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Real Estate related New Income-tax amendments as per Finance Bill, 2013 written by Subhash Lakhotia, Tax and Investment Consultant,  March 3, 2013

 Four very important amendments have been made by the Finance Bill, 2013 to the Income-tax Law which will have very far reaching impact on Real Estate transactions to be transacted in the financial year 2013-2014.  These amendments relate to taxing the notional income in the real estate transactions as against the real income of the real estate developers as well as the real estate investors.

The impact of these proposed amendments is surely going to be very sharp and in many cases it might result into big agony and big tax to many developers and investors as well.  Similarly, the provision relating to Tax Deduction at Source (TDS) on real estate transactions is also going to pause compliance related formalities to every purchase of real estate exceeding a particular price tag.  Well, the long and short of these new provisions is that they would surely impact real estate transactions during the financial year 2013-2014.  Finally, another amendment relates to granting a little more deduction towards interest on new residential property purchased after 1st April 2013.  All these new proposed amendments are being discussed in greater depth in the succeeding paragraphs so that all those interested in real estate activities during the forthcoming financial year 2013-2014 can carry out real estate transactions by carefully understanding tax implications with no problem at a future point of time.

Circle Rate to be adopted for Computation of Profits and Gains of Business or Profession.

 A new section 43CA is proposed to be inserted by the Finance Bill, 2013 which provides stamp duty value to be considered for the  purpose of  Computation of income under the head "Profits and Gains of Business or Profession in respect of all transactions relating to land or building or both.  This proposed amendment which is proposed to be implemented from 1st April, 2013 if passed by the Parliament will have adverse impact on almost all transactions of real estate entered into by all real estate developers and traders in India because their income would be computed on the basis of notional income and not the real income as appearing in the books of account of a tax payer.

It may be recalled that presently as per section 50C of the Income-tax Act for all investors deriving capital gain on selling their real estate assets the circle rate (in case it is higher than the sale price) or the stamp duty valuation rate as fixed by the State Government is to be considered as the sale consideration.  The computation of capital gains is thus arrived at by replacing the circle rate as per stamp duty value as against the actual sale consideration (in case the same is higher than the sale price).  However, till now, these provisions do not apply to transfer of immovable property, which is held by the transferor as his stock in trade.

 The Explanatory Memorandum to the Finance Bill, 2013 states that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the stamp duty value, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purposes of computing income under the head "Profits and gains of business or profession". It is also proposed to provide that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the stamp duty value may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer. However, this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

It is a well known and an accepted fact that many times the real estate developers and all those persons carrying on the business of real estate sell away some of their stock of real estate at a price which is lower than the existing circle rate of the property so as to correct their cash flow or for any other reason.  But now, in view of the above mentioned proposed changes to be made to Income-tax Law it is expected that great genuine hardship would be faced by all such persons who are now engaged in real estate business.  However, it is provided  in the law  that in case the assessee claims before  the Assessing Officer that the value adopted  or assessed by the  stamp valuation authority exceeds the fair market value of the  property then the Assessing Officer may refer the valuation of  the capital asset to the Valuation Officer as per  the  provisions  contained in the Wealth-tax Act.

Income-tax on immovable property received for inadequate consideration

The Finance Bill, 2013 proposes to amend section 56 of the Income-tax Act, 1961 to bring to tax all such properties which have been purchased by Individuals & Hindu Undivided Families at a price lower than the Circle Rate. Explaining the necessity to tax such  amount the Explanatory Memorandum to the Finance Bill, 2013  states that the existing provisions of sub clause (b) of clause (vii) of sub-section (2) of section 56 of the Income-tax Act, inter alia, provide that where any immovable property is received by an individual or HUF without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property would be charged to tax in the hands of the individual or HUF as income from other sources. It is further stated that the existing provision does not cover a situation where the immovable property has been received by an individual or HUF for inadequate consideration. It is proposed to amend the provisions of clause (vii) of sub-section (2) of section 56 so as to provide that where any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of the individual or HUF as income from other sources.

  Sometimes there may be a gap between the date of agreement for purchase  of the immovable property and the date of registration of the property, in such a situation to avoid the hardship  to the tax payers it is provided in the Explanatory Memorandum to the Finance Bill, 2013 that where the date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, the stamp duty value may be taken as on the date of the agreement, instead of the date of registration. This exception shall, however, apply only in a case where the amount of consideration, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement fixing the amount of consideration for the transfer of such immovable property. These amendments would be applicable from 01-4-2013 and would therefore be applicable for the financial year 2013-2014 relevant to the Assessment year 2014-2015.

