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

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PROJECT COMPLETION METHOD

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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

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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

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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

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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

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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)

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CONTRACTORS PERSPECTIVE

 Continued application of AS7 Revised

 TKP, PMC also
 Permissible method – PCM only
 Synchronization with IAS 11
 Estimation and basis of estimation

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 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

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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.)

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JOINT VENTURE - AOP

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 STATUS OF JV
 AOP or not
 Van Ord , 248 ITR 399(AAR)
 Geo Consult GmbH, 304 ITR 283(AAR)

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INDIRECT TAXES
&
ALLIED LAWS

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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

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DEVELOPMENT AGREEMENTS
&
REDEVELOPMENT

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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

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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.)

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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

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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

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S. 50 C

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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)

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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.)

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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)

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 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

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 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)

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EFFECTIVE DATE

 Chapter XXC & Conveyance

 Neville D Nooranha, 115 TTJ 390(Kol)

 Agreement and conveyance

 Mr. Sivaparvathi, 129 TTJ 463 (Visakha)

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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.)

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 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

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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

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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

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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

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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

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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.)

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THANK YOU

&

GOOD LUCK

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