Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Real estate - Income tax implications

10 views

Published on

Our team has compiled the various sections applicable in Income Tax which are applicable to the Real Estate sector. Synopsis of the sections and a brief understanding is attached for your perusal.

Published in: Law
  • Be the first to comment

  • Be the first to like this

Real estate - Income tax implications

  1. 1. S e t h & A s s o c i a t e s | 1 - Basics of Income tax applicable to REAL ESTATE April 2020 New Delhi | Lucknow | Coimbatore www.sethspro.com | info@sethspro.com
  2. 2. S e t h & A s s o c i a t e s | 2 COVERAGE Topics Page No. Joint Development Agreement 4 Slump Sale 7 Affordable Housing 9 Housing Interest Benefit 10 Re-Investment Benefit (Capital Gains) 12 Conversion of FA into Stock in Trade 15 Curbing Black Money 19 Taxation on Notional Rental Income 21 Consideration Received in Excess of FMV of Shares 22 Transfer of Capital Asset by way of Capital Contribution 23
  3. 3. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 3 - The real estate sector of India is undoubtedly the biggest employer (directly and indirectly). Not only employment it is also a major sector from where both the Central and the state governments get their revenue. For the central government the levy of GST and Income Tax and for the State government various taxes (Stamp and labour cess) and fees (maps etc) are a major source of Income. Needless to say, that where there is significant amount of revenue involved there would be intricacies of law and their interpretational issues. As the world prepares for Post COVID-19 scenario the real estate sector would be keenly watched. It is widely expected that the real estate contracts would turn more exotic leading to even more interpretational issues under the various taxation laws. It would not have been possible for us to cover every facet of real estate taxation in this publication hence we have given a brief outline of such sections which are directly applicable and are often missed out. Feel free to reach out to us for a tailor- made solution to your needs. CA. Dhruv Seth Partner, Seth & Associates, Chartered Accountants Real Estate Vertical (Audit, Taxation and Compliances) dhruv@sethspro.com This publication is an attempt to inform the general public about the various applicable sections of Income Tax Act which relate specifically to RE sector. Needless to mention interpretational issues cannot be discussed since they involve unique facts and require a deeper reading.
  4. 4. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 4 - Joint Development Agreement A development agreement may be defined as an agreement between two or more developers or between a developer and a landowner to construct or develop a real estate project. Under a JDA, the landowner enters an agreement with a developer to develop a project, along with a power of attorney providing the developer with rights such as right to develop, rights to obtain necessary approvals and create a charge on land etc. A pictorial presentation of the mechanism of a JDA is shown below: LANDOWNER DEVELOPMENT OF PROJECT Upfront Payment of Consideration Built up Area Built- Up Area Built- Up Area Gross/Net Revenue Enters in JDA Revenue sharing models DEVELOPER LAND OWNER PROJECT DEVELOPER Cash Consideration + Built Up Area Enters into a JDA Development and sale of asset.
