SUBSEQUENT TRANSFER TO A COMPANY: The said method is used where the property is owned by a firm or has been contributed into the firm earlier as capital contribution and the same will now have to be sold to prospective buyers. The methodology adopted in such cases is as follows: (i) The partners will contribute the immovable property as their capital contribution into a firm, which will be recorded in the books of the firm at cost or at a pre-determined value. Such contribution of immovable property as capital into the firm at book value (which is equal to the original cost of the property) will not involve incidence of capital gains under Section 45(3) of the Income Tax Act. naveenkhariwalg & Co.,

However, if the value recorded in the books of accounts is equal to the value at which the property is likely to be sold, there will be an incidence of capital gains at this stage itself on the difference between the value recorded in the books and the original cost of the property. The contribution of property into the firm is specifically permitted under section 14 of the Indian Partnership Act, 1932. naveenkhariwalg & Co.,

It is to be noted that unlike section 14 of the Partnership Act, there is no similar provision under the Limited Liability Partnership Act, 2008 read with Limited Liability Partnership Rules, Further, under the LLP Act the valuation at which the property shall be bought in by a partner as capital contribution shall be prescribed under the LLP Rules as specifically provided in section 32(2) of the LLP Act and hence there could be an incidence of Capital Gains Tax in the hands of the Partner at this stage itself. Further, as an LLP is an independent legal entity, there would be a stamp duty incidence on such contribution of immovable property. naveenkhariwalg & Co.,

(ii) Revalue the Immovable property in a year other than the year in which it is introduced and credit the excess on revaluation to the Partners‘ capital accounts. (iii) Further it is to be noted that such contribution of immovable property into the firm as capital contribution does not require registration. naveenkhariwalg & Co.,

Refer: Addanki Narayanappa Vs Bhaskara Krishnappa (1966) AIR 1966 SC 1300 Any property, including immovable property can be brought into the stock of the firm as capital contribution. This would mean that originally when a firm is formed a partner can bring even immovable property into common stock of the firm for it to become the property of the firm. This does not require any registration under the Indian Registration Act, 1908 naveenkhariwalg & Co.,

Refer: Supreme Court case Ratan Lal Vs
Refer: Supreme Court case Ratan Lal Vs. Purshottam Harit – AIR 1967 SC 401). In the above case the Supreme Court held thus “It is well settled now that the share of a partner in the assets of the partnership which has also immovable properties, is movable property and the assignment of the share does not require registration under Section 17 of the Registration Act.” naveenkhariwalg & Co.,

(iv) Admit the prospective buyers of the immovable property as partners by bringing as their capitals the amount for which the property was agreed to be sold and ensure that their share of profits is in the excess of 50% before the firm is converted into a Company as this will help in complying with one of the requirements of Section 47(xiii) of the Income tax Act. (v) Admit three more persons as partners with a nominal capital and a nominal share of profit as it is a pre-requisite to have seven members to register a firm as a joint stock company under Part – IX of the Companies Act. naveenkhariwalg & Co.,

(vi) Convert the firm into a company by registering the firm as a Joint Stock Company under Part IX of the Companies Act. The immovable property of the firm will vest with the company as per the provisions of Section 575 of the Companies Act and therefore will not require registration. Ref: Andhra Pradesh High Court in the case of Vali Pattabhirama Rao and Another Vs Sri Ramanuja Ginning and Rice Factory P.Ltd and others reported in Volume 60, Company Cases, Page 569. Also Refer LKG Gold Palace Case122 Company Cases 896 (Mad HC) naveenkhariwalg & Co.,

1. [CIT v Well Pack Packaging (2008) 174 Taxmann 102 (SC)].
(vii) The transfer of immoveable property by a firm to a company through the part IX route will not be hit by provisions of section 45(4) of the Income tax Act. 1. [CIT v Well Pack Packaging (2008) 174 Taxmann 102 (SC)]. No capital gain u/s 45(4), if a firm became limited company under part IX of Companies Act, 1956. 2. CIT v Rita Mechanical Works (2010) 46 DTR 133 (P&H).] 3. Texspin Engineering and Manufacturing works (2003) 263 ITR 345 (Bom) 4. ACIT Vs M/S Unity Care and Health Services ITA 611/Bang/ 2005-AY order dated reported in 286 ITR(AT)121(Bang) 5. Sachdeva & Sons (EOU) vs Dy CIT(2004)82TTJ (Assam Trib)847 6. Chetak Enterprises P Ltd vs Asst CIT (2006)281ITR (AT)162(Jodh-Trib) naveenkhariwalg & Co.,

The decisions of the Andhra Pradesh High Court and the Bombay High Court and the Income Tax Tribunals are based on the language used in Section 575 of the Companies Act which is reproduced below “All property, movable and immovable (including actionable claims), belonging to or vested in a company at the date of its registration in pursuance of this Part, shall, on such registration pass to and vest in the company as incorporated under this Act for all the estate and interest of the company therein”. The transfer of assets alongwith the liabilities can be also made by the firm to the company thereby reducing the Authorised Capital of the company and the costs involved with incorporating the same. naveenkhariwalg & Co.,

(viii) Transfer the shares allotted to the original partners (sellers) to the partners admitted (buyers) in the Joint Stock Company subsequent to its formation at a mutually agreed price. This will ensure that the original partners (sellers) will not have any stake in the company which will now own immovable property. Therefore, in such cases of succession of a firm by a company in the business carried on by the firm which also involves transfer of the immovable properties of the firm to the company, the registration of the firm as a Joint Stock Company under Part IX of the Companies Act 1956 is preferable. naveenkhariwalg & Co.,

Issue No. 9 Distribution of capital asset on dissolution of firm /AOP / BOI- Sec 45(4) Profit / Gains from transfer of capital asset on dissolution of firm / AOP or BOI or otherwise. Capital gain chargeable in the hands of firm / AOP / BOI. FMV on the date of transfer shall be the full value of consideration. naveenkhariwalg & Co.,

Meaning of the Word “Otherwise” a) The Distribution of a capital asset to a retiring partner will come within the ambit of the term “otherwise” as appearing under Section 45(4) of the Income Tax Act. The expression “or otherwise” following the words “on dissolution” should be understood as distribution before dissolution as well as after dissolution. CIT Vs. A.N.Naik Associates and another (2004) 265 ITR 346 (Mum). The word otherwise covers the transfer other than dissolution also. [New Gujarat Tin Printing Works v ITO (2011) 128 ITD 182 (Ahd)] The Mumbai Tribunal has in the case of Burlingtons ‘Exports, 45 ITD 424 held that the term otherwise’ will not include withdrawal of assets by a partner for consideration. Therefore if a partner buys an immovable property of the firm, from the firm the provisions of Section 45(4) will not be attracted. naveenkhariwalg & Co.,

No specific right to specific property b) Retirement of a partner from a firm does not amount to transferring any immovable property of the firm in favour of the surviving partners because there is no specific right to specific property. It is also important to note that when a partner retires from a firm he does not transfer any right in the immovable property in favour of the surviving partners because he has no specific rights with respect to the properties of the firm. Therefore when a partnership is reconstituted by adding a new partner, there is no transfer of assets within the meaning of Section 45(4). CIT vs. Kunnamkulam Mill Board (2002) 257 ITR 544 (Ker). naveenkhariwalg & Co.,

Continuance of Firm after dissolution without distribution c) Where the firm continues after dissolution for the limited purpose of winding up its affairs without distribution of capital assets, no capital gains would arise in the year of dissolution. (1) B.Raghuram Prabhu Estate vs JCIT (Assessment), 264 ITR 124 (Kar) (2) CIT vs. Mangalore Ganesh Beedi Works 265 ITR 658 (Kar) No capital gain where firm dissolves by operation of law, but not followed by transfer of capital assets by way of distribution of such assets. [CIT v Vijaya Metal Industries (2002) 256 ITR 540 (Mad)] naveenkhariwalg & Co.,

Revaluation – No Capital Gains
d) Revaluation of asset or realignment of share ratio on introduction of new partner does not attract capital gain. [ITO v Smt. Paru D. Dave and Deviprasad L Dave (2008) ITR (AT) 469 (ITAT - Mum.)] naveenkhariwalg & Co.,

Distribution of Stock in trade
e) Distribution of stock in trade amongst partners at the time of dissolution will not attract capital gain u/s 45(4) as SIT is not a capital asset. [A.L.A Firm v CIT (1991) 189 ITR 285 (SC). Transfer of Asset by Firm to Partner by book entry f) Firm is liable to capital gains tax on firms assets taken out by partners by books entries and transferred by them. [CIT v J.M. Mehta & Bros. (1995) 214 ITR 716, 719 – 20 (Bom)] naveenkhariwalg & Co.,

[CIT v Kumbazha Tourist Home (Dissolved) [2010] 328 ITR 600 (Ker.)]
Distribution of Depreciated Asset on Dissolution attracts Capital Gains g) Where the land and building was brought to the firm as capital by the partners and based on the ownership claimed by the firm, it claimed depreciation for all the years it was carrying on the lodging business using the land and building. Admittedly, on dissolution the land and building were distributed among the partners of the dissolved firm. This was a clear case falling u/s 45(4) attracting liability for capital gains. [CIT v Kumbazha Tourist Home (Dissolved) [2010] 328 ITR 600 (Ker.)] Transfer through MOU h) Transfer of capital asset through Memorandum of understanding prepared in lieu of dissolution deed – S. 45(4) will apply attracting liability for capital gains. [ACIT v G.H. Reddy & Associates [2009] 308 ITR (AT) 0025 ITAT (Chen)]. naveenkhariwalg & Co.,

Settlement of Retiring Partners Current / Capital Account
i) In a situation where a partner of a firm retires and the amount of his share in the partnership assets is settled, there is no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners. The amount received by the retiring partner towards settlement of his share is not liable to tax as "Capital gain" u/s. 45 of the Income-tax Act. CIT vs. R. Lingmallu Raghukumar (2001) 247 ITR 801 (SC); Tribhuvandas G. Patel vs. CIT(1999) 236 ITR 515 (SC). Amount received by a retiring partner in respect of his share in the partnership including goodwill is not assessable as capital gains. Addl. CIT vs. Mohanbhai Pamabhai (1987) 165 ITR 166 (SC). naveenkhariwalg & Co.,

Amount received by partner for reduction of his share in firm
j) No capital gains on consideration received by a partner for reduction of his share in partnership firm on inclusion of new partners CIT v. P.N. Panjawani [2012] 21 taxmann.com 458 (Kar.) naveenkhariwalg & Co.,

[Sakthi Trading co. v.CIT 250 ITR 871/118 taxman 301 (SC) (2001) ]
Valuation of Stock on Reconstitution without discontinuation of Business k) Where on dissolution following death of one partner, assessee-firm was reconstituted with remaining partners without discontinuation of business, closing stock of firm was to be valued at cost or market price whichever was lower. [Sakthi Trading co. v.CIT 250 ITR 871/118 taxman 301 (SC) (2001) ] naveenkhariwalg & Co.,

9.1 TRANSFER OF PROPERTY THROUGH RECONSTITUTION OF A FIRM: Transfer of immovable property contributed into the firm as capital can be done through reconstitution of the firm i.e., by introducing new partners (Buyers) and retiring existing partners (sellers). The Karnataka High Court has in the decision of CIT Vs Gurunath Talkies rendered on reported in 328ITR 59(2010) held that in case where the partners who contributed the property of the Firm retire from the firm leaving behind the property in the firm, it amounts to a transfer of immovable property by the retiring partners in favour of the continuing partners and amounts to transfer as understood u/s 45(4) of the Income Tax Act. naveenkhariwalg & Co.,

The Mumbai Tribunal in the judgment in the case of Shri Sudhakar M Shetty Vs ACIT ITA No – 1515/ Mum/ 2010 rendered on 09/09/2010 reported in (2011) 9 taxmann.com 274 held that assignment/ relinquishing of partnership interest by a retiring partner in favour of continuing partners for a lumpsum consideration would amount to a transfer of a Capital Asset U/s 2(47) of the Income Tax Act. naveenkhariwalg & Co.,

Decision of Gurunath Talkies overruled by decision of Dynamic Enterprises (Karnataka HC) dt I.T.A.NO.1414/2006 The department’s argument that the transaction by which the five incoming partners brought money into the firm and the three erstwhile partners retired by taking money (leaving the capital asset in the firm) is a device adopted to evade payment of profits or gains is not acceptable because it proceeds on the premise that the immovable property belongs to the erstwhile partners and that after the retirement the erstwhile partners have taken cash and given the property to the incoming partners. The property belongs to the partnership firm and not to the partners. naveenkhariwalg & Co.,

The partners only had a share in the partnership asset when they retired and took their share in cash, they were not relinquishing their interest in the immovable property. What they relinquished is their share in the partnership. Therefore, there is no transfer of a capital asset and no capital gains or profit arises (Ganesh Beedi Works 265 ITR 658 approved; Gurunath Talkies 328 ITR 59 reversed; Narayanappa vs. Bhaskara Krishnappa AIR SC 1300, Malbar Fisheries Co 120 ITR 49 (SC), Sunil Siddharthbhai 156 ITR 509 (SC), A.N. Naik Associate 265 ITR 346 (Bom) referred) naveenkhariwalg & Co.,

SECTION 45(4) VIS-À-VIS SECTION 50C Section 45(4) of the Income tax Act 1961 states that the profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of the transfer‖. naveenkhariwalg & Co.,

As can be seen from the aforesaid provisions, it is the fair market value of the asset on the date of transfer which is deemed as the full value of consideration received or accruing as a result of the transfer for the purpose of Section 45(4), whereas as per the provisions of Section 50C it is the consideration received or accruing as a result of the transfer, the value adopted by the stamp valuation authority, or the value ascertained by the Valuation Officer of the Income tax Department as the case may be which will be deemed to be the full value of consideration received or accruing as a result of the transfer. naveenkhariwalg & Co.,

Under the circumstances where an immovable property is distributed to a partner on dissolution of the firm or on his retirement, only the market value of the property on the date of distribution will have to be considered as deemed to be the full value of consideration received or accruing as a result of the transfer and Section 50C will have no application in such a case. The Madras Tribunal in the case of Swamy Studio Vs. ITO (1998) 66 ITD 276 has held that Section 45(4) itself is a charging provision and therefore Section 2(47) need not be looked into to decide whether the transaction amounts to a transfer” or not. naveenkhariwalg & Co.,

Immovable property distributed to partners on dissolution of the firm do not require registration as it is only a settlement of pre existing right. S.V.Chandra Pandian Vs. S.V.Sivalinga Nadar and Others (1995) 212 ITR 592 (SC) N. Khaderwali Saheb vs. N. Gudu Sahib (2003) 261 ITR 1 (SC). naveenkhariwalg & Co.,

In the case of distribution of depreciated assets of the firm to the partners it has been held that the provisions of Section 45(4) and not Section 50(1) would be applicable as what is contemplated under Section 50 is the sale of depreciated assets and not its distribution of assets, CIT Vs Kumbazha Tourist Home(2010) 328ITR 600(Ker). naveenkhariwalg & Co.,

Issue NO. 10. Sec. 46- Capital Gains on distribution of assets by companies in Liquidation. No capital gain in the hands of company on transfer of capital assets to share holders at the time of Liquidation. Capital gain shall be chargeable in the hands of shareholder. Dividend attributable u/s 2(22)(c) shall be allowed to shareholder. Full value of consideration will be: Amount of money received (+)FMV of asset distributed. as reduced by dividend u/s 2(22)(c). naveenkhariwalg & Co.,

