presentation by Gunjan Pathak, Advocate Vedanta Law Chambers, Jaipur
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Transcript of presentation by Gunjan Pathak, Advocate Vedanta Law Chambers, Jaipur
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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
?
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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