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Tax on real estate

Milan Agrawal (Chartered Accountant) (207 Points)

26 October 2013

Dear All,

Please guide in the following matter: An assessee is having a piece of land (Say 10 Acres) which he gives to a Builder who constructs multistoried apartments and some bungalows. In consideration of the land, the builder gives 4 houses (flats & bunglows) to the assessee.

Now the situation is, in the name of asset, earlier the assessee had land which is now converted into House Property. Now suppose, after some years, he sells 1 or 2 houses out of the 4 houses received in consideration of his land, then there arises so many questions:

1. What would be the tax treatment?

2. What may be considered as the cost of that house property?

3. How indexation would be done?

4. What value should he show for those houses in his books of accounts?

5. And many more..

Kindly look into the matter and guide.

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3 Replies

Mihir (Wealth Manager) (5293 Points)
Replied 27 October 2013

Land and building are separately indexed.

When the assessee sells the flat/bunglows, the cost of acquisition of land will be indexed, and the cost of acquisition of the building (those 4 flats/bunglows) will be indexed. The builder shall be in the position to give the figure on the cost of construction those 4 flat, and that would be your cost of acquisition of those 4 flats. Transfer expenses shall also be taken into account. When you sell these flats, cost of acquisition of land, cost of acquisition of flat will be taken to compute LTCG.

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Milan Agrawal (Chartered Accountant) (207 Points)
Replied 28 October 2013

Dear Mihir ji,

The assessee didn't pay anything to get those house except the land. So, as per my opinion, the department will not allow to deduct the cost of construction of the house which was actually borne by the constructer and not by the assesee beacuse by doing so, the assessee's tax liability would reduce without paying any cost of such house. Further, if the cost of land was say Rs.100000 in exchange of which he got 4 houses. So, while selling 2 houses whether entire 100000/- would be indexed or the proportionate amount i.e. Rs. 50000/- would be indexed. Again, whether indexing would be done from the date of acquisition of land or from the date of acquisition of house property.

There are lot of queries in this matter. Please guide.

Nikhil Kaushik (Fellow CA) (85509 Points)
Replied 28 October 2013

Dear Milin,

The taxation of Joint Development Agreement is a bit different. See if this help:

Under the joint development agreement, the assessee may enter into an agreement with the third party to develop the property and get the agreed share in the constructed area. Property owner will get constructed area in lieu of the land.

Liability of Capital Gains –
The liability of Capital Gains in a joint development agreement is largely dependent upon the drafting of the agreement. Capital Gains will arise in the year of handling over the possession to the developer and not when the assessee was handed over the possession of the constructed flats as per section 53A of the Transfer of Property Act, 1882. Thus, if the consideration is receivable in built-up area to be constructed and handed over by the builder to the landowner, it is advisable to avoid the applicability of section 53A of the Transfer of Property Act by mentioning in the agreement that license is granted to the builder to enter the premises and construct the building. The possession is retained by the landowner, which will be handed over as and when the built-up area is constructed and delivered. By this stipulation, the transfer will take place only in the year in which the built-up area is received and not before.

Thus, period of holding of the asset is computed from the date of acquisition to the date of transfer as per the joint development agreement.

Cost of Acquisition of the transferred Property –
The cost of acquisition of the property transferred to the developer would be the actual cost of land acquired plus the cost of building or the structure constructed on the land by the owner. This view is also supported by the Hyderabad Bench of ITAT in the case of Prabhandam Prakash v. ITO IT Appeal No. 147 (Hyd.) 2007 (AY 2001-02) that building value is also to be taken into consideration as cost of improvement for the purpose of computing capital gains even if it is demolished.

Sale Consideration of Property Transferred –
The sale consideration of the property transferred to the developer would be the cost incurred by the developer in constructing the flats on the property transferred as held in the case of Dy. DITO V. G. Raghuram 39 SOT 406 (Hyd.) (2010) wherein it is held that cost incurred by the developer will be the sale consideration of the owner and not the fair market value.

Deeming Fiction u/s 50C of the Act –
The Mumbai Bench of ITAT in the case of Arif Akhtar Husain vs. ITO (ITA No. 541/Mum/2010) held that the transfer of development rights by the owner of the property to the developer would attract provisions of section 50C of the Income Tax Act, 1961.

Exemption on account of Capital Gains Tax –
Section 54 provides for exemption on account of capital gains tax on sale of a residential property and purchases a residential property from the capital gains of the original property. Section 54F provides for exemption on account of capital gains tax on sale of any long term capital asset other than house property, i.e., in the case where the vacant land is transferred, and investing the capital gains in a residential property. The facts of the present case are similar as in the Karnataka High Court in the case of CIT v. Smt. K.G. Rukminiamma 196 Taxman 87 (Kar.) wherein the Hon’rable High Court held that in case the assessee received more than one residential flats, it has only to be construed as a “single residential house” and the assessee is entitled to the benefit of capital gains exemption under section 54 or section 54F of the Act. Thus, from the available precedence from the decided cases it seems that in such a situation an assessee may contend that the capital gain arising from such agreement is exempt from tax u/s 54 or 54F.

Conclusion -
The aforesaid discussion is summed up as follows –

A Sale Consideration of the Original Asset will be cost incurred by the Developer in construction of Flats acquired
B Cost of Acquisition will be original cost of acquisition of land & building
C Capital Gains: A – B

D Exemption under Section 54/54F: Cost of Construction of the flats acquired by the owner which is equal to the sale consideration as in A