Issue – When Capital gain shall be charged in the hands of company.
In the hands of the company Case 1. Where the co. in liquidation transfers the assets as such to the shareholders : in such a case there will be no capital gains tax in the hands of the co. Case 2. Where the co.first sell the assets and then transfer the cash to the shareholders : In such a situation the co. shall be liable to pay capital gains tax on such a transaction naveenkhariwalg & Co.,

Period of holding – Period subsequent to the date on which the company goes in to liquidation shall be excluded. Cost of acquisition – FMV on the date of distribution. [as per S.55(2)(iii) provided asset is chargeable to capital gain tax levy]. Cost of acquisition where asset distributed is not suffered by capital gain levy – Cost of acquisition shall be the cost to previous owner and further increased by COI incurred or borne by the company. [S.49(1)(iii)(c)] naveenkhariwalg & Co.,

Compulsory Acquisition u/s. 45(5)
Issue No. 11 Compulsory Acquisition u/s. 45(5) naveenkhariwalg & Co.,

i) Initial compensation
Transaction Year of Chargeability Consideration Transfer of a capital asset by way of compulsory acquisition under any law in the nature of: i) Initial compensation Previous year in which the compensation or part thereof is received The initial compensation or enhanced compensation as the case may be ii) Enhanced Compensation Previous year in which compensation is received (or) final order by any court / tribunal / other authority is made, whichever is later. naveenkhariwalg & Co.,

If the compensation for compulsory acquisition is received in installments, the entire amount of capital gain on such compensation is taxable in the year in which first installment is received. In the case of compulsory acquisition, any amount of enhanced compensation received in pursuance of an interim order of a court, tribunal or other authority, shall be deemed to be income of the previous year in which the final order of such court, tribunal or other authority is made – Proviso to sec. 45(5)(b). naveenkhariwalg & Co.,

While computing Capital gains in respect of enhanced compensation u/s 45(5), cost of acquisition and cost of improvement shall be taken as ‘Nil’. Even if the compensation is received by the legal heir of the deceased person (from whom the asset was acquired by the Central Government or RBI), or by another person the recipient shall be chargeable to tax. Capital gains originally computed in respect of the compensation or the enhanced compensation received shall be recomputed if such compensation or enhanced compensation is reduced by any court, tribunal or other authority. This re- computation shall be done by way of rectification u/s. 155. naveenkhariwalg & Co.,

According to Sec. 145A, any interest received on delayed receipt of compensation or enhanced compensation, as the case may be, shall be subject to tax under the head “Income from Other Sources” under Sec. 56(vii) in the year of receipt and deduction of 50% thereof shall be allowed u/s 57(iv). naveenkhariwalg & Co.,

f) The date of award is to be regarded as the date of transfer and not the date on which the amount is received where the same is received prior to the date of award. CIT Vs C.P.Lonappan and Sons (2004) 265 ITR 101 (Ker) CIT Vs Purshottambhai Maganbahi Hatheesing (HUF) (1985) 156 ITR 150 (Guj) CIT Vs Shiv Chand Satnam Paul (1998) 229 ITR 745 (P & H) naveenkhariwalg & Co.,

S. 10(37) – Exemption from Capital Gain.
Contd… Any STCG / LTCG arising to an Individual / HUF. From transfer of agricultural land by way of Compulsory acquisition. Where the consideration or the EC is received on or after 01/04/2004. Provided such land was used for agricultural purposes during the preceding two years by such individual or a his parents or by such HUF. Cases where compulsory acquisition has taken place before 01/04/2004 but the compensation is received after 31/03/2004 – it shall be exempt. Where original compensation has been received in part before 31/03/2004, then exemption shall not be available even though balance OC is received after 31/03/2004. If Enhanced compensation received on or after 01/04/ against agricultural land compulsory acquired before 01/04/2004 shall be exempt. naveenkhariwalg & Co.,

Contd… S. 155(16) – Rectification. In case consideration or EC or FC is reduced by any court, Tribunal or other authority. The AO shall amend the order taking the reduced consideration or EC or FC as full value of Consideration. Period of 4 years shall be reckoned from the end of the P.Y. in which the order reducing the compensation was passed by the court, tribunal or other authority. naveenkhariwalg & Co.,

Contd… Relaxation regarding time for acquiring new Asset - S. 54H 54H introduced through S.21 of Finance (No.2) Act, 1991, a new section 54 H was added in the statute providing for the extension of time for acquiring a new asset or for depositing or investing the amount in case of compulsory acquisition. Where the consideration against compulsory acquisition is not received by the assessee on the date of transfer, then the period of acquisition of new asset or period available to the assessee for depositing or investing as referred in S. 54, 54B, 54D, 54EC and 54F shall be reckoned from the date of receipt of compensation. naveenkhariwalg & Co.,

Issue - In case Assessee dies
Contd… Where assessee dies before receiving original compensation even – then capital gain shall be chargeable in the hands of deceased, however the legal heir will keep responsible for filling return of income as representative assessee. But in case, assessee dies after receiving original compensation but before enhanced compensation – the enhanced compensation shall be taxable in the hands of recipient i.e. the legal heir and not the deceased assessee. naveenkhariwalg & Co.,

Issue No. 12. PROPERTY ACQUIRED ON LEASE CUM SALE BASIS: It is commonly observed that properties are acquired on a lease cum sale basis from the Bangalore Development Authority (BDA) or other equivalent authority, in case of residential plots and from the Karnataka Industrial Area Development Board (K.I.A.D.B) or other equivalent authority in cases of industrial plots. The lease cum sale agreements generally stipulates that the buyer/allottee shall not transfer the rights in the property allotted during the period of lease and shall acquire ownership rights to the property only after the expiry of the lease period by getting sale deed executed and registered in his favour from the B.D.A or K.I.A.D.B. etc. The question which often arises is on the taxation of such properties, if they are sold within 36 months from the date of acquiring ownership rights. naveenkhariwalg & Co.,

The Karnataka High Court in the CIT vs Sri Ved Prakash Rakhra on 28 August, 2012 at page no. 4 & 5 of the order has held as follows; (Page 4 & 5) Relying on the decision rendered by the Division Bench of this court in ITA No.25/2001(INCOME TAX OFFICER v/s R.SATHYARAJ) disposed off on Paragraph 7 of the judgment reads as follows: "It is not in dispute that the lease-cum-sale deed was executed by the BDA on The assessee was put in possession of the property on He was enjoying the property as an absolute owner except to fulfil the terms and conditions of the lease-cum- sale deed. In other words, the assessee was enjoying the property as a owner and that he was put in possession of the property in terms of the agreement and such possession has to be treated as if he was enjoying the property under the part performance of the contract as defined under Section 53A of the Transfer of Property Act. naveenkhariwalg & Co.,

If the assessee was enjoying the property under the provision of Transfer of Property Act, we have to consider the date of ownership from the date on which he was put in possession of the property. As a matter of fact in a similar circumstances this Court in ITA 328/2003 dated in the case of COMMISSIONER OF INCOME TAX v/s SAROJA B.K. we have held that when a party is put in possession of the property under the part performance of the agreement as contemplated under Section 53A of the Transfer of Property Act, the person who is in possession in such capacity has to be treated as a owner from the date on which he was put in possession. If the same is taken into account, when the BDA has allotted the site and put the possession of the property, if the property is sold on it has to be treated as a long term capital gains as he was enjoying for more than 36 months as contemplated under Section 2(42) of the Income Tax Act." naveenkhariwalg & Co.,

Issue No. 13 EXTINGUISHMENT OF RIGHTS IN IMMOVABLE PROPERTIES In the case of the person who has entered into a agreement to sell for the purchase of an immovable property and ultimately extinguishes his rights under such agreement in favour of the ultimate buyer for a higher amount after holding such rights for more than 36 months, the income earned from such transaction will be taxed as a long term capital gain. This is due to the definition of the term of transfer under Section 2(47) of the Income Tax Act which includes the extinguishment of any rights therein”. The same analogy should be applied for compensation received on extinguishment of tenancy rights in a property naveenkhariwalg & Co.,

K.R.Srinath Vs ACIT (2004) 268 ITR 436 (Mad)
Beardsell Ltd Vs., Joint CIT (2002) DTC 402 (Mad ‘C’ Tri); or 80 ITD 224 (Mad Tri) CIT vs. Estate of Omprakash Jhunjhunwala (2002) 254 ITR 152 (Cal) or (2002) 172 CTR 325 (Cal) K.R.Srinath Vs ACIT (2004) 268 ITR 436 (Mad) CIT vs Vijay Flexible Containers (1990) 186 ITR 693 (Bom) CIT vs Rasiklal Maneklal (HUF) (1974) 95 ITR 656(Bom) CIT vs East India Charitable Trust (1994) 206 ITR 152 / 73 Taxman 380 (Cal) CIT vs D.P.Sandu Bros. Chembur P. Ltd. / Union of India and another vs Cadell Weaving Mill Co. P. Ltd. and Another (2005) 273 ITR 1 (SC) CIT vs M.N. Enterprises(2007) 293ITR 35(Kar) naveenkhariwalg & Co.,

Issue No. 14 INDEXATION BENEFIT FOR SECTION 49(1) CASES: Section 49(1) of the Income Tax Act provides that where the capital asset became the property of an assessee under any of the circumstances and events referred to under the said section, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. The question which, arises for the consideration is the indexation value or figure to be adopted when the property is ultimately sold i.e., whether the figure related to the year in which the previous owner acquired the property or the year in which the present owner acquired the property is to be considered. naveenkhariwalg & Co.,

It is also to be noted that in explanation (i) (b) to Section 2(42A) which defines short term capital asset, it has been clearly provided that in case the capital asset became a property of the assessee in the circumstances mentioned in Section 49(1), the period for which the asset was held by the previous owner should also be taken into account. It is held in the cases mentioned below that the indexation benefit should be reckoned from the year in which the asset was held by the previous owner: naveenkhariwalg & Co.,

In the judgement of the Hon’ble Bombay High Court in the case of Commissioner of Income Tax vs. Manjula J. Shah, the court opined that: “The object of giving relief to an assessee by allowing indexation is with a view of offset the effect of inflation. As per CBDT circular No. 636 dated , a fair method of accounting relief by way of indexation is to link it to the period of holding the asset. The said circular further provides that the cost of acquisition and the cost of improvement have to be inflated to arrive at the indexed cost of acquisition and the indexed cost of improvement and then deduct the same from the sale consideration to arrive at long term capital gains. naveenkhariwalg & Co.,

If indexation is linked to the period of holding the asset and in the case of an assessee covered under section 49(1) of the Act, the period of holding the asset has to be determined by including the period for which the said asset was held by the previous owner, then obviously in arriving the indexation, the first year in which the said asset was held by the previous owner would be the first year for which the said asset was held by the assessee”. naveenkhariwalg & Co.,

ACIT v. Sh. Gautam Navlakha ( ITAT Delhi), ITA No. 2747/Del/2012
Also, in the following decisions it has been held that in computing the indexed cost of acquisition, the indexation would begin from the first year in which the asset was held by the previous owner and not from the first year in which the asset was held by the transferor assessee. ACIT v. Sh. Gautam Navlakha ( ITAT Delhi), ITA No. 2747/Del/2012 Kamal Mishra vs. ITO (2008) 19 SOT 251 (Delhi) Mrs. Pushpa Sofat vs. ITO (2002) 81 ITD 1 (Ind) DCIT vs. Smt. Meera Khera (2004) 2 SOT 902 (Mum) Mina Deogun vs. ITO (2008) 19 SOT 183 (Calcutta) ITO v/s. Nandlal R. Mishra (2015) 62 taxmann.com 134 (Mum); CIT v/s. Smt. Asha Machaiah (2014) 48 taxmaan.com 381 (Kar); CIT v/s. Smt. Kaveri Thimmaiah (2014) 49 taxmaan.com 545 (Kar); CIT v/s. Smt. Daisy Devaiah (2014) 50 taxmaan. Com 234 (Kar) naveenkhariwalg & Co.,

Issue No. 15. SECTION 50 C VIS-À-VIS SECTION 54, 54EC AND 54F A plain reading of provisions of Section 50 C helps you to come to a conclusion that the actual consideration received or accruing as a result of the transfer or the value adopted by the Stamp Valuation Authority for the purpose of stamp duty whichever is higher shall be deemed to be the full value of the consideration for purpose of levy of capital gains. Section 48 of the Income tax Act provides that the income chargeable under the head Capital gains‖ shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer ………………… naveenkhariwalg & Co.,

While Sections 54 and 54EC provides that the capital gains arising from the sale of a residential house and a long term capital asset respectively should be invested in a house property or in bonds as the case may be to avoid or minimize the capital gain liability, Section 54F provides that the net consideration arising from the sale of a long term capital assets should be invested in a house property wholly or partly to avoid or minimize the capital gain liability. Section 54F further provides that the ―net consideration‖ in relation to a transfer of a capital asset means the full value of the consideration received or accruing as a result of a transfer of the capital asset…………………….. naveenkhariwalg & Co.,

From the above requirements of the respective sections it is clear that the capital gains to be invested in the cases of Section 54 and 54EC and the net consideration to be invested in the case of Section 54F will be computed taking into account that value adopted by the Stamp Valuation Authority for the purpose of payment of stamp duty in case such value is higher than the actual consideration received or accrued. This will be lead to an absurd situation of an assessee being liable for capital gains on an amount, which he has never received, i.e., the difference between the valuation adopted by the Stamp Valuation Authority and the actual consideration received. This may put a lot of assessees into genuine hardship especially in cases where the guideline values fixed are much higher than the actual market value of the properties in the locality or area concerned. naveenkhariwalg & Co.,

The Jaipur Tribunal has in the case of Gyan Chand Botra Vs ITO 6ITR (Trib) 147(Jaipur) also reported in (2010)195 Taxmann (BN- V) held that for the purpose of claiming the exemption under Section 54F, it is the actual value of consideration received which has to be reckoned and not the deemed value as determined under Section 50C on the analogy that the deeming fiction of determining the full value of consideration for the limited purposes of computation u/s 48 of the Income Tax Act and will not apply to the term net consideration under the explanation to Section 54F(1). naveenkhariwalg & Co.,

Mode of Computation of Capital Gains
Issue No. 17 Mode of Computation of Capital Gains Section 48 Full value of the consideration received or accruing as a result of transfer of capital asset less: Expenditure incurred wholly & exclusively in connection with such transfer. the cost of acquisition of the asset & the cost of improvement there to. naveenkhariwalg & Co.,

Issues Benefit of Indexation- in case assessee made payment in installments after issuance of allotment letter Where after issuance of allotment letter of a plot, assessee made payments from time to time in installments, in view of fact that assessee sold said plot after holding it for more than three years, long term capital gain was to be calculated taking into account indexed cost of acquisition as per payment schedule. [Nirmal Kumar Seth v. CIT 17 taxmann.com 127 (All) [2012]] naveenkhariwalg & Co.,

Expenses in connection with transfer
Any expenditure incurred in connection with transfer of a capital asset may be in the nature of those related with the physical transfer of the property and those related with realization of sale consideration or enhanced sale consideration. The following are illustrative list of expenses : Expenditures such as advertisement, brokerage or commission paid for securing a purchase, legal expenses, cost of stamp, registration fees borne by the seller, travelling expenditure incurred in connection with transfer are eligible for deduction. naveenkhariwalg & Co.,

Any payment made to obtain vacant possession of the property to fulfil condition precedent to the sale shall be considered as expenses in connection with transfer. It was held that the expenditure was incurred wholly and exclusively in connection with the agreement of sale, which preceded the transfer and in fulfilment of a condition of sale. Hence the expenditure could be considered as a deduction under section 48 (1). naveenkhariwalg & Co.,

