Taxation Builders Developers Flat Purchasers VimalP

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INDEX
Chapter Name of the Chapter
I Basics regarding Capital Gains on sale of Property.
II Basics Concepts of Joint Development Agreement
(JDA) in Real Estate Sector.
III Method of Accounting
IV Definition & Interpretation of Section 2 (47) of
Income Tax Act, 1961. Some Important Aspects
regarding Conversion of Capital Assets into Stock in
Trade and Vice versa, Compulsory Acquisition of
capital asset and compensation received thereof.
V Provision Related to Section 50C, 43CA and Section
56(2)(x) of the Income Tax Act, 1961.
VI Exemption of Capital Gains u/s 54, 54B, 54EC & 54F
of Income tax Act 1961.
VII Redevelopment Issues in case of Builders, Members,
Land Owner and Society
VIII Some Additional Concepts with respect to Builders
and Developers
IX Some Additional Concept with respect to Capital
Gains.
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LIST OF ABBREVIATIONS USED

CG Capital Gains
LTCG Long Term Capital Gain
STCG Short Term Capital Gain
COA Cost of Acquisition
CII Cost Inflation Index
COI Cost of Improvement
JDA Joint Development Agreement
SDV Stamp Duty Value
CC Completion Certificate
TOPA Transfer of Property Act
CCM Completed Contract Method
PCM Percentage Completion Method
ICDS Income Computation and Disclosure Standard
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CAPITAL GAINS ON IMMOVABLE PROPERTY
Chapter I: Basics regarding Capital Gain on Sale of Property

❖ Over View of Capital Gains.
➢ Profits or gains arising from the transfer of an immovable property,

held as a capital asset, are taxed under the head “Capital Gains”
(Section 45)
➢ The Incidence of tax on Capital Gains would arise in the previous

year in which the capital asset under consideration is being
transferred.
➢ Exception to Section 45(1): As per section 45(1), capital gain is

chargeable to tax in the year of transfer but in following four cases
capital gain is not taxable in the year of transfer but it would be
taxable in the year of receipt of consideration.
• Section 45(1A): Insurance Claims for damage or destruction

of capital assets.
• Section 45(2): Conversion of Capital Assets into Stock-in-
Trade.
• Section 45(5): Compensation on Compulsory Acquisition
under any law.
• Section 45(5A): Capital Gain in case of Joint Development
Agreement (Applicable only to Individuals and HUF’s)
➢ An immovable property, being land or building or both, held for a

period of 24 months or less qualifies as a ‘short term capital asset’
[Proviso to Section 2 (42A)] and if such capital asset is held for
more than 24 months it qualifies as ‘long term capital asset’. For
assessment years prior to AY 2018-19, such period was 36 months
instead of 24 months
➢ Transfer of a short term capital asset gives rise to Short Term

Capital Gains (“STCG”) [section 2(42B)] and transfer of a long term
capital asset gives rise to Long Term Capital Gains (“LTCG”)
[Section 2(29B)]. It is important to distinguish between STCG &
LTCG as the tax rates for both are different.
➢ STCG arising on account of transfer of short term capital

asset is computed as under (Section 48):
Full Value of Consideration XXX

Less: Expenditure incurred Wholly and exclusively (XX)
in connection with transfer of asset
Net Sale Consideration XXX
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Less: Cost of Acquisition (XX)

Less: Cost of Improvement (XX)
Short Term Capital Gains XXX
The STCG computed as above forms part of total income and is

chargeable to tax as per the normal rate of tax as applicable to
assessee.
➢ LTCG arising on account of transfer of long term capital

asset is computed as under (Section 48):
Full Value of Consideration XXX

Less: Expenditure Incurred Wholly and Exclusively (XX)
in connection with transfer of Capital asset
Net Sale Consideration XXX
Less: Indexed Cost of Acquisition (XX)
Less: Indexed Cost of Improvement (XX)
Long Term Capital Gain XXX
Indexation is a process by which the cost of acquisition is adjusted

against inflationary rise in the value of asset. For this purpose, the
CBDT has notified cost inflation index. The benefit of indexation is
available only to long term capital assets. For Computation of
indexed cost of acquisition following factors are to be considered:
➢ Year of acquisition/improvement;
➢ Year of transfer;
➢ Cost Inflation Index of the year of acquisition/improvement;
Indexed cost of acquisition is computed with the help of

following formula:
COA X CII of the year of transfer of capital asset/ CII of the year of
acquisition.
Indexed cost of improvement is computed with the help of

following formula:
COI X CII of the year of transfer of capital asset/ CII of the year of
improvement.
➢ Rate of Taxation for LTCG:
The LTCG Computed as above is chargeable to tax at special rate of

tax @ 20% (Plus Surcharge and cess as applicable). No deduction
under chapter VIA is allowed against LTCG. Further rebate u/s
87A is also not available against such income.
Where the actual sale consideration receivable for the transfer of a

capital asset, being land or building or both, is less than the value
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adopted or assessable by Stamp Valuation Authority for the

purpose of stamp duty in respect of such transfer, the value
adopted by such authority would be taken as the full value of
consideration in computing the Capital Gains as per provisions of
section 50C of the Act.
In other words, while computing Capital Gains: Full Value of

Consideration = (Actual Sales Consideration) or (Value Adopted by
Stamp Duty payment), Whichever is higher.
In this regard, some relief has been provided from A.Y. 2019-20
whereby the effect of the above deeming provision would not apply
if the difference between actual sales consideration and stamp duty
valuation of such property is not more than 5% of the actual sale
consideration. (from A.Y. 2021-2022 the tolerance band is
increased from 5% to10%)
Where the amount of actual purchase consideration payable by a

buyer for purchase of immovable property is less than the Stamp
Duty Value of such property, the difference between the Stamp
Duty Value and purchase consideration shall be taxable in the
hands of the Buyer under the head "Income from Other Sources"
at the normal rate of tax applicable to such assessee as provided
under section 56(2)(x) of the Act.
The above provision will not apply if such difference does not
exceed Rs. 50,000. Further, some relief has been provided from
A.Y. 2019-20. whereby the effect of the above provision would not
apply if the difference between Stamp Duty Value and actual
purchase consideration is not more than 5%(Increased to 10% from
A.Y. 2021-22) of the actual purchase consideration.
LTCG is exempt from tax if the seller invests the amount of such
capital gain in specified type of assets.
The Key Deductions in this regard have been summarized
below:
Section 54 54EC 54GB 54F

Exemptio Individu Any Assessee Individual Individual
n al or or HUF or HUF
available HUF
Sale of Asset Asset being Asset Any Long
being land/building or being Term
residenti both residentia
Capital
al house l house
Asset
or land property other
appurten than
ant residentia
thereto l house
property.
Investme Amount Amount of Capital Amount of Amount
nt Made of Gains to be Sale of sale
Capital invested in considerat considera
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in Gain to Specified bonds of ion tion is to

Purchase be NHAI/RECL/PFCL invested be
of invested /IRFCL (These in invested
in a bonds will now purchase in a
Residenti have maturity of 5 of Equity residentia
al house years or more) Shares of l house
property an eligible property
in India company in India.
(Note 2 in which
below) the
assessee
holds 50%
or more
shares/vo
ting
power,
and the
eligible
company
makes
investmen
t in Plant
&
Machiner
y as
prescribed
Time If Within 6 months of Before the If
Period of purchase transfer due date purchase
Purchase d within of ITR d within 1
one year (refer note year
before or 1 below) before or
2 years 2 years
after; if after; if
construc construct
ted ed within
within 3 3 years of
years transfer(r
after the efer Note
transfer 1 below)
(Refer
Note 1
below)
Conseque If new On sale of Bonds If new If new
nce if asset or otherwise asset asset sold
new asset sold conversion into (shares or within 3
sold within 3 money within 5 plant and years
within a years, years. Long Term machiner then
while Capital Gain y) sold amount
particular
calculati exempted earlier within 5 of Long
period
ng will be taxable in years, Term
capital the year of such then capital
gains for sale or conversion. amount of gain
the new long term exempted
asset the capital earlier
capital gain taxable in
gain exempted the year
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exemptio will be of such

n taxable in sale.
allowed the year
earlier of such
will be sale in the
reduced hands of
from its respective
cost of assessee.
acquisiti
n
Note 1: If investment in new asset is not made before the due date
of filing tax return for the year in which LTCG is taxable, such
amount of investment shall be deposited in a specified
bank/institution under Capital Gains Account Scheme before the
applicable due date.
Note 2: For LTCG upto Rs. 2 Crore the assessee can acquire two
residential house properties in prescribed time limit. However, this
benefit is available once in a life time. (Proviso to Section 54(1) as
Amended by Finance Act, 2019 w.e.f A.Y. 2020-2021)
Note 3: Amount of deduction as claimed under section 80C to be

taxable if residential house sold within 5 years.
Where loan was taken for purchase of residential house property

and deductions were claimed for the principal repayment, stamp
duty and registration under section 80C of the Act and thereafter, if
such house property is sold within five years from the end of the
financial year in which the possession of such property was
obtained, the tax benefits which were claimed earlier will have to be
reversed. The tax deduction claimed for the principal repayment,
stamp duty and registration under section 80C becomes taxable in
the year of such sale.
➢ Scenario 1: Seller and Buyer both are resident:
1. In case the total amount of purchase consideration payable for

immovable property other than agricultural land is more than
INR 50 lakhs, the Buyer is required to deduct tax at the rate of
1% of the purchase consideration payable to the resident seller.
2. Such TDS is required to be deducted at the time of payment or

credit to the account of the Seller whichever is earlier.
3. The Buyer is required to deduct tax at higher rates of 20% in

case the seller does not provide his PAN to the buyer [(Section
206(AA)].
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4. The tax so deducted has to be deposited by the Buyer with the

