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presentation by

Gunjan Pathak, AdvocateVedanta Law Chambers, Jaipur

Real Estate Real Estate TransactionsTransactions Concept, Accounting &

Taxation

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Income From Real Income From Real EstatesEstates

• Earning the fruits by leasing/ hiring

• Sale as capital asset

• Exploitation as a Venturer

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Accounting Challenges……..

• Taxation recognizes the method of accounting.• Accounting Policy formation vis-a-vis MAT• Profit to be determined annually• Handing over of Flat is completion of sale.• WIP can not be considered turnover for S. 44AB.• Retention money not income till obligation attached

not fulfilled• AS 7 not to apply

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Income Tax IssuesIncome Tax Issues

Head of Income Whether transfer u/s 2(47) or not a transfer u/s47 Conversion into S.I.T [Sec. 45(3)] Transaction through partnership firm and applicability of

Sec. 45(3)/ 45(4) Exemption provision u/s 54/ 54F etc. Deduction u/s 80IB Applicability of Sec. 50C Advanced received against sale: Sec.51

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Relevant Heads Of IncomeRelevant Heads Of Income

– Income from Property

– Income from Business/ Profession

– Income from Capital Gains

– Income from Other Sources» 56(2)(ii)» 56(2)(iii)

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Capital Gains……Basis of Capital Gains……Basis of ChargeCharge

CAPITAL ASSET

2(14)

No Capital Asset

TRANSFER

2(47)

No transfer--47

Relevant Year

(Timing of Transfer)

Exception 45(2)

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DEDUCTION u/s 80IBDEDUCTION u/s 80IB• Available to Housing Projects : 100% of profit of project• Approved prior to 31.03.2007 by a local authority

• Commencement of Development and Construction on or afteron or after 1.10.1998

• Completion:• Before 01.04.2008 (if first approved prior to 01.01.2004).• Otherwise, within 4 years from the end of the year in which first

approved.

• Minimum Land Size: One Acre

• Maximum Built-up Area:• Delhi/ Mumbai - 1000 Sq. ft.• Other places - 1500 Sq. ft.

• Max. Built-up area of shops/ commercial space: • 5% of the total built up area or 2000 sq.ft. (which ever is less)

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Other Laws also play roleOther Laws also play role• The Indian Contract Act, 1972• The Transfer of Property Act, 1882• The Indian Stamp Act, 1899• The Indian Registration Act, 1908• The Specific Relief Act, 1963• The Indian Easement Act, 1882• The Limitation Act, 1963• Hindu Succession Act and Indian Succession Act• Local Authority Certificates• Cooperative Society Laws

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I. In course of sale of Land, property is being developed to realize better price of land.

II. Owner converts Land into stock-in-trade then develops the same and sells the developed property.

III. Owner being venturer enters into an agreement with Developer for developing & selling the property as an agent, for remuneration.

IV. Owner- Developer join hands to develop the property and developed property is being sold by them jointly so as to share the profits of the venture.

V. Owner enters into agreement with Developer for development of the property and the developed property is being shared by them for independent selling or use.

SOME TYPICAL SITUATIONS ....

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Amt. in LacsAmt. in LacsCost of Land(1975)Cost of Land(1975) 10.00 10.00 MV of Land as of 1.04.1981MV of Land as of 1.04.1981 15.00 15.00MV of Land before development MV of Land before development

100.00100.00(F.Y. 2004-05)(F.Y. 2004-05)Cost of partial development for Cost of partial development for realizing better price of Land realizing better price of Land

50.0050.00Expected MV of partially developed 200.00 Expected MV of partially developed 200.00

property (DP) (F.Y. 2005-06) property (DP) (F.Y. 2005-06)Cost of complete development Cost of complete development

150.00150.00

Assumptions….

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Duration of partial developmentDuration of partial development 6 months 6 monthsDuration of full development Duration of full development 2 years 2 yearsMV of developed property 400MV of developed property 400Stamp Authorities ValuationStamp Authorities Valuation 500 500Profit Sharing Ratio 50 : 50 Profit Sharing Ratio 50 : 50 Developed Property Sharing Ratio 40:60Developed Property Sharing Ratio 40:60Developer’s Remuneration 1/10Developer’s Remuneration 1/10thth of the property of the property

Assumptions

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Situation I : Owner

ACCOUNTING

Cost of Land

Capital Profit

10.00

140.00

150.00

Sale of Developed

Land 200.00

Less:Cost of

partial develop. 50.00 150.00

150.00

Land Account

Contd..