CIT v. Eagle Traders ( Delhi HC), ITA 1287/2011
CIT vs. Miss Piroja C Patel (2002) 242 ITR 582 (Bom); CIT v . A. Venkataraman, [1982] 10 Taxman (Mad.). Seventh Income-tax Officer v. L.K.M. Hussain Beevi 1988] 26 ITD 17 (MAD.) Naozar Chenoy vs. CIT (1998) 234 ITR 95 (AP). CIT vs. R. Ranga Setty (1986) 159 ITR 797 (Kar); CIT v. ShakuntalaKantilal ( Bom HC) [1991] 190 ITR 56 Hardiallia Chemicals Ltd. v. CIT ( Bom HC) [1996] 218 ITR 598 CIT v. Shakuntala Rajeshwar ( Del HC) [1986] 160 ITR 840 ( Del). ITO v. G. Thangavel Gounder ( Mad HC) {1981] 12 TTJ 223 ( Mad. ) Where the property is obtained under a will, any probation charges, legal and travelling expenses incurred in execution proceedings is entitled for deduction – Mrs. June Perrett vs. ITO (2008) 298 ITR 268 (Kar).; naveenkhariwalg & Co.,

Section 55 -“Cost of Acquisition” for the purpose of section 48 & 49
• In case of capital asset being – ▫ Goodwill of a business. ▫ Trade mark or brand name. ▫ Tenancy rights ▫ Stage carriage permits or route permits. ▫ Loom hours. ▫ A right to manufacture, produce or process any article of thing, ▫ A right to carry on any business. Cost of acquisition means : (i) Acquired by assessee by purchase - The amount of purchase price. (ii) In any other case – NIL (Self generated) {As held by Supreme Court in CIT V. BC Srinivas Shetty} naveenkhariwalg & Co.,

Sec. 55-Cost of Improvement…..
• Cost of Improvement in relation to below mentioned shall be taken to be nil. Goodwill. Right to manufacture, produce or process any article or thing. Right to carry on any business. Any other capital asset. In case asset acquired before 01/04/1981 – Cost of Improvement incurred since 01/04/1981 either by previous owner or assessee. In case asset acquired after 01/04/1981 – All cost incurred by previous owner and assessee. Note : Expenditure deductible under the head “Income from house property”, Income from other sources”, “PGBP” will not be included in cost of improvement. naveenkhariwalg & Co.,

SEC 50:Capital gain on Transfer of Depreciable Assets
Issue No. 18 SEC 50:Capital gain on Transfer of Depreciable Assets naveenkhariwalg & Co.,

Short term capital gain / loss
Calculation of capital gains in case of depreciable capital asset Full Value of consideration XXX Less : i) Expenses for transfer ii) WDV of the block of assets at the beginning of the previous year iii) Assets acquired during the year and belonging to the same block of assets Short term capital gain / loss naveenkhariwalg & Co.,

TRANSFERRED FOR A VALUE MORE THAN THE ‘COST OF THE BLOCK’
Contd… SECTION 50(1): WHERE ONE OR MORE ASSETS (NOT ALL) ARE TRANSFERRED FOR A VALUE MORE THAN THE ‘COST OF THE BLOCK’ Then, the value of the block shall be reduced to nil (even if there are certain assets in the block ). In such a situation there shall be STCG. In such a situation there cannot be any STCL. SECTION 50(2): WHERE ALL ASSETS OF THE BLOCK ARE TRANSFERRED Then, the value of the block shall be reduced to NIL. In such a case where the assets are transferred for a value higher than the ‘cost of the block ‘then there shall be STCG and where they are transferred for a value less than the ‘cost of the block’,there shall be STCL naveenkhariwalg & Co.,

Special provision for Full Consideration in certain cases
Issue No. 19 Special provision for Full Consideration in certain cases Section 50C naveenkhariwalg & Co.,

Special provision for full value of consideration in certain cases-Sec
Special provision for full value of consideration in certain cases-Sec. 50C Sub-sec (1) Where the consideration received the value adopted or assessed [or assessable] or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, by any authority of a State Government (stamp valuation authority) for the purpose of payment of stamp duty in respect of such transfer, is less than the value so adopted or assessed [or assessable] shall, for the purposes of sec 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer. naveenkhariwalg & Co.,

for the purpose of this section, the expression “assessable” means the price which the stamp valuation authority would have notwithstanding anything to the contrary contained in any other law for the time being in force) adopted or assessed, if it was referred to such authority for the purpose of the payment of stamp duty. naveenkhariwalg & Co., 72

Without prejudice to the provisions of sub-section (1), where—
Contd…. Sub-Sec. (2) of Sec. 50C- Without prejudice to the provisions of sub-section (1), where— (a) the assessee claims before any Assessing Officer that the value adopted or assessed [or assessable] by the stamp valuation authority under sub-section (1) exceeds the fair market value of the property as on the date of transfer; (b) the value so adopted or assessed [or assessable] by the stamp valuation authority under sub-section (1) has not been disputed in any appeal or revision or no reference has been made before any other authority, court or the High Court, The AO may refer the valuation of the capital asset to a Valuation Officer and where any such reference is made, the provisions of the Wealth-tax Act, 1957 shall apply . naveenkhariwalg & Co.,

(3) Subject to the provisions contained in sub-sec (2), where
Contd…. (3) Subject to the provisions contained in sub-sec (2), where the value adopted or assessed [or assessable] by the SVA referred to in sub- sec(1) the value ascertained under sub-sec(2) exceeds then, the value so adopted or assessed [or assessable] by such authority shall be taken as the full value of the consideration received or accruing as a result of the transfer. naveenkhariwalg & Co.,

Section 155(15) - Rectification
• If the Stamp duty value is subsequently revised in any appeal or revision. • The AO shall amend the order of assessment taking the value so revised as full value of consideration for the computing CG. • Provision of S. 154 shall apply. • Period of 4 years shall be reckoned from the end of the P.Y. in which the order of appeal or revision is passed. naveenkhariwalg & Co.,

19.1 Is 50C constitutionally valid?
Section 50C cannot be said to be arbitrary because of adoption of guidelines value and violative of article 14 and principles of natural justice on the ground that no opportunity is given. Complete fullproof safeguard is to assessee to establish before the authorities concerned the real value – K.R. Palanisamy v. UOI [2008] 306 ITR 61 (Mad) & Bhatia Nagar Premises Co-operative Society Ltd. v. Union of India (2011) 334 ITR 0145 (Mum)

CIT Vs Thiruvengadum Investments (P) Ltd 320 ITR 345(Mad)
19.2 Sec. 50C has no application for determination of sale price of stock-in-trade/Business assets [Asst. CIT v. Excellent Land Developers (P.) Ltd. 1 ITR 563 (DELHI - ITAT) [2010]] KR Palaniswamy vs UOI (2009) 180 Taxman 253(Mad) CIT Vs Kan Construction and Colonisers Private Ltd (2012) 208Taxmann 478(All), 70 DTR 169(All) Inderlok Hotels Pvt Ltd Vs ITO(2009) 318 ITR (AT) 234(Mum-Trib), 122 TTJ 145(Mum) CIT Vs Thiruvengadum Investments (P) Ltd 320 ITR 345(Mad) ACIT V Aashish Gupta (2011) 42(II) ITCL 443 (Chen C Trib) CIT Vs Mukesh and Kishore 33 Taxmann.com 87(Guj HC) naveenkhariwalg & Co.,

19.3 Is section 50C applicable to depreciable assets?
Issues- Sec. 50C is applicable to depreciable assets The harmonious interpretation of sec 50 and sec 50C it is clear that there is no exclusion of applicability of one fiction in a case where other fiction is applicable. Thus, provisions of sec 50C can be applied to the transfer of depreciable capital assets covered by sec 50 and in computing the capital gain arising from the transfer by adopting the stamp duty valuation. ITO v. United Marine Academy 9 ITR 639 (Mum. ITAT) (2011) ACIT v Roger Pereira Communications P Ltd. 34 SOT 64 (Mum) Panchiram Nahata v JCIT 127 TTJ 128 (Kol)

19.4 Section 50C does not apply to transfer of “leasehold rights” as it is not “land or building”.
DCIT v Tejinder Singh (2012) (50 SOT 391) (Kol) - Transfer of lease hold rights in a building do not attract provisions of S. 50C. Atul G. Puranik v. ITO (132 ITD 499)(Mum) - Leasehold rights in plot of land is not land or building or both’. Kishori Sharad Gaitonde v. ITO ((ITA No. 1561/M/09), BCAJ Pg. 28, Vol 41 B Part 5, February 2010) naveenkhariwalg & Co.,

19. 5 Legal fiction created by sec. 50C is limited to purposes of sec
19.5 Legal fiction created by sec. 50C is limited to purposes of sec.48 alone and does not displace legal fiction created by sec. 69, 69A & 69B Subash Chand v. ACIT 18 taxmann.com 149 (ITAT-Chandigarh) [2012] The consideration, which is deemed by sec. 50C to have been received by the transferor, is for the limited purpose of computation of capital gain u/s 48 and for no other purpose. It cannot and does not mean that the said amount of consideration has been actually received by the assessee or actually paid by the transferee to him so as to be available in his hands for investments or for meeting the expenses. "Deemed consideration" u/s 50C for computation of capital gain u/s 48 is quite different from actual consideration or actual availability of money for the purpose of making investments or for meeting the expenses. Deemed consideration within the meaning of sec. 50C cannot and does not mean that the amount of deemed consideration has actually been paid by the transferee or actually received by the assessee. naveenkhariwalg & Co.,

[CIT-II Vs Harley Street Pharmaceuticals Ltd TIOL-391-(Ahm) (2011)]
The deeming fiction of Sec. 50-C could not be applied for ascertaining the undisclosed investment of assessee under Sec. 69-B. Further, in absence of any evidence for applying s 69B, difference b/w value for purpose of stamp duty and value shown in sale deed cannot be added in the income of assessee. [ITO v. Fitwell Logic System (P.) Ltd. 1 ITR (TRIB.) 286 (Delhi) [2010] ] [CIT-II Vs Harley Street Pharmaceuticals Ltd TIOL-391-(Ahm) (2011)] naveenkhariwalg & Co.,

19.6 S.50C does not applies to transfer of booking rights From the facts of the case, it was seen that the assessee had transferred booking rights and received back the booking advance. Booking advance cannot be equated with the capital asset and therefore section 50C cannot be invoked. Income Tax Officer Vs. Shri Yasin Moosa Godil 18 ITR (Trib) 253 (Ahemdabad) naveenkhariwalg & Co.,

Section 50C – Fair market value determined by DVO cannot be replaced for full value of consideration ITO Vs. Chandrakant R. Patel (ITAT Ahmedabad ) – The language in section 55A does not refer the ‘value of consideration’ but only uses the term ‘Fair Market value’. So the scope of the section gets con-fined to determine the fair market value of a capital asset only. Thus, considering the language of section 48 the value so deter¬mined cannot be substituted for ‘Full value of consideration’. – Section 50C states that the AO can refer to DVO u/s. 55A only if the assessee claims that the value adopted by the stamp valuation authority exceeds their fair market value or the value so adopted by stamp valuation authority has not been disputed by any authority, Court or High Court. – Thus, the valuation made by the DVO and the consequential addition as made by the AO was reversed and the view taken by the CIT(A) was upheld. naveenkhariwalg & Co.,

Reference to Valuation Officer u/s 55A
Issue No. 20 Reference to Valuation Officer u/s 55A naveenkhariwalg & Co.,

Reference to Valuation Officer u/s 55A….
With a view to ascertaining the FMV of a capital asset for the purposes of Capital Gains and other relevant purposes the AO may refer the valuation of capital asset to a Valuation Officer— under the following circumstances. (a) in a case where the value of the asset as claimed by the assessee is in accordance with the estimate made by a registered valuer, if the AO is of opinion that the value so claimed is at variance with its fair market value.” (amendment by Finance Act. 2012) (b) in any other case, if the AO is of opinion— or (i) that the fair market value of the asset exceeds the value of the asset as claimed by the assessee by more than 15 % of the value so claimed or by more than Rs (Rule 111AA) (ii) that having regard to the nature of the asset and other relevant circumstances, it is necessary so to do,

Issues-Sec. 55A Where valuation report of approved valuer submitted by assessee suffered from grave infirmity, inasmuch as it did not take into account a number of items used by assessee for construction of property, AO can adopt the value determined by DVO. [Krishan Kumar Jhamb v. ITO 179 Taxman 141 (P& H) [2009]] The Delhi High Court in the case of CIT Vs. Smt. Nilofer I Singh [2009] 309 ITR 233 has held that Sec. 55A can be invoked only when the Assessing Officer is required to ascertain the FMV of a capital asset. Eg. In the case of Sec. 45(4) and Sec. 45(1A). The entire exercise of reference to Valuation Officer is for ascertaining the fair market value of the capital assets of an assessee for the purpose of computation of income from capital gains and for completion of assessment and once the Assessing Officer has determined value of capital assets of the assessee and completed the assessment, he cannot, thereafter, refer the matter to the Valuation Officer u/s 55A Rallis India Ltd., vs. DCIT (2006) 154 Taxman 73 (Bom).

Is valuation expected to give true and correct market value?
Dilip N Shroff v JCIT (2007) 291 ITR market value to be different based on locale of the property Whether making a reference prevents ITO from estimating value on his own? No procedural provision of the Act should be interpreted in a manner to defeat the goal which the procedure seeks to achieve. The entire procedure is to facilitate the determination of the value of various assets to expedite the completion of the assessment. The said provision cannot be interpreted in a negative manner so that the provision becomes counterproductive and a clog in the proceeding. It cannot be said that once having referred the case of valuation to the DVO, the Assessing Officer is totally robbed of his jurisdiction. {Shahdara (Delhi) Saharanpur Light Railway Co. Ltd. v CIT (1994) 208 ITR 882 (Cal)}

Can valuation report be the basis for reassessment?
No as per ACIT v. Dhariya Construction Co. [2010] 328 ITR 515 (SC)

Whether formation of opinion of the Assessing Officer that the value claimed by the assessee less than its fair market value is sine qua non? CIT v Umedbhai International (P) Ltd. Can reference be made after completion of assessment? It is abundantly clear that for computation of income falling under Chapter IV of the Income-tax Act, the ITO may refer the matter of valuation of a property to the Valuation Officer only when the assessments are still pending. There is no authority under the said provisions of section 55A to refer case for valuation of a property after the assessment is completed by the ITO - Bhola Nath Majumdar v. ITO (1996) 221 ITR 608 (Gau)

Issue 21. Section 50D Section 50D is inserted to provide that FMV of capital asset to be considered where sales consideration cannot be determined. [w.e.f. 1st April, 2013] “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.” naveenkhariwalg & Co.,

Treatment of advance money received…….
Section-51 Treatment of advance money received……. Advance money received. 51. Where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received and retained by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition 2[Provided that where any sum of money, received as an advance or otherwise in the course of negotiations for transfer of a capital asset, has been included in the total income of the assessee for any previous year in accordance with the provisions of clause (ix) of sub-section (2) of section 56, then, such sum shall not be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition.] naveenkhariwalg & Co.,

[(ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,— (a) such sum is forfeited; and (b) the negotiations do not result in transfer of such capital asset.] naveenkhariwalg & Co.,

The following table illustratively explains the treatment of forfeiture of advance money received for sale of asset: Situation Receipt of Advance Forfeiture of Advance Year of Taxability Tax Treatment I A.Y Sec. 51 applies since the transfer took place prior to Accordingly, advance forfeited shall be reduced from cost of acquisition II A.Y The advance amount forfeited on or after shall be chargeable to tax under “Income from other sources” U/s 56(2)(ix). III A.Y IV naveenkhariwalg & Co.,