Government authorities within 30 days from the end of the
month in which TDS was deducted along with Form 26QB.
5. The Buyer is also required to furnish a TDS certificate as per

Forms 16B to the Seller within 15 days from the due date for
furnishing Form No 26QB after generating & downloading the
same from the web portal specified by the income tax
Department.
6. The Seller can then claim credit of such TDS from his income
tax liability in his income tax return.
7. The Seller can claim a refund of the TDS in his income-tax

return if he is incurring a loss on the sale of the property or if he
is claiming exemption from long-term capital gains under any of
the ways discussed earlier.
➢ Scenario 2: Seller is a Non-resident and Buyer is Resident:
1. If the immovable property is being purchased from a person who

is a non-resident in India as per the provisions of the Income-tax
Act, the Buyer is obligated to deduct tax 20% if the asset is a
long-term capital asset and @ 30% if the asset is a short-term
capital asset (plus surcharge and cess as applicable) (Section.
195)
2. Such TDS is required to be done at the time of payment or credit

to the account of the Seller, whichever is earlier.
3. The tax so deducted has to be deposited by the buyer with the

government authorities within 7 days from the end of the month
in which TDS was deducted.
4. Seller may also apply for a certificate of low or Nil deduction of

tax (Section197), if his total income is not taxable at rates
mentioned in this section.
5. The Buyer will also need to have a Tax Deduction Account

Number (TAN)
6. The Buyer is also required to furnish the applicable Quarterly

TDS Statement in Form 27Q in the prescribed manner The due
dates for filing such quarterly TDS statements have been
summarized below:
Quarter Ending on Due date for filing TDS

Statement in form 27Q
30th June 31st July of Financial Year
30th September 31st October of Financial Year
31st December 31stJanuary of Financial Year
31st March 31st May of Financial Year.
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❖ SOME IMPORTANT TAX PLANNING TIPS
• One should hold the asset for a long term perspective, as the tax
rate on sale of long term capital asset is comparatively less than
short term capital asset.
• One should ensure that some re-investments to be done as per

Section 54,54F, 54EC, etc within the prescribed time limit so that
the tax liability of an assessee gets reduced or eliminated.
• One should also ensure that transactions relating to immovable

property/assets shall be done in any mode other than cash.
Transactions in cash may lead to initiation of strict penal provision
under section 271D, 271DA and 271E.
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Chapter II: Basics concept of Joint Development Agreement

(JDA) in Real Estate Sector.
❖ Need For JDA
Real estate is considered to be an infrastructure sector for the growth
and development of economy for a country. Development of real estate
involves huge amount of investment, high degree of skill, efforts and
time. Investment is required in form of acquiring land, for obtaining
permission from the concerned authority for the purpose of development,
for developing the project as per norms of the regulatory authority, for
carrying out the construction activity and for marketing the project. The
real estate project may be in the nature of development of Industrial
Township, Commercial Complex, Residential Township, or Group
Housing Society etc. It generally takes several years in development and
completion of a real estate project.
For development of real estate, model of joint development arrangement
has emerged as a popular model wherein land owner and developer
contribute and combine their available resources and efforts for the
development of real estate project.
Under such joint development agreement, land owner contributes his
land and enters into an arrangement with the developer to develop and
construct a real estate project at the developer's cost. Thus, land is
contributed by the land owner and the cost of development and
construction is incurred by the developer.
❖ Benefits arising from Joint Development Agreement to the
land owner and real estate developer;
For Land Owner For Real Estate Developer
Land owner may not have requisite The cost of land in a project forms
experience in developing the substantial part of total cost of
property. The land owner gets an project. In such an arrangement
advantage to get its property the developer is not required to
developed by the professional make investment for acquiring land
developer as per the need and at initial stage.
specification.
The land owner may get The real estate developer can
consideration in the form of either develop the property on the said
lump sum consideration or land and can earn additional profit
percentage of sales revenue or after deducting the consideration
certain percentage of constructed paid to the land owner. Real estate
area in the project, depending upon developer can utilize his expertise
the terms and conditions agreed of project development with limited
upon between them resources in a much efficient
manner
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❖ Types of Joint Development Arrangements
1. Owner of an old house is ready to develop the property in modern

style which may have been allowed by the regulatory authorities:-
In such a case the owner hands over the house to the developer for the
development and the floors constructed are shared between them. In
addition, the developer may provide in a given case certain monetary
consideration and alternative residence to the owner to live during the
development period. This type of arrangement is mostly seen in metro
cities.
2. Large real estate project for development of residential or

commercial complexes:-
The developer may not be in position to invest in acquisition of land for
development of such project. In such a case, land owner contributes
his land whereas the development is undertaken by the developer and
the consideration for land is given by the developer to the land owner
linked with the development of the project as per the terms and
conditions mentioned in the agreement.
❖ Section 45(5A) of Income Tax Act, 1961

Section 45 of the IT Act is the charging section of the income chargeable
under the head Capital Gains. In the ordinary course, a transaction is
subject to capital gain in the year of transfer of the capital asset.
In case of the JDA or Specified Agreement (‘SA’) where the capital asset
being land, building, or both have been transferred to the developer,
such transaction is taxable in the year of transfer.
It is submitted that there may be significant time gap between the year in
which the transfer took place and the year in which the consideration is
received. Therefore, landowner of the capital asset faced difficulties in
payment of taxes.
To minimize the hardship to the assessee, the amendment was bought

up to insert new section 45(5A) in the IT Act. The Finance Act 2017 has
inserted a new section 45(5A) in the IT Act w.e.f. 01.04.2018 which
reads as under:
Section 45(5A). Notwithstanding anything contained in sub-section (1),

where the capital gain arises to an assessee, being an individual or a
Hindu undivided family, from the transfer of a capital asset, being land or
building or both, under a 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; and for the purposes of section 48, the stamp duty
value, on the date of issue of the said certificate, of his share, being land
or building or both in the project, as increased by the consideration
received in cash, if any, shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of the capital
asset :
Provided that the provisions of this sub-section shall not apply where the
assessee transfers his share in the project on or before the date of issue of
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the said certificate of completion, and the capital gains shall be deemed to
be the income of the previous year in which such transfer takes place and
the provisions of this Act, other than the provisions of this sub-section,
shall apply for the purpose of determination of full value of consideration
received or accruing as a result of such transfer.
Explanation.—For the purposes of this sub-section, the expression—
(i) “competent authority” means the authority empowered to approve the

building plan by or under any law for the time being in force;
(ii) “specified agreement” means 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;
(iii) “stamp duty value” means the value adopted or assessed or

assessable by any authority of the Government for the purpose of payment
of stamp duty in respect of an immovable property being land or building
or both.]
As new sub-section (5A) in section 45 of the IT Act, overrides the

provisions of Section 45(1), therefore, the taxable event i.e. the transfer of
title of land by the landowner (only in the cases of individuals and
HUFs) to the Developer under a JDA, arises on receipt of the certificate of
completion for the whole or part of the project, issued by the competent
authority, provided the landowner does not transfer his share in the
project to any other person on or before the date of issue of said
certificate of completion.
Further, new sub-section (5A) in section 45 of the Income Tax Act also
provides that the stamp duty value of land or building or both, of the
landowner’s share in the project/developed estate, on the date of issuing
of certificate of completion by the competent authority, to the land
owner, as increased by any monetary consideration received by the
landowner, if any, shall be deemed to be the full value of the
consideration received or accruing as a result of the transfer of the
capital asset, under section s 48 of the IT Act.
Before insertion of the above section by Finance Act 2017 (till A.Y.
2017-18)
Section 45(1) of the IT Act, is charging section and provides that-
“Any profits or gains arising from the transfer of a capital asset effected in
the previous year shall, save as otherwise provided in sections 54, 54B,
54D, 54E, 54EB, 54F, 54G and 54H, be chargeable to income tax under
the head ‘Capital Gain’ and shall be deemed to be the income of the
previous year in which the transfer took place.”
In view of the above, Capital Gains arise on “transfer” of a capital asset.

