COMPUTATION OF INCOM FROM REAL ESTATE TRANSACTION IN CASE OF BUILDER, DEVELOPER FOR TRANSFER OF IMMOVABLE PROPERTY IN LAND OR BUILDING OR BOTH

[Tarun Agarwalla]

Currently, when a capital asset, being immovable property, is transferred for a consideration which is less than the value adopted, assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, then such value (stamp duty value) is taken as full value of consideration under section 50C of the Income-tax Act. These provisions do not apply to transfer of immovable property, held by the transferor as stock-in-trade meaning there by in case of Real estate sector the immovable property is normally kept as stock in trade and hence the same was not applicable.

With effect from 01-04-2013 A new section 43CA of the Income Tax is being introduced where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head "Profits and gains of business of profession".

It is also proposed to provide that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

Accordingly, a new section 43CA has been proposed to be inserted to bring the transfer of immovable property being land or building or both held as stock-in-trade at par with such transfer of land or building held as capital asset. Therefore, where the apparent consideration for the transfer of immovable property being land or building or both is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of consideration for the purposes of computing income under the head 'Profit & Gains of Business or Profession'. The new provision has been introduced to bring the transfer of land or building or both being stock-in-trade at par with transfer of land or building or both being capital asset. Now the valuation done by stamp valuation authorities could be substituted for apparent sale consideration. All the provisions particularly sub-section (2) and (3) of section 50C have been made applicable under section 43CA to transfer of stock-in-trade as well. The judgments in respect of procedure in applying provisions of section 50C would also be applicable under section 43CA.

It is also proposed to provide that where the date of agreement fixing the value of consideration for the transfer of asset and the date of the registration of the said asset are not the same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. This exception will apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any more other than cash on or before the date of agreement.

Special observation

The proposed sub-sections (3) & (4) which provide for adoption of stamp duty value as full value of consideration in place of apparent sale consideration, as on the date of agreement and not on the date of registration of the transfer, may help in those cases where, on the date of making agreement, the valuation by stamp valuation authorities was less and thereafter the rates were revised upward by stamp valuation authorities. As proposed sub-section (4) does not lay down any monetary limit of receipt of money (other than by cash) by the transferor, a token amount received on the date of the agreement would be sufficient to invoke sub-section (3).

Further, the new provisions are likely to create litigation in couple of areas. Since flat or building or land of a builder or developer are stock-in- trade, and they form part of trading account, whether surplus (difference between full value of consideration (say FVC) being the valuation done by stamp valuation authorities or DVO as per sub-section (2) of section 50C, as per section 43CA, and the apparent sale consideration) would be an addition in the trading account and therefore an addition to the disclosed profits, or it will only enhance turnover on which a reasonable rate of profit may be applied to determine the profits arising from such difference.

The case of the assessee could be that if there is a deemed receipt of additional money on sale of the flats/building/land (being the difference between FVC being the valuation done by stamp valuation authorities or DVO and the apparent sale consideration) then there is also an expenditure in construction of the flat/building or development of the plots. Further, whether mere fact, that FVC is more than apparent sale consideration, will empower the Assessing Officer to reject the books of account and estimate the profits.

There are two methods of working out profits in the case of developer/builder. One is project completion method and other is POCM (Percentage of Completion Method). How the substitution of FVC in place of apparent sale consideration will enable the computation of profit under these two methods would be a disputable area. There is a likelihood of litigation as Assessing Officer would like to tax surplus (that is the difference between FVC and the apparent sale consideration) in one go in the year of transfer and not accepting any prorate division as is done in POCM, or differ the taxation of the surplus in the year of completion of the project even though sale might have taken place earlier.

Example

If X Ltd (a developer) sells a property for 55 lakhs and during the registration of the Sale Deed at the office of Registrar, he finds the valuation of the property as per circle rate to be 65 lakhs, then the stamp duty shall be payable on65 lakhs, even though X received a payment of 55 lakhs only. The stamp duty is being paid by the buyer. But in view of the provisions contained in section 43CA of the Income-tax Act, 1961, X ltd will be liable to show its sale price as 65 lakhs, which is the circle rate or the stamp duty authority's value of the said property. Hence, for all purposes X Ltd will have to take into consideration the sale price as 65 lakhs, being the value adopted by the stamp duty authority for the purpose of charging stamp duty on sale consideration.

However further if X Ltd does not agree with the same he may refer the matter for valuation to approved valuer. Again the valuer have valued at 60 Lakhs. In this case the sale value will be 60 Lakhs.

particular	Situation-1	Situation-2	Situation-3	Situation-3
Actual sale value	Rs 50 Lakhs	Rs 50 Lakhs	Rs 50 Lakhs	Rs 50 Lakhs
Stamp value at the time of registration	Rs 60 Lakh	Rs 60 Lakh	Rs 60 Lakh	Rs 60 Lakh
Value by Valuation officer if referred	Not applied for	Rs 55 Lakh	Rs 65 Lakh	Rs 60 Lakh
Sale value to be considered for income tax	Rs 60 Lakh	Rs 55 Lakh	Rs 60 Lakh	Rs 60 Lakh
further
particular	Situation-1	Situation-2	Situation-3	Situation-3
If the agreement is done before in terms of section 43CA(3)	Yes	yes	yes	yes
At the time of agreement stamp duty value	45 lakh	Rs 50 Lakh	Rs 55 Lakh	Rs 60 Lakh
Sale value considered for income tax	Rs 50 Lakhs	Rs 50 Lakh	Rs 55 Lakh	Rs 60 Lakh

The trade bodies should represent before the state government with respect to the frequent and uneven increase in stamp duty which caused two way damage to the industry

In one way it collects higher amount of stamp duty, on the other hand it left the party  to be taxed under income tax act with respect to the income which he never earn or received.

On the contrary state government may increase the stamp duty rate where the purpose of higher collection of stamp duty may be fulfilled but it will not as an unknown weapon to damage the industry and also the general customer.

Nevertheless to mention here that the said provisions are equally applicable to any person sailing an immovable property vide section 50C of the income tax act in similar fashion.

Hence it in the interest of all that state government should consider the matter prudently, judiciously, considering the proper market price while fixing the bench value for the stamp duty.