Issue No. 22 “Meaning of Slump Sale”- Section 2(42C)
Transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and Liabilities. If the values are determined for payment of stamp duty or registration fees–same will not amount to assignment of values to individual assets and liabilities. naveenkhariwalg & Co.,

Section 50B- Special provision
for cost of acquisition in case of Slump Sale. • Capital Gain from Slump Sale chargeable in the year of transfer. • Undertaking held for less than 36 months – STCG. • Undertaking held for more than 36 months – LTCG. • Net worth of the undertaking shall be deemed to be the COA and COI for the purpose of S. 48 & 49. • Certificate of CA to be obtained indicating the computation of net worth. • Net Worth = Aggregate value of total assets of Undertaking - Value of liabilities of such Undertaking. • Value of assets on account of revaluation of assets to be ignored. • Value of depreciable asset – WDV of Block as per 43(6)(c)(i)(C) of IT Act, 1961 • Other Assets – Book value naveenkhariwalg & Co.,

Issues with regard to Section 43 CA of the Income Tax Act
Issue No. 23 Issues with regard to Section 43 CA of the Income Tax Act naveenkhariwalg & Co.,

[Special provision for full value of consideration for transfer of assets other than capital assets in certain cases. 43CA. (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). naveenkhariwalg & Co.,

(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.] naveenkhariwalg & Co.,

Issue No. 24. 1 Sale of agricultural land held as Stock in Trade
Issue No Sale of agricultural land held as Stock in Trade. For Agricultural Lands which are held as “Investment Asset” there will be no Income Tax on their transfer as “they are not Capital Assets” as defined under section 2(14) of the Income Tax Act. However where such Agricultural Lands are developed by the owner thereof into a Residential layout or Farm house project, echo-villas etc., there could be a case of the owner having converted or treated the “Investment Assets” into a “Business Asset” and the Agricultural Lands owned and held by him would by default constitute a Stock-in-trade in his case. Consequently as when such lands are sold post development as Stock-in-trade, the provisions of section 43CA would apply. naveenkhariwalg & Co.,

It is to be noted that where an owner of an Agricultural Land which is not a “Capital Asset”, sells or transfers such a Land as part of his business, the profit arising there from would be assessed as a Business Income on the ground that the assessee has carried out an activity which is an adventure in the nature of trade. Refer: (1) G.VENKATSWAMY NAIDU & CO., Vs CIT [1959] 35 ITR 594 [SC] (2) DCIT Vs GOPAL RAMNARAYAN KASAT 2010 ITR 328 pgno.556 (3) RAJENDRA KUMAR DWIVEDI Vs CIT KANPUR, INCOME TAX APPEAL No.33 OF 2002, 457 & 458 OF 2007 naveenkhariwalg & Co.,

Needless to say that in the event of such activity not considered as an adventure in the nature of trade, the income derived from sale of such lands would be exempt from Income Tax as long as such lands are not capital assets. naveenkhariwalg & Co.,

Issue No Double-taxation where there is transfer of Capital Asset from a person to another who treats such asset as Stock in Trade. In case of the sale of Land and/or Building held by a person as an Investment Asset (Capital Asset) to another person being an individual or HUF who purchases the same to be held by him as a Business Asset (Stock-in-trade) for a consideration which is less than that adopted for the purpose of payment of stamp duty the transaction would be taxed as follows i. In the case of the transferor the provisions of section 50C would apply and the value deemed as consideration for the purpose of Capital Gains would be the value adopted for the purpose of payment of stamp duty i.e., such value would be higher than the consideration actually received. naveenkhariwalg & Co.,

ii. In the case of the purchaser being an individual or HUF, the value to be recorded as cost in his books would only be the actual consideration paid for and not the deemed consideration assessed in the hands of transferor for the purpose of section 50C. It is also to be noted that the Transferee would be liable to be taxed on the difference between the Stamp Duty value and the actual consideration under the head “Income from Other Sources” as per the provisions of section 56(2)(vii)(b) of the Income Tax Act. When the purchaser (Transferee) sells the asset in future the sale value minus the actual cost paid for acquisition would be treated as the Surplus to be taxed, in other words the purchaser would be taxed on the difference between the Stamp Duty value and the actual consideration once under “Income from Other Sources” and again under “Income from Profits and Gains and Business”. naveenkhariwalg & Co.,

In other words the transferee is not permitted to take advantage of the tax paid by the transferor on the deemed consideration and to the extent of the difference between deemed consideration and actual consideration, both the transferor and transferee would be liable to tax at different points of time. It is significant to note that the provisions of section 49(4) of the Income Tax Act which provides for step up of cost to the transferee is applicable only to transfers to which the provisions of section 56(2) (vii) and (vii a) of the Income Tax Act are applicable, and is only for the purpose of computing Capital Gains. naveenkhariwalg & Co.,

This hardship could be mitigated only with an identical provision such as section 49(4) is inserted into Section 43CA of the Income Tax Act as well. naveenkhariwalg & Co.,

Issue No The term “otherwise than in cash” whether it includes payments through bearer cheque, Promissory Notes, Transfer through Hundi, RTGS, NEFT etc and book entries Section 43CA has attempted to address the issue of the difference in value for the purpose of stamp duty (Guide Line value) between the date of agreement to sell and the sale deed as in certain case there could be a considerable time gap between the two dates. The section provides that in such cases it is the stamp duty valuation as on the date of agreement and not on the date of registration which shall be reckoned for the purpose of determining the value of “Consideration”. naveenkhariwalg & Co.,

In order to prevent the misuse of the provisions [as the general presumption is that the stamp duty valuation will always be on the incline], sub-section (4) of section 43CA specifies that the date of agreement will be considered only where the consideration or part thereof has been received on or before the date of the agreement by “any mode other than cash”. This sub-section has been introduced to prevent the predating of agreements to take the advantage of a reduced Stamp Duty Value. naveenkhariwalg & Co.,

The question which arises for consideration is whether payment received through bearer cheque, through Hundi, promissory note, transfer via RTGS, NEFT etc., would be regarded as payment received by a mode other than cash. As the objective of Section 43 CA (4) is only to prevent predating of the agreement, in case if it is proved that the consideration has actually passed through evidence of credit in the bank account of the transferor, it would suffice to invoke the Provision of Section 43 CA (3) of the Act. However, in the case of a book entry it could be very difficult for the transferor and transferee to prove to the satisfaction of the revenue authorities that the consideration had actually passed between the parties on the date of book entry. naveenkhariwalg & Co.,

Issue No Adoption of Fictional Sale Value as consideration in books of accounts. In the case of the sale of an asset to which the provision of Section 43CA applies, can the seller take the fictional sale value as income in his books, show the difference between the fictional value and actual consideration received as due from the purchaser and write it off as Bad Debt/ business loss in the same or subsequent year? naveenkhariwalg & Co.,

It is to be noted that for the purpose of the accounting, it is the actual value of the consideration received and not the deemed value which can be accounted in the books of accounts. The provision of Section 43CA has limited applicability to accounting of the transaction of sale and is a deeming provision only for computation of business profit under the Income Tax Act and hence the question of accounting the consideration at the fictional value and the claiming setoff either as a bad debts or as a business loss does not arise. naveenkhariwalg & Co.,

Issue No Whether Land and Building includes transfer of Development Rights, Transferable Development Rights, Lease Hold Rights etc. It is to be noted that the provisions of section 43CA refers to a transfer of an Asset being Land or Building or both and does not contain a definition of immovable property per se. There is no link to the definition of immovable property as defined under section 269UA (d) of the Income Tax Act to this section and therefore the section 43CA can apply only to the transferor who is the owner of the land and the building and not to a person who has any rights in or with respect to the land or building. This view could however be contentious as the department could well take a view that rights in an immovable property such as development rights, TDR’s, lease rights in excess of 12 years etc., amount to deemed ownership of land or building. naveenkhariwalg & Co.,

It has been held by the Mumbai Tribunal in the case of Akhtar Hussain Vs ITO ITA No 541 of 2010 and ITA No 706 of 2010 that the provisions of Section 50C are applicable to transfer of Development Rights also as they fall within the deeming provisions of Section 2(47) relating to transfer and the said analogy could also be extended to section 43CA. However in the case of transfer of leasehold rights the provisions of Section 50C have been held not applicable on the ground that the transfer does involve payment of stamp duty and there is no requirement to register such a document for transfer of leasehold interest. Carlton Hotels Pvt Ltd Vs ACIT 35 SOT 26 (Lucknow “A” Bench) 122 TTJ 515 ACIT Vs Shrikishan Das ITA No 915/Del/ 2012-ITAT Del Bench- rendered on naveenkhariwalg & Co.,

Issue No Whether deemed income under Section 43CA can be deferred over the period of the project based on Percentage Completion Method of accounting. The revenue from sale of land and/or building will normally be accounted in the year when the risks and rewards of ownership are transferred to the buyers as per the principles laid down in para 10 and 11 of Accounting Standard 9 on Revenue Recognition. The Institute of Chartered Accountants of India has also issued a guidance note on accounting for Real Estate Accounting (in Feb 2012), wherein the option of accounting for Real Estate sales in the year of transfer of risks and rewards has been permitted. The said guidance note has also recommended the Percentage Completion method for accounting of revenues in the case of certain projects as laid down in Para 5 of the said Guidance Note. naveenkhariwalg & Co.,

The Jurisdictional Income Tax Appellate Tribunal Bangalore ‘B’ Bench in the case of M/s. Prestige Estate Private Limited Vs DCIT (ITA No.218/Bang/09) 129 TTJ (2010) 680(Bang) has held that AS-9 should be followed to recognize revenue for a developer and the revenue cannot thrust following of AS-7 by a developer. Similar view is taken in case of ACIT Vs IBC knowledge Park (P) Ltd (2009) Tax Corp (ITAT) – ITA No.1079 (Bang) In a case where an assessee opts for the percentage completion method to account revenues from sale of Land and/or Building, the amount offered for revenue in a Financial Year could be done based on the fictional revenue. naveenkhariwalg & Co.,

It is to be noted that the Tax Accounting Standards issued by the Government of India, Ministry of Finance, Department of Revenue and Central Board of Direct Tax in August 2012 includes a Tax Accounting Standard on Construction Contracts the said Tax Accounting Standard recognizes only the “Percentage of Completion Method” from service transactions. The term “Contract Revenue” and the said Tax Accounting Standard comprises of a) The initial amount of revenue agreed on the contract including retentions and b) Variations in the contract work, claims and incentive payments i. To the extent that it is probable that they will result in revenue and ii. They are capable of being reliably measured naveenkhariwalg & Co.,

From a bare reading of the above, it appears that only the actual value of consideration and not the fictional value is required to be adopted as the basis for recognizing revenue on the percentage of completion method. However as the fictional value is deemed consideration which will be offered as revenue from operations, it could well be the basis which can be adopted to declare revenues under the percentage of completion method. naveenkhariwalg & Co.,

Text of Section 56(2)(vii)(b)
Issue No. 25 Text of Section 56(2)(vii)(b) [(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: naveenkhariwalg & Co.,

Text of First Proviso to Section 56(2)(vii)(b)(ii) 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: naveenkhariwalg & Co.,

Text of Second Proviso to Section 56(2)(vii)(b)(ii) 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;] naveenkhariwalg & Co.,

56(2)(vii)(b)(i) - Analysis GIFT RECEIVED IN THE FORM OF IMMOVEABLE PROPERTY (WITHOUT CONSIDERATION) At the time of Making Gift: Taxability in hands of Donee-Sec. 56(2)(vii)(b)(i): If any individual/HUF receives any immovable property, without consideration, the stamp value of which exceeds Rs.50,000 then stamp duty value of such immovable property shall be taxable. If stamp duty value of immovable property does not exceed Rs. 50,000 then nothing is taxable in hands of Donee. Taxability in hands of Donor-Sec.47(iii): No Capital gain will arise if transferred property is Capital asset because, it is not considered as transfer u/s 47(iii). naveenkhariwalg & Co.,

56(2)(vii)(b)(i) - Analysis After Making Gift: Clubbing of Income If transfer of immovable property is made to spouse, son’s wife, or any other person for immediate/deferred benefit of spouse or son’s wife of the Donor, then any income/benefit arise from the use/investment of such property will be clubbed in the hands of Donor (i.e. Transferor) proportionately. [Sec. 64(1)]. Further, if the donee is minor child of donor, then any income arising from the use/investment of such immovable property will be clubbed in the hands of Parents. [Sec. 64(1A)] naveenkhariwalg & Co.,

56(2)(vii)(b)(i) - Analysis Taxability in hands of Donee at the time of sale of such immovable property - Sec. 49(1) & 49(4): 1. Cost of acquisition for the purpose of computation of Capital Gain will be Cost of previous owner if nothing has been taxable under sec.56(2)(vii).[Sec. 49(1)] However, Where the capital gain arise from the transfer of a property, the value of which has been subject to income tax under section 56(2)(vii) or 56(2)(viia), the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purpose of the said section. [Sec. 49(4)] 2. Holding period for such asset will be counted from the date of acquisition of the previous owner [As per the decision by Bombay High Court in the case of Manjula J. Shah] ITA No.3378 of 2010, dt Here Previous owner means – a person who have acquired such asset by way of otherwise than gift. naveenkhariwalg & Co.,

Latest case laws on this issue are as under:
ITO v/s. Nandlal R. Mishra (2015) 62 taxmann.com 134 (Mum); CIT v/s. Smt. Asha Machaiah (2014) 48 taxmaan.com 381 (Kar); CIT v/s. Smt. Kaveri Thimmaiah (2014) 49 taxmaan.com 545 (Kar); CIT v/s. Smt. Daisy Devaiah (2014) 50 taxmaan. Com 234 (Kar) naveenkhariwalg & Co.,

Section 56(2)(vii)(b)(ii) – Analysis IMMOVEABLE PROPERTY RECEIVED FOR INADEQUATE CONSIDERATION At the time of Making Gift: Taxability in hands of Donee-Sec. 56(2)(vii)(b)(ii): [Amended by FA,2013, w.e.f. A.Y ] If any individual/HUF receive any immovable property, for a consideration which is less than Stamp duty value, and the difference between stamp duty value & consideration paid exceeds Rs.50,000, then difference between consideration paid and stamp duty value of such immovable property shall be taxable in the hands of donee. However, If the difference between stamp duty value & consideration paid does not exceed Rs.50,000 then nothing is taxable in hands of Donee. naveenkhariwalg & Co.,

Section 56(2)(vii)(b)(ii) – Analysis Taxability in hands of Donor-Sec
Section 56(2)(vii)(b)(ii) – Analysis Taxability in hands of Donor-Sec.50C & 43CA: Sec. 50C of Income Tax Act, 1961 will be applicable for Donor if such immovable property is Land & Building, & such land & building is capital asset for the Donor. If such land & building is not capital asset then sec.43CA will be applicable for donor. According to Sec. 50C & 43CA, if any Land or Building is transferred for a consideration which is less than Stamp Duty value, then Sale consideration will be Stamp Duty value for the purpose of calculation of Capital Gain/Business income. naveenkhariwalg & Co.,

Section 56(2)(vii)(b)(ii) – Analysis After Making Gift: Clubbing of Income If transfer of immovable property is made to spouse, son’s wife, or any other person for immediate/deferred benefit of spouse or son’s wife of the Donor, then any income/benefit arise from the use/investment of such property will be clubbed in the hands of Donor (i.e. Transferor) proportionately. [Sec. 64(1)] Further, if the donee is minor child of donor, then any income arising from the use/investment of such immovable property will be clubbed in the hands of Parents. [Sec. 64(1A)] naveenkhariwalg & Co.,

