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1. Taxation of Capital Asset under Development Agreement with Builder

1.1 In recent past, it has quite been a trend that individual plot/house owners enter into some development agreement with builders whereby in a typical agreement, the builder demolish the old house and constructs a new multistory building. The house owner gets some Floor/Apartments and some consideration in cash whereas the remaining Floors/Apartments are kept with the Builder. In such type of arrangement, the date of transfer has been a matter of litigation whereas the house owner (assesses) claims the date of transfer to be the date when he gets possession of his share of floor/apartments while the department considers the date of development agreement when the old house is handed over, to be the date of transfer.

1.2 To avoid litigation in such type of arrangements, the Finance Act, 2017 has inserted a new sub section (5A) to Sec 45 of the Income Tax Act.

1.3 Sec 45(5A) characterize such type of development agreement as 'Specified Agreement' which is defined as a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash.

1.4 Sec 45(5A) is applicable only in case where the transferor is an individual or a HUF, as it is meant to capture the cases of transfer pertaining to plots/houses as 'Capital Asset' only and thus it excludes business assessee and the transfer of plots/houses as business asset/stock-in-trade. Therefore, such arrangements where the land owner and builder/developer forms a Joint Venture and undertakes a joint development of real estate project as a business asset, such business arrangements will not be covered u/s 45(5A) as capital gain matter, but rather it will be a case of real estate business taxable u/s 28 of the Act. Sec 45(5A) is restricted in its scope to deal with the case of capital gains in the hands of owners who is an individual or HUF, transferring his plot and/or house as Capital Asset only.

1.5 Sec 45(5A) defers the taxability of capital gains from the date of handing over of plot/house to the date of completion certificate of the new building and therefore prescribes that in such cases of Specified Agreement, the capital gains shall be chargeable to income tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority. Point to be noted is that this new sec 45(5A) has not amended anything so far as the date of transfer is concerned which is same as per sec 2(47) of the Act, rather this amendment has just deferred the chargeability to the year of completion of the new building.

1.6 In such types of development agreements there happens to be an exchange of Capital Assets whereby effectively the plot/house owner transfers an undivided share in his land to the builder and in exchange gets a super structure comprising of his share of floor/apartments. For the purposes of computation of Capital Gain u/s 48, the full value of consideration of the outgoing undivided share in land so transferred to the builder shall be taken to be the sum of (a) the Stamp Duty value of incoming share in the super structure on the date of issue of completion certificate and (b) any additional consideration received in cash.

1.7 The cost of acquisition will be the actual cost of land attributable to the outgoing undivided share in land being transferred to the builder, and the actual cost of old building existing before entering into such specified agreement.

1.8 A question may arise regarding the outgoing undivided share being transferred in favor of the builder, that whether Sec 50C will apply to such Specified Agreement. In the opinion of the author when there is a specific Sec 45(5A) to deal with such Specified Agreement, there is no occasion of any application of sec 50C as it is an accepted maxim that specific provision prevails over general provision and therefore the case covered under specific provision of Sec 45(5A) shall be out of the purview of Sec 50C of the Act.

1.9 After completion of building the house owner will get his share of apartment(s), thereafter a question may arise as to what will happen when the house owner sells his newly acquired apartment later on in future. At that time how the Cost of Acquisition will be computed with respect to (a) the undivided share in his land which never got transferred to the builder and (b) the cost of super structure comprising of his apartment which he received from builder.

1.10 In such a case of subsequent transfer of new apartment, so far as the cost of acquisition of undivided share in land is concerned, it shall be the actual cost incurred by the plot/house owner as and when he acquired the same. So far as the cost of acquisition of super structure of apartment is concerned, it shall be the stamp duty value of the super structure as considered u/s 45(5A) to be the full value of consideration at that point. Sec 49 pertaining to cost of acquisition has been suitably amended to that effect.

1.11 It is to be noted that these provision of Sec 45(5A) shall not apply if before getting possession of his share of floor/apartment, the plot/house owner transfers such share in new building before the issue of completion certificate and if it so happens, then in such case there will be no deferment and capital gain shall be chargeable in the year in which transfer takes place, without any reference to sec 45(5A).