As per Section 2(47)(v) of the IT Act, the expression “transfer” amongst
other things includes:
“any transaction involving the allowing of the possession of any

immovable property to be taken or retained in part performance of a
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contract of the nature referred to in section 53A of the Transfer of Property

Act, 1882 (4 of 1882)”
It is submitted that the tax department, relying upon the said definition
of transfer, has always contended that the taxability of the capital gains
in the hands of the landowner, arises as soon as the JDA is signed and
entered into between the landowner and the developer. It does not matter
that property is not built-up and transfer to prospective buyers.
Therefore, tax department considered the taxable event as and when the
JDA is signed and entered into between the landowner and the
developer.
But the biggest question which arises is ‘when the project is just on
papers at the time of signing of JDA, with no real existence, what would
be the taxable value of consideration in the hands of the landowner’.
To give the answer of the above question, the tax department contended
that as per the provisions of section 50D of the IT Act, which reads as
under:
“Where the consideration received or accruing as a result of the transfer of

a capital asset by an assessee is not ascertainable or cannot be
determined, then, for the purpose of computing income chargeable to tax as
capital gains, the fair market value of the said asset on the date of transfer
shall be deemed to be the full value of the consideration received or
accruing as a result of such transfer.”
In view of the above, the taxable value of consideration in the hands of

the landowner would be the fair market value of the project including
land on the date of execution of the JDA.
Pursuant to provisions of section 50D of the IT Act, the fair market value
of the said asset on the date of transfer shall be deemed to be the full
value of the consideration received or accruing as a result of such
transfer’ but project under JDA takes times to complete (2 to 3 years)
and is subject to fluctuation risk. Therefore, fair market value of the
project on the date of execution of JDA is not justified.
❖ Judicial Ruling in case where registration of contract is
mandatory in order to attract definition of Transfer
The Hon’ble Supreme Court in its landmark Judgment in the case

of CIT v. Balbir Singh Maini” Civil Appeal No. 15619 of 2017 held
that
The provisions of ‘transfer’ under section 2(47)(v) of the IT Act, are not
applicable since JDA entered into by the taxpayer with developers is not
registered. In order to qualify as a ‘transfer’ of a capital asset under
section 2(47)(v) of the IT Act, there must be a ‘contract’ which can be
enforced in law under Section 53A of the Transfer of Property Act, 1882
(TOPA). There is no contract which can be taken cognizance of, for the
purpose specified in Section 53A of the TOPA after the amendment to the
Registration Act, 1908 in 2001 unless the said contract is registered. Since
JDA was never registered, the JDA has no efficacy in the eye of law,
therefore, no ‘transfer’ can be said to have taken place.
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The Supreme Court also observed that the income from the capital gain on
a transaction has never materialized and it is a hypothetical income. There
is no profit or gain which arises from transfer of capital asset. The
taxpayer did not acquire any right to receive income, in as much as alleged
right was dependent upon the necessary permissions being obtained.
There was no debt owned to the taxpayers by the developers, and
therefore, the taxpayer had not acquired any right to receive income under
JDA. Therefore, no profit or gains ‘arose’ from the transfer of capital asset
so as to attract Section 45 and 48 of the Act.
❖ Highlights of Section 45(5A)
Applicable – Only to Individuals or HUF
Year of Transfer – Year in which possession of immovable property is
transfer in Joint Development Agreement
Year of Tax – Year in which Completion Certificate (CC) is issued by
Competent Authority
Full Value of Consideration – Stamp Duty Value on the date of issue of
CC of his share in project + Consideration received in cash (if any).
Note: Above Provisions will not apply if in case assessee transfers his
share in project on or before the date of issue of completion certificate
and capital gain will be taxable in the year in which transfer took place
i.e possession transfer in JDA.
❖ Taxability in the hands of Real Estate Developer:
The Income arising to the developer under JDA, in the form of sale
consideration of his share in the developed property is considered as
his business income and taxed as per applicable provisions.
❖ Taxability in the hands Land Owner:

The income arising to land owner either as percentage of built up
area in a developed property or monetary consideration is taxable
under the head income from capital gains.
❖ Important issues to be taken care while drafting JDA
• Whether possession of land is handed over to developer in a

manner to grant license to enter upon and possess land only for
development purpose or developer is enjoying the possession
beyond that.
• Manner and Point of time, Ownership of land is transferred to the
developer by land owner for deciding capital gain tax liability to
the land owner.
• Whether rights and authorities to mortgage land is granted to
developer by land owner to avail credit facilities from bank?
• Manner of Sale consideration and time of payment determined
between land owner and developer. Further consideration in
monetary terms, or in kind or in combination of both to be
specified.
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Chapter III: Method of Accounting.

❖ Types of Accounting Method to be followed by Real Estate
Developer
a. Project Completion Method/Completed Contract Method (CCM)

A method of recognizing revenues and costs from a long-term project
in which profit is recorded only when the project has been completed.
Even if payments are received while the project is in progress, no
revenues are recorded until its completion. The completed-contract
method is a conservative way of accounting for long-term
undertakings and is used for certain types of construction projects.In
the case of sale of immovable property, ownership of the property is
transferred as per the Transfer of Property Act, 1882 when legaltitle of
ownership is transferred. As per the Transfer of Property Act,1882
legal title of the property is transferred by way of registrationof sale
deed or in accordance with the provision of section 53A ofthe Transfer
of Property Act.
Revenue is recognized as per the above principle when ownership of
property is transferred. In real estate project ownership can be
transferred only when property comes into existence and physical
possession of the property is handed over.
b. Percentage Completion Method (PCM)

A method of recognizing revenues and costs from a long-term project
in relation to the percentage completed during the course of the
project. Thus, the percentage-of- completion method allows a business
profits (or losses) on a project before its completion. Under PCM,
revenue is recognized as per stage of completion of the project on year
to year basis during the development of the project.
❖ IMPACT OF ICDS ON THE REVENUE RECOGNITION BY THE REAL

ESTATE DEVELOPER
Applicability of Accounting Standard-7 “Construction Contract” on

the Builder/Real estate Developer
The ICAI has prescribed Accounting Standard No. 7 “Construction

Contract” in which accounting of Construction contractor described.
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The Method of Recognition of revenue provided under the A.S. 7 is

as follow
➢ Before 2002
Pre-2002 AS-7 (Old) dealing with Construction Contracts permitted two
methods for revenue recognition, namely, Percentage of Completion
Method (POCM) and Completed Contract Method (CCM). So before 2002
construction contractor can follow either POCM or CCM method for the
recognition of revenue under the Income tax.
➢ After 2002
Thereafter accounting standard was revised by the Institute of Chartered
Accountant of India and which permits only one method i.e. Percentage
of Completion Method has been implemented by the construction
industry at large and is also accepted by the tax authorities. Accordingly,
the use of completed contract method is no longer permitted to
construction contractor
Thereafter Recently CBDT (Central Board of Direct Tax) notified 10 ICDS

(Income disclosure and computation slandered) for the computation of
taxable income/Losses which is applicable from the financial year 2015-
16 i.e. A.Y. 2016-17 and assessee is required to mandatory follow these
standard for the computation of the income.
Out of these ICDS the ICDS No. III is related to “Construction Contract”
wherein the computation of taxable income of the Construction Contract
is provided.
The Method of Recognition of revenue provided under the ICDS III

is as follow:-
Section 145(1) – Income chargeable under the heads “Profits and Gains
from Business or Profession” or “Income from other Sources” – subject to
145(2)- as per method of accounting regularly followed
Section 145(2) – the Central Government has power to notify “ICDS”
CBDT vide notification dated 31 March 2015 introduced 10 ICDS to be

effective from 1 April
2015 and shall be accordingly apply for AY 2016-17 onwards.
Section 145(3)-AO has the power to make best judgement assessment

u/s. 144 if he is not satisfied about the :-
• correctness or completeness of the accounts of the assessee ; or
• method of accounting is not regularly followed ;or
• Income not computed as per ICDS
Hence ICDS has to be mandatorily followed or else best judgement

assessment can be done by Assessing Officer.
Under the ICDS III the method of recognition of revenue by the

