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REAL ESTATE TAXATION BUSINESS INCOME FEW IMPORTANT ISUES Friday 1st February 2013 Hotel J.W.Mariott IMC & BCAS Pradip Kapasi & Co. 1
REAL ESTATE TAXATION BUSINESS INCOME
FEW IMPORTANT ISUES
Friday
1st February 2013
Hotel J.W.Mariott
IMC & BCAS
Pradip Kapasi & Co. 1
SYNOPSIS Judicial view on Project Completion Method
Relevance of PCM in present times
Tax Accounting Standards
Road Ahead for PCM
Matching concept of Accounting
Finance cost and Treatment in taxation
Few real estate related developments
Development Agreements
Joint Development Agreements – Status & taxation
Character of income
Conversion and Introduction and Dissolution
Redevelopment
Applicability of s. 50C
Real Estate Investments Trust, Venture Capital Fund &Co.
Tax Incentives - s. 10(23FB), 10(47), 35AD and 80IAB2
YEAR OF TAXATION FOR DEVELOPER Bilahari Investment, 299 ITR 1 (SC)
Case of a chit fund
CCM (Project Completion)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
Realest Builders Pvt. Ltd. 307 ITR 202(SC)
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RELEVANCE OF PCM IN TAXATION
Accountancy and ICAI - Current status 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, 55 The CA, 1764 June 06
Revised Guidance Note, 60 The CA, pg. 1436, March,12
IFRS on Real estate & Investment properties
Material aspects of Guidance Note
IFRS Effect
New S. 145
Tax Accounting Standards , 349 ITR 87(st.)
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TAX ACCOUNTING STANDARDS-TAS
Modification in AS 7 and AS 9
Service transaction only on % of Completion basis
Postpone only for price escalation and export incentives
For recognition of rev. outcome need not be measurable
Contract cost be actually incurred for allowance
No deduction for future losses unless incurred
Recognition of retention money to be recognised
Reversal of rev.only on compliance of s. 36(1)(vii)
Preconstruction income taxable
Recognition only on completion of 25% of work
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ROAD AHEAD IN TAXATION
Prudent and Better view Method for taxation
Time for recognition
Stage for recognition
TAS
Post 1.04.2003 and revised AS 7 Avadhesh Builders, 37 SOT 122 (Mum)
Prestige Estates Projects Ltd., 129 TTJ 680 (Bang)
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MATCHING CONCEPT OF ACCOUNTANCY
Matching concept Expenditure to match income recognised
Judicial acceptance Calcutta Co. Ltd. 37 ITR 1(SC)
Rajgir Builders, 70 ITD 226 (Mum)
Taparia Tools, 260 ITR 102 (Bom.)
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Section 36(1)(iii)
Analysis Lokhandwala Construction, 260 ITR 579(Bom)
Wallstreet Constructions, 101 ITD 156 (Mum)(SB)
Panchvati Developers, 115 TTJ 139(Mum)
Mangal Tirth Estate Developers(Mad), ITAT India
Thakkar Developers, 115 TTJ 841(Pune)
Effect of Revised AS-7 & New s.145
AS 16 and Borrowing costs
Industry practices
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FINANCE COST & TREATMENT
FEW RELATED DEVELOPMENTS
Advance receipts and stage of certainty National Builders, 137 ITD 277(Ahd.)
Time for applying AS7 Lurgi India,114 ITD 1(Delhi)
TDR proceeds and Project Completion method Pushpa Construction Co., 44A –BCAJ 59(Mum.)
Taxation of retention money- year of receipt
Chandragir Construction Co., 147 TTJ 249 (TM )
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FEW RELATED DEVELOPMENTS
Time sharing arrangements Club Mahindra (Chennai) (SB)
Explanation to s. 37(1) Mehta Enterprises, 135 Taxman 293(Ker.)
Mamta Enterprises, 266 ITR 356(Karn.)
322 ITR 421(Karn.) , 219 Taxation 1(Delhi)
Change from PCM/WIP to CCM Satish H. Patel, 93 TTJ 458 (Pune)
Audit Gopalkishan Builders, 92TTJ 215(Luck.)
Pilot Construction Pvt. Ltd, 44-B, BCAJ 422 (Mum.)
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DEVELOPMENT AGREEMENTS
Typical agreement
Permission – License – Power – Consideration - Sharing
No transfer u/s 2(47) 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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DEVELOPMENT AGREEMENTS
Findings in Chaturbhuj Dwarkadas’ case Arrangement conferring privileges of ownership
Passing or transferring complete control
Substantial performance - a non relevant
Payment and permission not relevant factors
Limited POA is significant even an agreement to grant is sufficient
Irrevocable license relevant
Actual possession and irrevocable license not relevant
Disguised agreement for sale
Year of execution of contract is year of transfer
Objective behind introduction of clause(v) of s. 2(47)
Guideline for Income tax Department
DA is not a transfer under general law
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DEVELOPMENT AGREEMENTS
Ingredients of part performance u/s 53A Agreement for transfer of an immovable property
Written instrument for a consideration
Possession – Willingness to perform
Reconsideration of decision
Privileges of o’ship & Passing of comp. control Is ‘License’ a ‘possession’
Future possession and satisfaction u/s. 2(47)(v)
Difference - Agreement for sale & Dev. Agreement
Grant of POA – Limited or general
Subsequent non performance
Finality of subsequent decisions
POSSIBLE ALTERNATIVES
Conversion and contract, 213 CTR 241(Del)
Piecemeal transfer
Partial retention
Pending approvals,13 SOT 82(Mum.)
