Long Term Capital Gains on Sale of Agricultural Lands

1.  CG would be attracted, as you are not in the business of agriculture and not has any agricultural activity been carried on.  Though agricultural income has not been defined in the Income Tax Act, section 2(1A) dealing wih agricultural income defines agricultural income as any rent or revenue derived from land which is situated in India and is used for agricultural purposes.  Obviously your case doesn't qualify.

2. Converting the lands as stock in trade may not help since it will attract tax at the normal rates.  If you are in the business of real estate, you cannot expect to pay CG Tax.  You will have to pay tax at normal rates.

3. Tax may not be attracted immediately on signing the JDA, as you have not derived any benefit by doing so.  If the developer builds something and hands over the same to you, then tax liability arises. Moreover, when you sell the residential complexes, there will be again income involved and you will have to pay tax on it.  Whether this will be treated as your business income or CG will depend on whether (2) above has happened or not.

Dear Sir,

Thanks for your immediate reply.

We are inline with your views on the first point, as no agricultural activity has been done on this land.

However to pay only CG tax and not to be treated as business income, please advise what we need to do ?  Your comment that stock in trade may not help - is it because that we are not in the business of real estate ?

One suggestion was to form a new LLP and have the company/firm bring in these lands as their capital (along with some other lands we own) and the objective of this LLP would be to develop these lands and get into real estate business.  The LLP can bring these lands into stock-in-trade along with other lands for development and the LLP can do a JDA with the builder.  In this case, would this attract CG or business income ?

Finally if the above is not possible, please inform the modality we can take to treat this as CG rather than business income.  Thanks in advance for your feedback.

Regards

Hariharan

If you want to pay only CG and not normal tax, this has to be a one off transaction.  The answer is obviously to leave the land as fixed assets in your books and then enter into a JDA so that the gains are taxable as CG.  Forming an LLP with the objective of developing the lands will again entail tax at normal rates, as you will now be a real estate dealer and the lands are your stock in trade.  And your transfer of lands from firm/company to the LLP will again be a transfer under section 2(47).  May be you transfer it at book value so that there is no gain, but all this will make the taxman suspicious. 

Thanks for your feedback. Kindly give us the final clarifications for the points mentioned below :

1)  If we leave the lands as fixed assets in our books and then enter into JDA, what would be the quantum of CG payable ?  

2)  Our idea of forming a LLP was to revalue the lands @ current market value and bring the same as capital into the LLP and we are sure this would attract CG and this can be paid up to the current market value - cost of acquisition.  These lands can then be put into stock in trade in the LLP and then JDA can be made with the builder ?  Pls confirm if this is one probable route for this problem ?

3)  In case the LLP route is found suitable, whether the lands which are developed can be sold (by effect of JDA agreement) within 8 years and if sold within 8 years, what are the implications ?

I am sorry for repeatedly bothering you and appreciate your sincere feedbacks.

Regards

Hariharan

Hello,

For the first point i agree to the Member regarding the tax. My views will be:

1. It will attract tax once you sell it. Being a company and not in an agriculral business.

2. It is owned by firm and company. so you have to sell it to the new LLP. and It will be liable to tax. I have to check it detail regarding the taxation.  I think it will not extract tax liability if its transferred as Agricultural land only. and will be considered as Income from Other sources in the books.

3. After transferring to the new LLP, it needs to be converted to NA land and than can enter into JDA. CG will be proportianely calculated considering the 50% is sold of land is sold.

4. You cannot show agriculture land in fixed assets and enter into JDA as you may not be having this object in your article of association. ( so you cannot show it as stock in trade)

5. Into the LLP you can show it as a Stock.

6. And yes you can sell it anytime.  Consider it as a New LLP of construction and the taxation will apply accordingly.

dear hariharan,

the file attached may solve ur problem

@ Ronit:

Nice work.

But the problem is not to calculate the tax....

Its more than that.

Also First needs to transfer it to LLP. Than comes CG. also when the LLP is engaged in construction, its not considered as stock in trade. Its construction accounting comes into picture and will be WIP. as it is there main business....

RESPECTED SHIVANG,

i have prepared my file as per the below mentioned facts as cleared out by MR HARIHARAN above......

One suggestion was to form a new LLP and have the company/firm bring in these lands as their capital (along with some other lands we own) and the objective of this LLP would be to develop these lands and get into real estate business.  The LLP can bring these lands into stock-in-trade along with other lands for development and the LLP can do a JDA with the builder.  In this case, would this attract CG or business income

Great thanks for the clarification Ronit.

But still it will be a problem as it is an agricultural land. They have to first convert it and also I doubt that the Object clause mentions construction or to form a LLP.

@ Hariharan: Contact a CA to do all the stuff.... Its more than Tax...

ALSO dear HARIHARAN PLZ consider sec 80IB for ur case ...........may be u will benefited.....

Dear ALL :

Thanks to every one who have taken pains to answer my queries.

During recent discussion with our auditor, he has informed us that the route of forming a LLP with company & firm as partners cannot be done, as the LLP cannot have a firm as one of the partners and hence the extent of land held by the firm cannot come into the LLP.  Hence this route has to be ignored.

However we have the following two modalities :

a)  The company will put the lands into its stock-in-trade and enter into an agreement for development of the lands with "our" existing firm - which holds the balance 50%.  The ratio of sharing the income from the lands held by the company would be shared @ ratio of 60(firm):40(company).  The firm would enter put its land into stock-in-trade and along with the lands held by the company, enter into a JDA  with the builder.  In both the cases, the company as well as the firm, revalues its land @ market value and hence the same are subject to capital gains @ 20% on the current market value.  The balance proceeds would be business income in the hands of the firm.  However by virtue of this transaction, the proceeds of the entire transaction would be 80% (50% for its land + 30% (60% of 50%) for the company's land) and to the company - it would be 20% (40% of 50%).  By this, the fund into the company is also restricted to 20% (thereby avoiding dividend distribution tax) and 80% funds get into the hands of the firm, where it is tax free.

b)  The company would become a partner in the firm and bring the lands as its capital.  This capital can be worked out on the current market value and the same would be admitted in the books of the firm.  The company would then be liable for CG @ 20%.  Also the firm revalues the lands @ current market value and enters the same as its stock-in-trade and then enters into JDA with the builder.  By this modality also, the CG would be attracted @ 20% and balance as business income.

I request the readers to give their expert opinion on these two modalities, as to which route we can take.

I once again thank all of those who submitted their comments and thanks for their time.

Regards

Hariharan

Second is the worh one and you can claim 80IB also.

It is not easy to consider it the Stock in trade directly. Only an accounting entry wont satisfice. Please see the company law sections also.

Thanks for your feedback.  But section 80IB, is it applicable for housing projects started off this financial year (FY 2010-11) and what are the benefits.  When should the project be completed ?

Hey i think so it is still available...it has to be compelted  within 5 years from the year of approval...

Pls confirm it...