Contractor is same as per revised AS 7. So under this ICDS it is
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mandatory requirement to follow the Percentage of Completion method

for the recognition of revenue.
So as per revised AS-7 and ICDS III, after 2002 it is clear position that
assessee under construction contract it is required to follow the
percentage of completion method for the recognition of revenue.
But, the question arises whether the ICDS III and AS-7 are
applicable to the Real Estate Developer or not.
Background of AS -7
The ICAI issued Accounting Standard (AS) 7 – ‘Construction Contract’ in
the year 1983 which was later on revised in the year 2002. The AS 7 laid
down the principles of accounting for ‘construction contracts’ in the
financial statements of the Contractors. As per the revised AS 7 the
accounting was to be done as per percentage/progressive completion
method.
In response to a query rose, on applicability of revised AS 7 to a real
estate developer, before the Expert Advisory Committee (EAC) formed by
the ICAI, the EAC observed that the pre revised AS 7 specifically
mentions about its applicability to enterprises undertaking construction
activities on their own which would include real estate developer.
However, the revised AS 7 is applicable only to Contractors.
The Scope of AS -7 before the revision in year 2002 is as follows
“This Statement deals with accounting for construction contract in the
financial statement of enterprise undertaking such contract (hereinafter
referred to as “Contractor”) this statement will also apply to enterprise
undertaking construction activities of the type dealt with in this
statement not as contractor but on their own account as a venture of
commercial nature where the enterprise has entered into agreement for
sale”.
As per above before 2002 the AS -7 was applicable on the both contractor
and Real estate developer who develop the building and thereafter sale
on their own account.
The Scope of AS-7 after the revision in year 2002 is as follows

“The Standard should be applied in accounting for construction contract
in the financial statement of Contractor”
As per the revise AS -7 the scope of the standard was limited to
contractor only. So after revision a real estate developer/ Builder are not
covered under the AS -7, accordingly they are not required to follow the
percentage of completion of method for the revenue recognition.
The Scope of ICDS III is as follows

“This Computation and Disclosure should be applied in determination of
income for a construction contract for a contractor”
Page 18 of 63
Applicability of ICDS III

Meaning of Construction contract as given in ICDS is as follow
2(1)(a) A “construction contract” is a contract specifically negotiated for

the construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and
function or their ultimate purpose or use and includes :
(i) Contract for the rendering of services which are directly related
to the construction of the asset, for example, those for the
services of project managers and architects;
(ii) Contract for destruction or restoration of assets, and the
restoration of the environment following the demolition of assets.
So the ICDS apply on Construction Contractor and to service providers

such as architects, project managers, etc. who generally, render services
which are directly related to the construction contract. These categories
of taxpayers will now be mandatorily required to compute their taxable
income on POCM basis.
However this ICDS is silent whether the same is applicable to Real Estate
Developers or not. But if we see applicability of ICDS – III then it will
apply only on construction contract and service provider who is providing
the service related to the construction contract and the Scope of ICDS III
it also similar to AS -7 and as per various decided case law it is decided
that provision of AS -7 is not applicable on Real Estate Developer
because of that it seems that there is no applicability of ICDS III on Real
estate Developer and accordingly the mandatory requirement to follow
the percentage of completion method for recognition of revenue under
ICDS III will not applicable on Real estate developer.
❖ FAQ
Whether Real Estate Developer can follow Completed Contract
Method (CCM)?
Answer: Income-tax Act does not prescribe any specific method to be
adopted to compute taxable income of real estate developer. There is no
specific provision under the Income-tax Act in this regard and therefore,
business income of the real estate developer is to be computed and
assessed in accordance with the normal provisions of computation of
business income prescribed under the Act. The tax authorities cannot
impose and do not have power to insist to adopt any particular method
for revenue recognition and computation of taxable income by the real
estate developer.
Furthermore, for the purpose of tax computation and filing of Income Tax
return by the real estate developer, income can still be computed by
adopting Completed Contract Method even after the issue of revised
guidance note, primarily for the following reasons:
• Developer has been following CCM regularly in the past and
thereforefollowing the principle of consistency and as per method of
accounting regularly employed as permitted under section 145, it
continuesto follow CCM.
Page 19 of 63
• No specific ICDS has been issued by CBDT applicable to real estate

developers. Therefore, neither the assessing officer nor the assessee
is having any specific provision under the Act to be followed for tax
computation purpose by the real estate developers.
❖ Judicial Rulings for adoption of Method of Accounting.

Following case laws have been decided in favor of assessee wherein
an option to the assessee is given to choose either of the method
i.e. CCM or PCM
• Krish Infrastructures Ltd v. Asstt. CIT [2013] 35 taxmann.com
38/58 SOT 127 (Jaipur – Tribunal)
• Awadesh Builders v. ITO [2010] 37 SOT 122 (Mum).
Cases where adoption of CCM is approved (favorable to assessee)
• CIT V. Manish Buildwell Ltd (Delhi)
• Prem Enterprises V. ITO (Mumbai)
• Haware Constructions (P) Ltd V. ITO
• ITO V.Kasturi Construction
• CIT V. Unique Builders & Developers.
Page 20 of 63
Chapter IV:-Definition and Interpretation of Section 2(47) of

Income Tax Act, 1961, Some Important Aspects regarding
Conversion of Capital Asset into Stock in Trade and vice versa,
Compulsory Acquisition of capital asset and compensation
receive thereof.
❖ Section 2(47)
Clause (47) of section 2 of Income-tax Act, 1961 defines the term
"transfer" as under:-
"transfer”, in relation to a capital asset, includes,-
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) ina case where the asset is converted by the owner thereof into,
oris treated by him as, stock-in-trade of a business carried on by
him. such conversion or treatment; or
(iva) the maturity or redemption of a zero coupon bond; or
(v) any transaction involving the allowing of the possession of any
immovable property to be taken or retained in part performance of
a contract of the nature referred to in section 53A of the Transfer
of Property Act, 1882 (4 of 1882); or
(vi) any transaction (whether by way of becoming a member of, or
acquiring shares in, a co-operative society, company or other
association of persons or by way of any agreement or any
arrangement or in any other manner whatsoever) which has the
effect of transferring, or enabling the enjoyment of, any immovable
property.
Explanation 1-For the purposes of sub-clauses (v) and (vi). "immovable

property" shall have the same meaning as in clause (d) of section 269UA.
Explanation 2.-For the removal of doubts, it is hereby clarified that

transfer includes and shall be deemed to have always included disposing
of or parting with an asset or any interest therein, or creating any
interest in any asset in any manner whatsoever, directly or indirectly,
absolutely or conditionally, voluntarily or involuntarily, by the way of an
agreement (whether entered into in India or outside India) or otherwise,
notwithstanding that such transfer of rights has been characterized as
being effected or dependent upon or flowing from the transfer of a share
or shares of the company registered or incorporated outside India."
❖ Interpretation of the above definition

As it uses the word ‘includes’it is an inclusive definition and does not
exclude the contextual or the ordinary meaning of the word ‘transfer’.
(i) Relinquishment means ‘to withdraw from’ or ‘to abandon’ or ‘to
give up any thing or any right’ or ‘to cease to hold’ or ‘to
surrender’. For example, co-owner of property relinquishes his
right in the property, transfer of right in right share etc.
(ii) Extinguishment means cancellation or destruction of a right.

Page 21 of 63
(iii) Compulsory acquisition of a capital asset under any law means

capital asset such as land or interest in land is purchased or
taken under statutory powers without agreement of the owner.
It is compulsorily acquired by the government authorities for the

development of infrastructure facilities for public, for example
land acquired by NHAI or by Railways for its further
development for public. Such compulsory acquisition results in
transfer of the ownership rights of the asset by the owner to the
government. Therefore, the definition of transfer under section
2(47) covers such situation within its ambit and capital gains
shall be liable to be charged to tax on compulsory acquisition of
the asset in the year of acquisition
(iv) Conversion of capital asset into stock in trade When a person

converts any capital asset owned by him into stock in-trade of a
business carried on by him, it is regarded as a transfer under
section 2(47)(iv). Normally, there can be no transfer if the
ownership of an asset remains with the same person. However,
the Income-tax Act provides an exception for the purpose of
capital gains. The definition of transfer u/s 2(47) has been
expanded to include conversion of capital asset into stock in
trade to be covered within the ambit of transfer of capital asset.
(v) Analysis of clause (v) - Transaction involving the allowing of

