Subscription   Feedback   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Forum Articles Highlights TMI Notes SMS News What's New Calendar Imp. Links Database More...
 
Discussions Forum
Home Forum Income Tax
A Public Forum.
Anyone can participate to share knowledge.
We acknowledge the contributions of Experts/ Authors.
 
← Previous Next →

Allocation of Profit in sale of Land and Building, Income Tax

Issue Id: - 5269
Dated: 3-2-2013
By:- Deepak Whorra
Allocation of Profit in sale of Land and Building

  • Contents

We sold our factory land &building where the sale deed seperately stated the value of the land and seperately stated the value of the Building.  The Sale value was more than the combined values of Land and Building .The values were accepted by the Stamp Valuation Officer and stamp duty was duly paid.

The Value of the Land ( circle Rate ) was 1.23 Crore and the building was at  O.24 crore in the sale deed. However we sold the property at 2.40 crores and the same was in the sale deed. Thus there was an excess of about 92 lacs over the circle rates.

After deducting the indexed cost of land, we paid Long Term capital Gains.

The residual value i.e. 2.40 crores less (1.23 + 0.24 ) = 1.16 crores was Credited to the Block of Assets i.e. Buildings.This meant  0.24 lacs value of Building in the sale deed+ 92 lacs excess. Thus no tax was paid on that as the existing Block of Assets ( Buildings ) was more than 1.16 lacs

The AO is now stating that the excess over the stamp duty value cannot be all transferred to the Building account but should be divided between Land and Building in the ratio of the circle values as per circle rates. This would mean that we cannot Credit all the residaul value over the land value ( as per circle rates ) to the Block of Assets of the Building but have to add back 79 lacs to the land Values . We would then have to pay LTCG Tax on the Land Value.

 

This is a case where our sale deed is above the Circle rates and yet we are sufferring. Please Comment

 

Posts / Replies

Showing Replies 1 to 10 of 10 Records

1 Dated: 13-2-2013
By:- Deepak Whorra

Seems that there is no settled case law on the bifurcation criteria between Land and Buildings when the sale value is above the total of the Land and Building values as assessed by The stamp valuation authority ? Or is there ?


2 Dated: 15-2-2013
By:- SANJAY DAVE

I am not clear as to what was the break up sale values mentioned in the sale deed since it was much above the circle values and stamp duty was paid on 2.40 as against combined circle value of 1.47.

 

However in real terms it is only the land which appreciates and not building (except for some specific reason or case depending on type of construction and the present cost for similar construction).  In such a situation it may be right thing to appropriate the consideration in acceptable proportion. 

The idea of setting off differential value to block of building, in such a situation, may not be an acceptable method.


3 Dated: 15-2-2013
By:- Deepak Whorra

Dear Mr.Sanjay Dave,

Thank You for your reply.

I have mentioned the break up of the sales values in the sale deed . To repeat - land 123.3 ( which is the circle rate )lacs and Building 24 lacs.

When we sell a Building, the sale is based on the present repeat present cost of construction... why should anyone sell at  construction a cost which was incurred 10 or 15 yearsago( construction consts have quadrupled over the last decade).  when construction costs were substantially lower ? We negotiate with  the buyer and sell at a price which is the cost of a similar construction at today's date.

 

We took the sale price of Land at the prevailing Circle rate ( as mentioned in the sale deed ) and the residual value we took as the sale price of the building. In the absence of any specified method in the ACT or of any case laws, what other method could we have adopted ???????

In any case the profit of the sale of a building ( being a depreciable asset ) is STCG which attracts a higher rate of tax than Long Term Capital Gains. So where are we wrong ?

Its a different matter that we had a block of Assets to absorb this sale price. However, now with our Building Block of Assets having depleted so much, when and if we sell the present building, we will have to pay STCG on a whooping profit !

 

You write - " Acceptable proportion". I do not understand how to arrive at an acceptable proportion ?? Please do eluciadate on this point - what is acceptable proportion and is there any Case law to support this .

 

Once again , thank You for making an effort

 

 

 


4 Dated: 16-2-2013
By:- SANJAY DAVE

I agree with what you have mentioned in 2nd para of your response about the present cost of construction for building, which is what I have stated in my first reply with in the bracket.