Section 56(2)(vii)(b)(ii) – Analysis Taxability in hands of Donee at the time of sale of such immovable property - Sec. 49(1) & 49(4): 1. Where the capital gain arise from the transfer of a immoveable property, the value of which has been subject to income tax under section 56(2)(vii) or 56(2)(viia), the cost of acquisition of such property shall be deemed to be the value which has been taken into account for the purpose of the said section. [Sec. 49(4)] 2. Holding period for such asset will be counted from the date of acquisition of asset by the Donee. naveenkhariwalg & Co.,

First / Second Proviso to Sec 56(2)(vii)(b)(ii) – Analysis Exceptions:
In case the assessee has – entered into an agreement; the agreement is for transfer of immovable property; and the agreement fixes the amount of consideration; the date of such agreement and the date of registration are not the same; the amount of consideration referred to in the said agreement or a part of the consideration has been paid by any mode other than cash on or before the date of the said agreement then, the stamp duty value on the date of the agreement may be taken for the purposes of S. 56(2)(vii)(b)(ii). naveenkhariwalg & Co.,

Text of first proviso to of Section 56(2)(vii)
Provided that where the stamp duty value of immovable property as referred to in sub-clause (b) is disputed by the assessee on grounds mentioned in sub-section (2) of section 50C, the Assessing Officer may refer the valuation of such property to a Valuation Officer, and the provisions of section 50C and sub-section (15) of section 155 shall, as far as may be, apply in relation to the stamp duty value of such property for the purpose of sub-clause (b) as they apply for valuation of capital asset under those sections : naveenkhariwalg & Co.,

First proviso to 56(2)(vii) – Analysis In case the assessee disputes the stamp duty value and claims before the Assessing Officer (AO) that the value adopted or assessed or assessable by the stamp duty value exceeds the fair market value of the property and the stamp duty value has been accepted (i.e. it has not been disputed in an appeal or revision or no reference has been made before any other authority, court or the High Court) then the AO may refer the valuation of such property to a Valuation Officer and the provisions of Section 50C and S. 155(15) shall apply in relation to the stamp duty value of such property for the purposes of clause 56(2)(vii)(b). naveenkhariwalg & Co.,

Text of Second Proviso to Section 56(2)(vii)
Provided further that this clause shall not apply to any sum of money or any property received— from any relative; or on the occasion of the marriage of the individual; or under a will or by way of inheritance; or in contemplation of death of the payer or donor, as the case may be; or from any local authority as defined in the Explanation to clause (20) of section 10; or from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or from any trust or institution registered under section 12AA. naveenkhariwalg & Co.,

Text of explanation to Section 56(2)(vii)
Explanation.—For the purposes of this clause,— "assessable" shall have the meaning assigned to it in the Explanation 2 to sub-section (2) of section 50C; "fair market value" of a property, other than an immovable property, means the value determined in accordance with the method as may be prescribed; "jewellery" shall have the meaning assigned to it in the Explanation to sub- clause (ii) of clause (14) of section 2; naveenkhariwalg & Co.,

Text of explanation to Section 56(2)(vii)
d) "property" [means the following capital asset of the assessee, namely:—] immovable property being land or building or both; shares and securities; jewellery; archaeological collections; drawings; paintings; sculptures; any work of art;[or] bullion;] naveenkhariwalg & Co.,

Text of explanation to Section 56(2)(vii) [(e) "relative" means,— (i) in case of an individual— (A) spouse of the individual; (B) brother or sister of the individual; (C) brother or sister of the spouse of the individual; (D) brother or sister of either of the parents of the individual; (E) any lineal ascendant or descendant of the individual; (F) any lineal ascendant or descendant of the spouse of the individual; (G) spouse of the person referred to in items (B) to (F); and (ii) in case of a Hindu undivided family, any member thereof;] (f) "stamp duty value" means the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property;] naveenkhariwalg & Co.,

‘Immovable Property’ S. 56(2)(vii)(b) contemplates assessee receiving ‘immovable property’ without consideration or for a consideration which is less than its stamp duty value. Explanation to S. 56(2)(vii) defines ‘property’ interalia to mean capital asset being immovable property being land or building or both. Question may arise whether rights in land or building, such as tenancy, lease, license in or with respect to land or building or both, are covered by this section. Since the definition of property does not refer to rights or transactions which may enable use or enjoyment of property, it appears that having regard to the description, context and objective, acquisition of such rights cannot be equated with immovable property because the Act specifically refers to such rights or transactions where the same are sought to be covered. naveenkhariwalg & Co.,

‘Consideration’ Any immovable property received without consideration or for a consideration which is less than its stamp duty value is the subject matter of charge. However, the term ‘consideration’ is not defined in the Act. The language used in S. 56(2)(vii)(b) is different from the definition of the term ‘gift’ was defined under Gifts Tax Act, 1958. naveenkhariwalg & Co.,

‘Consideration’ The Courts, in the context of the provisions under the Direct Tax Laws have explained the word ‘consideration’ as follows: In the context of the provisions of the Indian Income-tax Act, 1922, Patna High Court in RaiBahadur H.P. Banerjee v.CIT [1941] 9 ITR 137 explained it as follows : “In my judgment the word ‘consideration’ appearing in this sub-section is used in its legal sense as it is used in connection with the transfer of assets. A transfer of assets may be gratuitous or wholly without consideration or it may be with consideration, that is for some return moving from the transferee to the transferor. The word ‘consideration’ is not defined in the Transfer of Property Act, and in my judgment it must be given a meaning similar to the meaning which it has in the Indian Contract Act. Section 2(d), Indian Contract Act, defines ‘consideration’ in these words ‘When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”. naveenkhariwalg & Co.,

‘Consideration’… In the context of the provisions of the Gift-tax Act, 1958 the Full Bench of the Kerala High Court in CGT v.Smt. C.K. Nirmala [1995] 215 ITR 156, 160, 161 explained it as follows: “Within the framework of the above finding what is required to be decided by this court is whether the transfer of property involved in this case would come within the meaning of the word ‘gift’ in section 2(xii) of the Act. One of the essential ingredients constituting the gift under this provision is that the transfer of property by one person to another must be ‘without consideration in money or money’s worth’. However, the word ‘consideration’ is not defined in the Act and, therefore, it must carry the meaning assigned to it in section 2(d) of the Indian Contract Act, In Keshub Mahindra v.CGT [1968] 70 ITR 1, the Bombay High Court, in a similar situation, adopted the said course. naveenkhariwalg & Co.,

First Proviso to S. 56(2)(vii)
The proviso grants the assessee a right to dispute SDV of the IP received by him without consideration or for a consideration which is less than the stamp duty value thereof on the ground that the FMV of the property is less than the stamp duty value of the property. Upon the assessee disputing the stamp duty value of the property, the AO may refer the valuation of the property to a Valuation Officer. naveenkhariwalg & Co.,

First Proviso to S. 56(2)(vii)
The proviso uses the word `may’. In the context of S. 50C(2), the Tribunal has in the following cases held that “may” should be read as `should’. It is held that if S. 50C is read to mean 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. M/s Fortuna Structures Pvt. Ltd. v ACIT (2008)(60 itatindia 886)(Lucknow) Meghraj Baid v ITO 23 SOT 25 (Jodh) Kalpataru Industries v ITO (Mum)(41-B BCAJ 32)(ITA No. 5540/Mum/2007, Mum H Bench, Asst Year , Order dated ) Abbas T Reshamwala v ITO (41-B BCAJ33)(Mum) (ITANo. 3093/Mum/2009) (AY ) (Decided on ) naveenkhariwalg & Co.,

Conflict between 49(4) and 49(1).
Section 49(1) provides that where a capital asset is received by the assessee in any of the modes stated therein the cost to the previous owner shall be deemed to be its cost of acquisition. When an assessee who is an individual receives immovable property without consideration from a person who is not a relative of the assessee, the stamp duty value of the immovable property so received will be charged to tax u/s 56(2)(vii)(b). It may so happen that the cost of acquisition of the property to the donor may be more than its stamp duty value on the date of its receipt by the assessee. In such a case, for the purposes of computing capital gains on transfer of this property an issue would arise as to whether the cost of acquisition should be as per provisions of S. 49(1) or S. 49(4). naveenkhariwalg & Co.,

Conflict between 49(4) and 49(1).
To illustrate, in a case where assessee has on 13th October, 2013 received an immovable property without consideration from a person other than a relative and the stamp duty value of the property so received was Rs. 10,00,000 but the cost of acquisition of this property to the previous owner is Rs. 12,00,000. For computing capital gains arising on transfer of this property in assessment year , the cost of acquisition will be deemed to be Rs. 10,00,000 for the following reason – naveenkhariwalg & Co.,

Conflict between 49(4) and 49(1)...
The assessee has received immovable property as gift i.e. in one of the modes mentioned in S. 49(1). S. 49(1) provides that where the capital asset became property of the assessee in any of the modes stated therein the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. In other words, as per S. 49(1) the cost of acquisition will be Rs. 12,00,000. However S. 49(4) provides that capital gain arising from transfer of a property, the value whereof has been subject to income-tax under S. 56(2)(vii), the cost of acquisition shall be deemed to be the value which has been taken into account for the purposes of the said clause (vii). In other words, the cost of acquisition will be Rs. 10,00,000. naveenkhariwalg & Co.,

Conflict between 49(4) and 49(1)...
Since there are two provisions dealing with the same situation one needs to consider whether the assessee has an option to disregard the provisions of S. 49(4) and exercise the option to apply S. 49(1) or will it be contended that 49(4) is a specific provision whereas S. 49(1) is a general provision therefore, the specific will prevail over general. It appears that the specific provision will prevail over the general one. Section 49(1) is a general provision dealing with all assets acquired in modes mentioned therein but S. 49(4) is a specific provision dealing with a particular class of assets whose value has been charged to tax under clause (vii) of sub-section (2) of section 56. naveenkhariwalg & Co.,

1 Provisions of Section 194-IA:
Issue No. 26 Deduction of tax at source from payment on transfer of certain immovable property 1 Provisions of Section 194-IA: Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax thereon. (2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees. naveenkhariwalg & Co.,

Explanation — For the purposes of this section,—
(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section. Explanation — For the purposes of this section,— (a) "agricultural land" means agricultural land in India, not being a land situate in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2; (b) "immovable property" means any land (other than agricultural land) or any building or part of a building. naveenkhariwalg & Co.,

2 Scope of section 194-IA: Section 194-IA, as inserted with effect from provides that any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land) shall deduct an amount equal to one per cent of such sum as income-tax at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of cheque or draft or by any other mode, whichever is earlier. No deduction shall be made where consideration for the transfer of an immovable property is less than fifty lakh rupees. naveenkhariwalg & Co.,

3 What payment is covered by section 194-IA:
Any sum paid by way of consideration for transfer of any immovable property (other than agricultural land) is covered under section 194-IA, provided the consideration for transfer of an immovable property is not less than Rs. 50 lakhs. naveenkhariwalg & Co.,

A land shall not be treated as Agriculture Land, if:
3.1 Agricultural Land: Agricultural land means agricultural lands in India, not being a land situated in any area referred to in section 2(14)(iii)(a)/(b). A land shall not be treated as Agriculture Land, if: a) It is situated within jurisdiction of Municipality or Cantonment Board which has a population of not less than 10,000; or b) It is situated in any area within below given distance measured aerially: 3.2 Immovable Property: Immovable property means any land (other than agricultural land) or any building or part of building. Population of the Municipality Distance from Municipal limit or Cantonment Board More than 10,000 but does not exceed 1,00,000 Within 2 kms. More than 1,00,000 but does not exceed 10,00,000 Within 6 kms. Exceeding 10,00,000 Within 8 kms. naveenkhariwalg & Co.,

4 Who is the payer: The payer is any person, being a transferee, responsible for paying (other than the person referred to in section 194-IA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land). 5 Who is the payee: The payee is resident transferor of any immovable property (other than agricultural land). naveenkhariwalg & Co.,

6 Conditions to be satisfied for applicability of section 194-IA:
For applicability of section 194-IA following conditions need to be satisfied: The payer must be any person referred to in Para 4 above. The payee must be a resident transferor of an immovable property (other than agricultural land). The payment must be by way of consideration for transfer of any immovable property (other than agricultural land). The quantum of payment must be Rs. 50 lakhs or more. naveenkhariwalg & Co.,

7 Time of deduction of tax:
Tax shall be deducted at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier. 8 Rate of TDS: Tax shall be deducted at the rate of 1%. naveenkhariwalg & Co.,

9 Effect of non-furnishing of PAN on rate of tax:
Section 206AA, as inserted with effect from , provides as under: • Every person whose receipts are subject to deduction of tax at source (i.e., the deductee) shall furnish his PAN to the deductor. • If such person does not furnish PAN to the deductor, the deductor will deduct tax at source at higher of the following rates: (a) the rate prescribed in the Act; (b) at the rate in force, i.e., the rate mentioned in the Finance Act; or (c) at the rate of 20 per cent. • Where the PAN provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his PAN to the deductor and above provisions shall apply accordingly. naveenkhariwalg & Co.,

10 Tax Deduction and Collection Account Number (TDCAN):
Provisions pertaining to Tax Deduction and Collection Account Number, i.e., section 203A, shall not apply to a person deducting tax at source under Section 194-IA. 11 Deposit of tax to the credit of the Central Government: 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. The sum so deducted shall be deposited to the credit of the Central Government by remitting it electronically to the Reserve Bank of India or the State Bank of India or to any authorised bank. naveenkhariwalg & Co.,

12 Certificate/statement for tax deducted at source:
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. 13 Furnishing of statements by tax deductor to department: 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 him a challan-cum-statement in Form No. 26QB electronically within seven days from the end of the month in which the deduction is made. naveenkhariwalg & Co.,

ICDS III - Construction Contracts – Analysis
Whether ICDS – III will apply to Real Estate Developers? Accounting standard – 1985 – Scope :- “This Statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts (hereafter referred to as 'contractors'). The Statement also applies to enterprises undertaking construction activities of the type dealt with in this Statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale.” Accounting standard – 2002 – Scope :- “This Standard should be applied in accounting for construction contracts in the financial statements of contractors.” ICDS – Scope :- “This Income Computation and Disclosure Standard should be applied in determination of income for a construction contract of a contractor.” naveenkhariwalg & Co.,

Issue No. 27 INCOME COMPUTATION AND DISCLOSURE STANDARDS (ICDS) Notification No.32/2015, F. No. 134/48/2010‐TPL, dated 31st March, 2015

ICDS-IV - REVENUE RECOGNITION

ICDS-IV vs. (AS) 9 Sr. No. Points of comparison
ICDS IV : Revenue Recognition (AS) 9 Revenue Recognition 1. Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" and not for the purpose of maintenance of books of account (AS) 9 applies for the purpose of preparation of financial statements 2. Revenue recognition from the rendering of services Revenue from service transactions shall be recognised by the percentage completion method. Income Computation and Disclosure Standard on construction contract also requires the recognition of revenue on this basis. The requirements of that Standard shall mutatis mutandis apply to the recognition of revenue and the associated expenses for a service transaction. Unlike (AS) 9, ICDS-IV does not recognize completed service contract method Revenue may be recognized by completed service contract method or under the proportionate completion method whichever relates the revenue to the work performed

3. Recognition of dividends Dividends are recognised in accordance with the provisions of the Act. Dividends are recognized when owner's right to receive payment is established 4. Recognition of royalties Royalties shall accrue in accordance with the terms of the relevant agreement and shall be recognised on that basis unless, having regard to the substance of the transaction, it is more appropriate to recognise revenue on some other systematic and rational basis Royalties shall accrue in accordance with the terms of the relevant agreement

ICDS-IV vs. I.T. Act Section 145A(1)(b) of the Act provides that interest received by an assessee on compensation or on enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received. Such interest shall be taxed under the head 'Income from other sources' in the year of receipt irrespective of whether assessee follows mercantile system of accounting or cash system. Section 57(iv) allows a deduction of 50% in respect of such interest. ICDS-IV will not apply to interest received by an assessee on compensation or on enhanced compensation since in case of conflict between ICDS and Act shall prevail.