the possession of an immovable property in part
performance of a contract of the nature referred to in
section 53A of Transfer of Property Act, 1882 treated as
'transfer'
In order to attract section 53A of the Transfer of Property Act, 1882,
following conditions should exist:
(a) There should be a contract for consideration, it should be in
writing; it should be signed by the transferor,
(b) The contract should pertain to the transfer of immovable
property, from which the terms necessary to constitute the
transfer can be ascertained with reasonable certainty,
(c) The transferee should have taken possession of the property
& has done some act in furtherance of the contract.
(d) The transferee should be ready and willing to perform his
partof the contract.
(e) Even without execution of sale deed, the transferee acquires
the rights in the property and the transferor cannot claim any
right in respect of the property other than the right expressly
provided in the terms of the contract.
As per the Transfer of Property Act, 1882, ownership rights of the
immovable property are validly transferred when conveyance deed is
registered in favour of the transferee. The analysis of section 53A of the
Transfer of Property Act, 1882 shows that an alternative method for
transfer of ownership rights of the immovable property, has been
prescribed even when conveyance deed is not registered The combined
reading of various components of section 53A indicates that when there
Page 22 of 63
is an intention to transfer the ownership rights of the property by the

transferor to the transferee by entering into a contract for consideration
and handing over the possession of the property and accepting part
consideration there under, the transferee acquires the rights in the
property, provided the transferee is willing to perform the balance part of
his obligations.
Thus, unless there is contract with the intention to transfer the
ownership rights of the immovable property, mere handing over the
possession of the immovable property would not be enough to constitute
transfer of the property
❖ Conversion of capital asset into stock in trade Section 45(2)
The provision of Section 45(2) is applicable when Capital Asset is
converted into business asset by the owner of asset/land and
subsequently asset is used by him by undertaking business activity.
Such business activity may be taken by the owner of the land himself or
with a builder/developer in a Joint Development Agreement. But it is
important that the ownership of the land should not be transferred to the
Builder/Developer through Joint Development Agreement. It should be in
the name of the owner of Capital Asset/Land.
In case of conversion of capital asset into stock in trade, the transfer
would be considered in the year in which such conversion took place
However, capital gain will be taxable in the year in which converted asset
(Stock in trade) is sold.
Further on sale of converted asset (Stock in trade) the assessee would
also be liable to tax under the heads of profits and gains from business
or profession on sale of Stock in trade
Computation of taxable income under both the heads is shown below:
Under the head Capital Gain
Full Value of Consideration (Fair XXX
market Value on the date of
conversion)
Less: Cost of Acquisition (XX)
Less: Cost of Improvement (XX)
Long term/Short Term Capital Gain XXX
Under the head Profits and Gains from Business or Profession

Sale Price of Stock in Trade XXXX
Less: Cost (Fair Market Value of (XX)
asset as on the date of conversion)
Profits/Gains from Business or XXXX
Profession
Page 23 of 63
Note:
If any part of Stock in trade is sold then only part Capital gain shall arise
in the year in which part Stock in trade is sold.
In case of conversion of capital asset into stock in trade and subsequent
sale of stock, the period of 6 months shall be calculated from the date of
sale of stock in trade for the purpose of exemption under section 54EC.
❖ Conversion of stock in trade into capital asset (Section
28(via) as Amended by Finance Act, 2018 w.e.f A.Y. 2019-20)
Section 28(via) of the Profits and Gains from Business or profession
provides that FMV of Inventory as on the date on which it is converted
into, or treated as, a Capital asset shall be taxable under Profits and
Gains from Business or Profession on the date of conversion.
For the purpose of computing capital gain Cost of acquisition of such
asset shall be the fair market value referred in section 28(via) of the
income tax act.
❖ Compensation on compulsory acquisition of capital asset
under any law (Section 45(5))
Normally capital gain is taxed in the year of transfer but in case of
compulsory acquisition of capital asset, Capital gain will be taxable in
the year in which compensation is received
Compensation are of two types
(a) Initial Compensation and;
(b) Enhanced Compensation
Initial Compensation means compensation decided by the government

authorities and paid to the assessee. Normally these compensation are
undisputed compensation.
Where the compensation is fixed by the government authority and the
same is not acceptable to the assessee, in that case an assessee has an
option to go in court of law for claiming higher compensation. If the court
orders the government to provide such higher compensation, such
compensation is termed as Enhanced Compensation.
❖ FAQ
What are the consequences on taxability if the amount of
compensation is received in installments?
Ans: If the Compensation received is in the nature of Initial
Compensation: It will be taxable in the year in which first installment is
received.
If the Compensation received is in the nature of Enhanced
Compensation: It will be taxable as and when received. However, if any
enhanced compensation is received due to the interim order of any court,
then such compensation shall not be taxable in the year of receipt but
shall be taxable in the year in which final order is passed by such court
or other authority.
Page 24 of 63
Further Interest received on late compensation shall be taxable under

Income from other sources in the year of receipt and 50% deduction will
be allowed u/s 57.
Amendments made in Income Tax due to ‘Right to Fair
Compensation and Transparency in Land Acquisition,
Rehabilitation and Resettlement Act, 2013’ (RFCTLARR) which has
been made effective from 1st January 2014 which states as
hereunder:
The CBDT has clarified that compensation received in respect of any
award or agreement which has been exempted from levy of income-tax
vide section 96 of the Right to Fair Compensation and Transparency
in Land Acquisition, Rehabilitation and Resettlement Act, 2013
(RFCTLARR) shall also not be taxable under the provisions of Income-
tax Act, 1961 even if there is no specific provision for exemption of such
compensation in the Income Tax Act, 1961.
Page 25 of 63
CHAPTER V:- Provision related to section 50C, 43CA and

section 56(2)(x) of the Income Tax Act, 1961.
❖ SECTION 50C
(1) Where the consideration received or accruing as a result of the
transfer by an assessee of a capital asset, being land or building or
both is less than the value adopted or assessed or assessable by
any authority of a State Government (hereafter in this section
referred to as the "stamp valuation authority") for the purpose of
payment of stamp duty in respect of such transfer, the value so
adopted or assessed or assessable shall, for the purposes of section
48, be deemed to be the full value of the consideration received or
accruing as a result of such transfer:
Provided that where the date of the agreement fixing the amount of
con sideration and the date of registration for the transfer of the
capital asset are not the same, the value adopted or assessed or
assessable by the stamp valuation authority on the date of
agreement may be taken for the purposes of computing full value of
consideration for such transfer:
Provided further that the first proviso shall apply only in a case
where the amount of consideration, or a part thereof, has been
received by way of an account payee cheque or account payee bank
draft or by use of electronic clearing system through a bank account
or through such other electronic mode as may be prescribed, on or
before the date of the agreement for transfer:
Provided also that where the value adopted or assessed or

assessable by the stamp valuation authority does not exceed one
hundred and ten per cent of the consideration received or accruing as
a result of the transfer, the consideration so received or accruing as a
result of the transfer shall, for the purposes of section 48, be deemed
to be the full value of the consideration.
(2) Without prejudice to the provisions of sub-section (1), where –
(a) the assessee claims before any Assessing Officer that the value
ad opted or assessed or assessable by the stamp valuation
authority under sub-section (1) exceeds the fair market value of
the property as on the date of transfer;
(b) the value so adopted or assessed or assessable by the stamp

valuation authority under sub-section (1) has not been disputed in
any appeal or revision or no reference has been made before any
other authority, court or the High Court,
the Assessing Officer may refer the valuation of the capital asset to a
Valuation Officer and where any such reference is made, the
provisions of sub-sections (2), (3), (4), (5) and (6) of section 16A,
clause (i) of sub-section (1) and sub-sections (6) and (7) of section
23A, sub-section (5) of section 24, section 34AA, section 35 and
Page 26 of 63
section 37 of the Wealth-tax Act, 1957 (27 of 1957), shall, with

necessary modifications, apply in relation to such reference as they
apply in relation to a reference made by the Assessing Officer under
sub-section (1) of section 16A of that Act.
Explanation 1.-For the purposes of this section, "Valuation Officer"
shallhave the same meaning as in clause (r) of section 2 of the
Wealth-tax Act, 1957 (27 of 1957).
Explanation 2.-For the purposes of this section, the expression

"assessable" means the price which the stamp valuation authority
would have, notwithstanding anything to the contrary contained in
any other law for the timebeing in force, adopted or assessed, if it
were referred to such authority for the purposes of the payment of
stamp duty.
(3) Subject to the provisions contained in sub-section (2), where the

value ascertained under sub-section (2) exceeds the value adopted or
assessedor assessable by the stamp valuation authority referred to
in sub-section (1), the value so adopted or assessed or assessable by
such authority shall be taken as the full value of the consideration
received or accruing as a result of the transfer.
❖ Analysis of Section 50C:
• This section is applicable to all assesses such as Individual, HUF,

