preity (article) (55 Points)
23 June 2013Issue : 5 brothers have joint land ( agricultural ) . They have given the contract to a builder to develop 500 plot of residential houses on that land . 100 flats will lie in the account of each brother . Registry in nae of general public . when they'll sell land as converted in residential flat will it attract cap gain or pgbp provisions .
Do reply asap ...on this post or my e mail id aa75143 @ gmail.com
Shenba Associates
(Partner)
(115 Points)
Replied 23 June 2013
C.A SUVAJIT SAHU
(CA ( In Practice ))
(708 Points)
Replied 24 June 2013
CA SUNIL SURI
(chartered accountant)
(345 Points)
Replied 24 June 2013
PGBP........... AS THEY ARE DOING BUSINESS
Varsha
(Student)
(1164 Points)
Replied 24 June 2013
In my opinion it will attract PGBP provison bt nt completely sure....
Z
( )
(2960 Points)
Replied 24 June 2013
To orignal poster. Can you please cite the source
I want to have a deeper probe into this issue. I read your case earlier but due to time constraints I wasn't able to say anything and it was for good because you got more info. to share with us
My opinion was (w/o considering the update which you have removed)
Brothers have given development rights to the builder , which is a capital asset in hands of builder
When brothers give development rights to the builder then this transaction does not results into sale and the builder is constructing buildings on behalf of the brothers (with or without the recommendations of the brothers in respect of construction) . So it is infact the brothers who are developing the land through third party.
Next point in consideration is whether there is a transfer as per S. 2(47) or not?
You mentioned that brothers have agricultural land. So I presume that this land was classified in the records of revenue as agriculture land and in the records of the state govt as agriculture land
When construction would be completed they will no longer be agricultural land but residential/commercial properties which again have to be registered from the state government.
So brothers got residential/commercial properties and what they had was agriculture land and hence there is a conversion. I will further support my view by saying that brothers will sale these properties so they will engage in business and hence this case is covered in conversion of capital asset into stock in trade which is covered in the definition of transfer.
Also see Meccane Industries Ltd [2002] HC & CIT v. Bai Shirinbai K. Kooka (Reproducing the text)
"As regards the question of the cost of the acquisition of the capital asset, it was submitted by counsel that what was bought by the assessee was agricultural lands and when the assessee proceeded to sell it for use as house sites and when it was put to non-agricultural use, the market value as on the date of the agreement should be considered for the purpose of determining the capital gain. It was submitted that an asset which was in the nature of agricultural land was not an asset for the purpose of levy of capital gain at the relevant time. When that land was converted and put to use as non-agricultural land it became an asset to which the capital gain provisions would apply (THAT IS CAP ASSET), and it is that date that would be relevant for determining the cost of acquisition."
Held that the Tribunal was right in holding that the cost of acquisition is the cost to the assessee when it acquired the agricultural land
NOTE FACTS OF THE 2 CASES ARE DIFFERENT
Counsel contended that when the agricultural land was sold for the purpose of use as non-agricultural land, it amounted to the assessee bringing into existence a new asset and the date on which that asset was created was to be regarded as the date of acquisition, and the market value prevailing on that date should be treated as his cost of acquisition.
CIT v. Bai Shirinbai K. Kooka held that when a capital asset is converted into stock-in-trade and thereafer sold, the cost of acquisition should be taken with reference to the date on which the capital asset was converted into stock-in-trade.
What am basically trying to say is that whichever way you look it as, if you SELL the property as non agricultural or convert it. There will be cap gains. If you do some construction then also the land ceases to be agricultural land (crux from the 1st case law) and it becomes a capital asset but transfer would be effective from date of bringing BUILDING into stock in trade
In your case there will be no agricultural land and hence IT DEFINITELY is a tranfer
So the charge has been created but the payment will have to be made at the time this Stock in trade(Building) will be sold.
Brothers will need to maintain proper records 'cause transaction is big, So in their books (As AOP or as individuals) they will bring this Stock in trade into their books.
AT WHAT TIME? Since this can be done on proportionate basis(depending upon the terms of contract say seperate agreements for buildings or on milestone basis)
or entire in 1 go (STOCK IN TRADE IS BUILDINGS AND NOT THE LAND, so you don't have building then you don't have stock so.......what were you saying in this behalf.............. I need more info )
next:
AT WHAT COST? This also needs to be considered because for the purpose of PGBP ,See the above case
Constructing 500 units will take some years (if not in mood to beat the record for completeing construction in lowest time) And there is limitation on selling the units like some % (i guess 20) of total construction should be completed lest you can not sale (I will cite it later when I find it)
& over the years the value of the units will increase as more units will be completed and also considering the rise in the price. So it is imperative that there will be profits on sale and that shall be covered under PGBP income and as soon as you transact sale, they will have to pay the tax in relevant year.