  5. 5. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 5 - Value of consideration- Section 45(5A) of the ITA states that where an individual or an HUF transfers a capital asset, being land or building, to a developer under a JDA and the consideration is to be received as a share in built-up area with or without cash payment, then the total consideration will be deemed to be the stamp duty value, on the date of issue of the said certificate, of a share ,in the project at the time of completion, as increased by any additional cash received from the developed. Section 45(5A) Where an individual or a Hindu Undivided Family (HUF) transfers a capital asset, whether land or a building, to a developer under a JDA, with the consideration to be received as a share in the built-up area (with or without cash payment) then, the gains arising on such transfer will be deemed to arise in the year in which the completion certificate is issued by the authority for the project. However, if individuals or HUFs sells his share in the project on or before the date of issue of the said certificate of completion, capital gains will arise in the previous year in which such sales takes place. Section 45(5A) Any transaction involving permission for 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. Under a JDA, the landowner parts with possession of the land in lieu of a certain built-up area or cash consideration, or a combination of both hence it is capital gains for him. Section 2(47)(v) The Taxation in respect of JDA transactions are discussed in detail below:
  6. 6. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 6 - Yes Individual/HUF entering into specified agreement for development of project. Is the Individual/HUF transferring his share in the project after the date of issue of COC? Full Value of consideration to be computed as per Sec 45(5A) of ITA. Capital Gains would be taxable in the PY in which COC for whole or part of the project is issued by the Competent authority. Is the Individual/HUF transferring his share in the project before the date of issue of COC? Stamp Duty Value on the date of issue of COC+ Cash Consideration. Full Value of consideration to be computed as per Sec 50C of ITA. Capital Gains would be taxable in the PY in which the property is ultimately sold. SDV on the date of transfer or Actual Consideration whichever is higher No Yes
  7. 7. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 7 - Slump Sale As per Section 2(42c), “slump sale" means Ø the transfer of one or more undertakings Ø as a result of the sale Ø for a lump sum consideration Ø without values being assigned to the individual assets and liabilities in such sales. In a scenario, where a developer ('existing developer’), post the commencement of development activities on a piece of land, may be desirous of transferring such ‘under construction project’ (undertaking) to another developer (new developer). One of the options available to the Existing Developer is to transfer the undertaking on a going concern basis to the new developer entity by way of a slump sale. In India, a slump sale could either be implemented as a business transfer agreement or through a Scheme of Arrangement under section 230-232 of Companies Act, 2013. The conditions for a transfer to be taxable as a slump sale under the provisions of the ITA are given below: • Transfer of one or more undertakings as a result of a sale for a lump sum consideration. • No values being assigned to individual assets and liabilities of the undertaking in such a sale. • The ‘undertaking’ being transferred by way of a slump sale should constitute a business activity and it also includes part of an undertaking or unit or division but does not include individual assets or liabilities or any combination thereof not constituting a business activity.
  8. 8. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 8 - Computation of capital gains tax as per Section 50B of the ITA The key tax implication for an existing developer on a slump sale are given below: Capital gains is taxable at the given tax rates depending on the period of holding of the undertaking. Particulars Amount Sale Consideration xxx Less: Expenditure in relation to transfer xxx Less: Cost of acquisition of undertaking (book values of non-depreciable assets + Tax WDV of depreciable assets) (xx) Capital gains xxx Particulars Amount *LTCG (undertaking held for more than 24 months) 20% STCG (undertaking held for less than 24 months) The short-term capital gain is added to the income tax return and the taxpayer is taxed according to his income tax slab. (Normal rate of Tax) *The benefit of indexation while computing capital gains on transfer of long-term undertaking is not available.
  9. 9. S e t h & A s s o c i a t e s | 9 Tax exemption for Affordable housing projects Deductions in respect of profits and gains from housing projects- Section 80-IBA In a bid to give impetus to affordable housing, section 80-IBA was introduced in the Finance Act, 2016, which grants profit-linked tax exemption. The section provides 100% tax exemption on profits earned on an affordable housing project, subject to certain conditions. The regulations or conditions are applicable to housing projects approved after the 1st day of June,2016, but on or before the 31st day of March. The key regulations for claiming tax exemption under section 80-IBA of the ITA are as under: S. No Particulars Conditions 1. Project Approval by the competent authority After the 1st day of June, 2016 but on or before 31st March 2020. 2. Project Completion • Within a period of 5 years from the date of approval by the competent authority. Such period is reckoned from the date of first issue of such approval by the competent authority. • Project shall deemed to have been completed when COC for the project as whole is issued by the competent authority. 3. Carpet area of the shops and other commercial establishments Does not exceed three per cent of the aggregate carpet area. 4. Type of Project Only housing project on the entire plot of land. 5. Restriction on Allotment No other residential unit should be allotted to the • Same Individual • spouse of the Individual • Minor children of such individual . 6. Books of Accounts the assessee maintains separate books of account in respect of the housing project. 7. Other Requirements S.No Area Chennai, Delhi, Kolkata or Mumbai Others I. Size of Plot of Land >1000 sq. m >2000 sq. m II. Carpet area of a residential unit <30 sq. m <60 sq m. III. Utilisation of the floor area ratio >90% of the floor area ratio permissible in respect of the plot of land under the rules to be made by the Central Government or the State Government or the local authority, as the case may be. >80% of such floor area ratio
