presentation by Gunjan Pathak, Advocate Vedanta Law Chambers, Jaipur

1. Real Estate Transactions Concept, Accounting & Taxation presentation by Gunjan Pathak, Advocate Vedanta Law Chambers, Jaipur

2. Income From Real Estates • Earning the fruits by leasing/ hiring • Sale as capital asset • Exploitation as a Venturer

3. 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

4. Income 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

5. Relevant Heads Of Income • Income from Property • Income from Business/ Profession • Income from Capital Gains • Income from Other Sources • 56(2)(ii) • 56(2)(iii)

6. Capital Gains……Basis of Charge CAPITAL ASSET TRANSFER Relevant Year 2(14) 2(47) (Timing of Transfer) No transfer--47 No Capital Asset Exception 45(2)

7. DEDUCTION 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 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)

8. Other 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

9. SOME TYPICAL SITUATIONS .... • In course of sale of Land, property is being developed to realize better price of land. • Owner converts Land into stock-in-trade then develops the same and sells the developed property. • Owner being venturer enters into an agreement with Developer for developing & selling the property as an agent, for remuneration. • 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. • 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.

10. Assumptions…. Amt. in Lacs Cost of Land(1975) 10.00 MV of Land as of 1.04.1981 15.00 MV of Land before development 100.00 (F.Y. 2004-05) Cost of partial development for realizing better price of Land 50.00 Expected MV of partially developed 200.00 property (DP) (F.Y. 2005-06) Cost of complete development 150.00

11. Assumptions Duration of partial development 6 months Duration of full development 2 years MV of developed property 400 Stamp Authorities Valuation 500 Profit Sharing Ratio 50 : 50 Developed Property Sharing Ratio 40:60 Developer’s Remuneration 1/10th of the property

12. Situation I : Owner ACCOUNTING Land Account Contd..

13. Situation I : Owner TAXATION Sales Consideration 200 Less: Exp. In connection with transfer 75 Cost of Acquisition (Indexed) 15 * (500/100) 50125 L O N G T E R M C A P I T A L G A I N 75 Contd..

14. Situation II Owner ACCOUNTING Land Account Project Account

15. Situation II Owner TAXATION Year of Taxability: 2006-07 • 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 • Business Profits • (As per Project Account) 150

16. Situation III : Owner ACCOUNTING Real Estate Project Account Contd..

17. T A X A T I O N ?

18. ACCOUNTING Situation IV Owner : Land Account Situation IV JV : Real Estate Project Account

19. T A X A T I O N ?

20. SITUATION V 40% 60% Portionof Owner Portion of Developer

21. ACCOUNTING Situation V Owner Land Account Developed Property (DP) Account

22. ACCOUNTING Situation V:Developer Real Estate Project Account – Year 1 Contd..

23. ACCOUNTING Situation V : Developer Real Estate Project Account – Year 2 Contd..

24. ACCOUNTING Situation V : Developer Real Estate Project Account – Year 3 Contd..

25. T A X A T I O N ?

26. 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?

27. 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

28. 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.

29. N O T H A N K S