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TAXATION OF REAL ESTATE
Some important aspects
including
Project Completion Method
Development & Redevelopment
s. 50C and 80IB(10)
Wednesday
20th October 2010
Walchand Hirachand Hall
IMC
Bombay Chartered Accountants Society
Pradip Kapasi & Co. 1
BILAHARI INVESTMENT, 299 ITR 1 (SC)
Case of a chit fund
CCM acceptable in tax laws
Possible for integrated scheme > 12 months
Objective assessment of income of contract
Revenue neutral
New AS not invoked
Method accepted in past
Onus on AO for change in method
Possible to invoke new AS – para 21
Pradip Kapasi & Co. 3
RECENT DEVELOPMENTS
Developments in Accountancy AS 7 Revised 1.04.2003
EAC, The CA Vol.52 pg.232
Exposure Draft AS I – The CA Vol. 54 April, 2005,
Guidance Note 23 The CA, Vol. 55 pg. 1764 June 06
IFRS on Real estate & Investment properties
Developments in Taxation Acceptance of Project Completion Method
Project completion NOT possible
Greater Ashoka LDC. (P) Ltd., 89 TTJ 281 (Del)
Growth Techno Projects Ltd., 29 SOT 59(Delhi)
New s. 145 and s. 145A
Pradip Kapasi & Co. 4
ROAD AHEAD IN ACCOUNTING
Guidance Note
Revenue from real estate sales Enterprise- Builders & Developers
Material Aspects Effect of flat sale agreement
Performance for buyer- contractor
Escalation and such claims
Percentage of completion method
Reference to AS 7
Examples in para 8
Retention of effective control
Disclosure of Accounting policy
IFRS Effect
Pradip Kapasi & Co. 5
INTERNATIONAL PRACTICE
IFRS -IAS 11 & 18 & 40 Contractors
Percentage of completion method, only
Builders Developers
Multiple element contracts
Fair value accounting
Recognition of revenue on passing of property
IFRIC 15
Recognition of land revenue for investment property
Indian grand stand MCA ICAI NACAS & CBDT
ET Report dt. 14.10.2010
Conflicting stands & objectives
Pradip Kapasi & Co. 6
ROAD AHEAD IN TAXATION
New S. 145 & GN of ICAI
Relevance of PCM/CCM & deci. cases
Post 1.04.2003 and revised AS 7 Avadhesh Builders, 37 SOT 122 (Mum)
Prestige Estates Projects Ltd., 129 TTJ 680 (Bang)
Realest Builders Pvt. Ltd. 307 ITR 202(SC)
Matching concept, Rajgir Builders, 70 ITD 226 (Mum)
New scrutiny guidelines
Time for applying AS7 Lurgi India,114 ITD 1(Delhi)
Pradip Kapasi & Co. 7
CONTRACTORS PERSPECTIVE
Continued application of AS7 Revised
TKP, PMC also
Permissible method – PCM only
Synchronization with IAS 11
Estimation and basis of estimation
Pradip Kapasi & Co. 8
SOME CONCERNS
Economic benefit to flow
Parameters of Reliable measurement
Stage of completion
Effective control retained or not
Recognition of loss
Treatment of Land cost
Revenue recognition for land
Borrowing cost
Valuation of stock /land/WIP
Imp. of Champion Const. 5 ITD 495 (Mum)
S. 145 and AS-7
Pradip Kapasi & Co. 9
RELATED DEVELOPMENTS
Indirect & Finance cost Lokhandwala Construction, 260 ITR 579(Bom)
Wallstreet Constructions, 101 ITD 156 (Mum)(SB)
K.Raheja ,102 ITD 414 (Mum.)
Thakkar Developers, 115 TTJ 841(Pune)
Time sharing arrangements Club Mahindra (Chennai) (SB)
Change from PCM/WIP to CCM Satish H. Patel, 93 TTJ 458 (Pune)
Audit
Gopalkishan Builders, 92TTJ 215(Luck.)
Pradip Kapasi & Co. 10
STATUS OF JV
AOP or not
Van Ord , 248 ITR 399(AAR)
Geo Consult GmbH, 304 ITR 283(AAR)
Pradip Kapasi & Co. 12
INDIRECT TAXATION Service Tax on sale of flats
Harekrishna Developers AIT- 2008-128 (AAR)
Magus Constructions P.Ltd. 2008-TIOL-321(Gau)
Controversy rested by circular dt. 29.01.2009
Amendment of 2010
Stay by Bombay high court
Consumer Protection Act Fakirchand Gulati v. Uppal,(SC), ITAT Online
VAT on sale of flats Review of K.Raheja’s decision by larger bench of SC in L&T ‘s case
Amendment of 2006 w.e.f. 20.06.2006 and stay for MCHI
Trade circular dt.07.02.2007
Amendment of 2010 and stay for MCHI
Completed flats
Stamp duty Development agreements and tenancy transfers
Pradip Kapasi & Co. 14
DEV. AGREEMENT AND TRANSFER
Typical agreement
Permission – License – Power – Profits
No transfer
26 TTD 477 (Del), 70 ITD 9 (Mum),
80 ITD 58 (Cal), 272 ITR 264 (Del)
Transfer – Chatrabhuj Dwarkadas, 260 ITR 491 (Bom)
Date of substantial compliance and possession not relevant
Objectives of s. 2(47(v) and (vi)
Disguised sale - Date of contract relevant
Pradip Kapasi & Co. 16
POSSIBLE ALTERNATIVES
Conversion and contract – S. 45(2) Ashok Kapur (HUF), 213 CTR 241(Del)
Piecemeal transfer
Partial retention
Pending approvals, Gandhi & Co. , 13 SOT 82(Mum.)