  10. 10. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 10 - Deduction for interest paid on home loan for affordable housing - Section 80EEA A new Section 80EEA has been inserted to allow for an interest deduction from AY 2020-21 (FY 2019-20). The existing provisions of Section 80EE allow a deduction up to ₹ 50,000 for interest paid by first-time home buyers for loan sanctioned from a financial institution between 1 April 2016 and 31 March 2017. With a view to further the benefit and give impetus to the real estate sector, the government has extended the benefit. A deduction for interest payments up to ₹ 1,50,000 is available under Section 80EEA to Individual Taxpayers. This deduction is over and above the deduction of ₹ 2 lakh for interest payments available under Section 24 of the Income Tax Act. Therefore, taxpayers can claim a total deduction of ₹ 3.5L for interest on home loan, if they meet the conditions of section 80EEA. Similar to Section 80EE, in order to claim deduction under Section 80EEA, you should not own any other house property on the date of the sanction of a loan. Carpet area of the house property Does not exceed 60 sq. meter (645 sq. ft) in metropolitan cities of Bengaluru, Chennai, Delhi National Capital Region (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of Metropolitan Region) - Does not exceed 90 sq. meter (968 sq. ft) in any other cities or towns.
  11. 11. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 11 - CONDITIONS Difference between Section 80EEA & 80EE SECTION 80EEA SECTION 80EE 1 Stamp duty value of house should be upto ₹ 45 lakh Value of a house should be Rs 50lakh or less 2 Loan should be sanctioned during April 1,2019 to March,31,2020 Loan should be sanctioned during April,1,2016 to March,31,2017 3 Maximum deduction available is ₹ 1,50,000 Maximum available deduction is ₹ 50,000 4 There is no limit on the of land Value of land should not be more than ₹ 35 lakh Section 80EEA and Section 24 Under Section 24, homeowners can claim a deduction for their interest payments upto ₹ 2 lakhs on their home loans, if the owner or his family resides in the house property. The deduction is applicable even when the house is vacant and also when the house property is rented out. If one is able to satisfy the conditions of both Section 24 and Section 80EEA of the Income Tax Act, the benefits can be claimed under both the sections. First, deductible limit under Section 24 is exhausted, which is ₹ 2 lakh. Then, the additional benefits can be claimed under Section 80EEA. Therefore, this deduction is in addition to the ₹ 2 lakh limit allowed under Section 24. Difference between the two sections are as follows: SECTION 80EEA SECTION 24 1 Sec 80EEA does not impose any requirement of possession, as soon as you start your interest payment you can claim for exemption To claim deduction u/s you must have possession of your house 2 Allows home loans taken from banks and financial institution only In case loan taken from friends or relatives and interest paid to them is also allowed for exemption 3 Maximum deduction available ₹ 1,50,000/- Maximum deduction available ₹ 2,00,000/- 4 Conditions to claim deduction • Stamp duty value of house upto ₹ 45 lakh • Assessee not own any residential house property • Loan sanctioned during Apr,1,19 to Mar31, 2020 No such conditions exist
  12. 12. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 12 - Capital Gains Exemptions Section 54 and 54F provides the tax reliefs upon reinvestment. The benefits under these sections is mutually exclusive and can be taken together. The tax relief is available if capital gain or sale consideration is reinvested in purchase of another residential house and is subject to some conditions. However, the tax benefit varies benefit upon whether the sold property is residential or commercial. SECTION 54 Following conditions should be satisfied to claim the benefit of section 54: ü The benefit of section 54 is available only to an individual or HUF. ü The asset transferred should be a long-term capital asset, being a residential house property. ü Within a period of one year before or two years after the date of transfer of old house, the taxpayer should acquire another residential house or should construct a residential house within a period of three years from the date of transfer of the old house. ü In case of compulsory acquisition the period of acquisition or construction will be determined from the date of receipt of compensation (whether original or additional). Exemption can be claimed only in respect of one residential house property purchased/constructed in India. If more than one house is purchased or constructed, then exemption under section 54 will be available in respect of one house only. No exemption can be claimed in respect of house purchased outside India. With effect from Assessment Year 2020-21, the Finance Act, 2019 has amended Section 54 to extend the benefit of exemption in respect of investment made in two residential house properties. The exemption for investment made, by way of purchase or construction, in two residential house properties shall be available if the amount of long-term capital gains does not exceed ₹ 2 crores. If assessee exercises this option, he shall not be entitled to exercise this option again for the same or any other assessment year. Quantum of Exemption The Section 54 of the Income Tax Act allows the lower of the two as exemption amount for the tax payer ü Amount received as the capital gains on transfer of the residential property. ü Investment made for constructing or purchasing of the new residential property. The balance amount (if any) will be taxable as per income tax act.
