Direct Tax implications in Construction IndustryCA Ram Prasadcaram@sbsandco.comDate: 19th Feb 2016 by

OUTLOOKINCOME TAX PROVISIONS RELEVANT FOR JDA IMPORTANT ASPECTS- GENERAL LAWIMPORTANT JUDICIAL DECISIONSICDS ON CONSTRUCTION CONTRACTS2www.sbsandco.com

INCOME TAX PROVISIONS RELEVANT FOR JDA (1/2)'transfer' includes Any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in section 53A of the 1882 Act and Any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property. ( CBDT CIRCULAR -495 -22/09/1987)

Section 2(47)(v) read with section 45 indicates that capital gain is taxable in the year in which such transactions are entered into even if the transfer of immovable property is not effective or complete under the general law. 3www.sbsandco.com

INCOME TAX PROVISIONS RELEVANT FOR JDA (2/2)Enabling the Enjoyment of property by POA is a relevant fact. Without such clause in POA there is no transfer. ( CIT VS C. SUGUMARAN- MADRAS HC).

Section 53A of 1882 Act has been bodily transposed into section 2(47)(v) and the effect of it would be that section 53A of 1882 Act shall be taken to be an integral part of section 2(47)(v). In other words, the legal requirements of section 53A are required to be fulfilled so as to attract the provisions of section 2(47)(v)

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IMPORTANT ASPECTS GENERAL LAW (1/3)Development and construction and right of entry is only licence within the purview of provisions of section 52 of Indian Easements Act 1882Examining the question of possession, one of the essential conditions for enforceability of section 53A of 1882 Act is that the transferee must in part performance of the contract take possession of the property or any part thereof'Possession' is a word of open texture. It implies a right to enjoy which is attached to the right to property. It is not purely a legal concept but is a matter of fact. The issue of ownership depends on rule of law whereas possession is a question dependent upon fact without reference to law5www.sbsandco.com

IMPORTANT ASPECTS GENERAL LAW (2/3)Section 53A of the Transfer of Property Act, 1882 seeks to protect the prospective transferees by allowing them to retain the possession over the property, against the rights of the transferorsThe Registration and Other Related Laws (Amendment) Act, 2001 has brought about a radical change in the rights flowing on the basis of agreements executed in part performance of the contract under Section 53A of the 1882 Act. (WEF 24/09/2001)A contract accompanied by delivery of possession or executed in favour of a person in possession, is compulsorily registrable under Section 17(1A) of the Registration Act, 19086www.sbsandco.com

IMPORTANT ASPECTS GENERAL LAW (3/3)Failure to register such a contract would only deprive the person in possession of any benefit conferred by Section 53A of the 1882 Act. The effect of the amendment is that now if any person takes possession in pursuance to a contract which is required to be registered but has not been registered, the transferee has no right to remain in possession of the property. Sukhwinder Kaur v. Amarjit Singh P & H High Court7www.sbsandco.com

IMPORTANT JUDGEMENTS (1/4)Capital Gain is chargeable to tax in the year in which possession was handed over to the developer and not on the date of agreement - CIT VS Mrs. Geeta Devi Pasari 14 SOT 63 (Mum)Where only part of the property was transferred (1/3 ) capital gain should be computed with reference to consideration (pro rata) received and not with reference whole of the consideration agreed. CIT VS K. Jeelani Basha ( High Court of Madras)8www.sbsandco.com

IMPORTANT JUDGEMENTS (2/4)Developer had not done anything to discharge obligations cast on it capital gain is not chargeable on signing of the development agreement. Binjusaria Properties (P) Ltd VS ACIT( ITAT-HYD)Handing over of possession under the agreement amount to transfer and capital gains are chargeable even where the payment of consideration is deferred for future date. Potla Nageswara Rao VS Dy. CIT (AP HC). Similar view expressed in cases of Chaturbhuj Dwarkadas Kapadia, Dr. T.K. Dayalu, Dr. Maya Shenoy 9www.sbsandco.com

IMPORTANT JUDGEMENTS (3/4)Where the agreement only permitted the development to be carried on and entire control over property is with the assessee and occupancy certificate was given to the assessee execution of agreement couldnt amount to transfer contemplated under section 53A of TOPA. CIT VS Shri Sadia Shaik (HC of BOM at Goa)Willingness to perform has to absolute and unconditional. If willingness is studded with condition, it is no more than an offer and cant be termed as willingness. Fibras Infratech Pvt. Ltd VS ITO (ITAT-HYD)10www.sbsandco.com

IMPORTANT JUDGEMENTS (4/4)The JDA to be covered under section 53A of 1882 Act was required to be a registered instrument even for purposes of enforcing civil law rights. Once it was embodied in section 2(47)(v) by incorporation, all the legal requirements of section 53A of 1882 Act had to be complied with. In the absence of registration of such an agreement, the same was not enforceable under general law keeping in view the provisions of sections 17(1A) and 49 of the 1908 Act and at the same time, the transaction would not fall under section 2(47)(v). Charanjit Singh Atwal VS CIT (P&H HC)11www.sbsandco.com

ICDS- CONSTRUCTION CONTRACTS (1/5)ICDS applies all assessees following mercantile system of accounting in computing their income under the heads PGBP or IFOS (Notification 892(E) dated 31/03/2015). ICDS shall apply to AY 2016-17 and subsequent AYsNon compliance of ICDS notified by the CG under section 145(2) may empower the AO to make an assessment U/S 144In case of conflict between the provisions of Income tax Act and ICDS, the provisions of Act shall prevail to that extent12www.sbsandco.com

ICDS- CONSTRUCTION CONTRACTS (2/5)Contract revenue and Contract cost are required to be recognized on Percentage of Completion Method (POCM). Once contract crosses 25% of the completion stage the profit in respect of such contract is required to be recognizedPre-construction income in the nature of interest, dividend and capital gains is specifically offered to tax and not allowed to be reduced from the cost of construction. Losses incurred on a contract are allowed only in proportion to the stage of completion. Any future or anticipated losses are not considered allowable unless actually incurred.13www.sbsandco.com

ICDS- CONSTRUCTION CONTRACTS (3/5)Section 44AD provides for computation taxable income under presumptive basis. Not required to maintain books if they offering income as per that section. Whether do they require to comply with ICDS?Companies recognize income from contract in the books from day one. While ICDS require recognition of income on reaching 25% threshold. It may have MAT implicationsICDS provides for recognition of retention money on POCM basis. This is inserted with an intention to overrule judicial pronouncements which states the retention money accrues to contractor only when there is a right to receive such income accrues. It ignored concept of prudence14www.sbsandco.com

ICDS- CONSTRUCTION CONTRACTS (4/5)Charging section 4 and 5 of the Income Tax Act, 1961 provides for taxation of real income. One may evaluate the tax treatment under ICDS with section 4 and 5 of the ActProvision for foreseeable losses or anticipated losses held allowable under various judicial decisions. Section 28 of the Act allows the losses while computing business income. ICDS provides for recognition of losses on POCM basis. This will impact Fixed price Contracts15www.sbsandco.com

ICDS- CONSTRUCTION CONTRACTS (5/5)Imposition of damages or downward variation by the customer reduces the contract revenue. ICDS refers to upward variation which results in revenue.Any amount treated as receivable under ICDS and not reflected in the books becomes irrecoverable can be claimed as bad debt even though the same is not written off in the books. (FA 2015)No significant ICDS dealing with Service Concession Arrangements (SCA)- BOT/BOOT projectsAppendix C to Ind AS 115 specifically provides for recognition of revenue in case of SCA16www.sbsandco.com

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