Discussion and analysis of the section 43CA of the Income-tax Act

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Introduction
1. The Finance Act, 2013 inserted section 43CA of the Act
applicable from A.Y. 2014-15 which deals with the taxability
of transfer of immovable properties, i.e., land or building or
both in the nature of stock-in-trade. The primary intention of
this provision is that sale value of a property held as stock-
in-trade should not be less than the value adopted for stamp
duty purposes.
These newly introduced provisions are identical to the provisions
of section 50C which were introduced a few years back in
connection with the transfer of land or building held as capital
assets. Over the years, section 50C of the Act has raised a
number of controversies leading to long drawn litigation. The
unsettled controversies may continue to haunt the taxpayers/
professionals while applying section 43CA. In fact, section
43CA can be said to be an offshoot of one of the controversies
that arose in section 50C where the department had sought to
apply, though unsuccessfully, section 50C even to the land or
building held as stock-in-trade.
Section 43CA:
Whether well
equipped to tax
developers?
DHARMESH SHAH
CA
DIRECT TAX LAWS

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However, there are unique issues which can
pose challenges for the taxpayers, particularly
the developers and builders to understand
and apply section 43CA, more so when there
are some additional conditions placed on
implementation of section 43CA of the Act.
Relevant Provisions of Section 43CA
2. The relevant provisions of section 43CA
are reproduced below in order to address
the issues, keeping in light the language of
the said section:
“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).
(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.”
Manner in which income arises and is
offered to tax by builders
3. Before we understand the issues, it is
necessary to understand the method of operation
in case of developers and builders and the
manner in which the income accrues, arises
and is offered to tax by builders.
(a) Generally, the developers and builders
launch their project and start collect-
ing the booking amount from the vari-
ous parties. The total consideration is
agreed upon by the developers with
the prospective buyers at this stage.
Upon receiving the booking amount, an
allotment letter is issued signifying the
right in the specific flat in the proposed
project/building.
(b) Thereafter the buyers keep making periodi-
cal payments in instalments, as agreed
at the time of booking of the flat.
(c) Possession of the flat is generally handed
over after 3 to 4 years of the construction
period when the project is substantially/
fully completed. The builders ensure
that the entire, or at least substantial,
consideration is received before the date
of possession.
(d) In some cases the buyers prefer to regis-
ter their agreement immediately at the
time of booking of the flat. In other
cases, the registration may be done at
the time of handing over the possession
or on making complete payment of the
consideration.
(e) The builders and the developers, in
normal circumstances, follow percent-
age completion method as prescribed
in the Guidance Note on accounting of
the real estate transactions issued by
the ICAI and the income is accordingly
DIRECT TAX LAWS

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recognized based on the said Guidance
Note. Percentage of completion method
is also recognised as valid method of
accounting in income completion and
disclosure standard - construction con-
tracts notified on March 31, 2015.
Issues that may arise in applying section
43CA
4. Based on the above facts, attempt is made
to understand some of the following issues
that may arise in applying this section:
(a) Applicability of section 43CA of the Act
to entities following the percentage
completion method.
(b) The ascertainment of the date of agree-
ment for the purpose of invoking section
43CA(3) of the Act
(c) Whether the deeming provisions of section
43CA of the Act would be applicable to
cases where the agreements have already
been entered into and executed prior to
1-4-2013?
(d) Whether the lease right would constitute
an asset within the meaning of section
43CA of the Act?
(e) What is the meaning of the term ‘transfer’
used in section 43CA(1)?
4.1 Applicability of section 43CA of the Act
to entities following the percentage completion
method: One of the most interesting issues
that arises from the language of section 43CA
is with respect to applicability of section
43CA of the Act to entities following the
percentage completion method. It is most critical
and crucial issue which may arise, probably
in case of every developer. In normal case,
profits or gains are computed at the time
when goods are sold by transferring the
ownership. However, the accounting for real
estate transactions poses difficulties when the
Guidance Note on Revenue Recognition for
Real Estate Transactions issued by the ICAI
is to be followed and ‘Percentage Completion
Method’ is followed for the purpose of
recognising revenue from the project.