Section 8 of the Act provides that for the purposes of inclusion in the total income of an assessee,— (a) any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be; (b) any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it. ICDS-IV provides that dividend shall be recognized in accordance with the Act i.e. section 8 of the Act.

ICDS-III corresponds to (AS) 7
ICDS-III corresponds to (AS) 7. The differences between ICDS-III and (AS) 7 are as under:

Sr. No. Points of comparison ICDS III : Construction Contracts (AS) 7 Construction Contracts 1. Applicability This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head "Profits and gains of business or profession" or "Income from other sources“ and not for the purpose of maintenance of books of account (AS) 7 applies for the purpose of preparation of financial statements

2. Retentions Retentions shall be included in contract revenue (AS) 7 silent on retentions 3. Criteria for recognition of variations in contract work, claims and incentive payments Not specified in ICDS-III Recognition criteria specified in (AS) 7

4. Recognition of contract costs and contract revenues with reference to stage of completion of the contract activity at the reporting date (percentage of completion method) Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. ICDS-III does not recognize that the possibility that outcome of a construction contract cannot estimated reliably except during early stages of contract - i.e. upto 25% stage of completion When the outcome of a construction contract can be estimated reliably , Contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. (AS)7 specifies criteria as to when the outcome of a construction contract can be estimated reliably for fixed price contracts and cost plus contracts.

5. Early stages of completion of contract During the early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognised only to the extent of costs incurred. The early stage of a contract shall not extend beyond 25% of the stage of completion. During the early stages of a contract, where the outcome of the contract cannot be estimated reliably contract revenue is recognised only to the extent of costs incurred. However, no definition as to upto what % of completion it can be considered that contract is at early stage.

6. Netting of costs by incidental income Netting off allowed for all types of costs. However, such netting off not allowed if incidental income is in the nature of interest, dividends or capital gains Costs that relate directly to the specific contract shall be reduced by any incidental income that is not included in contract revenue . Such netting off not allowed from : (i) costs that are attributable to contract activity in general and can be allocated to the contract; (ii) such other costs as are specifically chargeable to the customer under the terms of the contract

7. Recognition of expected losses from contract In proportion to percentage of completion. To be recognized in full.

Issue No. 28 Meaning of TDR The term Transferable Development Rights (TDRs) means making available certain amount of additional built-up area, in lieu of the area relinquished or surrendered by the owner of the land, so that he can use extra built-up area, either himself or transfer it to another, in need of the extra built-up area for an agreed sum of money. As per Advanced Law Lexicon, 3rd Edition, 2005, by P.R. Aiyar, Transferable Development Rights (TDRs) means certificates issued in respect of category of land acquired for public purpose either by Central or State Government, in consideration of surrender of land by the owner with monetary compensation, which are transferable in part or whole. naveenkhariwalg & Co.,

CIT Vs Amrik Singh [2008] 299 ITR 14 (P&H) : 3 DTR 325 (P&H)
Legal precedents in support of the view that there will be no capital gains tax on transfer / sale of TDR CIT Vs Sambhaji Nagar CHS Ltd. [2015] 370 ITR 325 (Bom) : 113 DTR 89 (Bom) CIT Vs Amrik Singh [2008] 299 ITR 14 (P&H) : 3 DTR 325 (P&H) Land Breez Co-operative Housing Society Ltd. Vs ITO [2013] 21 ITR (Trib) 467 (Mum) ACIT Vs I G E India Ltd. [2013] 22 ITR (Trib) 365 (Mum) Maheshwar Prakash-2 Co-operative Housing Society Ltd. Vs ITO [2009] 313 ITR (AT) 103 (Mum) : 20 DTR 269 (Mum) New Shailaja Co-operative Housing Society Ltd. Vs ITO [2009] 18 DTR (Trib) 385 (Bom) ITO Vs Lotia Court Co-operative Housing Society Ltd. [2008] 12 DTR (Trib) 396 (Mum) : 118 TTJ 199 (Mum) naveenkhariwalg & Co.,

Issue No. 29 Transfer by way of Family Arrangement do not attract capital gain tax. [Ram Charan Das v Girja Nandini Devi AIR 1966 SC 323, see also CIT v. A.N. Naik Associates and Anr (2004) 265 ITR 346 (Bom), CIT v AL Ramanathan (2000) 245 ITR 494 (Mad). naveenkhariwalg & Co.,

ISSUES No. 31 Capital Asset
The term “Capital asset” is defined to include property of any kind except those assets which are specifically excluded u/s 2(14). The Supreme Court, in the case of Ahmed G.H. Ariff vs. CWT (1969) 76 ITR 471, has held that the term “Capital asset” is of the widest import signifying every possible interest which a person can clearly hold or enjoy. The right to obtain a conveyance of immovable property falls within the expression. ISSUES No. 31 Capital Asset naveenkhariwalg & Co.,

“Property of any kind” used in sec
“Property of any kind” used in sec. 2(14) of the Income-tax Act and is consequently a capital asset. The payment of earnest money in order to obtain such a right constitutes its cost of acquisition. Where such a right is given up it amounts to relinquishment of the capital asset. There was, therefore, a transfer of capital asset within the meaning of Income-tax Act - CIT vs. Vijay Flexible Containers (1990) 186 ITR 693 (Bom). naveenkhariwalg & Co.,

Transfer of leasehold interest in immovable property for the purpose of capital gains and consequently premium received for granting mining lease of the assessee’s land for 99 years is held liable to capital gains subject to deduction of cost of the land R.K. Palshikar vs. CIT (1988) 172 ITR 311 (SC); A.R. Krishnamurthy & A.R. Rajagopalan vs. CIT (1989) 176 ITR 155(SC). naveenkhariwalg & Co.,

TAXATION ISSUES IN REAL ESTATE DEVELOPMENT AGREEMENTS
Issue No. 32. TAXATION ISSUES IN REAL ESTATE DEVELOPMENT AGREEMENTS naveenkhariwalg & Co.,

Section 2(47)(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 naveenkhariwalg & Co.,

Cases which have gone in favour of the department
Chaturbhuj Dwarkadas Kapadia Vs CIT ( 2003 ) 260 ITR 491 ( Bom. ) Jasbir Singh Sarkaria ( 2007) 294 ITR 196 ( AAR ) R.Kalanidhi Vs. ITO Chennai 314 ITR (AT) 266 Chennai CIT Vs. K.Jeelani Basha (Chennai) 256/282 (Madras) Dr. Maya Shenoy Vs. ACIT 124 TTJ 692 (Hyd) Dr.T. Achyutha Rao Vs. A.C.I.T. 13 (1), Hyderabad 106 ITD Page 388(Hyd) Dr T K Dayalu 202 Taxman 531 ( Kar ) CIT Vs H B Jairaj ( Karnataka HC) Potla Nageswara Rao Vs DCIT (2014) 89 CCH 022 AP High Court naveenkhariwalg & Co.,

Cases in favor of Assessee
CIT Vs Attam Prakash & Sons (Del HC) IT Reference Nos f 1988 Ranjith Reddy Vs Dy CIT (Hyd) rendered on 07/06/2013 Vaswani Estates and Developers Vs State of Karnataka(Tribunal Decision under KVAT) Binjusaria Properties P Ltd case (149 ITD 169), Hyd bench Fibars Infratech Hyd bench naveenkhariwalg & Co.,

Joint Development of Properties 1
Joint Development of Properties 1. Any transaction involving the “Allowing of possession to be taken” shall be considered as transfer within the meaning of sec. 2(47)(v) and accordingly, the same shall be subject to capital gains tax. Where an irrevocable power of attorney was executed by the owners in favour of the developers together with handing over of possession, the liability to capital gain, in such case, shall arise in the year in which handing over of possession takes place – Jasbir Singh Sarkaria (2007) 294 ITR 196 (AAR); 2. On the same grounds even if the consideration is not paid on the date of agreement, the transaction shall be regarded as transfer where the factual possession of capital asset is handed over – Potla Nageswara Rao vs. Deputy CIT (2014) 365 ITR 249 (AP). naveenkhariwalg & Co.,

3. Asseesse entered in to a joint development agreement (JDA) with a developer for developing a particular extent of land. Later, dispute arose and the assessee had to return part of the money back to developer and development was carried for a limited land area, as per the revised agreement. Department proceeded against the assessee and charged capital gains based on the original JDA invoking the definition of section 2(47) read with sec. 53A of the Transfer of Property Act, The Court has held that ‘transfer’ within the meaning of section 53A and ‘transfer’ under section 2(47)(v) is conditional and not absolute. naveenkhariwalg & Co.,

Where the terms in original agreement is not capable of performance due to various issues between parties, including public interest ligation before the courts, it is not right to hold the assessee for charging capital gains based on the original JDA. The court further pointed out that in such cases, the handing over of possession in pursuance of original JDA shall at best be described as licence for the development of the property, not falling within the purview of section 2(147)(v) – C.S. Atwal vs. CIT (2015) 378 ITR 244 (P&H). naveenkhariwalg & Co.,

4. [TS-5357-ITAT-2016( CHENNAI)] ADDISON AND COMPANY LTD Vs
4. [TS-5357-ITAT-2016( CHENNAI)] ADDISON AND COMPANY LTD Vs. DCIT Transfer u/s 2(47)(vi) SYNOPSIS BY ORANGE EXPERTS ‘Transfer’ u/s 2(47)(vi)' –Tribunal upholds CIT(A) order, an arrangement between the parties which enables enjoyment of the property by the developer as its own is a ‘transfer’ within the meaning of sec. 2(47)(vi) of the Act even though there may not be transfer within the meaning of sec. 53A of the TOPA; Holds that an irrevocable agreement for joint development along with handover of possession for development activities amounts to ‘transfer’

5. C S ATWAL Vs CIT [TS 5389 HC 2015( PUNJAB & HARYANA)], [2015] 234 TAXMAN 69 (P&H)

Capital Gains HC reverses ITAT order and grants relief to the taxpayer, lays down law on interpretation of Sec 53A of Transfer of Property Act (‘TOPA’) in context of definition of 'transfer' u/s 2(47) of IT Act; Assessee (an individual) was one of 30 members of cooperative society that owned the land and society entered into joint development agreement (‘JDA’) with the developers; Assessee received part amount under JDA towards his share in land & offered proportionate capital gains to tax, AO on the other hand, taxed entire monetary consideration due under JDA as well as the fair value of the builtup area to be received; Sec 53A of TOPA by incorporation, stood embodied in Sec 2(47)(v) of the IT Act and thus all essential ingredients of Sec 53A were required to be fulfilled; JDA to be covered under TOPA was required to be a registered instrument for enforcing civil law rights; Absent registration of JDA, it was not enforceable under general law and transaction would not fall u/s 2(47)(v);

Society or members never parted with the possession under JDA and special power of attorney, developer was given rights to mortgage the property; At best, possession was given to developers as 'licensee' only and not in the capacity of transferee; HC also notes that eventually JDA was terminated by society, HC therefore observes "willingness to perform their part of the contract was absent on the part of the developers or it could not be performed by them which was one of the condition precedent for applying Section 53A"; HC holds the observations in AAR ruling Jasbir Singh Sarkaria (294 ITR 196) on interpretation of the term 'possession’ cannot be faulted with since it would depend upon facts and circumstances of the case; Clause (vi) of Sec 2(47) not attracted as developers did not become members of the society and surrender of right to plot by member was merely to facilitate entering into JDA with developers; Further, clause (ii) of Sec 2(47) not applicable absent any extinguishment of rights in land absent registered conveyance deed.

6. CIT Vs CHAITANYA PROPERTIES PVT LTD [TS 5061 HC (KARNATAKA)] Reopening of assessment Change of opinion JDA Capital asset into stock in trade

SYNOPSIS BY ORANGE EXPERTS Reopening of assessment u/s
SYNOPSIS BY ORANGE EXPERTS Reopening of assessment u/s. 147 HC dismisses Revenue’s appeal; Upholds Tribunal’s ruling, fact of conversion of capital asset into stock-in-trade and subsequent entering into a joint development agreement (JDA) was considered by AO in original assessment proceedings; Reopening of the assessment on the basis of a subsequent judicial decision is a case of mere change of opinion and thereby illegal; Follows Apex Court decision in Kelvinator India Ltd. and Bombay HC decision in Sesa Goa Ltd.; Holds that question whether a case is of change of opinion or nondisclosure of true and correct facts is a question of fact and notes Tribunal’s finding that the relevant material was on record and therefore it was not a case where there was nondisclosure of true and correct facts.

7. CIT Vs DHANDAYUTHPANI FOUNDRY (P) LTD [TS 5832 HC- 2014(MADRAS)] JDA Capital gains on transfer of the property AO not entitled to take different view where findings have attained finality

SYNOPSIS BY ORANGE EXPERTS HC upholds ITAT ruling, capital gains on transfer of the property through joint development is assessable as income of Previous Year relevant to AY and rejected the contention of Revenue that it should be assessable as income of the year relevant to the AY ; HC observes that the Order of ld. CIT(A) in so far as AY treating it as substantive assessment and not on presumptive was correct basis and that the Revenue had no justification to claim that capital gains on transfer of property should be reckoned in respect of AY ; HC holds order of ld. CIT(A) is binding on AO, and is not entitled to take a different view where findings have attained finality

8. CIT Vs ZIAUDDIN AHMAD [TS 6077 HC- 2014(ALLAHABAD)], (2015) 115 DTR 7 (ALL), (2015) 229 TAXMAN 281 (ALL), (2016) 128 CTR 223 (ALL) JDA Agreement with Builder Development of land Title right not transferred Capital gain to be computed on the basis of transfer

SYNOPSIS BY ORANGE EXPERTS HC rules that Capital gain assessable in year when possession was handed over by assessee; Observes that except title all other right (including right to enjoy the property) was transferred and thus capital gain to be computed on the basis of transfer and in the year in which possession was handed over by assessee; Word "transfer" has been defined in Sec. 2(47) and the clause (v) and (vi) were introduced in w.e.f. April 1, 1988 where, it is provided that "transfer" includes (i) any transaction which allows possession to be taken / retained in part performance of a contract of the nature referred to in Sec. 53A of the TPA, 1882; HC opines “had the possession not been given prior to a reasonable period, then the date of launching of the scheme, the builder could not have been in a position to launch the scheme”; Further opines that demolition of old building and acquiring of the land for construction not being a childish job, was to take sufficient time and therefore, the assessee's plea is that the possession of land was handed over latest by is liable to be accepted

9. COMMISSIONER OF INCOME TAX Vs SKYLINE GREAT HILLS [TS HC-2016(BOMBAY)] JDA Capital gain Transfer of rights of ownership by way of irrevocable covenant.

SYNOPSIS BY ORANGE EXPERTS No accrual of income on date of receipt of security deposit under JDA HC dismisses Revenue’s appeal, income from transfer of land under JDA can be taxed only in A.Y i.e the year when license was granted to builder and not in the year when security deposit was received by assessee; Upholds ITAT order that the development transaction crystallised and income from transfer accrued only when license was granted to the developer to enter upon assessee’s plot of land for purpose of construction activities; No sale took place in the year of receipt of security deposit under JDA dated 4th April 2008 as no conveyance was executed that year; Further holds, ‘land and rights’ being held as stock in trade, Sec. 53A of the TOPA will not apply as it is applicable only to capital assets defined u/s. 2(47).