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Situation I : Owner

TAXATION

Contd..

Sales Consideration 200

Less:Less:

Exp. In connection with transfer 75

Cost of Acquisition (Indexed)

15 * (500/100) 50 125

L O N G T E R M C A P I T A L G A I N 75

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Situation II OwnerACCOUNTING

Land Account

Cost

Capital Profit

10.00

90.00

100.00

Conversion into Stock in Trade at MV

100.00

100.00

Land

Cost of development

Profit

100.00

150.00

150.00

400.00

Sale of DP 400.00

60.00

Project Account

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Situation II OwnerTAXATION

Year of Taxability: 2006-07Year of Taxability: 2006-07

I. Capital Gains

FMV at time of conversion 100

Less: Indexed Cost of Acquisition 75

L O N G T E R M C A P I T A L G A I N 25

II. Business Profits

(As per Project Account) 150

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Situation III : Owner

Cost of Land

Cost of development

Remuneration to developer

Net Profit

10.00

150.00

40.00

200.00

400.00

Sale Proceeds of

DP 400.00

400.00

Real Estate Project Account

Contd..

ACCOUNTING

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T A X A T I O N

?

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ACCOUNTING

Situation IV Owner : Land Account

Cost of LandCapital/ Business Profit

10.00

90.00

100.00

Contributed to Joint Venture (JV)

100.00

100.00

Cost of Land

Cost of Development

Profit:

Owner 75.00

Developer 75.00

100.00

150.00

150.00

400.00

Sale Proceeds of DP 400.00

400.00

Situation IV JV : Real Estate Project Account

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T A X A T I O N

?

20

40%

60%

SITUATION V

Portion of Owner Portion of Developer

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ACCOUNTING

Situation V Owner Land Account Cost of Land

Cost of Dev.Business profits on trf. Of 60% Land Rights

10.00

60.00

54.00

124.00

Trf. of 60% Land Rights

Cost of DP

60.00

64.00

124.00

Cost of DP

Profit on sale of DP

64.00

96.00

160.00

Sale of DP 160.00

160.00

Developed Property (DP) Account

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ACCOUNTING

Situation V:Developer

Cost of Development

Net Profit – 1st year50.00

----

50.00

Turnover pertaining to portion handed over

(Sale proceeds recd. 180)

Work in progress (WIP)

NIL

50.00

50.00

Contd..

Real Estate Project Account – Year 1

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ACCOUNTING

Situation V : Developer

Opening WIP

Cost of Dev.

Indirect Expense

Net Profit –2nd year

50.00

100.00

6.00

75.00

231.00

Turnover pertaining to portion handed over (90%)

Stock in hand

216.00

15.00

231.00

Real Estate Project Account – Year 2

Contd..

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ACCOUNTING

Situation V : Developer

Opening stock

Indirect Expenses

Net profit – 3rd year

15.00

1.00

8.00

24.00

Turnover of portion sold

24.00

24.00

Real Estate Project Account – Year 3

Contd..

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T A X A T I O N

?

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Q U I Z F O R A U D I E N C E

• Would Section 54 exemption be available on investment in 2 houses?

• Is it necessary to purchase house in one’s own name for availing benefit u/s 54?

• Would the concept of transfer as applicable to Capital Gains applies to S.I.T.?

• Is deduction u/s 80IB available to vendor’s of the property?

• What would happen if the valuation u/s 50C(2) is lower than actual consideration?

• What if the seller does not get the transfer registered or gives the power of attorney to buyer?

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C O M P U T E C A P I T A L G A I N S

• Property acquired in 1975 for Rs. 5 lacs

• Value in 1981– Rs. 7 lacs

• Advance recd. In 1992 Rs. 10 lacs

• Forfeited as per contract– Rs. 8 lacs

• converted into Stock in 2000: value Rs.20lacs

• Sale in April 2004– Rs. 30lacs

• Stamp Authority's Valuation Rs. 35 lacs

• Deposit in Capital Gain A/c Scheme u/s 54 Rs. 30lacs

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Suggest the structure

• One Undivided Land Owned by three companies.• Companies have already contributed them to a

partnership firm with a motive to do development business where the three companies are partners.

• Development Business could not take off and the land prices increased substantially.

• The promoters of the three companies want to dispose of the land.

• The buyer is a developer group.

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N O T H A N K S