One may find different views on the subject
of applicability of section 43CA to such cases.
As per the aforesaid Guidance Note issued by
the ICAI, the project revenue and the project
costs associated with the project should be
recognised as revenue by reference to the
stage of completion of the project activity
on the reporting date. For computation of
revenue, the stage of completion is arrived
at with respect to the entire project cost
incurred, including the land cost, borrowing
cost and construction and development cost.
It has been provided in para 5.5 of the said
Guidance Note that the project costs which
are recognized in the statement of profit and
loss by reference to the stage of completion
of the project activity are matched with the
revenues recognised resulting into reporting
of revenue, expenses and profits which can
be attributed to the proportion of work
completed. It would be helpful here to
reproduce the relevant extract of the Guidance
Note explaining the accounting treatment:
“5.4 When the outcome of a real estate
project can be estimated reliably and the
conditions stipulated in paragraphs 5.2
and 5.3 are satisfied, project revenue and
project costs associated with the real estate
project should be recognised as revenue
and expenses by reference to the stage of
completion of the project activity at the
reporting date. For computation of revenue
the stage of completion is arrived at with
reference to the entire project costs incurred
including land costs, borrowing costs and
construction and development costs as defined
in paragraph 2.2. Whilst the method of
determination of stage of completion with
reference to project costs incurred is the
preferred method, this Guidance Note does
not prohibit other methods of determination
of stage of completion, e.g., surveys of work
done, technical estimation, etc. However,
computation of revenue with reference to

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other methods of determination of stage of
completion should not, in any case, exceed
the revenue computed with reference to the
‘project costs incurred’ method. Illustration
appended to this Guidance Note clarifies the
method of computation of revenue.
5.5 The project costs which are recognised in
the statement of profit and loss by reference
to the stage of completion of the project
activity are matched with the revenues
recognised resulting in the reporting of
revenue, expenses and profit which can be
attributed to the proportion of work completed.
Costs incurred that relate to future activity
on the project and payments made to sub-
contractors in advance of work performed
under the sub-contract are excluded and
matched with revenues when the activity
or work is performed. This method provides
useful information to the extent of contract
activity and performance during a period.”
This methodology is also explained by the
ICAI in terms of the illustration as reproduced
below:
4.1.1 Illustration on application of percentage
completion method
Total saleable area 20,000 Sq. ft.
Estimated Project Cost (This comprises of land cost of ` 300 Lakhs
and construction costs of ` 300 Lakhs)
` 600 Lakhs
Cost incurred till end of reporting period (This includes land cost of
` 300 lakhs and construction cost of ` 60 Lakhs)
` 360 Lakhs
Total Area Sold till the date of reporting period 5,000 sq. ft.
Total Sale Consideration as per Agreements of Sale executed ` 200 Lakhs
Amount realised till the end of the reporting period ` 50 Lakhs
Percentage of completion of work 60% of total project cost, including
land cost or 20% of total construction
cost
At the end of the reporting period the enterprise will not be able to recognise any revenue as reasonable
level of construction, which is 25% of the total construction cost, has not been achieved, though 10% of
the agreement amount has been realised
Continuing the illustration....
If the work completed till end of reporting period is (This includes
land cost of ` 300 Lakhs and construction cost of ` 90 lakhs)
` 390 Lakhs
Percentage of completion of work would be 65% of total project cost, including
land cost or 30% of construction cost
The enterprise would be able to recognise revenue at the end of the accounting period. The revenue
recognition and profits would be as under:
Revenue recognised
(65% of ` 200 lakhs as per Agreement of Sale)
` 130 Lakhs
Proportionate cost (5000 sq. ft./20,000 sq. ft.) X 390
Income from the project ` 32.50 Lakhs
Work-in-progress to be carried forward ` 292.50 Lakhs
As can be seen from the above illustration, the
project revenues have been considered with
respect to the agreement for sale executed/sale
consideration determined by the developers.