  13. 13. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 13 - 4 SECTION 54F Section 54F of the Income Tax Act provides an exemption for capital gain in case of transfer of long term capital assets against investment in a residential house. The salient features for availing exemption under section 54F are detailed hereunder – 1.The exemption under section 54F is available only to individual and HUF; 2.The capital gain should have arisen on account of transfer of any long-term capital assets other than a residential house. 3.Net consideration arisen on account of transfer of long-term capital assets should have been invested as follows: ü Net consideration has been re-invested in the purchase of one residential house within a period of 1 year before the date of transfer or within a period of 2 years after the date of transfer; or ü Net consideration has been re-invested in construction of one residential house in India within a period of 3 years from the date of transfer Quantum of Exemption ü In case the full amount of net consideration is invested in the purchase/construction of a residential house, then, the full amount of long- term capital gain gain would be exempted under section 54F. ü In a case where only part of the net consideration is invested in the purchase/construction of a residential house, then, only the proportionate amount of long-term capital gain would be exempted under section 54F. Provided that nothing contained in this sub- section shall apply where the assessee- ü owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or ü purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or ü constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
  14. 14. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 14 - Difference between Section 54 & Section 54F: Section 54 Section 54F 1. It includes exemption of long term capital gains for sale of residential property It can be claimed on long term capital gains for sale of any asset other than a residential property 2. Entire capital gain needs to be invested to claim full exemption Entire sales proceeds need to be invested to claim full exemption 3. No rule is mandatory for ownership of one or more residential house property One cannot own more than one residential house at the time of sale of the old asset 4. If entire sale proceeds is not invested the exemption allowed is proportionate Exemption = Cost of the new house * Capital gains / Sales Consideration received 5. If the individual sells the new house property with I the period of three years from the purchase the exemption will be reversed and the capital gains from such property will be taxed as short term capital gains If individual sells the new property with in the period of three years from the purchase of new property or purchases another property within two years of sale of original asset other than the new house within three years of sale of original property the exemption will be reversed. Th capital gains in such case will be taxed as long term capital gains. Taxation of Profit on Sale Of Commercial Property With respect to any commercial property owned and used for the purpose of business, the profits arising from the sale of such property becomes taxable as short-term capital gain, provided no property is left under the same category of asset, irrespective of the period of holding. Exemption can be claimed under section 54F, by investing the net consideration in a residential property. In case of commercial property, which is let out, the profit on sale of such commercial property shall be long term capital gain and will be taxed at a flat rate of 20%, irrespective of the quantum The way to save tax is by investing in residential house under section 54F or by investing in capital gains bond under Section 54EC.
