Land purchased by partners before forming partnership

This query is : Resolved

C.A. Anthony C D'souza (Querist)
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31 October 2015 Land is purchased by an individual. Then he is forming partnership firm with three other people. Firm will Construct apartment on that land and sell. What is the best procedure to do so by following income tax rules and regulations?

Nitin Bhuta

Nitin Bhuta (Expert)
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31 October 2015 INtroduce Land as an asset introduced by the partner and comply with the provisions of section 45 of the Income Tax Act 1961. Please execute assignment agreement by paying stamp duty as applicable under the provisions of Stamp Duty Act

C.A. Anthony C D'souza

C.A. Anthony C D'souza (Querist)
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31 October 2015 Thanks Nitin for replying. But introduction of land will attract capital gain tax in hands of partner and also stamp duty. Both together will be a large amount calculated u/s 50C. Is there anything else that can be done? Example:- joint venture agreement etc?

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Nitin Bhuta

Nitin Bhuta (Expert)
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31 October 2015 even if you enter into development agreement with SPV then such situation also would attract Capital gains and stamp duty it can't be avoided because if you do some other way it would create the issue at the time of sale of property because of title of the property in the hands of firm won't be clear and that would create lot of issues in my opinion. You can probably check out with some expert solicitor firm but in my opinion it is better not to complicate the transaction and keep it simple and transperent considering the margins earned in real estate business

C.A. Anthony C D'souza

C.A. Anthony C D'souza (Querist)
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31 October 2015 thanks once again Mr. Nitin. Yo are right. I have been trying to find a way out. But even i feel that capital gain tax and stamp duty cannot be avoided. Can we show firm as contractor for building the premises and show business income. And show capital gain in hands of owner adding the cost of premises paid by him to firm?

Nitin Bhuta

Nitin Bhuta (Expert)
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31 October 2015 Yes that can be done but then other partners of the firm may not be able to share the pie of the project which may result into possible conflict amongst them.

As Work Contractor firm needs to comply with host of several compliances that are applicable under several laws and same laws owner of the land need to comply too resulting double compliances for them.

Transaction betweeen owner of the land and Firm shall be treated as Related Party transaction so you need to document the trsansaction at arms lenghth price to safeguard under 40A(2)(b)as well as section 92E if applicable.