By acceptable proportion I meant that entire consideration should have been allocated in a proportion instead of taking only circle values for L & B and then allocating entire surplus to B.  The three options of how to go about it, as I can think of are:

a. Having valuation by a regd. valuer and allocating entire consideration of Rs.2.40 to L & B based on valuation;

b. Alternately allocating entire Rs.2.40 in proportion of 123:24 which would have been Rs 2.00 & 0.40;

c. Hybrid of the above two.

I am not able to think of any case law on similar issue but will let you know if I come across something.

To my mind it is not important as to higher tax under STCG, future tax possibilities etc. when issues are challanged by tax dept. in present scenerio.  The best way to defend/justify is with an external evidence like option (a) above or acceptable evidence like option (b) above.  I think even now you may think of valuation by a regd valuer, if that is doable.  How do you substantiate that residual value is for B & not L since you have taken circle values for both?  Why you did not split the consideeration as Rs.1.23 for L & Rs.1.17 for B in the sale deed?  Do you have the workings of Registrar for payment of stamp duty by buyer- since generally it is done separately for L & B?  Is it on Rs. 1.23 & Rs.1.17?  Some of these facts could support you in defending your allocation. 

It is a known fact that circle rates are only indicative for limited purpose of stamp duty levy and generally do not reflect the current market price which is far above the circle rates (ofcourse there are always exceptions to this and section 50C is one such exception).

 


5 Dated: 16-2-2013
By:- SANJAY DAVE

Please see this case law on similar issue:

ITA No. 285 of 2011 of Delhi High Court in Gadodia Electronics Pvt Ltd v/s CIT


6 Dated: 16-2-2013
By:- Deepak Whorra

Thank You for your reply and, as I see it , you have understood the issue very well.

A few points worth looking into ;

 

1) Now that this is done ( in 2009 ), what is the best remedy ? If the valuation of the building turns out  less than 116, then can we not claim profit on the building account ?

2) The case of Gadodia refers to a valuation by the DVO higher than that accepted by the dept being ruled in favour of the Assesse. There is no decision in connection with the bifurcation.

3) In the absence of any rule / law /prescribed method in the ACT , can we not take our stand based on interpretation of the law . In Vegetable Products Ltd v CIT, the honourable Supreme Court has ruled that where  two reasonable constructions of any taxing Provisions are possible that construction which favours the Assesse must be adopted.

In our case, since there is no case law or rule for bifurcation and several interpretations could be made .

4) If the view of the AO is accepted during appeals, then is this a case for penalty also ?

5) You have mentioned Section 50C . Is this applicable in our case since our computation is not below the Circle rates but above it ?  However the sanctity of the section is such that the AO cannot refer to a valuation officer nor can the AO apply a rate higher than than the circle rate . The GADODIA CASE is also relevant in this connection. But the question is that of bifurcation for which no provision exists in Law.

6) I am totally confused as your comments are on what could have been done and not on what can be done now as per the law.

 

Once again thank you for your efforts and I eagerly look forward to your reply

 

PS: For your information, the Indexed Cost of Land is about 14 lacs and the depreciated value of the building in our books is 16.7 lacs. Thus we have paid  LTCG on the Land at 123.3 less 14 lacs.  If an alternate method of bifurcation is taken, could it not be based on the ratios of the book values  x sale price of 240   OR  x total profit of about 210 lacs in which case the value of the building will still be higher than now Credited to the Block of Assets and the allocation towards the sale price will make the land value lower than the circle rates.


7 Dated: 16-2-2013
By:- Deepak Whorra

Two more points come to mind :

 

1) The circle rates for building construction vary from area to area and, in 2009, they vary from Rs.4750 per sqm and they are three times in some other areas of Delhi - upto Rs.13500 per sqm. I can understand this for Land Values but construction costs can never vary so much for similar quality of construction. This could be a possible ground for argument though I don't know if this can have any basis in legal terms and can be construed as argumentative.

2) You have mentioned that there can be three alternative methods of bifurcation and in point 3 you have stated a hybrid of theose suggested in points 1 and 2 above. What are the possible hybrid methods that one can look at ?


8 Dated: 16-2-2013
By:- SANJAY DAVE

Please do not get confused.  I mentioned about what you could have done, so that you are prepared to counter Dept.'s arguments. 