Willingness to perform, 14 SOT 32(Mum.), 65 DTR 250(Hyd.)
Possession deferred, Pending approvals 14 SOT 63(Mum) , Aug.08 I T Review 32 (Bom.)
12 DTR 1(Delhi), 114 TTJ 246(Bang), 60 DTR 403(Karn.)
Written agreement 301 ITR 124(Mad.), 135 ITD 441(Delhi)
On taking steps for development, 52 SOT 521(Hyd.)
On grant of POA , 131 ITD 71(Agra)(TM)
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JOINT VENTURES TAXATION
Status- AOP or not
Van Ord , 248 ITR 399(AAR)
Geo Consult GmbH, 304 ITR 283(AAR)
Linde AG, 349 ITR 172(AAR)
Alstom, 349 ITR 292(AAR)
Arm’s Length
Landowner and Builder
Mahesh Nemichand Ganeshwade, 73 DTR 1(Pune)
Vijay Productions (P) Ltd., 134 ITD 19(Chennai)
Developer and Builder
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CONVERSION OF CAPITAL ASSET - S. 45(2) – I
Year of computation of capital gains Law applicable * Rate of tax * 50C value
Set-off of losses * On conversion * Others
End year for Indexation , 55DTR 5(Karn.)
Time for reinvestment Circular No. 560 (18.05.1990) & No. 791( 02.06.2000)
Need for existence of business ‘Of a business carried on ‘
Jeahngir T. Nagree, 23 SOT 512(Mum)
Need for documentation Kamalkant Kasliwal, 97 TTJ 427(Jp.)
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CONVERSION OF CAPITAL ASSET - S. 45(2) II
Event of ‘transfer’ Agreement for flat sale,
Crest Hotels, 75 TTJ 771(Mum)
Power of Attorney,
Wipro Ltd. 34 DTR 493 (Bang.)
Development Agreement
R. Gopinath(HUF), 133 TTJ 595(Chennai)
Triloksingh P.Rajpal, 91 TTJ 322(Mum.)
Introduction in firm or Joint Venture
Nayanaben R. Desai, 124 ITD 387(Ahd.)
Piece meal transfer
Ajay Kumar Shah Jagati, 55ITD 348(Del), 215 CTR 346
Cost of acquiring stock Shirinbai Kooka’ a good law – Book value or FMV
S. 50C Applicability
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INTRODUCTION OF CAPITAL ASSETS s. 45(3) -I
Capital contribution or ‘otherwise’ Payment in kind
Stock-in-trade DLF Universal Ltd.’s case, 123 ITD 1 (Del)(SB) - Analysis
Value recorded in books of account Dharamshi B. Shah, 32 DTR 106 (Ahd) – Revaluation
Applicability of s. 50C, s. 50, s. 56(2)(viia) & s. 92C
Carlton Hotels (P) Ltd. 122 TTJ 515(Luck.) (para 24, 25)
Canora Resources Ltd., 313 ITR 5(AAR)
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INTRODUCTION OF CAPITAL ASSETS s. 45(3) -I I
COA for firm or AOP Where s. 50C applied
Where s. 56(2)(viia) applied – s.49(4)
Where none applied
Cost where stock introduced at a higher value
Period of holding for firm or AOP
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DISTRIBUTION ON DISSOLUTION – s.45(4)
Change in constitution Gurnath Talkies, 226 CTR 474 (Karn)
Kunnankulam Mills Board, 257 ITR 544 (Ker.)
Meaning of ‘or otherwise’ Retirement, A.N. Naik, 265 ITR 346(Bom.)
Withdrawal
Applicability of s.50 & s. 50C & 50B & s.56(2)(vii) Kumbagha Tourist Home, 233 CTR 599 (Kerala)
Malukhan & Party, 84TTJ 31(Jd.) – deduction of cost
AOP or firm – ‘chargeable to tax as income of the firm or AOP’
Kothari Vora Associates, 57 ITD 171 (Pune)
P. N. Devigirikar, 61 ITD 376 (Pune)
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UNCONVENTIONAL MODES
Liquidation and s. 46 , 49 and 55
Company and Shareholders
Society take over
Lease
Membership of society
Slum – Cluster – Parking - Others
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INCOME FROM HP v. BUSINESS Composite arrangements
Shambhu Inv. Pvt. Ltd., 263 ITR 143 (SC)
Business Service Centres/Shopping malls Royal Business Centre Pvt. Ltd. 39-B BCAJ 24(Mum)
PFH Mall & Retail Management Ltd.112 TTJ 523(Kol)
Marwar Textiles (Agency) Pvt. Ltd., 22 SOT 493(Mum)
Service Apartments
Premises – F & F – Services, 206 CTR 421(All.)