  15. 15. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 15 - Particulars Tax rate LTCG (property held for more than 24 months) 20% STCG (property held for less than 24 months) The short-term capital gain is added to the income tax return and the taxpayer is taxed according to his income tax slab. (Normal rate of tax) Particulars Section 45(2) Section 28(via) Introduced by F.A. Finance Act 1984 Finance Act 2018 Head of Income Capital Gains PGBP Point of Taxability When stock is sold. Mercantile System – In the year of conversion Cash System – in the year consideration is received Valuation As on the date of conversion As on the date of conversion Conversion of Fixed Asset into Stock in Trade and vice versa- Section 45(2) & Section 28(via) If the immovable property is held as capital asset, transfer of such property will be taxed as ‘capital gains’ in the hands of the developer. As per section 45(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, 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 took place. In the hands of developer Property held as capital asset Transfer of assets On transfer of assets, the developer will be liable to pay capital gains tax, depending on the period of holding of immovable property at the given rates. vamus Profits arising from the transfer by way of conversion of Capital Asset into as Stock-in-trade shall be chargeable to tax as the income under the head “capital gains” of the year in which such Stock-in- trade is sold or otherwise transferred. Under the Act, the conversion of capital asset into stock-in- trade is taxable as capital gains. However, the existing provisions did not cover the situations of conversion of stock-in-trade to capital asset. To bring parity and to discourage the practice of deferment of tax payment on conversion of inventory into capital asset, the Finance Act, 2018 was amended. As per section 28(via), the FMV of inventory as on the date of its conversion into, or treated as capital asset shall be chargeable to tax under the head “Profit and Gain from Business & Profession”
  16. 16. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 16 - Property held as Stock-in-Trade If the immovable property is held as stock in trade, transfer of such property will be taxed as ‘business income’ in the hands of the developer. As per Section 43CA of the ITA, where a person transfers any property, be it land or a building, at less than its stamp duty value (i.e. FMV), then such FMV of the property will be deemed to be the consideration paid. However, if the stamp value does not exceed 110% of the consideration received, such consideration shall be deemed to be the full consideration for the purpose of computing profits and gains from transfer of such asset. Provisions in Income Tax Act as applicable for adopting Stamp duty valuation Under Sec 50C and 43CA of the Income Tax Act any transactions of an immovable property done below the defined circle rate would be added to the income of the assessee. The difference between the stamp duty valuation adopted for payment of stamp duty and the actual transaction price would be deemed to be the income of the assessee in the year the transaction is completed. Summarized provisions of Sec 43CA and Sec 50C after amendment by Finance Act 2020 Condition Deemed Sale Consideration 1. Stamp Duty Value>Actual Consideration If the Stamp Duty Value>110% of actual consideration. If the Stamp Duty Value<110% of actual consideration. Stamp Duty Value Actual Sales Consideration 2. Actual consideration>Stamp duty Value Actual Sales Consideration 3. Value Ascertained by Valuation Officer> Stamp duty Value Stamp duty Value 4. Value Ascertained by Valuation Officer< Stamp duty Value Value Ascertained by Valuation Officer
  17. 17. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 17 - If land and building are held as stock- in-trade. *Stamp Duty Value on the Date of Agreement will be considered for computing FVOC. Is whole or part of the consideration received otherwise than by way of cash on or before the date of agreement? Is the date of agreement different from the date of transfer? Sec 43CA will apply Sec 50C will apply Is the date of agreement different from the date of transfer? Is whole or part of the consideration received by way of A/c payee cheque/Bank Draft or ECS through bank A/c on or before the date of agreement? If land and building are held as capital asset. No No No No *Stamp Duty Value on the Date of Transfer will be considered for computing FVOC. *If the SDV>110% of actual consideration, FVOC= SDV *If the SDV<110% of actual consideration, FVOC= Actual Consideration Tax Implication On Transfer Of Immovable Property For Inadequate Consideration In the hands of seller A Pictorial representation comparing Sec 43CA and Sec 50C of ITA is presented below:
  18. 18. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 18 - Item received Threshold limit Amount Taxable Immovable property Received without consideration Stamp duty value exceeds ₹ 50000 The whole of the aggregate value of such sum Immovable property Received for consideration less than the stamp duty value Difference between the stamp duty value and consideration does not exceed ₹ 50000 or, the amount equal to 10%of the consideration. whichever is higher. Entire difference between the stamp duty value and consideration. The key features of section 56(2)(x) of the ITA applicable to the investor are as under: • The receipts contemplated exceeding threshold limit of ₹ 50,000 are taxable • The receipt must be on or after 1-4-2017. • The amount liable to tax would be: In the hands of developer Section 56(2)(x) provides that where a person receives certain property for a consideration, which is less than its fair market value (FMV) as prescribed under the Income Tax rules, then the difference between the FMV and consideration paid will be taxed in the hands of the recipient of the property. The amount on which tax is paid will be available as the cost of such property received, for the purpose of calculation of capital gains.