G Case - Ref was made with only idea  that it was referred to valuation and based on that High Court has decided that valuation adopted by assessee may be accepted since it is closer to the valuation done.

50C is not applicable to you but was referred with a view to note exception to circle values being important where consideration/market value in sale deed is less than circle value.

Now what you can do - From facts provided by you, I can think of following 2 options:

1. As already suggested in my previous reply, get a valuation done from Regd valuer;

2. If buyer is willing to share the information with you, what are the values adopted in their books and on what value depreciation is claimed and allowed by Dept.

These two external evidences could support you, depending on the results of these exercises.

Two reasonable constructions - That is only in respect of interpretation of what is stated in section, here that is not the case.  


9 Dated: 16-2-2013
By:- Deepak Whorra

Firstly apologies for harping on the same points again and again...But , as I stated, I am confused

 

1) Two interpretations : Since nothing is stated in any section on this issue of bifurcation, then two interpretations could refer to any method of valuation being ad-hoc. Or not ? Our view is of residual value since Land sale value is computed as per circle rates

2) Re: Valuation : Is it prudent to get valuation done or to let the AO get it done since under which section would she get it done ?

3) it is difficult to obtain further information from the Buyer of the property since this does not affect them and why would they want to get entangled.

4) Have we contravened any part of the law ?


10 Dated: 16-2-2013
By:- Deepak Whorra

Sorry, but once again some thoughts:

 

1) If the AO adds to the Land value by reducing the allocation to the Building value, then under which section can she change the bifurcation ? Will that not be an ad-hoc change in value ?

2) When we put the residual value in the building even though both Land and Building   circle rates were mentioned in the sale deed, then does it not mean two interpretations and the assesse taking the construction that is beneficial to the assesse ?

 

Your quick replies have helped me, in clearing my mind somewhat but I do need to find a solution. This is a case where we took the full payment by cheque and are sufferring due to a technical error by not putting the building value in the sale deed but just the circle value. I do need a solution specially since this will go in appeal.

 

Thanks You once again


1

Old Query - New Comments are closed.

← Previous Next →
  ↓     Latest Happening     ↓  

Highlight: Sharing of expenses - BAS - promotion of business of group companies - sharing of expenditure for common facilities cannot be treated as service by one to another in such arrangement.

Forum: Cess paid instead of SGST

Forum: import purchase

News: RBI Reference Rate for US $

Forum: 3B mistake

Forum: Input credit of gst paid on urd

Article: Credit of unsold stock [Section 140(3)] - Actual Credit as well as Notional Credit - Part-I - GST Transitional provisions

Circular: Certain Clarifications sought on Construction Services provided in the Real Estate Sector reg.

Forum: transfer of shares

Forum: Input tax credit

News: Anti-dumping duty on import of bus/truck tyres from China

News: Fast-track GST refund, else ₹ 65K cr may be stuck: Exporters

Highlight: It is open to the Settlement Commission to use best judgment in arrival of the figure. Nonetheless it has to explain the manner in which the best judgment figure has been arrived at by the Settlement Commission - HC

Highlight: Deemed dividend u/s 2(22)(e) - advances given to societies - in the absence of legal right of the assessee in the said society the amount advanced cannot be treated as deemed income.

Highlight: When electrical installations are treated as plant and machinery the depreciation has to be allowed @ 25% as per provisions contained u/s 32

Forum: GST return filing software online | Easy GST compliance management

TMI Note: Capital Gain - transfer of right in the land or transfer of land itself - addition u/s 50C - Harassment to the honest tax payers

Highlight: Option to avail composition scheme under GST by electronically filing an intimation in FORM GST CMP-02 and FORM GST ITC-03 upto 30-9-2017 - See Rule 3(3A)

TMI Note: Does ICDS apply for the purposes of computing exemption u/s 11 to 13.

Highlight: Voluntary Reporting of Estimated Current Income and Advance Tax Liability - CBDT issues draft notification

TMI Note: Certain ICDS provisions are inconsistent with judicial precedents. Whether these judicial precedents would prevail over ICDS.

Highlight: Provisions of ICDS shall prevail w.e.f. AY 2017-18 to the transactional issues dealt therein over earlier judicial pronouncements.