The analysis of the said Guidance Note would
thus explain that entering into the agreement
by way of issue of allotment letter or booking
of the flat would trigger the applicability
DIRECT TAX LAWS

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of the said Guidance Note, if the stage of
completion has reached at a reasonable level,
as explained in para 5.3 of the Guidance
Note. In such cases the sale consideration
during the year would be relevant for the
purpose of accounting the project revenues
as per the Guidance Note.
One would, therefore, find that even the
project revenues under the Guidance Note and
income completion and disclosure standards
are to be offered based on the agreement,
may be by way of allotment letter, booking
of the flat or entering into agreement for
sale. Hence, it can be said that mechanism
under section 43CA of the Act would be
applicable even in respect of those project
revenues which are considered as the basis for
accounting of income under the ‘Percentage
Completion Method’.
Therefore, one can take a view that section
43CA of the Act would be applicable to all
the cases where agreement has been entered
into with the buyer. In such cases the assessee
should replace the agreement value with the
value adopted for stamp duty purpose and
re-compute the income from project applying
the said ‘Percentage Completion Method’ to
all the years.
However, converse to the above discussion,
one may also argue that the provisions
of section 43CA of the Act would not be
applicable to a case where the assessee is
following the ‘Percentage Completion Method’.
The basis of such argument could be that the
provisions of section 43CA of the Act can
be applied only upon transfer of an asset.
In case of ‘Percentage Completion Method’
followed by an assessee, the income is not
offered on the basis of transfer of an asset.
In such case, the income is offered on the
basis of an artificial formula provided in the
Guidance Note. It is, therefore, considered
that the revenue recognition would have no
connection whatsoever with the transfer of the
assets. One may opine that the mechanism of
section 43CA of the Act fails in cases where
the income is recognised by the assessee
under ‘Percentage Completion Method’.
However, such a view would result into making
section 43CA of the Act redundant. This is
because the Guidance Note on accounting
for real estate transactions is applicable to
all the projects in real estate which are
commenced on or after 1-4-2012 and also to
the projects which are already commenced but
the income is recognised for the first time
on or after 1-4-2012. In effect, the Guidance
Note is applicable to all the entities and all
the developers. In such a scenario, in all
probability, the most of the developers would
have adopted the said Guidance Note. Hence,
to take a view that section 43CA of the
Act is not applicable to the said developers
adopting the Guidance Note would result
into making the said provisions redundant
in case of most of the developers. This may
not be the intention of the Legislature.
In view of the above, it appears safe to
hold that section 43CA of the Act should be
applied even to a case where the developers
recognise income based on the Guidance Note,
depending upon sale agreement entered into
by them during the relevant year.
4.2 The ascertainment of the date of agreement
for the purpose of invoking section 43CA(3) of
the Act: Another crucial issue that may arise
is the ascertainment of the date of agreement
for the purpose of invoking section 43CA of
the Act. This section deals with a peculiar
situation where the date of agreement, fixing
the value of consideration, is different from
the date of registration of transfer of asset
and both the dates fall in different years.
In such cases, the value as per the stamp
duty authority be taken based on the date of
agreement fixing the value of consideration.
Hence, one has to first understand what is
meant by ‘agreement’ for the purpose of
section 43CA(3).
As explained earlier, in practice a buyer
generally pays a booking amount much
before or at the time when the construction

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activity is carried out. In consideration of the
said booking amount, the builder issues an
allotment letter thereby agreeing to allot and
later on transfer the rights in the property
to be constructed by him for an agreed
consideration. Thereafter, the buyer makes
the balance payment of consideration in a
phased manner over a period of time. The
formal deed of agreement is then entered into
and registered either upon the completion
of the construction or on the delivery of
the possession. In other words, a formal
understanding is first reached between the
buyer and developer at the time of booking of
the flat. This understanding is then formalised
by way of agreement which is duly registered.
A question may arise whether the date of
booking/allotment letter would be the date of
agreement or whether the date of execution of
formal deed should be the date of agreement?
Hence, it is relevant to understand the term
‘agreement’ as referred to in section 43CA(3)
of the Act, since the value as per stamp
duty authority is dependent upon the year
in which such agreement is entered into.