Letting of premises held as stock-in-trade
Period of lease & s. 27, 111 ITD 203(Delhi)
Stamp duty , Regn, Brokerage, Aug.2008 BCAJ 449-M
With security and pesticides Rasiklal & Co. 123 TTJ 279(Mum)
INCOME FROM HP V.BUSINESS
Income from leasing of IT Park
IT Park Ltd, 49 SOT 491 (Bang.)
Narayan Market Complex, 51 SOT 387 (Cuttack)
Income from hospital business
Kenton Leisure Services P. Ltd 135 ITD 10 (Coch.)
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BUSINESS V. CAPITAL GAINS
Plotting and Infrastructure development
Nature of income
P.M.Mohammed Mira Khan, 73 ITR 735(SC)
Shashikumar Agarwala, 195 ITR 767(All)
Premji Gopalbhai, 113 ITR 785(Guj)
R.V. Gupta, 177 CTR 101(Del.)
G.Venkataswamy Naidu & Co. 35 ITR 594(SC)
Year of accrual
Madanlal Ahuja, 136 ITR 649(All)
Ashaland Corpn,133 ITR 55(Guj)
Estate Investment, 121 ITR 580(Bom)
S. 50C SOME DEVELOPMENTS -I
Scope Tenancy
Kishori S. Gaitonde, 41-B, BCAJ 5321 (Mum)
Tejinder Singh, itatonline.org (Kol.)
Lease Atul G.Puranik, 132 ITD 499(Mum)
Development rights Arif Akhtar Hussain, 140 TTJ 413(Mm)
Chiranjivlal Khanna, 132 ITD 474(Mum)
Stock –in – trade Thiruvengadam Inv., 320 ITR 346 (Mad)
Purchasers Chandni Bhuchar , 323 ITR 510 (P&H)
Right in a flat Yasin Mussa Godi, 18 ITR 253 (Ahd.)(TM )
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S. 50C SOME DEVELOPMENTS -II
Chapter XXC & Conveyance Neville D Nooranha, 115 TTJ 390(Kol)
Agreement and conveyance Mr. Sivaparvathi, 129 TTJ 463 (Visakha)
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
United Marine Academy, 130 ITD 113 (SB) (Mum.)
S.54F and s. 50C Gouli Mahadevappa, 128 ITD 503 (Bang.)
Prakash Karnavat, 49 SOT 160 (Jaipur)(Trib.)
Gyan Chand Batra, 133 TTJ 482 (Jp.)
Mohammed Shoib, 29 DTR 306 (Luck.)
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REDEVELOPMENT
Redevelopment of Ownership premises in society
Redevelopment of Tenanted premises
Permanent Alternative Accommodation 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.)
Ownership
Subsequent transfer
Dr. Modi, 218 ITR 1(Karn), Dr. Irani, 234 ITR 850(Bom).
Temporary Alternative Accommodation
Monetary compensation
Corpus Fund
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CAPITAL EXPENDITURE –s. 35AD
Deduction for capital expenditure
Weight @ 150%
Year of expenditure
Business
Affordable Housing
Slum Redevelopment
Star Hotel
Hospital with 100 Beds
Warehousing for Agricultural Produce & Sugar
Cold Chain facility
ICD & CFS
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VENTURE CAPITAL – s 10(24FB)
Deduction for capital expenditure
Weight @ 150%
Year of expenditure
Business
Affordable Housing
Slum Redevelopment
Star Hotel
Hospital with 100 Beds
Warehousing for Agricultural Produce & Sugar
Cold Chain facility
ICD & CFS
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INFRASTRUCTURE DEBT FUND –s. 10(47)
Infrastructure Debt Fund
Investment in Infrastructure
Exemption for Income
Rule 2F
Prescribed Guidelines
Notified by Central Government
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SPECIAL ECONOMIC ZONE –s. 80 IAB
Development of SEZ
Deduction @ 100% for Income
10 consecutive years out of 15 years block
Compliance of prescribed conditions
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HOTEL AT WORLD HERITAGE SITE –s. 80ID
Hotel located in specified district
World Heitage Site
Construction and commencement by 31.03.2013
Deduction for Income @ 100% for 5 years
Compliance of prescribed connditions
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R E INVESTMENTS TRUSTS & FUNDS
Pooling SPVs
Domestic & Offshore
Offshore
FDI and PN 2
Structure selection
Tax efficient offshore jurisdiction
Character of income & DTC
Domestic
VCU , VCC & VCF
PMS
Pass through vehicle
S. 160 to s.167B
THANK YOU
&
GOOD LUCK
Pradip Kapasi & Co. 34