Firm, Companies or any other persons.
• This section is applicable in case of transfer of capital assets being

land, building or both.
• In case the asset being land, building or both is not held as capital
asset but held as stock in trade then Provisions of Section 43CA
would be applicable rather than provisions of Section 50C.
• Where assessee claims that stamp duty value (SDV) is more than
fair market value and such SDV has not been disputed in any
appeal then the AO may refer the valuation to valuation officer.
• If the value ascertained by Valuation Officer is more than SDV of

stamp valuation authority then Full value of consideration would
be equal to SDV of Stamp Authority and value determined by
Valuation Officer would be ignored. However, If the value
ascertained by Valuation Officer is less than SDV of stamp
valuation authority then Full value of consideration would be equal
to value ascertained by Valuation Officer.
• Normally SDV as on the date of registration is considered but in

case if the date of agreement and date of registration is not same,
then assessee can take SDV as on the date of agreement if the
assessee has received consideration or part thereof upto the date of
agreement by account payee cheque, account payee draft or use of
Page 27 of 63
any electronic clearing system through bank account or any other

electric modes as prescribed.
• This section is applicable where sales consideration is less than the

SDV assessed or assessable by stamp valuation authority.
However, a tolerance band of 10% is given to assessee from A.Y.
2021-22 which means if the SDV does not exceed 110% of sales
consideration then provision of this section is not applicable (This
tolerance band was earlier introduced in Budget 2018 and was set
at 5% but from A.Y. 2021-22 this has been increased to 10%)
❖ Judicial Ruling
Where limit of tolerance band is set and allowed upto 15% of

variance between SDV and Sales Consideration.
(i) C B Gautam V. Union of India [199 ITR 530 SC]

(ii) Welfare Properties Pvt Ltd V. DCIT 13(3)(1), [ITA
4394/MUM/2018 – 29.11.2019]
Whether this tolerance limit may be made applicable
retrospectively?
It has been held in the case of Chandra Prakash Jhunjhunwala
V. Dy. CIT [2020] 181 ITD 185/188 DTR (Kol. ‘B’) that third
proviso to Section 50C has been inserted to remove an undue
hardship to the assessee or to remove apparent incongruity and
same being curative in nature is applicable with retrospective effect
from 1st April, 2003 i.e. the date effective from which Section 50C
was introduced.
❖ In case of immovable properties if SDV as on 01.04.2001 is

available then Fair Market Value as on 01.04.2001 should
not be more then SDV as on 01.04.2001 (Added by Finance
Act 2020, w.e.f. AY 2021-22)
Example: 1
Mr A acquired a House property on 12.02.1992 for Rs. 2,00,000.

FMV as on 01.04.2001is Rs. 4,50,000 & SDV as on 01.04.2001 is
Rs. 3,60,000.:- In this case COA of property is Rs.3,60,000.
Example:2
MrA acquired a House property on 12.02.1992 for 2,00,000. FMV

as on 01.04.2001 is Rs 4,50,000 & SDV as on 01.04.2001 is Rs.
7,60,000.:- In this case COA of property is Rs 4,50,000. (In this
case if an assessee has not obtained Valuation Report from
Registered valuer determining Fair Market Value as on
01.04.2001 then SDV can be taken as on 01.04.2001. i.e Rs.
7,60,000)
Page 28 of 63
Example:3
MrA acquired a House property on 12.02.1992 for Rs. 2,00,000.

FMV as on 01.04.2001is Rs.1,50,000& SDV as on 01.04.2001 is
1,20,000.:- In this case COA of property is Rs. 2,00,000,
Example:4
Mr A acquired a House property on 12.02.1992 for Rs. 2,00,000.
FMV as on 01.04.2001 is Rs. 4,50,000& SDV as on 01.04.2001 Not
available,:- In this case COA of property is Rs 4,50,000
❖ Section 43CA:
(1) Where the consideration received or accruing as a result of the
transfer by an assessee of an asset (other than a capital asset),
being land or assessed or building or both, is less than the value
adopted or assessed or assessable by any authority of a State
Government for the purpose of payment of stamp duty in respect of
such transfer, the value so adopted or assessable shall, for the
purposes of computing profits and gains from transfer of such asset,
be deemed to be the full value of the consideration received or
accruing as a result of such transfer:
Provided that where the value adopted or assessed or assessable

by the authority for the purpose of payment of stamp duty does not
exceed one hundred and ten per cent of the consideration received or
accruing as a result of the transfer, the consideration so received or
accruing as a result of the transfer shall, for the purposes of com
puting profits and gains from transfer of such asset, be deemed to
be the full value of the consideration.
As per Finance Act 2021 this safe harbour limit of 10% for
home buyer andreal estate developers selling such residential
units has been increased to20% for certain transfer of
residential property complying with the following
requirements:
(i) the transfer of such residential unit takes place during
the periodbeginning from the 12th day of November, 2020
and ending on the30th day of June, 2021;
(ii) such transfer is by way of first time allotment of the

residential unit to any person; and
(iii) the consideration received or accruing as a result of such

transferdoes not exceed two crore rupees.
(2) The provisions of sub-section (2) and sub-section (3) of section 50C
shall, so far as may be, apply in relation to determination of the
value adopted or assessed or assessable under sub-section (1).
Page 29 of 63
(3) Where the date of agreement fixing the value of consideration for
transfer of the asset and the date of registration of such transfer of
asset are not the same, the value referred to in sub-section (1) may
be taken as the value assessable by any authority of a State
Government for the purpose of payment of stamp duty in respect of
such transfer on the date of the agreement.
(4) The provisions of sub-section (3) shall apply only in a case where the
amount of consideration or a part thereof has been received by way
of an account payee cheque or an account payee bank draft or by
use of electronic clearing system through a bank account or through
such other electronic mode as may be prescribed on or before the
date of agreement for transfer of the asset.
❖ Analysis of Section 43CA:
• This section is applicable from assessment year 2014-15
• This section is applicable to any person transferring land or

building or both held as stock in trade.
• In case transfer of property takes place without registration of sale

deed but by execution of sale agreement and power of attorney or
by way of transfer with the regulatory authority in any other
manner, Provision of section 43CA is applicable.

• Assessee has the option to claim before the Assessing Officer that
the value adopted or assessed or assessable by the Stamp
Valuation Officer exceeds the Fair Market Value (FMV) as on date of
the transfer and ask him to refer the valuation of the property to
the Valuation Officer like as per the provisions of section 50C.
• Preference to Valuation Officer (Provisions of Section 50c (2)

and (3) made applicable to section 43CA) [Section 43CA
(2)]:Section 43CA(2) provides that the provisions of section 50C(2)
and (3) shall, so far as may be, apply in relation to determination of
the value adopted or assessed or assessable under section 43CA(1).
Common point w.r.t Section 50C and 43CA in case of reference to

valuation Officer:
Assessing Officer (AO) may refer the case to Valuation officer in the
following circumstances:
Page 30 of 63
(i) Fair Market Value (FMV) claimed by the assessee as per the
registered valuer and AO is of the opinion that value so claimed
is at variance with its FMV.
(ii) In other case :

(a) If AO is of the Opinion that FMV as claimed by the assessee is
more than the lower of below.
- 15% of value claimed by assessee; or
- Rs. 25000/-
(b) Having regard to nature of asset and other relevant

circumstances, it is necessary to do so.
❖ SECTION 56(2)(X):
where any person receives, in any previous year, from any person or
persons on or after the 1st day of April, 2017,
(a) any sum of money, without consideration, the aggregate value of
which exceeds fifty thousand rupees, the whole of the aggregate
value of such sum;
(b) any immovable property,-
(A) without consideration, the stamp duty value of which exceeds
fifty thousand rupees, the stamp duty value of such property;
(B) for a consideration, the stamp duty value of such property as
exceeds such consideration, if the amount of such excess is
more than the higher of the following amounts, namely-
(i) the amount of fifty thousand rupees; and
(ii) the amount equal to "[ten] per cent of the consideration:]
Provided that where the date of agreement fixing the amount
of consideration for the transfer of immovable property and the
date of registration are not the same, the stamp duty value on
the date of agreement may be taken for the purposes of this
sub clause
Provided further that the provisions of the first proviso shall

apply only in a case where the amount of consideration
referred to therein, or a part thereof, has been paid by way of
an account payee cheque or an account payee bank draft or by
use of electronic clearing system through a bank account "[or
through such other electronic mode as may be prescribed], on
or before the date of agreement for transfer of such immovable
property:
Provided also that where the stamp duty value of immovable