Therefore there will be BOTH PGBP as well as CAP GAINS
There are more issues in this case
You have mentioned that their will be construction of 500 units and 5 brothers will divide it. But usually in such cases the person(s) (specially individuals) on whose behalf this construction is being done does not pays the entire consideration in cash/bank. Practically they let some units to be kept by the builder. Because if this be the case then for the purpose of capital gains there might be some adjustments in the cost of acquisition of the building. I want confirmation on this point 'cause this will add to more um. considerations.
IF ANYONE HAS OTHER VIEW POINT THEN THEIR VIEWS ARE MOST WELCOMED
preity
(article)
(55 Points)
Replied 25 June 2013
the brothers arn't regularly doing real estate business ( & no flats will belong to builder as u asked ... & the source is a client of my ca ) so even if it considered as business it will attract adventure / concern in the nature of trade provisions (which can be defeated ...depends on case to case ).....The principal tests are : (a) whether the taxpayer dealt with the property acquired by him in the same way as a dealer in such property ordinarily would deal with it; (b) whether the nature and quantity of the property excludes the possibility that its sale was the realization of an investment or was otherwise of a capital nature, or that it could have disposed of other than in a transaction of a trading nature; and (c) whether the taxpayer's intention, as established or deduced, is consistent with other evidence pointing to a trading motivation.
as per these conditions can't we say that ... agriculturists didn't acquire the land to deal with it as dealer since beginning , the possibility of otherwise disposing off still exists , and motivation was not solely trading ...
also they had urban agricultural land ( already a capital asset ) .... another point or reason is that i read somewhere in expert section in caclubindia only that since it's one time transaction and not a regular business of the assessee it sud be cap gain ....
OR .....However, where the taxpayer goes beyond mere subdivision of the land into lots and installs improvements such as watermains, sewers or roads, or carries on an extensive advertising campaign to sell the lots, the taxpayer will be considered to
have converted the land from a capital property into a trading property & hence cap gain on conversion into sit and pgbp on sale
do provide ur views regarding all above points ....
Sundar
(Articled Assistant)
(85 Points)
Replied 25 June 2013
Unless registered themselves as a real estate dealers, no pgbp provisions will apply. So therefore; Capital gain.
preity
(article)
(55 Points)
Replied 25 June 2013
u sure sundar ... coz the ito is adamant to charge it under pgbp....as it'll take few yrs for them to sell off those flats.. so practically its lyk doin real estate business
Z
( )
(2960 Points)
Replied 25 June 2013
"the brothers arn't regularly doing real estate business"
"the principal tests are : (a) whether the taxpayer dealt with the property acquired by him in the same way as a dealer in such property ordinarily would deal with it;
(b) whether the nature and quantity of the property excludes the possibility that its sale was the realization of an investment or was otherwise of a capital nature, or that it could have disposed of other than in a transaction of a trading nature;
(c) whether the taxpayer's intention, as established or deduced, is consistent with other evidence pointing to a trading motivation.
"as per these conditions can't we say that ... agriculturists didn't acquire the land to deal with it as dealer since beginning , the possibility of otherwise disposing off still exists , and motivation was not solely trading ... also they had urban agricultural land ( already a capital asset ) .... another point or reason is that i read somewhere in expert section in caclubindia only that since it's one time transaction and not a regular business of the assessee it sud be cap gain .... do provide ur views regarding all above points"
Agree with a,b & c above
When you said agricultural land then I presumed its a rural land because there was no mention of this fact. This changes the whole thing.
Having regards to the quantum , The department will treat it as business.
So PGBP only
but however I suggest that brothers maintain seperate records for those assets which they want to treat as investment. And by seperate records I mean it should be specifically shown as investment is books and if possible make another entity for the property to be treated as investment
Sundar
(Articled Assistant)
(85 Points)
Replied 26 June 2013
How long the property held with them is isn't a matter. the only thing is whether they get themselves registered or not.
Sheena Maheshwari
(ARTICLESHIP)
(240 Points)
Replied 26 June 2013
hi. The transaction needs to be viewed in all respects . My question: How is the builder/contracter paying compensation to the brothers. Basically details of the contract like:
1) have the brothers hired him to build the flats and they pay him for it and the brothers have 100% right over all receipts from sale of flats or;
2) the contract is such that the builder acquires the land from the brother constructs the flats and a part of the sale portion is paid to them?
In the first case it would be pgbp. In the second case cap gains.
CAclubindia
