Analysis – Finance Bill, 2013

1. Analysis – Finance Bill, 2013 - March 2013

2. Contents • Overview of the relevant budget proposals regarding 'Impact on Real Estate Sector': • Transfer of immovable property in certain cases [ Section 43CA] • Immovable property received for inadequate consideration [Section 56(2)(VII)(B)] • TDS on transfer on certain immovable properties other than agricultural land [Section 194LA] • Additional deduction of interest on housing loan [Section 80EE]

3. Fictional taxation of business income for transfer of immovable property in certain cases [S. 43CA] (w.e.f. 1st April 2014) • Fictional taxation of business income where there is transfer of land and/ or building held as stock in trade or current asset for consideration less than stamp duty(SD) value • SD value to be treated as full value of consideration for computation of business income • Taxable as per method of accounting followed by the taxpayer • Similar to S.50C as applicable for capital gains computation • Applies to land or building or both (other than capital asset) • Will include, land, commercial units, residential house, etc. • Continuing controversy on scope of ‘Land or building’ e.g .whether extends to transfer of development rights, Leasehold/Tenancy rights, etc. • In case of difference in date of agreement to transfer and date of registration ,value determination w.r.t. date of agreement can be adopted if : • consideration or part thereof received on or before date of agreement by any mode other than cash

4. Fictional taxation of business income for transfer of immovable property in certain cases [S. 43CA] (w.e.f. 1st April 2014) • Where taxpayer objects to SD value, he can seek valuation by DVO • In case, DVO’s valuation is lower than SD, tax authority is bound by DVO’s such lower valuation. However, where DVO’s valuation is higher than SD, taxation will be w.r.t. SD value. • Valuation can be challenged in appeal proceedings • Provision may not apply to following cases : • Case of transfer of business undertaking, on slump basis as there is no identifiable consideration paid in respect of land or building • Case of contribution of stock in trade to partnership firm, since arguably, consideration is indeterminable in view of ratio of Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC)], in particular since section 45(3) applies for capital asset. • Point need to be considered whether section 56(2)(vii)(b) will get trigerred off, if introduction is at lower rate that FMV as per tax officer.

5. Fictional taxation of business income for transfer of immovable property in certain cases [S. 43CA] (w.e.f. 1st April 2014) – Key Issues • Can a builder, as per fiction of S.43CA, make an entry that consideration has become due, but, he writes it off as bad debt and claim deduction • Can difference between fictional value and consideration be treated as business loss • Whether bearer cheque will be considered in mode other than cash • Whether once the income is deemed in section 43CA, can it be deferred over a period of project, based on percentage of completion method. As per the accounting standard of ICAI and proposed accounting standard in income tax Act, the income from real estate can be offered to tax on percentage completion method (also known as work in progress method). • Currently, there is controversy on scope of ‘land’ and ‘building’ u/s. 50C whether it includes items like TDR, grant of development rights, long term tenancy/leasehold rights, etc. Same will extend to 43CA also. • Whether 43CA can apply to slump sale? • No cost step up for buyer who buys the property as stock-in-trade (and hence 56(2)(vii) is not applicable). Hence results in double taxation in hands of seller and buyer.

6. Taxability in case of receipt of immovable property for inadequate consideration [S. 56(2)(vii)(b)](w.e.f. 1st April 2014) • Section expanded to cover cases of receipt of immovable property by individual or HUF for inadequate consideration (i.e. for consideration lower than SD value by more than INR 50,000) • Difference between the SD value and agreed consideration to be taxed as income from other sources • In case of difference in date of agreement to transfer and date of registration ,value can be determination w.r.t. date of agreement if : • consideration or part thereof received on or before date of agreement by any mode other than cash • Reincarnation of provision sought to be introduced vide Finance (No. 2) Bill, 2009* • Withdrawn by Finance Act 2010 with retrospective date, releasing hardship due to issue of time gap between date of booking and date of registration

7. Taxability in case of receipt of immovable property for inadequate consideration [S. 56(2)(vii)(b)](w.e.f. 1st April 2014) • Applies to immovable property being land or building or both (which is a capital asset) • Will include land including agricultural land , commercial units, residential house, etc. • Continuing controversy on scope of ‘Land or building’ such as : • Whether extends to transfer of development rights, Leasehold /Tenancy rights etc,? • Whether covers transactions involving shares in a co-op society? • On account of existing exemption provisions dealing with gift taxation, the receipt of property from relatives or on occasion for marriage etc. will continue to be protected • Cost step up available to transferee w.r.t. value which is taken into account for determining taxability under S.56(2)(vii)(b)[Refer, S.49(4)]

8. Taxability in case of receipt of immovable property for inadequate consideration [S. 56(2)(vii)(b)](w.e.f. 1st April 2014) - Key Issues • Double taxation of the same income in the hands of two different person i.e. section 43CA or in section 50C and be taxed as IFOS under section 56(2)(vii) of the Act. Like it will be taxed in the hands of developer and under section 56 in the hands of purchaser. • Whether 56(2)(vii)(b) can apply if the sale is pursuant to court monitored auction or pursuant to Debts Recovery Tribunal process or sale is by Union/State Government to recover tax dues? • Whether allotment letter issued to buyer constitutes ‘agreement’ for purposes of 43CA and 56(2)(vii)(b)? What if formal agreement is delayed due to regulatory restriction or court disputes?