property is disputed by the assessee on grounds mentioned in
sub-section (2) of section 50C, the Assessing Officer may refer
the valuation of such property to a Valuation Officer, and the
provisions of section 50C and sub-section (15) of section 155
Page 31 of 63
shall, as far as may be, apply in relation to the stamp duty

value of such property for the purpose of this sub-clause as
they apply for valuation of capital asset under those sections:
(Provided also that in case of property being referred to in the

second proviso to sub-section (1) of section 43CA, the
provisions of sub-item (i) of item (B) shall have effect as if for
the words ten per cent, the words "twenty per cent had been
substituted;]
(C) any property, other than immovable property-
(A) without consideration, the aggregate fair market value of

which exceeds fifty thousand rupees, the whole of the
aggregate fair market value of such property;
(B) for a consideration which is less than the aggregate fair

market value of the property by an amount exceeding
fifty thousand rupees, the aggregate fair market value of
such property as exceeds such consideration:
Provided that this clause shall not apply to any sum of money
or any property received-
(i) from any relative; or
(ii) on the occasion of the marriage of the individual; (under a

will or by way of inheritance, or
(iii) Under a will or by way of inheritance; or
(iv) in contemplation of death of the payer or donor, as the case

may be: or
(v) from any local authority as defined in the Explanation to

clause (20) of section 10; or
(vi) from any fund or foundation or university or other

educational institution or hospital or other medical institution or
any trust or institution referred to in clause (23C) of section 10;
or
(vii) from or by any trust or institution registered under "[section

12A or section 12AA or section 12AB]; or
(viii) by any fund or trust or institution or any university or

other educational institution or any hospital or other medical
institution referred to in sub-clause (iv) or sub-clause (v) or sub-
clause (vi) or sub-clause (via) of clause (23C) of section 10; or
(ix) by way of transaction not regarded as transfer under

clause (1) or "[clause (iv) or clause (v) or] clause (vi) or clause
Page 32 of 63
(via) or clause (viaa) or clause (vib) or clause (vic) or clause

(vica) or clause (vich) or clause (vid) or clause (vii) [or clause
(viiac) or clause (viiad) or clause (viiae) or clause (viiaf)] of
section 47; or
(x) from an individual by a trust created or established solely

for the benefit of relative of the individual;
(xi) from such class of persons and subject to such conditions,

as may be prescribed.]
Explanation For the purposes of this clause, the expressions

"assessable", "fair market value", "jewellery", "property",
"relative" and “ Stamp Duty Value” shall have the same
meaning as respectively assigned to them in the explanation to
clause (vii).
❖ Analysis of Section 56(2)(X):
• This section was introduced by the Finance Act, 2017 and it was
made applicable from A.Y. 2018-19 to all persons.
• Prior to this section the provision related to immovable property

was covered in Section 56(2)(vii)(b) which was only applicable to
Individuals and HUF.
• The provision of Section 56(2)(vii)(b) was introduced from 1st

October 2009 and was made applicable in receipt of immovable
property only to individuals and HUF and not to any other person
such as firm, company, etc. The said provisions were effective from
1st October 2009 till 31st March 2017,thereafter the provisions of
section 56(2)(x) was made applicable with respect to all the
assessee.
• Section 56(2)(x) is applicable only if the property is in the nature of

capital asset of the recipient. If it is in the nature of Stock in trade
provision of this section is not applicable.
• This section is applicable to immovable properties and movable

properties such as Shares & Securities, Jewellery, Drawing,
Painting, Sculptures, Archaeological collections, any other work of
art and Bullion.
• Money or property not taxable if it is received from Relative, on

occasion of Marriage, Under will or by way of inheritance, in
contemplation of death, from any Trust registered u/s 12AA, from
any hospital or medical institution, from any university or
educational institution, from any local authority defined u/s
10(20), From an individual by a trust created solely for the benefit
of the relative of the individual, by any fund, trust, institution,
referred in section 10(23C), by way of certain transaction not
regarded as transfer under section 47.
Page 33 of 63
• With respect stamp duty value to be considered on the date of sale

agreement and stamp duty value as adopted, assessed or
assessable, the provisions of section 50C are applicable to this
section also.
• If any person receiving any asset for inadequate consideration and

he already assessed under this section on the basis of SDV or FMV
then Cost of Acquisition of such asset shall be the FMV or SDV
which was considered under Income from Other Sources u/s
56(2)(x)

Clause (XI) of proviso to Section 56(2)(x) of the IT Act read with Rule
11UAC of the IT Rules, provides for prescribed class of persons to whom
the provisions of Section 56(2)(x) of the IT Act would not apply.
The Central Board of Direct Taxes (CBDT) vide notification1 dated 29
June 2020 has replaced the said Rule 11UAC of the IT Rules. As per
the revised Rule 11UAC, effective from fiscal year 2019-20, the
provisions of Section 56(2)(x) of the IT Act would not apply to:
Any immovable property, being land or building or both, received
by a resident of an unauthorized colony in the National Capital
Territory of Delhi, where the Central Government has regularized
the transactions of such immovable property based on the
prescribed documents in favour of such resident
Page 34 of 63
CHAPTER VI:-Exemption of Capital Gains u/s. 54, 54B, 54EC