  19. 19. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 19 - Construction is a matter of optimism; it’s a matter of facing future with confidence. from June 1, 2015, any transaction in real estate including agriculture land shall be required to be made through account payee cheque or real-time gross settlement (RTGS) or electronic funds transfer if the amount is ₹ 20,000 or above. If the cash transaction beyond the limit is done, then a penalty of an amount equal under Section 271D of Income Tax Act will be imposed on a seller who accepts cash or refund of advance is made in cash by the seller of the property. Exceptions: The provisions of this section shall not apply to any loan or deposit or specified sum taken or accepted from, or any loan or deposit or specified sum taken or accepted by ü Government or any banking company, post office savings bank or co-operative bank ü any corporation established by a Central, State or Provincial Act ü any Government company ü other notified institutions ü where the depositor and the acceptor are both having agricultural income and neither of them have any taxable income. Section 269SS The earlier provisions contained in section 269SS of the Income-tax Act provide that no person shall take from any person any loan or deposit otherwise than by an account payee cheque or account payee bank draft or online transfer through a bank account, if the amount of such loan or deposit is ₹ 20,000 or more. In order to curb generation of black money by way of dealings in cash in immovable property transactions section 269SS of the Income-tax Act was amended with effect from 01.06.2015 to provide that no person shall accept from any person any loan or deposit or any sum of money, whether as advance or otherwise, in relation to transfer of an immovable property otherwise than by an account payee cheque or account payee bank draft or by electronic clearing system through a bank account, if the amount of such loan or deposit or such specified sum is twenty thousand rupees or more. Consequential amendments were also been made with effect from 01.06.2015 in section 271D to provide penalty for failure to comply with the amended provisions. As per the tax law formulated by the Central Board of Direct Taxes (CBDT), which is effective Curbing Black Money One of the biggest issues faced by the Indian Economy is Black Money and the root cause of black money is attributable to cash transactions between parties in India. According to ANAROCK Property Consultants even three years after demonetisation, up to 30 percent of the total transaction value on the secondary (resale) residential market across India can still be paid in cash. This causes a pathetic spectacle of huge amass of black money in the real estate sector. In order to solve the issue, the Government of India has been continuously initiating various strategic attempts.
  20. 20. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 20 - Clauses Meaning Irrespective Of (a) in aggregate from a person in a day No. of persons – 1 No. of days – 1 Number of transactions (b) in respect of a single transaction No. of transactions – 1 Number of persons Number of days (c) in respect of transactions relating to one event or occasion from a person No. of persons – 1 No. of event/occasion – 1 Number of days Number of transactions 100% of the amount that was acquired in contravention of this section. In such a scenario, if a person, receives cash in excess of ₹ 2,00,000, it will be considered a violation of the section. Therefore, penalty is leviable u/s 271DA.@ 100%. Exceptions: It has been provided that the provisions of this section shall not apply to any receipt by— ü Government; ü any banking company, post office savings bank or co-operative bank; ü transactions of the nature referred to in section 269SS; ü such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify. REAL ESTATE: It needs to be ensured by the real estate developers that there is no receipt of any amount of cash in case the demand letters send are in excess of Rs. 2 lacs. Section 269ST Before 1st April, 2017, there is no provision in income tax regarding cash receipts. Withs its introduction, section 269ST casts a restriction on the person receiving the cash i.e. payee. The Finance Act of 2017 introduced Section 269ST in the Income Tax Act with effect from April of 2017. This section was implemented in order to make provisions to restrict cash transactions as the effectiveness to control black. Section 269ST of the Income Tax Act states that No person shall receive an amount of two lakh rupees or more— ü in aggregate from a person in a day; or ü in respect of a single transaction; or ü in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account. A new Section 271DA was introduced under the Income Tax Laws and Rules. According to this Section, if an individual receives an amount in contravention to any of the provisions or rules of Section 269ST, they would be held accountable to pay a penalty of the total sum equal to the amount that was received in cash. Thus, in layman terms, the penalty amount would be
  21. 21. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 21 - Notional Rental Income - Section 23(5) In CIT v. Ansal Housing (2016) 389 ITR 373 (Delhi)(HC) and in CIT v. Sane and Doshi Enterprises (2015) 377 ITR 165 (Bom.)(HC) courts have held that sections 22 and 23 is applicable to assesses who are engaged in business of construction of house property and are therefore liable to pay tax on the annual letting value of the unsold flats as “Income from House Property”. Section 23(5) now seeks to tax notional income in respect of house property held as stock-in- trade. Thus, the developer who has unsold completed /built flats as inventory / stock-in- trade would be covered, thereby charging to tax notional rental income without actually earning the same. Where the property consisting of any building or land appurtenant thereto is held as stock-in- trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil. Finance Bill 2019, based upon the recommendation from industry, has further extended relief to the taxpayer builders for one more additional year. Consequently, notional rent in respect of unsold inventory shall not be charged to tax up to two years, instead of existing one year, from the end of the financial year in which the certificate of completion is obtained from the competent authority. Therefore, under section 23(5) incidence of tax would arise after period of two year from the end of financial year in which certificate of completion of construction is obtained from the competent authority.