Willingness to perform, General Glass (P) Ltd., 14 SOT 32(Mum.)
Possession deferred, Pending approvals Geetadevi Pasari, 14 SOT 63, Aug.08 I T Review 32 (Bom.)
12 DTR 1(Delhi), Veermanna Reddy,114 TTJ 246(Ban).
Written agreement G.Saroja, 301 ITR 124(Mad.)
Pradip Kapasi & Co. 17
TENANTED PROPERTY
Landlord Sale * Part retention * Development
Tenant Tenancy to tenancy
Wagle Process Studio, June, 2003 AIFTP Journal 18
Milan A. Patel, ITA No.2167/M/02 dt.27.12.2002
Tenancy to ownership J.C.Chandiok, 69 ITD 75(Del),G.D. Thirani, 70 ITD 148(Cal.)
Benefit of s. 54/54F for residential premises
Subsequent transfer Period of holding & Cost of acquisition
Dr. Modi, 218 ITR 1(Karn), Dr. Irani, 234 ITR 850(Bom).
Other receipts * Rent * Compensation* Corpus
Slum Dwellers/Occupiers
Pradip Kapasi & Co. 18
SOCIETY PROPERTY
Consideration based on TDR
Om Shanti CHS Ltd. , 41-B, BCAJ 265 (Mum)
Jethalal D. Mehta, 2 SOT 422(Mum.)
Shakti Insulated Wires Ltd. 87 ITD 56(Mum.)
Incidence of taxation
Members or society or both
Legal Status, DC Rules and Revenue records
ITAT cases
Auroville CHS Ltd. & W.Tax circular
Dual taxation approach
Members premises & taxation
Transfer or No transfer
Other receipts * Rent * Compensation* Corpus
Pradip Kapasi & Co. 19
GENERAL
Constitutional K. Palanisamy, 306 ITR 61(Mad.) Bhatia Nagar Premises CHS Ltd. dt.19.08.2010 (Bom.)
Efficacy of Stamp duty valuation, Jai Marwar,79 TTJ 178(Jd), U.P.Jal Nigam, AIR 1996 SC 1170, Raja Narendra, 123 Taxation 63(Raj)
Acceptable margin – a break through Rahul Construction, 38 DTR 19 (Pune)
21
SCOPE
Assets Land & Bldg.
Immovable property
Whole or part
Purposive interpretation
Land & Building and right therein Kishori S. Gaitonde, 41-B, BCAJ 5321 (Mum)
Capital asset u/s 2(14) Thiruvengadam Investments, 320 ITR 346 (Mad)
Inderlok Hotels , 122 TTJ 145 (Mum)
Excellent Land Dev. (P) Ltd., 1 ITR (Trib) 563 (Delhi)
S. 50C and s. 69B Chandni Bhuchar , 323 ITR 510 (P&H)
Jayashankar S. Vaid, 35 SOT 46 (Ahd)
Optic Disc Mfg. , 11 DTR 264(Chd.)
22
VALUATION
Failure to apply Ambattur Clothing Co., 221 CTR 196 (Mad)
Need to refer to DVO Meghraj Baid, 114 TTJ 841(Jd.), Manju Rani Jain, 24 SOT 24(Delhi)
Effect of DVO’s valuation Less than SAV Ravi Kant, 110 TTJ 297(Del) Higher than SAV, Jitendra Saxena, 117 TTJ 974(Luck.)
Lower valuation by DVO R. V. Singh, 26 DTR 129 (Lucknow)
SVA value can not be challenged by AO Punjab Poly Jute, 120 ITD 233(Asr.)
Valuation of a let - out property Wakf Attar Aulad, 37 SOT 58 (Delhi)
Valaution of Tenant’s share Acceptable margin
Rahul Construction, 38 DTR 19 (Pune)
C. B. Gautam’s case 199 ITR 530 (SC)
23
REGISTRATION
Not applicable where registration not required
Navneet Kumar Thakkar,112 TTJ76(Jd)
Carlton Hotels,122TTJ 515 ,
Vijayalaxmi Dhadda, 20 DTR 365(Jp)
Morgardshammar India Ltd., 1999(1) SCC 108,
Effect of Amendments of 2009
S. 50 C and s. 56(2)
Effective date
24
REVISION & PENALTY
Possibility of revision where s. 50C ignored
AKG Consultants (P) Ltd. , 17 SOT 592(Luck.)