Notification: Levy of anti dumping duty on New/unused pneumatic radial tyres with or without tubes and/or flap of rubber (including tubeless tyres) having normal rim dia code above 16 originating in, or exported from China PR

News: Voluntary Reporting of Estimated Current Income and Advance Tax Liability

TMI Note: In case of conflict between ICDS and other specific provisions of the Income-tax rules, 1962 governing taxation of income like rules 9A, 9B etc. of the Rules, which provisions shall prevail.

TMI Note: Does ICDS apply to computation of Minimum Alternate Tax (MAT) u/s 115JB of the Act or Alternate Minimum Tax (AMT) u/s 115JC of the Act.

TMI Note: Where a term has not been defined under ICDS, nor under the Act, but has different interpretations given to it by the courts in tax cases, and in ICAI Accounting Standards, which interpretation would prevail while interpreting ICDS.

TMI Note: Whether the provisions of ICDS apply to a non-resident who claims the benefit of a double taxation avoidance agreement (DTAA).

TMI Note: In case any of the ICDS provisions is contrary to a circular or press release issued by the CBDT, which would prevail over the other.

TMI Note: ICDS-I requires disclosure of significant accounting policies and other ICDS requires specific disclosures. Where is the taxpayer required to make such disclosures specified in ICDS.

Notification: Income Computation and Disclosure Standards (ICDS) - New ICDS to be effective from AY 2017-18

News: RBI Reference Rate for US $

Highlight: GST - Detention of goods under transport - discrepancy in documents - the statutory provisions provide a mechanism for adjudication following detention of goods including for the provisional release thereof pending adjudication - HC

Highlight: Reassessment - first few paragraphs of the assessment order dealt with objections and disposed of accordingly - Unfortunately, the manner in which the AO has decided the issue is wholly unsustainable in law - HC

Highlight: Business expenditure u/s 37 - liquidated damage - breach of contract terms - Expenditure was not incurred for any purpose which is an offence or which is prohibited by law - cannot be disallowed - HC

Highlight: Valuation - inclusion of reimbursement of expenses - managing participation of clients in certain mela, fairs, promotional activities etc. - They are liable to service tax on the gross amount received - They cannot restrict their tax liability to only agency commission

Highlight: TDS liability - ITAT confirmed the liability - We do not see how it is possible for us to uphold the order of the Tribunal and when it purports to decide two Appeals of the Revenue by single paragraph conclusion - HC

Highlight: Reopening of assessment - sufficiency of material available with the AO to form a belief that income chargeable to tax had escaped assessment - bogus purchases - seller refused to respond - notice would not be interfered with - HC

Highlight: Exemption u/s 11 - education activities - transport and hostel facilities surplus cannot be considered as business income of the assessee society

News: Draft Notification for insertion of new rule 39A in the Income-tax Rules, 1962 comments and suggestions-reg.

Highlight: Genuineness of labour wages expenses, embroidery charges, fabrication expenses etc. - getting work done through small workmen who do not have any permanent place of residence - disallowance of ad hoc expenditure deleted.

Highlight: Project import - Since the goods were never used for the purpose for which it was imported, the actual user condition has been violated - Redemption fine and penalty imposed.

Highlight: Penalty u/s 112 (a) - CHA - Lack of due diligence and failure to take more precautions can not, by itself, bring in penal consequences

Highlight: Import of services - GST - The fact that those services were received outside India will not change the fact that the services have been paid for by the beneficiary appellant, who is located in India. - Demand confirmed.

Notification: SEZ for IT/ITES at Madhurwada Village, Visakhapatnam District in the State of Andhra Pradesh - denotified.

Highlight: Merely because payment is received in Indian rupee, it cannot be said that payment against export has not been received in convertible foreign exchange.

Highlight: Merely vehicle numbers was not mentioned on the invoices cannot be the reason to deny Cenvat Credit

Highlight: Extension of time limit for submitting the declaration in FORM GST TRAN-1 under rule 120A of the Central Goods and Service Tax Rules, 2017 - Circular

Circular: Extension of time limit for submitting the declaration in FORM GST TRAN-1 under rule 120A of the Central Goods and Service Tax Rules, 2017

News: Auction for Sale (Re-issue) of Government Stocks



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map || ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version