  22. 22. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 22 - Where a company issues shares at a value higher than its face value, then the amount received by the company in excess of the FMV determined by income tax provisions shall be taxed as income in the hands of the company. Therefore, while issuing the shares to the investor(s), the JV entity/company should ensure that the shares are issued at the FMV as per the guidelines provided in this section. In case the JV entity is incorporated as an LLP, no implications would arise under section 56(2) (viib), as stated above. Consideration received in Excess of FMV of Shares - Section 56(2)(viib) Applicability of Section 56(2)(viib) Face Value of Shares (₹) FMV of Shares (₹) Issue Price of Shares (₹) Applicability (i) 100 120 130 Applicable The provisions are attracted since the shares are issue at premium (i.e., issue price exceeds the FV). The excess of issue price over the FMV would be taxable (ii) 100 120 110 Applicable The provisions are attracted since the shares are issue at premium. However, no sum shall be taxable as the shares are issued at a price less than FMV (iii) 100 90 98 Not Applicable Since the issue is at discount, though the issue price is greater than the FMV (iv) 100 90 110 Applicable The provisions are attracted since the shares are issued at a premium. The excess of the issue price over the FMV would be taxable Determining Fair market value In terms of rules the fair market value of the shares would include the stamp duty value of the immovable property as appearing in the books of accounts. Mere historical cost stated in the books is to be disregarded.
  23. 23. S e t h & A s s o c i a t e s | 23 The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals(not being a company or a cooperative society)in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and for the purposes of section 48, the amount recorded in the books of account of firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset”. Transfer of a Capital Asset by way of Capital Contribution - Section 45(3) From the above it follows, in case the JV entity is incorporated as an LLP or a firm, transfer of land (being a capital asset) by the developer, by way of capital contribution, to the LLP or the firm would be subject to capital gains tax in the hands of the developer (depending on period of holding). Under section 45(3) of the Income Tax Act, the amount recorded by the LLP or the firm in its books of accounts shall be deemed to be the full value of consideration for computation of capital gains in the hands of the developer. However, in case the land is held as stock in trade, the provisions of section 45(3) would not apply and the income shall be charged to tax as ‘business income’ and the provisions of section 43CA should be applicable
  24. 24. S e t h & A s s o c i a t e s | w w w . s e t h s p r o . c o m | A p r i l 2 0 2 0 | 24 - Seth & Associates was established in 1975 and since then it has been providing unparalleled value addition to its client. We are a firm with diverse and rich exposure in various fields. All our partners are full time active working partners looking into specific sector domains such as Corporate Law, Direct Tax, Indirect Taxes, Raising Capital (Bank and Equity), Business Advisory solutions, Forensic and Information Technology audit and many other core sectors relevant to overall growth of the clients. The information herein contained is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is very accurate and considers the latest amendment in laws which are very frequent. The above is purely for academic reading and general awareness of the law. No one should act on this information without appropriate professional guidance which requires a thorough examination of a particular situation. This content is owned by Seth & Associates, Chartered Accountants and is not be reproduced without our explicit permission. www.sethspro.com | info@sethspro.com New Delhi | Lucknow | Coimbatore

×