 It may also be noted that in case the stamp duty value of the immovable property is disputed by the assessee then in such situation the Assessing Officer can refer the matter to the Valuation Officer as per the provisions contained in the Wealth- tax Act.

TDS on transfer of certain Immovable Properties

 A new section 194-IA is proposed to be inserted in the Income-tax Act, 1961 as a result of an amendment by the Finance Bill, 2013 which provides for Tax Deduction at Source (TDS) on transfer of certain immovable properties.  This proposal is expected to come into operation with effect from 1st June, 2013.  It may be recalled that similar provision was introduced in last year but the same was withdrawn later on.  As a result of the new proposed amendment greater obligation is now cast on all persons who are purchasing immovable property in excess of Rs.50 Lakhs.

 Explaining the logic and reason for introduction of this provision the Explanatory Memorandum to the Finance Bill, 2013 states that under the existing provisions of the Income-tax Act, tax is required to be deducted at source on certain specified payments made to residents by way of salary, interest, commission, brokerage, professional services, etc. On transfer of immovable property by a non-resident, tax is required to be deducted at source by the transferee. However, there is no such requirement on transfer of immovable property by a resident except in the case of compulsory acquisition of certain immovable properties.  In order to have a reporting mechanism of transactions in the real estate sector and also to collect tax at the earliest point of time, it is proposed to insert a new section 194-IA to provide that every transferee, at the time of making payment or crediting of any sum as consideration for transfer of immovable property (other than agricultural land) to a resident transferor, shall deduct tax, at the rate of 1% of such sum.

 It may be noted that the Agricultural Land  has been excluded from the ambit  of this new  provision, however by going  through  the provisions  line by line we find that all agricultural lands are not excluded and that the agricultural land which is comprised within the jurisdiction of a municipality having a population of over 10,000 as well as land  which is not more than 8 Kilometres of the local limits of any municipality would come within the purview of making compliance as per the  above new proposed section and thus in respect  of this category of agricultural land the formalities of TDS  are required to be complied with.

Consequent to the requirement  of compliance  of the formality of deducting tax at source on real estate purchase the tax payers  would be  required to obtain TAN (Tax  Deduction Account Number) Number  and also perhaps  would be required to file the yearly TDS return.  Hence, every person after 1st June, 2013 would have to deduct TDS @ 1 % on payments made to the transferor for real estate.  In case the property  in excess of Rs.50 Lakhs is purchased then such TDS would be required  to be deducted at every part  payment of  consideration which would cause great harassment specially  to investors who are not engaged in day to day business activities.

Extra Deduction in respect of interest on loan taken for residential house

 A new section 80EE is proposed to be inserted by the Finance Bill, 2013 which aims to provide extra deduction of one time only in respect of interest on loan taken for a residential house property.  The maximum amount of deduction is Rs.1 Lakh.  The following conditions are required to be complied with to obtain this special deduction:

(i)   the loan has been sanctioned by the financial institution during the period beginning   

      on the1st day of April, 2013 and ending on the 31st day of March, 2014

(ii)    the amount of loan sanctioned for acquisition of the residential house property does           not exceed twenty-five lakh rupees

(iii)  the value of the residential house property does not exceed forty lakh rupees

(iv)  the assessee does not own any residential house property on the date of sanction of the loan. 

The Explanatory Memorandum to the Finance Bill, 2013 states that this extra benefit by way of deduction for interest on residential house property is being made keeping in view of an affordable house.  Further, while explaining the provisions in greater detail the Explanatory Memorandum states that proposed new section 80EE seeks to provide that in computing the total income of an assessee, being an individual, there shall be deducted, in accordance with and subject to the provisions of this section, interest payable on loan taken by him from any financial institution for the purpose of acquisition of a residential house property.

It is further provided that the deduction under the proposed section shall not exceed one lakh rupees and shall be allowed in computing the total income of the individual for the financial year beginning on 1st April, 2013 and in a case where the interest payable for the previous year relevant to the said financial year is less than one lakh rupees, the balance amount shall be allowed in the financial year beginning on 1st   April, 2014.  It may be noted that the loan has to be taken only from any financial institution or a house finance Company.  The most unfortunate part of this provision is that the benefit of this proposed provision is not available to existing property owners having a house property loan from bank etc.

Conclusion :

The above mentioned proposed amendments made by the Finance Bill, 2013 relating to the real estate sector will have far reaching consequences to a large number of investors in real estate as also to the persons engaged in real estate business, hence it is recommended that all those interested in real estate must very carefully study and implement these new tax provisions.

The Author is Tax and Investment Consultant at New Delhi for last 40 years.  He is also Director of M/s. R.N. Lakhotia & Associates LLP & The Strategy Group. E-Mail: slakhotia@satyam.net.in Mobile: 9810001665