10. DEPUTY COMMISSIONER OF INCOME TAX Vs EVEREADY INDUSTRIES INDIA LTD [TS-5319-ITAT-2016( KOLKATA)]

SYNOPSIS BY ORANGE EXPERTS Factory land transfer pursuant to JDA taxable as capital gains, not business income ITAT holds that income from transfer of factory land pursuant to a joint development agreement (‘JDA’) entered with builder, assessable as “Capital Gains” and not “Business Income” for AY ; Notes that obligation to develop the land by constructing building thereon was on developer at its own cost and expenses and assessee was not obliged to incur any cost or perform any work related to development and construction; Pointing out that manufacturing activities in factory building (put up over the subject land) was carried on for over 33 years before entering into the JDA, observes that assessee’s intention at the time of acquisition was to hold the property as a capital asset; Remarks that “By entering into the Agreement with the builder it cannot be said that the Assessees took a plunge into waters of trade. It was case where the Assessee wanted the best returns for its investment”; Accordingly accepts assessee’s contention that it never intended to indulge in any adventure in the nature of business or trade, relies on SC ruling in G. Venkataswami Naidu & Co. in this regard

11. INFINITY INFOTECH PARKS LIMITED Vs DY CIT [TS-5203-ITAT-2015(KOLKATA)] Transfer of title u/s 2(47)(v) under a Joint Development Agreement Revision u/s 263

SYNOPSIS BY ORANGE EXPERTS ITAT quashes the revisional order of ld
SYNOPSIS BY ORANGE EXPERTS ITAT quashes the revisional order of ld. CIT, holds that order of AO not erroneous, conditions stipulated u/s. 263 fails; follows SC decisions in Max India Ltd. & Green world Corporation and holds that in respect of any debatable issue the CIT cannot exercise revisionary powers if the AO has taken one of the possible views. During assessment, the AO made a detailed note on taxation of capital gains arising out of JDA entered into by the assessee as land owner with a developer wherein the AO accepted the assessee’s contention that the transfer of leasehold title would be transferred in the year in which possession is delivered and received by the assessee which actually happened in AYs & ; that at time of entering into the JDA only license to carry out obligations under the JDA was granted and no transfer of leasehold interest in the land was made.

Ld. CIT, however invoked jurisdiction u/s
Ld. CIT, however invoked jurisdiction u/s. 263 on the ground that the order of the AO was erroneous in as much the JDA involved allowing of possession to be taken over in part performance of contract in terms of Sec. 53A of the TOPA and thus amounted to Transfer as defined in Sec. 2(47)(v). On appeal, ITAT observes that this is not a case of lack of enquiry on the part of AO, he, after making detailed enquiries and making a detailed note, allowed the claim of the assessee on the issue; Clarifies that an order can be said to be erroneous if there is an incorrect assumption of fact or incorrect application of law in the order passed by the AO; If the AO has, after making the enquiries and examining the records, taken one of the possible views, it cannot be said that the order passed by the Assessing Officer is erroneous; Follows SC decision in Malabar Industrial Co. Ltd.

13. SHRI AWADHNARAYAN SINGH & SHRI SATYAPRAKASH SINGH Vs DY COMMISSIONER OF INCOME TAX [TS-5090-ITAT-2016(MUMBAI)] Capital Gain “Transfer of property" “date of possession, substantial compliance of the contract etc.” are not relevant in the case of development agreements

SYNOPSIS BY ORANGE EXPERTS JDA – Year of chargeability of capital gain is the year in which the contract was executed Mumbai ITAT allows assessee’s appeal & additional ground and deletes capital gains addition for AY ; Holds capital gains arising on entering of Joint Development agreement (JDA) taxable in the year of execution of JDA i.e. AY ; If the amount was not taxed in that relevant AY, it could not be taxed after a lapse of 4 years even if it was erroneously offered to tax by assessee; Relies on Bombay HC ruling in Chaturbhuj Dwarkadas Kapadia wherein Bombay HC had held that the factors such as 'date of possession, substantial compliance of the contract etc.' are not relevant in the case of development agreements and further had also held that “year of chargeability in the case of Development Agreements is the year in which the contract was executed…”

Effect of unregistered development agreements ?
naveenkhariwalg & Co.,

As per Sec 49 of the Transfer of Property Act, unregistered document shall not effect any immovable property and Cannot be received as evidence in a court of law. The proviso to Sec 49 which provided that it may be received as evidence for part performance of contract U/s 53A has been omitted since 2001 and therefore, even the agreements where Sec 53A needs to be applied, require registration. naveenkhariwalg & Co.,

Merely because the particular instrument has not been registered will not alter the situation. The amendment made in section 53A by which the requirement of registration has been indirectly brought on the statute will not alter the situation for holding the transaction to be a transfer U/s 2(47)(v) if all other ingredients have been satisfied - Sureshchandra Agarwal v. ITO & Sushila S. Agarwal v. ITO - (2011) TIOL 662 ITAT-Mum. [BCAJ] naveenkhariwalg & Co.,

Development Agreement – an illustration
1000 sq yds Total Builtup area – sq ft. Landowner - 40 % Developer - 60 % Total Landarea - Builtup Area – Date of Development Agreement – March 01, 2014 Possession handedover to developer on 15/05/2014( With GPA ) Building completed & Landowner’s share handed over on 15/09/2015 naveenkhariwalg & Co.,

Registration Value / Market value of proportionate share in land
Amount of Income Registration Value / Market value of proportionate share in land Cost of construction of builtup area falling to the Landowner’s share naveenkhariwalg & Co.,

Illustration continued
1000 sq yds Total Builtup area – sq ft. Landowner - 40 % Developer % Total Landarea - Builtup Area – Land Area being transferred sq yds ( 60 % of 1000 Sq Yds ) Landowners share of builtup area - 8,000 sq ft Land Registration Rate - Rs 12,000 per sq yd Estimated cost of construction - Rs 1000 per sq ft naveenkhariwalg & Co.,

Computation of Caital Gain
Method I Registration Value of Land = Rs 12,000 X 600 sq yds = Rs 72,00,000 Method II Cost of construction of Builtup Area = sq ft X Rs = Rs 80,00,000 Sale Consideration – Higher of the above two - Rs 80,00,000 naveenkhariwalg & Co.,

A wiser course of action may be to fix a certain consideration in agreement and providing that same will be discharged by way of allotment of certain specified built up area In CIT Vs Sri Ved Prakash Rakhra 210 Taxman 605 Kar it was held that : Exchange value as specified in the project development agreement can be taken as the basis for computation of the construction in joint development—Cost incurred by the developer need not necessarily represent only a cost of construction—Detailed particulars are not given— Transaction of Joint development is one of exchange— Consideration specified in the said document represents the market value on the date of entering into the agreement naveenkhariwalg & Co.,

ITO v. Sri N. S. Nagaraj (ITA No. 676/Bang/2011 – AY 2007-08), (ITA No
ITO v. Sri N.S. Nagaraj (ITA No.676/Bang/2011 – AY ), (ITA No.676/Bang/2011 – AY ) The Bangalore Tribunal in the present case has held that the taxpayer had relinquished his rights in the land on the execution of the JDA and grant of possession over the land through irrevocable license. In lieu of relinquishment of the rights in the land, the taxpayer got the right to receive the developed area, and therefore, the capital gains tax liability gets fastened on the taxpayer in the year of such transfer. It is pertinent to note that the Chandigarh Tribunal in the case of Charanjit Singh Atwal v. ITO [2013] 144 ITD 528 (Chd)while dealing with the aforesaid issue adopted the fair market value of flats provided by the developer as full value of consideration to determine capital gains tax liability. However, in the present case, the Bangalore Tribunal has held the cost of construction incurred by the developer as the full value of consideration in lieu of the relinquishment of the rights in the land, and not the fair market value of the land on the date of transfer.

Section 50D wef AY Where the consideration received or accruing is not ascertainable, fair market value of the said asset on the date of transfer shall be deemed to be full value of the consideration Fair market value defined in Sec 2(22B) naveenkhariwalg & Co.,

What if the Landowner sells partof his builtup area
This will result in a Long Term Gain on the undivided share of land transferred. Pl see CIT Vs Dr Ramachandra Rao (236 ITR 51) And A Short Term Gain on the builtup portion transferred. Pl see ITO vs Vikash Behal 131 TTJ (Kol) 229 (2010) wherein the Kolkata bench of ITAT held that time should be counted from the date of capital gain accrual and not completion of building. naveenkhariwalg & Co.,

Illustration on transfer ofLandowner’s share of builtup area
Land retained 8000 sq ft 400 sq yds Area sold Undivided share tr. 2000 sq ft sq yds Total sale consideration Rs 40 Lakhs ( Land- 16 lakhs + builtup area – 24 Lakhs ) naveenkhariwalg & Co.,

Is there any way this capital gain accrual can be postponed ?
Is there a way out ? In a Development Agreement Capital Gain accrues as soon as possession is handedover with a General Power of Attorney Is there any way this capital gain accrual can be postponed ? naveenkhariwalg & Co.,

Conversion of land into stock-in-trade
U/s 45 (2) if land is converted into stock-in- trade, it shall be taxed in the year in which it is sold or otherwise transferred. Fair Market Value on the date of conversion would be treated as full value of sale consideration Difference between actual sale value and fair market value as of date of conversion would be taxed as business income naveenkhariwalg & Co.,

R Gopinath (HUF) Vs CIT (2010) 42 DTR ( Chennai ITAT) 127
Assessee converted his immovable property into stock in trade and then entered into a Development Agreement Section 2(47) rws 53A cannot be applied as the asset is no longer a capital asset. Similar view has been taken in the case of Vidyavihar Containers Vs Dy CIT (2011) 133 ITD 363 ( Mumbai ) naveenkhariwalg & Co.,

Land introduced as capital in partnership firm
U/s 45(3) if land is introduced as capital in partnership firm, consideration would be the value recorded in the books of account of the firm Capital gain as well as liability to pay tax would arise immediately on introduction of capital unlike in a Section 45 (2) case where it is converted into stock in trade and liability is postponed naveenkhariwalg & Co.,

Provisions of Section 50C
Where the sale consideration for land and building is less than Stamp Duty Value, the stamp duty value will be adopted for computation of capital gains If the value is not disputed by the assessee, the AO will have to refer the valuation to Valuation Officer and provisions of Section 55A will be applicable naveenkhariwalg & Co.,

Sec 50C Vs Sec 45(3) Under Sec 50C the AO is empowered to take stamp duty value where the value shown is less than the stamp duty value Sec 50C is not applicable where the assessee has opted for Sec 45(3) – See Carlton Hotel P Ltd Vs Asst. CIT (2009) 122 TTJ 515 ( Lucknow) Also for the reason that specific provision will override a general provision naveenkhariwalg & Co.,

KEY PROBLEM IN TAXATION OF JDA (For Developer) – u/S.80IB(10)
Many developers claim Deduction u/s 80IB(10) of the IT Act, 1961 S.80IB(10) provides for 100% deduction in the case of an undertaking developing and building housing projects approved before the 31st day of March, 2008 by a local authority IF: Such undertaking has commenced/commences development & construction of housing project >= 1st day of October 1998 The project size should be minimum of one acre Residential unit has maximum built-up area of 1000 sq.ft (Delhi & Mumbai or within 25 kms. from municipal limits) and 1500 sq.ft at any other place

KEY PROBLEM IN TAXATION OF JDA (For Developer) - u/s 80-IB(10)
The built up area of shops and commercial establishment does not exceed 3% of aggregate built up area or 5000 sq.ft, whichever is higher Not more than 1 residential unit is allotted to any person not being an individual Where one residential unit is allotted to an individual, no other residential unit is allotted to: Individual, spouse, or minor children of such individual HUF in which such individual is karta Any other person representing that individual The assessee should not be a mere ‘contractor’ (should assume risks)

S.80-IB(10) issues No specific requirement that assessee who claims u/s 80-IB should OWN the land – can be developer and/or builder CIT vs. Radhe Developers 341 ITR 403 Guj. HC CIT vs. Sanghvi & Doshi Enterprises (83 CCH 7 Madras HC) 80-IB(10) is available on each “housing project” Arun Excello Foundation vs. CIT (108 TTJ 71 Mad.) CBDT Circular F. No.205/3/2000/ITA II dated “any project which has been approved by a local authority as a housing project” In Viswas Promoters P. Ltd. vs. ACIT (TCA No 1014 of etc. dated 2nd Nov. 2012) Madras HC held that each distinct residential block can be a ‘housing project’

S. 80-IB(10) issues Built-up area ceiling violation:
Some Flats may violate 1500 sq.ft. requirement; pro-rata deduction u/S.80-IB to be given (Bengal Ambuja Housing Development, ITA 458 of 2006 dated ) Open terrace cannot be subject matter of inclusion of built-up area (CIT vs. Sanghvi & Doshi, Madras HC) Commercial usage area violation: If both commercial & residential units are built proportionate deduction to extent of compliance would be allowed (CIT vs. Arun Excello Foundations (P) Ltd. TCA No & 1349 of 2007 dated Oct. 18, 2012) Pre AY 05-06, approved project by local authority was eligible for deduction u/S 80IB(10) irrespective of extent of commercial usage (CIT vs. Brahma Associates. 333 ITR 289 Mum. HC)

S.80-IB(10) issues Mere ‘contractor’ (not ‘developer’) ineligible for S.80-IB(10): B.T.Patil & Sons Belgaum Construction Private Limited (126 TTJ Mumbai 577), CIT vs. Indwell Linings P. Ltd. 122 TTJ Chennai 137 Depends on facts of each case; who has discretion of execution & undertakes risks? Specific explanation inserted with retrospective effect from by Finance Act, 2009 Completion Certificate issues: Approval of project prior to 2005 did not require issuance of Completion Certificate (CIT vs. CHD Developers Ltd. 362 ITR 77 Delhi HC) On facts of case, Completion Certificate had been given in Owners name and later Developer acquired adjacent plot and claimed deduction on entire property - Developer was eligible for S.80-IB(10) (88 CCH 152 Mumbai HC)

Joint Development Agreement between the Landowner and Developer breaks down and the project is not completed, then whether Landowner is liable to pay capital gains tax? naveenkhariwalg & Co.,

General Glass Co. (P. ) Ltd. V Dy
General Glass Co. (P.) Ltd.V Dy.CIT(2007) 108TTJ 0854/(2007) Mumbai ITAT In the above case the Tribunal has held that when transferee had failed to make payment of balance sale consideration, it can constitute that transferee was not willing to perform his obligation under the contract and having failed to keep the time schedule of payment of balance sale consideration as per agreement for sale, no transfer within the meaning of Section 2(47)(v) of the Income Tax Act, 1961 read with provisions of Section 53A of the Transfer of Property Act, 1882 could be said to have taken place. naveenkhariwalg & Co.,

Now in above case if the landowner has already recognized transfer of land and has filed income tax return , offering Capital Gain tax on transfer of land and after Joint Development Agreement has broken down and ownership of land again returns to the landowner , two situations arises; 1. One option is that the landowner will revise his return filed earlier ,since breakdown indicates that there was no transfer of land to the developer and request for refund of Capital Gain tax paid to the exchequer; or 2. Treat the returned land as repurchase and in such case the sale consideration already paid in case of “transfer” as earlier recognized shall be treated as Cost of Acquisition of the land. naveenkhariwalg & Co.,