The term ‘agreement’ has not been defined
under the Act. Hence, we have to resort to
the provisions of other laws to understand
the said term. As per the provisions of the
Indian Contract Act, 1872, the ‘agreement’ is
defined as follows:
“Section 2
(a) When one person signifies to another
his willingness to do or to abstain
from doing anything, with a view
to obtaining the assent of that other
to such act or abstinence, he is said
to make a proposal;
(b) When the person to whom the proposal
is made signifies his assent thereto,
the proposal is said to be accepted.
A proposal, when accepted, becomes
a promise;
** ** **
(e) Every promise and every set of prom-
ises, forming the consideration for
each other, is an agreement;”
Thus, as per the Indian Contract Act, 1872,
when one person signifies to another his
willingness to do some act and the other
person accords his consent, it becomes a
promise and when there are promises which
form set of consideration for each other, it
becomes an agreement. This means that only
upon the consent of both parties to carry
out a transaction, even for a delivery at a
future date, an agreement can be said to have
entered into. In case of purchase of flat, a
preliminary consent is exchanged between
the developer and buyer at the time when
the buyer books a flat in the building and
developer issues an allotment letter. Such
allotment letter which signifies the booking
of a flat and recognises the right of the
buyer to buy a flat in the proposed building
would therefore fulfil the criteria laid down
in section 2 of the Indian Contract Act. The
said allotment letter can be said to be the
agreement for the purpose of section 43CA(3).
This also finds support from the service tax
law. Under the provisions of the Service
Tax Act, the construction activity has been
brought within the tax net. The idea and
intent of the Legislature behind the inclusion
of the construction activity being regarded
as service is that upon agreeing to transfer
the property to be constructed and receiving
consideration against the same, whether whole
or part, the builder starts working for and
on behalf of the said buyer and, therefore, he
is considered to have provided the services
thereafter. Thus, even the service tax law
indicates that the moment a builder agrees
to transfer the property to the prospective
buyer for a specified consideration, he is
said to have transferred the right in the
property and thereafter, he is considered to
be working for the buyer and provide the
service of constructing the property for the
said buyer.
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It is also relevant to refer to para 3.3 of the
Guidance Note on accounting for real estate
transactions wherein it is provided that once
the seller has transferred all the significant
risks and rewards to the buyer, any act on
the real estate performed by the seller are,
in substance, performed on behalf of the
buyer in the manner similar to a contractor,
even though a legal title is not passed out
to buyer.
In fact, section 43CA also refers to the
agreement fixing the value of consideration.
The allotment letter is the first and primary
step when the value of consideration is fixed
between the buyer and developer. Hence,
even on the said count, the allotment letter
can be constituted as an agreement for the
purpose of section 43CA.
As discussed above, the right over the proposed
property is agreed to be transferred once the
allotment letter is issued. The allotment letter
issued by the builder generally describes the
amount paid by the buyer, total consideration
agreed upon in respect of specified area of
the property, the specific property (in many
cases), etc. Thus, primarily all the ingredients
of an agreement as analysed above are
present in the said allotment letter. In terms
of provisions of different laws as discussed
above, one can conclude that the allotment
letter issued by the builder to the buyer upon
payment of the booking amount constitutes
an ‘agreement’ between the two parties.
Further, one may also look into the intention
with which these provisions appear to have
been inserted. The prime intention of the said
provisions is to ensure that the consideration
agreed between the builder and the prospective
buyer should not be less than the stamp
duty value as on the date when the said
consideration is determined and fixed between
them. The consideration is always fixed at
the time when the booking is done and the
allotment letter is issued by the builder.
Hence, the Legislature would expect that the
consideration at such time should not be less
than the stamp duty value.
Thus, looking at the intention of the Legislature
and language of section 43CA of the Act, the
circumstances as well as the meaning of the
term agreement, the date of agreement has
to be considered as the date on which the
consideration is agreed upon by the builder
and the buyer, i.e., the allotment letter issued
by the builders or event where booking
amount is accepted by the builder.
Moreover, even in cases where the allotment
letter is not formally issued, if the booking
is done and consideration is fixed, the said
event would constitute an agreement for the
purpose of section 43CA.