Penalty for concelment
N. Meenaxi, 125 TTJ 856 (Chennai)
Prakash Chand Nahar, 110 TTJ 886 (Jodhpur)
Balkrishna Waghere & Ors. July/Aug., 2010, PCAJ 3 (Pune)
25
EFFECTIVE DATE
Chapter XXC & Conveyance
Neville D Nooranha, 115 TTJ 390(Kol)
Agreement and conveyance
Mr. Sivaparvathi, 129 TTJ 463 (Visakha)
26
PARALLEL FICTIONS
Deeming Transfers& Fictions - FMV or SV S. 45(2)(3)(4), 47, 50 and 50B ,
Shahzada Nand & Sons, 60 ITR 392(SC)
Carlton Hotels, 122 TTJ 515( Luck.)
S. 50C and s. 50 Panchiram Nahata, 127 TTJ 128 (Kol)
Mrs. Munira S. Bootwala, ITA No. 7468/M/07 for A.Y.04-05 dt. 01.05.09
Overriding effect of s. 54F Mohammed Shoib, 29 DTR 306 (Luck.)
27
ASSESSMENT
Assessment not stayed for indefinite period
Rajni Venugopal, 16 DTR 319 (Mad)
Assessment order pending DVO’s report
N. Meenaxi, 30 DTR 1 (Mad)
Effect of s. 155(3)(ii)
Seller’s power under Stamp duty laws
28
PARTNERSHIP & REAL ESTATE
Introduction of Stock-in-trade
DLF Universal Ltd., 128 TTJ 121 (Delhi)
Introduction and revaluation
D. B. Shah, 1 UTR (Trib) 536 (Ahd)
‘Transfer’ of converted asset
Wipro Ltd., 34 DTR 493 (Bang)
Reorganisation and s.45(4)
Gurunath Talkies. 214 Taxation 729 (Karn)
Retirement and distribution
Puryyankar Ind., 188 Taxman 34 (Karn)
R
Housing projects –s. 80IB(10)
Amendments Approval up to 31.03.2008
Completion period extended for some
Size of commercial establishments – 3% or 5000 sq.ft.
Another flat in project
Circulars & Notifications Effective date of amendment
Surrounding area , common area
Percentage completion method
Slum Rehabilitation
Brahma’s propositions, 122 TTJ 433(Pune) (SB)
Amendment of 2004 not retrospective
Deduction possible for mixed project - limit of 10% for CE
Pro-rata deduction not possible
Deduction possible on stand alone basis
Scope of Decision restricted to old law
Pradip Kapasi & Co. 31
Housing projects -s. 80IB(10)
Land - size acquisition and ownership Ownership of land,
Size of plot of land,
Two projects on one land
Approvals In stages
Amendment anticipates
Commencement Extension of pending projects,
Commencement date for saleable area ,
One Wing and project,
Pre commencement work ,
Built Up Area –flat size Balcony ,
Common area, Club house,
Niche, Dry area, Terrace, garden, lounge, porsche, projections,
Adjoining flats
Pradip Kapasi & Co. 32
Housing projects -s. 80IB(10)
Income Profit on sale of amenities,
Interest on deposits,
Unconsumed FSI,
Sale of plot ,
Allocation of expenses,
Pro rata deduction
Method of Accounting Percentage completion Method,
Prospective a retroactive
Other Conditions s. 80IB(2)
MAT
33
Housing projects – s. 80IB(10) Brahma Associates, 122 TTJ 433(Pune) (SB)
AIR Developers, 123 TTJ 959(Nag.)
Saroj Sales, 3 DTR 494(Mum)
Radhe Developers, 113 TTJ 300(Ahd) ,
Shakti Corporation, 32 SOT 438 (Hyd),
Smt. Saroj Kapoor, 38 DTR 475(Indore)
Om Engg. & Builders, 109 ITD 235(Pune)
Ansals Property & Ind.22 SOT 45(Delhi)
Sheth Developers 33 SOT 277(Mum),
SJR Builders, 3 ITR (Trib) 569 (Bang)
Vandana Properties, 31 SOT 392(Mum.)
Vimal Builders, 41 A BCAJ 45(Mum)
Lok Holdings, 189 Taxman 452 (Mum)
B. Nagi Reddy, 2 ITR (Trib) 730 (Chennai)
Brigade Enterprises, 119 TTJ 269(Bang.)
G.V. Corporation, 38 SOT 173(Mum.)
Bengal Ambuja(Cal. HC)
B. T. Pate Ent. 28 DTR 451(Pune),
Paarth Corporation, 23 SOT 368 (Mum)
Ganesh Housing Corporation Ltd. 32 SOT 207(Ahd.)
34
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