2. Change of Base Year 1981 to 2001

Hitherto, in all the cases of Capital Gains where the respective Capital Asset was acquired before 01st April 1981, there was a provision u/s 55 whereby the assessee had an option to substitute the fair market value (FMV) as on 01st April 1981 to be taken as the cost of acquisition. The Finance Act 2017 has substituted this base year from 1981 to 2001 therefore from 01st April 2017, for all the cases where the capita asset was acquired before 01st April 2001, the assessee has an option to take the FMV of capital asset as on 01st April 2001 instead of his actual cost of acquisition incurred. Likewise the indexation base year has been shifted from 1981 to 2001 and new index schedule has been notified.

3. Valuation of Unquoted Shares

3.1There used to be litigation in the cases of share transfer of unquoted shares of closely held/private limited companies and particularly so when such private limited company owned some immovable property. The litigation usually pertained to 'the full value of consideration' of the shares so transferred where the valuation of shares was a matter of dispute between the assessee and the department. The assessee used to claim the 'transaction value' declared to be 'the full value of consideration' or at the most used to agree to compute the share value as per rule 11UA, whereas the revenue used to apply sec 50C and computed the share value adopting the sector rate of the property reflecting in the balance sheet of the private limited company. For adopting such course of action the revenue used to invoke clause (vi) of Sec 2(47) of the Act asserting thereby that the assessee in the grab of share transfer, has in fact transferred the immovable property held by the Private Limited Company.

3.2There are already Judicial pronouncements in favor the assessee that clause (vi) of sec 2(47) doesn't apply to such transfer of shares and in the absence of any specific provision under the Act, the actual sale consideration cannot be substituted for any deemed valuation.

3.3 Now to deal with all such situations, the Finance Act 2017 has inserted a new Sec 50CA whereby if the consideration received or accruing as a result of the transfer by an assessee of a Capital Asset, being share of a company other than a quoted share, is less than the fair market value (FMV) of such share, then the full value of consideration shall be deemed to be the FMV of such share, arrived at as per rules prescribed.

3.4The valuation rule 11UA has been revised by the CBDT vide Notification No.61/2017 dated 12-07-2017. It is to be noted that as per new valuation rules notified, while computing the share value, any jewellery, artistic work, shares, securities and immovable property is taken at fair market value (FMV) instead of book value as used to happen earlier as per erstwhile rule 11UA. A new rule 11UAA has been inserted which says that for the purposes of Sec 50CA, the valuation will be done as per revised rule 11UA. Thus from 01st April 2017 all the share transfer of unquoted shares are subject to new valuation rules u/s 50CA as well as u/s 56 of the Act.

3.5It is to be noted that 'quoted share' u/s 50CA, means which are quoted on any recognized stock exchange with regularity from time to time, where the quotation is based on current transaction made in the ordinary course of business.

3.6.The meaning of 'quotation with regularity' is not defined. However useful reference may be made to the meaning of 'frequently traded shares' as per Notification No. 43/2017 dt 5th June 2017, which means shares of a company, in which the traded turnover on a recognized stock exchange during the twelve calendar months preceding the calendar month in which the transfer is made, is at least 10% of the total number of shares of the company.

3.7.Thus though the quoted shares on recognized stock exchange are exempt from the provisions of sec 50CA, but it is not all the quoted shares, rather only such quoted shares which are 'quoted with regularity', only those regularly quoted shares are exempt from the rigor of sec 50CA of the Act.

4. Exemption of Long term Capital Gain of Quoted Shares

4.1Hitherto, Long Term Capital Gain arising from transfer of equity shares used to be exempt u/s 10(38) of the Act provided the 'sale transaction' is chargeable to Securities Transaction Tax (STT). This STT is levied on shares traded on a recognized stock exchange.