4.3 Whether the deeming provisions of section
43CA of the Act would be applicable to cases
where the agreements have already been entered
into and executed prior to 1-4-2013? Another
issue that one may come across is whether
the deeming provisions of section 43CA of
the Act would be applicable to cases where
the agreements have already been entered
into and executed prior to 1-4-2013? If yes,
how to give effect to such provisions where
the returns for the earlier years have already
been filed? As per the Finance Act, 2013,
section 43CA is stated to be applicable from
A.Y. 2014-15. They have been introduced
prospectively and not retrospectively. The
language of the section also does not suggest
that the said provisions are clarificatory/
declaratory in nature. In such case, the
agreements which are already entered into
prior to 1-4-2013 cannot be burdened with
such enabling provisions. The agreements
which were entered into past years cannot
be subjected to section 43CA of the Act.
4.4 Whether the lease rights would constitute
an asset within the meaning of section 43CA
of the Act? Another issue which may be
relevant is whether the lease rights would
constitute an asset within the meaning of
section 43CA of the Act? In the context of
section 50C of the Act, there have been a
number of decisions of the benches of the
Tribunals holding that the land or building
or both would not include any right in the

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land or building. Following decisions have
been rendered on the said issue in the context
of section 50C of the Act:
(a) Anil G. Puranik v. ITO [2011] 132 ITD
499 (Mum.)
(b) ITO v. Pradeep Steel Re-Rolling Mills (P.)
Ltd. [2014] 61 SOT 104 (Mum.)(URO)
(c) CIT v. Tejinder Singh [2012] 50 SOT 391
(Kol.)
(d) Kishore Gaitonde 41B BCAJ 533 (Mum.).
On the similar analogy, one can take a plea
that leasehold rights would not be covered
within section 43CA of the Act. In fact,
useful reference can also be made to the
provisions of section 54D of the Act wherein
the Legislature has referred to the assets as
‘land, building or any rights in the land
or building’. Thus, the Legislature is very
conscious of the nature of terms to be used
in the statute. Since the specific terminology
of the rights in the land and building has
not been used in section 43CA of the Act,
it supports the claim that the ‘rights in the
land and building’ may it be leasehold rights,
cannot be covered within section 43CA of
the Act.
4.5 What is the meaning of the term ‘transfer’
used in section 43CA(1)?: The last issue is the
meaning to be assigned to the term ‘transfer’
referred to in section 43CA. The section 43CA
of the Act states that the entire exercise of
replacing the agreement value with the value
adopted by the stamp duty authorities is for
the purpose of computing the profits and
gains from transfer of assets. The Income-tax
Act defines ‘transfer’ under section 2(47) of
the Act. However, this definition may not be
useful, as section 2(47) of the Act reads as
“transfer in relation to capital asset, includes,-”
which means it specifically refers to the
transfer for the purpose of capital gains.
In this scenario, no guidance can be sought
from the Income-tax Act for the meaning of
term ‘transfer’. The section 5 of Transfer of
Property Act (TOPA) has defined as what
is meant by transfer of property. These
provisions of TOPA are reproduced below:
“Transfer of property” defined
In the following sections “transfer of
property” means an act by which a living
person conveys property, in present or
in future, to one or more other living
persons, or to himself, or to himself
and one or more other living persons;
and “to transfer property” is to perform
such act.
In this section “living person” includes
a company or association or body of
individuals, whether incorporated or
not, but nothing herein contained shall
affect any law for the time being in
force relating to transfer of property to
or by companies, associations or bodies
of individuals.”
As per TOPA, the ‘transfer of property’
refers to act of conveying property in present
and in future to any other living persons.
This definition can be imported into section
43CA to understand the event when section
43CA is applicable. Thus, one can consider
transfer to be any act whereby the right in
the property is transferred to other persons,
even though the property is yet to come in
existence. Thus, it would mean that issuing
allotment letter may amount to transfer for
the purpose of section 43CA of the Act.
Concluding remark
5. Since the issues discussed above are
important for determination of income, CBDT
should look into the issues and provide
clarity and solution to the same. Otherwise,
these provisions can generate huge litigations
in future.
zzz
DIRECT TAX LAWS