Real estate taxation

Dear AK

The following is only for your general understanding. For a full fledged advice on practical lines, do consult your CA.

a. 1a. Conversion of a firm into a Pvt. Ltd. company - If the conversion takes place satisfying the conditions mentioned in Sec.47(xiii) of the Income Tax Act, then the transfer of capital assets between the old and new organisation will not be consdiered as a "transfer" and thus, there will be no "capital gains" taxable.

Conditions u/s 47(xiii) are like transfer of all assets and liabilites from firm to the company, shareholding of old partners in the new company to be in the same proportion as their capital account as on the date of succession, old partners not to receive any consideration other than by allocation of shares in the new company and most importantly, the old partners to hold 50% or more voting power in the new company as also that this should remain so for FIVE years from the date of succession.

[There used to be an arbitrage opportunity to the new company to consider the revalued cost at which assets are taken over by the new company from a firm as the cost of acquisition of such assets due to the absense of mention of such a situtaion u/s 49, however, following a retrospective amendment in Finance Act, 2012, such an opportunity is no more available from Assessment Year 1999-2000]

Any contravension of the above condition will entail the capital gain to be taxable in the hands of the company.

You will also be entitled to carry forward any business loss or unabsorbed depreciation, if any, of the old firm by the company as per Sec.72A(6).

a. 1b. Tax Rate is same as 30%+surcharge+cess for an Indian Company. Further, you will be subject to Minimum Alternate Tax (MAT) provisions u/s 115JB.

a.1c. You will no more be eligible to take benefit of presumptive taxation scheme u/s 44AD. But considering the fact that you are engaged in real estate field, I assume your "turnover" will easily exceed Rs.1 crore in a financial year, so, even if you continue as a firm the same may not be available to you.

a.1d. There are certain deduction which are available only to corporate assessees, which you can start availing after the conversion.

a.2a.Conversion of Firm to LLP - it is tax neutral. The taxation will be the same as that of LLP.

a.2b. You will no more be eligible to take benefit of presumptive taxation scheme u/s 44AD. But considering the fact that you are engaged in real estate field, I assume your "turnover" will easily exceed Rs.1 crore in a financial year, so, even if you continue as a firm the same may not be available to you.

b. Maitanance work - as like any other buiness, your income from the maintanance wrok net of expenses will be taxable. Is there any details? Also, you will be subject to service tax.

c. The income from property used for firm's business (office/guest house) will not be chargeable under the head "Income from House Property". However, you may claim other deductions like depreiation u/s 32 and interest on borrowing may be claimed subject to provisions u/s 36(1)(iii). That is, interest portion of the EMI for the period upto the date of use of the building for business purpose maybe capitalised (and this will be available for deduction u/s 32 as depreciation) and the interest portion from the put to use date of the building can be claimed as interest u/s 36(1)(iii).

Further, there is no question of availability of deduction of the "principal" portion of the EMI u/s 80C since Sec.80C is not applicable to partnership firms. Instead, since it is a capital asset of the business, it will appear in your balance sheet and the depreciation will be available to you as deduction on yearly basis.

Regards

Ajay