4.2This exemption has been made subject to one more condition, that not only the 'sale transaction' must be chargeable to STT but the transaction of acquisition (Purchase transaction) must also have been subject to STT. Hence from 01st April 2017, the 'sale transaction' as well as the 'acquisition (Purchase) transaction', both, must have been subject to STT failing which the long term capital gain will no longer be exempt u/s 10(38) of the Act.

4.3 However the Central Government has been empowered to notify the acquisitions to be exempt from this new condition of 'acquisition transaction' being subject to STT.

Excising such powers the Central Government vide Notification No. 43/2017 dated 05-06-2017 has notified that all acquisitions are exempt from STT conditions, barring a negative list prescribed in the said notification. The negative list includes such listed equity shares which are not frequently traded and are acquired through a preferential issue, or through off-market transaction or during the period of temporary delisting of such shares.

The Government has basically targeted those acquisitions what is popularly known as 'penny stock' where usually the sale transaction is through stock exchange but the purchase transaction is usually off-market or through preferential issue.

5. Conversion of Charitable Trust into Non-Charitable Entity

5.1 The Finance Act 2016 inserted a new chapter XII-EB whereby it was provided that if the registration of any charitable/religious trust is cancelled u/s 12AA, then such trust shall be subject to taxation on the basis of Accreted Income. The Accreted Income was defined to be the amount by which the aggregate Fair Market Value (FMV) exceeds the total liability of such trust. Thus practically speaking, the net worth of the Trust computed at FMV, has been made liable to tax whereas this net worth so computed at FMV is given a new name 'Accreted Income'.

5.2 The whole idea of 'Accreted Income' and its taxation, is founded on the premise that the eligible trust enjoys the exemption benefit on the condition that all its income, savings and surplus shall be applied towards the charitable purpose only and thus whenever a charitable institution gets converted into a non-charitable organization, the accumulated surplus as on the date of such conversion ceases to be for any charitable purpose and therefore should be made subject to income tax. That is how chapter XII-EB got its place in income tax statute.

5.3. However the Finance Act 2016 did not provide as to what will happen when any asset is subsequently sold after the same has already been made subject to taxation under chapter XII-EB.

5.4. To correct the above omission, the Finance Act 2017 has amended sec 49 of the Act pertaining to Cost of Acquisition with retrospective effect from 01st June 2016 so as to provide, that where the capital gain arises from the transfer of an asset, being the asset held by a trust or an institution in respect of which accreted income has been computed and the tax has been paid thereon in accordance with the provisions of Chapter XII-EB, the cost of acquisition of such asset shall be deemed to be the fair market value of the asset which has been taken into account for computation of accreted income.

6. Corpus Donation by a Charitable Trust to another Charitable Trust

The Finance Act 2017 has inserted a new Explanation No. 2 to Sec 11(1) to provide that any amount credited or paid to any other trust or institution registered u/s 12AA being contribution to corpus of such donee trust or institution, shall not be treated as application of income of the donor trust.

This provision is meant to curb the practice whereby the donor trust used to issue corpus donations and claimed such outgoing corpus donation as application of income u/s 11 of the Act and whereas at the same time the donee trust claimed exemption from application of such incoming corpus donation being not covered u/s 11(1)(a) but these corpus donation being covered u/s 11(1)(d) and thus no requirement of application of such incoming corpus donations.

This practice encouraged Sec 11 exemption without any requirement of its application towards charitable purposes. The new Explanation No. 2 added to Sec 11(1) has debarred such practice henceforth with effect from 01st April 2017.

7. Modification in objects clause of Charitable Trust

The Finance Act 2017 has amended Section 12A/12AA so as to provide that when any trust registered u/s 12AA subsequently, adopts or modifies the objects which do not confirm the conditions of registration then such trust shall within 30 days from the date of such adoption or modification shall apply to Pr. CIT/CIT for registration as per newly adopted/modified objects.

Thus henceforth w.e.f 01st April 2017 any adoption/modification of objects which are not confirming to the conditions of existing 12AA registration, requires to revisit the registration process and seek approval of competent authority being Pr.CIT/CIT.


Published by

CA Vipin Garg
(Lead Advisor VGNC)
Category Income Tax   Report

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