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Property transferred without consideraion - Capital Gain Taxability????

VINAY PANDEY (DEPUTY MANAGER) (30 Points)

26 June 2015

Would the following transaction in property be taxed u/h capital gain :

Facts : Mr. A owns a property and enters into a JV agreement with a promoter who is to develop the property and contruct 8 flats. As per the agreement the promoter is to construct 8 flats out of which 4 shall be handed over to Mr. A for his own use. The rest is alloted to the promoter who is free to sell the property. No consideration is paid by promoter to Mr.A nor Mr.A pays any amount to the promoter for the construction.

Can anypne please advice on the taxability of the transaction u/s capital gain in the hands of Mr. A and the promoter.

Regards,

Vinay Pandey

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10 Replies

Z ( ) (2960 Points)
Replied 26 June 2015

There is a transfer. For date of transfer we will need more details like date of agreement, clauses therein , date of handing over the possession etc.

For Mr.A , sales consideration is the fair market value of the 4 flats which he will be receiving. Which can be arrived by using weighted average cost of construction of the flats.

Theres a lot in this topic

Z ( ) (2960 Points)
Replied 26 June 2015

There is a transfer. For date of transfer we will need more details like date of agreement, clauses therein , date of handing over the possession etc.

For Mr.A , sales consideration is the fair market value of the 4 flats which he will be receiving. Which can be arrived by using weighted average cost of construction of the flats.

Theres a lot in this topic

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Rashi Bajaj (CA) (752 Points)
Replied 27 June 2015

Interesting case. Agreed with Z.

Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 29 June 2015

yes, definitely would be chargeable as Capital Gain. Fair market value of new 4 flats at the time of date of agreement would be the full value of consideration and should be tax in the year of agreement for reconstruction entered into. To reckon fair market value, you can refere property ready reckoner for the place where property actually situated. Cost of old property which has been handed over for reconconstruction would be the cost of acquisition and same should be indexed if property purchased for more than 3 years. Further, if you received any corpus, same should be part of full value of consideration and therefore full value of consideration should increase accordingly for calculating capital gain tax. However, there is little ambiguity on taxability of monthly maintainance rent given by builders for accomodating tenant til the time construction completes.

However, if construction gets completed within 3 years from the date of JV agreement, capital gain would be exempted if fair market value of those 4 flats at the time of completion of those 4 flats (means time when builder receivs CC from municipal authorities) would be greater than or equal to capital gain calculated earlier.

Hope this solves your query.

Thanks and Regards,

Manoj B. Gavali

VINAY PANDEY (DEPUTY MANAGER) (30 Points)
Replied 30 June 2015

Originally posted by : Manoj B. Gavali
	yes, definitely would be chargeable as Capital Gain. Fair market value of new 4 flats at the time of date of agreement would be the full value of consideration and should be tax in the year of agreement for reconstruction entered into. To reckon fair market value, you can refere property ready reckoner for the place where property actually situated. Cost of old property which has been handed over for reconconstruction would be the cost of acquisition and same should be indexed if property purchased for more than 3 years. Further, if you received any corpus, same should be part of full value of consideration and therefore full value of consideration should increase accordingly for calculating capital gain tax. However, there is little ambiguity on taxability of monthly maintainance rent given by builders for accomodating tenant til the time construction completes. However, if construction gets completed within 3 years from the date of JV agreement, capital gain would be exempted if fair market value of those 4 flats at the time of completion of those 4 flats (means time when builder receivs CC from municipal authorities) would be greater than or equal to capital gain calculated earlier. Hope this solves your query. Thanks and Regards, Manoj B. Gavali

Hi,

Thank you for the reply.

I have come accross section 56(2) of Income Tax Act, wherein property without consideration is taxed based on FMV of the property as on the date of transfer. However, you have stated that the gain shall be exempt if the construction is completed within 3 years from the date of the JV agreement.

Can you kindly state the appropriate provision of Income Tax Act which exempts Capital gains referred to above for clarity.

Regards,

Vinay Pandey

Rashi Bajaj (CA) (752 Points)
Replied 30 June 2015

Manoj Sir,

If I am not mistaken you are stating provisions of Sec 54.. But for that section to apply, the original property should be a residential property only. Also 54F would not apply as more than one residential property has been alloted. Please clarify this part.

Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 30 June 2015

Hi Vinay,

As per my view you can claim exemption u/s 54F.

Thanks and Regards,

Manoj B. Gavali

Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 30 June 2015

Hi Rashi,

Am referring to exemption u/s 54F. There was one ITAT decision exactly having the same facts given in our case where two or more residential property located adjacently and are commonly occupied, then all residential unit shall be considered as single unit and exemption u/s 54F would be available.

ITAT Mumbai decision enclosed for your reference. I agree that one may need to contend with the department to avail exemption 54F and given decision is only when 4 flats situated adjacently to each other.

Thanks and Regards,

Manoj B. Gavali

Attached File : 213302 20150630161215 2007 107itd00327 mum sb .rtf downloaded: 156 times

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Z ( ) (2960 Points)
Replied 30 June 2015

Manoj Sir is right

There are other High court judgements also. Some of them I have cited on my profile page

(which is incomplete, since other high court judgements which were not mentioned brought more clarity, will update it someday)

Although the amendment has made it abundantly clear that exemption shall be restricted to only one residential house property, but what constitutes as a single residential house property has been matter of judgement

...... Theres a lot in this case and interesting part will come when this property will be sold.

Manoj BG (Tax Professional and in Service) (1795 Points)
Replied 13 July 2015

Hi All,

Latest judgement passed by ITAT-Chennai allowing sec. 54F relief when assessee gets multiple flats from builder under joint development agreement.

Where in terms of development agreement, assessee obtained multiple flats in lieu of cost of 60 per cent of land allotted to builder, still her claim for deduction under section 54F was to be allowed.

Detailed case law enclosed herewith for your reference.

Thanks and Regards,

Manoj B. Gavali

Attached File : 213302 20150713115610 101010000000160592.rtf downloaded: 83 times

2 Like