Landowner receives some compensation after break down of JDA If the compensation is received as liquidation damages, then it is treated as Capital Receipt and not taxable. It was decided in case of Ram Nath Exports Limited v CIT (2010) 151 Delhi it was held that liquidated damages linked with profit making apparatus are in nature of Capital receipt. naveenkhariwalg & Co.,

Landowner pays some compensation after break down of JDA There may be a case in which the landowner has to pay some compensation to the developer after breakdown of Joint Development Arrangement to claim his land. In this case also question arise about taxability of payment of compensation, whether it will be treated as cost of improvement of the land and be included in the cost of land or otherwise. Now in this case the landowner has to prove that the compensation has been paid and the same has enhanced the value of the land and same be added in the value of the land. naveenkhariwalg & Co.,

Whether any exemptions are available
Exemption U/s 54/ 54 F - Budget One residential house - In India Exemption U/s 54EC Exemption is available for investment in REC/NHAI bonds with an upper limit of Rs 50 lakhs. Rs 50 Lakhs limit applies per Financial Year ? – Budget 2014 amendment Six months period, referred to in section 54EC, should be reckoned from the end of the month in which the transfer takes place – Yahya E Dhariwala V DCIT - ITA No /Mum./2009 [BCAJ] – Jan 2012 naveenkhariwalg & Co.,

While clubbing income of minors, 54EC limit can be applied to each minor separately – DCIT Vs Rajiv Goyal (2012) 52 SOT 335 ( Kol) If land is converted into stock-in-trade U/s 45(2) six months time for Sec 54EC investment should be counted from the date of actual sale –CBDT instructions – Mahesh Nemichands case –(2012) 147 TTJ (Pune) 488 naveenkhariwalg & Co.,

Structure to be evolved Formation of a Partnership firm between the land Owner and the Developer.
Land owner to contribute immovable property as capital contribution Firm to pay 1% Registration Fee to enable entry into Book I Developer will become partner in the firm by making initial capital contribution. naveenkhariwalg & Co.,

Dissolution clause in Deed to be drafted suitably
The profit sharing and drawings clause in the deed would be suitably worded. Owner will draw as profits a % of gross revenue less cost of land contributed less proportionate income tax. Developer to draw as profits a % of gross revenue less cost of construction, selling cost, finance cost etc. less proportionate income tax. VAT, service tax & deposits for facilities would be retained by the firm and paid accordingly. Owners share of drawings will be transferred to a separate bank account. Dissolution clause in Deed to be drafted suitably naveenkhariwalg & Co.,

Recent judicial judgments on development agreements will not apply.
The firm will convert or treat the immovable property as stock in trade on the happening of certain events Advantages: 1)No need of POA to developer due to mutual agency in partnership 2)Question of giving a possession to the builder as a licensee or prospective buyer does not arise Incidence of Income tax postponed to the year of sale or transfer of stock in trade Recent judicial judgments on development agreements will not apply. No VAT & Service Tax on Owners share being constructed by the Developer Disadvantages: Unlimited liability in partnership concept could affect the venture- mutual indemnity to be given by owner and developer. Property would be stuck in the firm in the event the development is abandoned mid way and hence dissolution clause to be suitably worded. naveenkhariwalg & Co.,

Formation of LLP between the Owner and the Developer
LLP is a distinct legal entity registered under the LLP Act, but is treated as a “firm” U/s 2(23) of the IT Act. Advantages: Limited liability Mutual indemnity between owner and developer not required or optional. Disadvantages: No identical provision as Sec 14 of the Indian Partnership Act Value of immovable property to be recorded in the books of LLP should be in accordance with Sec 32(2) of the LLP Act r/w Sec 23 of the LLP rules. naveenkhariwalg & Co.,

Issue No. 33 Recent decisions on 54 F

S. 54F:Capital gains-Investment in a residential house–Section does not require that the construction of the new residential house has to be completed, and the house be habitable, within 3 years of the transfer of the old asset-It is sufficient if the funds are invested in the new house property within the time limit-Beneficial must be interpreted liberally. [S.45 ] Commissioner of Income Tax Vs Sambandam Udaykumar reported in (2012) 81 CCH 0151 CIT .v. B. S. Shantakumari (Karn.)(HC) (AY ) ( ITA No. 165 of 2014, dt )

S. 54F : Capital gains - Investment in a residential house-Entire sale consideration in construction of a residential house within three years from date of transfer, he could not be denied exemption under section 54F on ground that he did not deposit said amount in capital gains account scheme before due date prescribed under section 139(1). [S.45, 139(1)] CIT v. K Ramachandra Rao (2015) 277 CTR 522 / 230 Taxman 334/ 120 DTR 72 (Karn.)(HC)

S. 54F : Capital gains - Investment in a residential house- Amount spent on construction of house-Entitled exemption. [S.45, 263 ] Assessee sold agricultural land and long-term capital gain arose to him. Amount was spent towards construction of house. The assessee filed his return of income which included capital gain. The Assessing Authority allowed the benefit under section 54F to the assessee. The Commissioner invoked his powers under section 263 and reviewed the order.The Tribunal held that the benefit extended to the assessee was strictly in conformity with section 54F. There is no scope for the different interpretation as sought to be made out by the Revisional Authority and therefore, he allowed the appeal setting aside the order passed by the Revisional Authority. On appeal by revnue dismissing the appeal of revenue; the Court held that even before sale of agricultural land, assessee, with help of borrowed housing loan, had started construction on site belonging to him after sale of agricultural land amount spent towards said construction of house was more than consideration received by sale of agricultural land. Assessee was entitled to benefit of section 54F. (AY ) CIT v. Anandraj (2015) 230 Taxman 534 (Karn.)(HC)

S. 54F : Capital gains-Investment in a residential house –Computation- Assessee and his brothers demolishing residential building and handing over vacant space to developer – Not entitled to exemption under section 54 but entitled to exemption under section 54F- Exchange value specified in project development to be taken as basis for computation of construction in joint development. [S.2(47), 45, 54, Transfer of Property Act 1882, S.53A] Under the development agreement entered into between the parties, the assessee and his brothers had demolished their existing residential building and handed over the vacant space to the developer for construction of the apartment and, hence, they were not entitled to claim benefit under section 54 of the Act. At the most they were entitled to benefit under section 54F.Exchange value specified in project development to be taken as basis for computation of construction in joint development, cost incurred by developer need not necessarily represent cost of construction. (AY ) CIT .v. Ved Prakash Rakhra (2015) 370 ITR 762 (Karn.)(HC)

S. 54F : Capital gains - Investment in a residential house – Transferable tenancy rights-Owner Substantial rights giving assessee dominion, possession and control over said property with transferable rights, which were almost identical to that of an owner of property, assessee was entitled for exemption. [S. 45] Assessee earned long-term capital gains on sale of shares. She claimed exemption under section 54F on plea that she had purchased a residential flat. Assessing Officer noted from transfer deed that assessee had "transferable tenancy rights" and "not ownership" of flat, therefore disallowed claim under said section. Where rights of assessee in flat were not mere tenancy rights but were substantial rights giving assessee dominion, possession and control over said property with transferable rights, which were almost identical to that of an owner of property, assessee was entitled for exemption. (AY )A.Y Archana Parasrampuriav. ITO (2015) 68 SOT 550 (Mum.)(Trib.)

S. 54F : Capital gains-investment in residential house-Farm house-Even where assessee purchased share in a property without right in land on which said property was constructed being transferred to assessee, was eligible for deduction.[S. 45] The assessee earned long term capital gain on account of sale of shares and claimed deduction under section 54F for a sum which was invested out of the sale consideration for acquisition of rights in a property. The assessee had purchased 50 per cent of the share of a farmhouse (used for residential purposes) constructed on the land belonging to the members of the HUF, from one of the members, 'I'. Exemption was denied by the AO which was confirmed by CIT(A).On appeal, allowing the appeal Tribunal held that;

It is amply evident that the land is an independent and identifiable capital asset, which can be separate from superstructure built up on it. A person can be the owner of a superstructure and can earn income separately from such a superstructure, either in the form of rent or by gain on selling it. It is not necessary that the assessee should hold the exclusive right on the land while purchasing the house or vice versa. Such kind of arrangement always happen in the case of lease land. Therefore, the contention of the department that, simply because the property has been sold without the transferring the right in the land, the same cannot be held to be sale of property, is not to be agreed.

So far as the issue, whether the assessee can purchase fractional interest, that is, buying of share in the property and whether it can be held as purchase or not, it is found that this issue, in principle, is settled by the decision of the Supreme Court in the case of CIT v. T.N. Aravinda Reddy [1979] 120 ITR 46.(SC).Section 54F, per se, does not prohibit or bar that fractional interest or share in the property, which has been purchased, will not be entitled for deduction under section 54F. Thus, following the said proposition laid down by the Court, it is held that the assessee is eligible for deduction under section 54F on the amount spent on acquisition of rights in a property from the other members of the family or HUF. (AY ) Chandrakant S. Choksi HUFv. ACIT (2015) 67 SOT 311 (Mum.)(Trib.)

S. 54F : Capital gains -Investment in residential house –Matter seta side for verification. Assessee earned long-term capital gain on sale of a property and invested a part of sale consideration in new residential property and claimed exemption u/s. 54F. Revenue authorities disallowed claim for want of documents in respect of investment and ownership of residential property. Assessee submitted that he was in position to produce architect and also furnish details towards construction of property. Matter was remanded to examine assessee's claim. (A.Y – 2009) Subhash Vinayak Supnekar .v.ACIT(2013) 158 TTJ 237/(2015) 152 ITD 389 (Pune)(Trib.)

S. 54F : Capital gains - Investment in residential house-Invested in land before permission from Executive engineer, Municipality- Rejection of claim was not justified , when assesse constructed a house. [S.45] Assessee received compensation towards acquisition of land by National Highway Authorities. Revenue authorities’ negated claim of assessee to allow deduction u/s. 54F on amount invested in construction of building on ground that permission from Executive Engineer, Municipality had not been obtained before construction of building. It was noted that assessee had constructed house which was evident from copy of certificate of valuation by Municipal Engineer and moreover, assessee had requested A.O. to call for Engineer, who had given certificate. A.O. had not called any information from Municipality and disallowed claim. The matter was restoring back to AO. to verify genuineness of certificate, which he had not done and therefore, assessee's claim for deduction was to be allowed. (AY ) Harendra Kumar Das v. ITO (2015) 152 ITD 359 /170 TTJ 269(Cuttak)(Trib.)

S. 54F : Capital gains -Investment in residential house-Approval of building plan-There is no condition that building plan of residential house should be approved by Municipal Corporation or any other competent authority- Entitled exemption.[S. 45] The assessee earned long-term capital gain on sale of shares. The assessee claimed deduction under section 54F in respect of construction of a new residential property. The revenue authorities rejected assessee's claim holding that since there was no approved plan for the new construction, the assessee was not entitled to claim exemption under section 54F. The provisions of section 54F mandate the construction of a residential house, within the period specified, however, there is no condition that the building plan of the residential house constructed should be approved by the Municipal Corporation or any other competent authority.

If any person constructs a house without approval of building plan, he will be raising construction at his own risk and cost. As far as for availing exemption under section 54F, approval of building plan is not necessary. The approved building plan, certificate of occupation etc. are sought to substantiate the claim of new construction. In the present case, the fact that the assessee has raised new construction is evident from the interim order issued by the Municipal Corporation. (AY ) B. Sivasubramanian v. ITO (2015) 152 ITD 379/170 ITD 125 (Chennai)(Trib)

S. 54F : Capital gains - Investment in a residential house- Amount paid to builder for house is equivalent to amount spent by assessee for construction. Fact that only advance is given and construction is delayed beyond 3 years does not deprive assessee of exemption.[S.45] Question before the Tribunal was whether the amount of consideration received on transfer invested by the assessee in a flat constructed within three years would amount to construction of a residential house within the time limit of three years. Tribunal held that we are of the opinion that a flat which is newly constructed by a builder on behalf of the assessee is in no way different from a house constructed. Section 54F being a beneficial provision has to be interpreted so as to give the benefit of residential unit viz., flat instead of house in the present state of affairs. Further, as already pointed out even if only advance is given the benefit still will be available for exemption u/s. 54F. (AY ) (ITA no. 1520/Hyd/2013, dt ) Pradeep Kumar Chowdhry .v. DCIT (Hyd.)(Trib.)

S. 54F : Capital gains - Investment in a residential house-Even if construction/ purchase of new house is not completed within stipulated period, deduction is admissible if investment is madeis a beneficial provision which has to be construed liberally. [S.45, 263] Provision contained under section 54F being a beneficial provision has to be construed liberally. In various judicial precedents it has been held that the condition precedent for claiming benefit under section 54F is only that the capital gain realized from the sale of capital asset should be parted by the assessee and invested either in purchasing a residential house or in constructing a residential house.

the assessee has invested the money in construction of residential house, merely because the construction was not complete in all respects and it was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit under section 54F.Once the assessee demonstrates that the consideration received on transfer has been invested either in purchasing a residential house or in constructing a residential house, even though the transactions are not complete in all respects and as required under the law, that would not disentitle the assessee from availing benefit under section 54F. Even investment made in purchasing a plot of land for the purpose of construction of a residential house has been held to be an investment satisfying the conditions of section 54F. Though there cannot be any dispute with regard to the above said proposition of law, the assessee is required to prove the actual date of investment and the amount invested towards purchase/construction of the residential house with supporting evidence. (AY ) S. Uma Devi .v. CIT(2015) 117 DTR 151/169 TTJ 487 (Hyd.)(Trib.) V.Shailaja v.CIT ( 2015) 117 DTR 151/169 TTJ 487 (Hyd)(Trib)

S. 54F : Capital gains-Investment in residential house-More than three houses- Two houses in the name of HUF- Matter remanded.[S.45] The AO denied the exemption on the ground that assesse was having three houses .CIT (A) also confirmed the disallowance of exemption. On appeal the assesse contended that two of the three houses were owned by HUF and not by assesse in his individual capacity. Tribunal held that no clear finding regarding ownership of these two properties claimed to be belonging to HUF was recorded . Matter was remanded to the AO for re adjudication. (AY ) Dr Sunil Kumar Sharma vs ITO (2014) 52 taxmann.com 437/(2015) 67 SOT 158 (Delhi)(Trib.)

ISSUE - 34 INTEREST ON BORROWINGS PAID ON THE CAPITAL ASSET POST ACQUISITION CIT vs Mithlesh Kumari (HC) (1973) 92 ITR 9 (Delhi) CIT v. Fort Gloster Industries Ltd. [1971] 79 ITR 48 (cal) Habib Hussein v. CIT [1963] 48 ITR 859 (Bom). 188 Taxmann 170 (Kar.) 2010 CIT vs Sri Hariram Hotels (P) Ltd., (1984) 18 Taxmann 75 (Kar) CIT vs Maithreyi Pai (1973) 92 ITR 9 (Delhi) CIT vs M.R.A Ansari & D.K. Kapur J.J. (2002) 125 Taxman 148 (Madras) (HC) CIT vs K.Raja Gopala Rao (1979) 119 ITR 372 (Andhra Pradesh) (HC) ACIT vs K.S. Gupta S Balan alias Shanmugam vs. DCIT [2009] 120 ITD 469 (Pune) Interest paid on account of borrowed capital can be added to cost of acquisition of capital asset provided that where such borrowed capital was utilised for the purpose of acquisition / construction of the capital asset. naveenkhariwalg & Co.,

Thank You!!! naveenkhariwalg & Co.,

CRITICAL ISSUES IN REAL ESTATE TRANSACTIONS

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