9. TDS on Immovable property transaction (S.194IA)(w.e.f. 1 June 2013) • Tax withholding @1% on payment by transferee to resident transferor by way of consideration for transfer of immoveable property • Intent is to collect tax at the earliest and to secure reporting of transactions • S.206AA may require TDS @20% if seller does not furnish PAN • Similar proposal in Finance Bill 2012 withdrawn at enactment stage due to additional compliance burden issue • Applies only if consideration payable is INR 50 L and above • Litigation prone to contend that the limit be tested qua each co-owner • Immovable property is defined to mean land (other than agricultural land) or building or part of building • Immovable property could be commercial units, residential house, etc. • Applies also to property sold as stock in trade of developer. • Continuing controversy on scope of ‘Land or building’ such as: • whether extends to transfer of leasehold/tenancy rights? • whether covers transactions involving shares in a co-op. society?

10. TDS on Immovable property transaction (S.194IA)(w.e.f. 1 June 2013) • ‘Transferee’ includes individual, firms, company, HUF, builder as purchaser, etc. • In case of joint transferee, each co-owner is liable. • Transfer between relatives and family members also covered • Applies also to NR buyer or an agriculturist who is a buyer • TDS with respect to actual consideration – though, seller may have implication under S.50C or S.43CA or even where seller has exempt capital gains • Trigger event is credit or payment of consideration on or after 1 June, 2013 – may apply to payment of balance installments, even where purchase of property accomplished prior to June 2013 • Transferee to comply with TDS procedure; will need to obtain TDS number, file TDS statements • Provision applicable to all transferees including salaried individuals, housewife, senior citizen, minor • NIL tax deduction certificate is not possible to be secured u/s. 197

11. TDS on Immovable property transaction (S.194IA)(w.e.f. 1 June 2013) – Key Issues • Object of the provision is to cover the persons who are not in tax bracket, but on practical experience no property can be registered without furnishing PAN number, but the apprehension of the Finance Minister would result in undue hardship to the taxpayers. • It is the responsibility of the Registration Department to ensure that the PAN numbers are quoted in the documents pertaining to purchase/ sale of immovable properties. The taxpayers could not be made subject to tax due to inefficiency of the Registration Department in not obtaining PAN numbers • Provisions “may” not apply to cases: • Case of transfer of business undertaking on slump basis as there is no identifiable consideration paid in respect of immovable property

12. TDS on Immovable property transaction (S.194IA)(w.e.f. 1 June 2013) – Key Issues • Whether 50 lakhs to be taken on the basis of stamp duty value or on the basis of agreement value. • If it is to be taken on stamp duty value then stamp duty value on the date of agreement or on date of registration. • Section 206AA may require TDS @20%, if seller does not furnish PAN • In case income of seller exempt from tax – whether liability to deduct TDS? • No section dealing with NIL withholding tax • Applicability of this section to all persons even if not subject to tax audit • In case of cancellation of transaction, what will be the implication on TDS deducted and deposited in such cases? • Finance Bill 2012 contemplated easy TDS compliance for payer – no need to obtain TAN or file quarterly TDS statement or issue Form 16A. No such relaxation contemplated in current year’s Finance Bill.

13. Additional Interest deduction for Buyers of New Home (S. 80EE) (For A.Y. 2014-15 and 2015-16) • One time interest deduction on home loan from Financial Institutions (FIs) sanctioned during period 1 April 2013 to 31 March 2014 • Eligibility conditions : • Borrowing from FI or housing finance company for acquisition of a residential house property • The Taxpayer should not own any residential house property on the date of sanction of loan • Sanctioned loan amount not to exceed INR 25 L • Value of residential property (and not the consideration) not to exceed INR 40 L • There could be litigation on meaning of “value”. • House could be under construction: possession not pre-requisite

14. Additional Interest deduction for Buyers of New Home (S. 80EE) (For A.Y. 2014-15 and 2015-16) • One time deduction under s. 80EE to be in addition to (or independent of) deduction of INR 1.5 L in s. 24(b). • No condition on self occupation; even let out house eligible • Deduction, if it remains under utilised due to inadequate interest liability in A.Y. 2014-15, shortfall is allowed in A.Y. 2015-16 • Deduction can be effectively enjoyed in A.Y. 2014-15 if interest is payable > INR 2.5 L.

15. Additional Interest deduction for Buyers of New Home (S. 80EE) (For A.Y. 2014-15 and 2015-16) – Key Issues • ‘Value’ of property not defined. Controversy may arise whether or not to include VAT, Service Tax, Stamp duty, Society entrance fees, etc. • Whether loan borrowed for repaying existing home loan will qualify? • Benefit should be extended to housing loans availed from employer • Salary TDS Circular should permit employer to consider 80EE deduction for Salary TDS purpose • It is also recommended that, that the existing upper limit/ deduction should be raised to Rs 2,50,000, so that actual benefit flows to the taxpayer. By restricting the deduction by imposing conditions would not serve the purpose of benefiting the taxpayers