& 54F of Income Tax Act, 1961.
❖ Profit on transfer of house property used for residence
[Section54]:
Benefit of section 54 is confined to sale of a residential house after 24
months and reinvestment in a residential house. Reinvestment
benefits are available both for purchase and construction of the
house. Purchase has to be either one year before or two years later.
Construction has to be completed within three years of the sale of the
asset in respect of which benefit of reinvestment is claimed. There
have been many decisions on purchase/construction of the house.
❖ Judicial Rulings
i. House includes part of the house: House property does not mean a
complete independent house. It includes independent residential units
also, like flats in a multi-storeyed complex. The emphasis is not on the
type of the property, but, on the head under which the rental income
is assessed. [CIT (Addl.) v Vidya Prakash Talwar (1981) 132 ITR
661 (Del)].
ii. Release deed may also be treated as purchase: Where a property is
owned by more than one person and the other co-owner or co-owners
release his or their respective share or interest in the property in
favour of one of the co-owners, it can be said that the property has
been purchased by the releasee. Such release also fulfils the condition
of section 54 as to purchase so far as releasee-assessee is concerned
[CIT v T.N. Aravinda Reddy (1979) 120 ITR 46 (SC)]
iii. Addition of floor to the existing house eligible for exemption under
section 54: The assessee sold his residential property and invested the
capital gain within the stipulated time in the construction of a new
floor on another house owned by him by demolishing the existing
floor, it was held that he was entitled to exemption under section 54.
[CIT v Narasimhan (PV) (1990) 181 ITR 101 (Mad)].
iv. No exemption under section 54 if land only is sold: The house
property concerned must be building or land appurtenant to building.
The basic test was whether the land appurtenant to building could be
used independent of the user of the building. If so, it cannot be said to
be land appurtenant to building. Further, the basic requirement is
that the capital gain should arise from the transfer of building or land,
the income of which is chargeable under the head Income from house
property. If the land alone is sold, the provisions of section 54 will
have no application inasmuch as the income from land is not
chargeable under the head Income from house property. [CIT v
Zaibunnisa Begum (1985) 151 ITR 320 (AP)].
v. Successor is entitled to benefit of exemption in case of death of the
assessee: In case of assessee's death during the stipulated period,
benefit of exemption under section 54(1) is available to legal
representative if the required conditions are satisfied by the legal
representative. [Ramanathan (CV) v CIT (1980) 155 ITR 191 (Mad)].
Page 35 of 63
vi. Purchase of limited interest in the house eligible for exemption under
section 54: Where an assessee had sold the residential house and
acquired only 15% interest in another house and such other house
was already used for residence prior to purchase, it was held that the
benefit should be available to the assessee. [CIT v
ChandabenMaganlal (2000) 245 ITR 182 (Guj)]. In coming to the
conclusion, the High Court followed its own earlier decision in CIT v
TikyomalJasanmal (1971) 82 ITR 95 (Guj). In that case, what was
purchased was a unit of house property, while in the present case
before the High Court, it was a limited interest in the property.
vii. Construction in another property not eligible for exemption: An
assessee gifted some land to his wife. He, thereafter constructed a
building on the said land. The Government acquired the land and
building and paid compensation for land to the wife and for the
building to the assessee (husband). It was held that capital gain on
land was assessable in the hands of the husband by virtue of section
64 but he was not entitled to exemption under section 54 in respect
of capital gain on the acquisition of the land of the wife as the capital
gain to the wife did not arise on transfer of a residential house. [T.N.
Vasavan v CIT (1992) 197 ITR 163 (Ker)].
viii.House of the firm used by partners: Where a firms property is used
for residence of partners and thereafter distributed to the partners
upon dissolution of the firm and the partner sells the same,
exemption can be claimed by the partner under section 54. For this
purpose, period for which this property was held by the firm shall
also be taken into account for determining the question whether the
house property in exemption was a long-term capital asset or not.
[CIT v M.K. Chandrakanth (2002) 258 ITR 14 (Mad)].
ix. There can be both purchase and construction: Where the assessee
had partly invested the capital gains on the purchase of another
house and partly on the construction of additional floor to the house
so purchased within the prescribed time limit, it was held that the
Income-tax Officer was not justified in restricting exemption to
investment on purchase only, holding that the exemption under
section 54 was admissible either for purchase or for construction but
not for both. [Sarkar (B.B.) v CIT (1981) 132 ITR 661 (Del)].
x. Construction can start before the sale of asset: The construction of
the new house may start before the date of transfer, but it should be
completed after the date of transfer of the original house. [CIT v J.R.
SubramanyaBhat (1987) 165 ITR 571 (Karn)]. The very fact that
purchase of another house as also the construction can take place
before the sale means that cost of purchase or new construction need
not flow from the sale proceeds of the old property. [CIT v H.K.
Kapoor (Decd) 1998 234 ITR 753 (All) and CIT v M.
VasudevanChettiar (1998) 234 ITR 705 (Mad)].
xi. Allotment of a flat by DDA under the Self-Financing Scheme shall be
treated as construction of the house [Circular No. 471, dated 15-10-
1986]. Similarly, allotment of a flat or a house by a cooperative
society, of which the assessee is the member, is also treated as
construction of the house
Page 36 of 63
xii. [Circular No. 672, dated 16-12-1993]. Further, in these cases, the
assessee shall be entitled to claim exemption in respect of capital
gains even though the construction is not completed within the
statutory time limit. [SashiVarma v CIT (1997) 224 ITR 106 (MP)].
Delhi High Court has applied the same analogy where the assessee
made substantial payment within the prescribed time and thus
acquired substantial domain over the property, although the builder
failed to hand over the possession within the stipulated period. [CIT v
R.C. Sood (2000) 108 Taxman 227 (Del)].
xiii. As per a circular of CBDT, the cost of the land is an integral part of
the cost of the residential house, whether purchased or
constructed. [Circular No. 667, dated 18-10-1993].
xiv. Where an assessee who owned a house property, sold the same and
purchased another property in the name of his wife, exemption
under section 54 shall be allowable. [CIT v V. Natarajan (2006)
154 Taxman 399 (Mad)].
xv. Where the assessee utilised the sale consideration for other
purposes and borrowed the money for the purpose of purchasing
the residential house property to claim exemption under section 54,
it was held that the contention that the same amount should have
been utilised for the acquisition of new asset could not be accepted.
[Bombay Housing Corporation v Asst. CIT (2002) 81 ITD 454
(Bom). Also followed in Mrs. Prema P. Shah, Sanjiv P. Shah v
ITO (2006) 282 ITR (AT) 211 (Mumbai)].
xvi. Where non-resident Indian sold property in India and purchased
residential property in U.K. and claimed deduction under section
54, it was held that it was not necessary that residential property
showed be purchased in India itself. [Mrs. Prema P. Shah, Sanjiv
P. Shah v ITO (2006) 282 ITR (AT) 211 (Mumbai)].
But, After the Amendment vide Finance (No.2) Act, 2014,
exemption is no longer allowed on Investment in residential
house outside India.
If Long Term capital gain is upto Rs. 2 Crore the assessee can
acquire two residential house properties in prescribed time
limit. However, the benefit of acquisition of two house
property is available once in a life time. (As Amended by
Finance Act 2019 w.e.f A.Y. 2020-2021)
➢ Whether Investment made in new house property prior to the
date of transfer of old house property is eligible as deduction
under section 54 or 54F?
Hon’ble Delhi High Court in the case of Commissioner of
Income Tax vs Bharti Mishra (supra) has observed that sub-
section 4 of section 54F prescribes appropriation of sale
consideration of original asset towards provision of new asset made
within one year before the date of transfer of original asset, two
years from the date of transfer or construction of new in-house
property, within three years from the date of transfer of original
receipt but the Act does not prescribe any condition as to the date
Page 37 of 63
of commencement of construction of house property which may be

commenced even before the date of transfer of original receipt.
Similarly, the Hon’ble Karnataka High Court in the case of
Commissioner of Income Tax vs J.R. Subramanya Bhat
reported in 165 ITR 571 (Kar.) had expressed similar view and
had held that investment made towards construction of house
property prior to the date of transfer should also be eligible as
deduction for the purpose of section 54 of the Act.
Accordingly, respectfully following the ratio laid down by the
Hon’ble Delhi High Court and the Hon’ble Karnataka High Court as
aforementioned, we are of the view that provisions of section 54F do
not prescribe any condition as to the date of commencement of
construction of new house property, meaning thereby that the
construction of house property may be commenced even before the
date of transfer of original asset. However, it should be completed
within three years after the date of transfer of original asset.
In case of Tarun Jalali V. DDIT (ITAT Delhi) it was held that
On the facts of this case, we find that the construction of house
property had been completed within three years from the date of
transfer and accordingly, we are of the view that the assessee is
eligible for exemption u/s 54F in respect of the two disputed
amounts viz. Rs. 12 lakh paid on 20.06.2008 and Rs. 14,91,697
paid on 22.08.2008 which were expended prior to the date of
transfer of original asset.
Assessee is eligible to claim deduction under section 54 in
respect of purchase of more than 1 house property wherein the
said purchases of more than 1 house was on account of more
number of family members
Yes as held in K.G Vyas V. Seventh Income tax Officer by
Mumbai Tribunalthe mere fact that the assessee had purchased
them jointly either in the name of his wife or in the names of his sons
would not materially affect or alter the factual position that he is the
owner of all the four flats and that he is also living in them along
with the members of his family. The fact that on a future date the
assessee may divide these properties among the members of his
family is of no relevance or consequence for the purpose of allowing
relief to the assessee under Section 54, since the assessee has
fulfilled the conditions laid down under Section 54, namely, that he
had purchased a house for his own residence by investing the sale
proceeds of his former residential house in the purchase of these four
flats. It can hardly be denied that considering the strength of the
assessee's family with ten members, the accommodation acquired by
the assessee in the form of four flats in the same building is
commensurate to his requirements. We are, therefore, inclined to
accept the contentions of the learned counsel for the appellant and
hold that the assessee is entitled to full relief under Section 54
Page 38 of 63
❖ Capital gain on transfer of land used for agricultural purposes

[Section 54B]:
Any capital gain (short-term or long-term), arising to an assessee
(only individuals), from the transfer of any agricultural land which
has been used by the assessee or his parents for at least a period of
2 years immediately preceding the date of transfer, for agricultural
purposes, shall be exempt to the extent such capital gain is
invested in the purchase of another agricultural land within a
period of 2 years after the date of transfer to be used for
agricultural purpose, provided the new agricultural land
purchased, is not transferred within a period of 3 years from the
date of its acquisition.
Section 54B is applicable only to individuals and not to any other
assessee this is because the section uses the expression used by
"his or a parent of his" which clearly indicate that the "assessee"
refers to an individual. [CIT v Devarajalu (G.K.) (1991) 191 ITR
211 (Mad)]
❖ Capital gain on transfer of long-term capital assets not to be
charged on investment in certain bonds [Section 54EC]:
Any long-term capital gain, arising to any assessee, from the transfer of
any capital asset on or after 1-4-2000 shall be exempt to the extent such
capital gain is invested within a period of 6 months after the date of such
transfer in the long-term specified asset provided such specified asset is
not transferred or converted into money within a period of 5 years from
the date of its acquisition.
Exemption under section 54EC not available in respect of deemed capital
gains on amount received on liquidation of a company: Section 54E (now
section 54EC) permits reinvestment benefit, if the sale proceeds/capital
gains on sale of long-term capital assets are invested in the manner
required by the section. Where a shareholder is made liable for deemed
capital gains on amount received on liquidation of a company, is he
eligible for reinvestment benefit under section 54E (now 54EC)? It was
held that section 54E (now 54EC) would have application only where
there is an actual transfer and not in a case, where there is only a
deemed transfer. [CIT v Ruby Trading Co. Pvt. Ltd. (2003) 259 ITR 54
(Raj)].
Benefit under section 54EC, etc. available even on transfer of depreciable
assets: Although as per section 50 the profit arising from the transfer of
depreciable asset shall be a gain arising from the transfer of short term
capital asset, hence short-term capital gain but section 50 nowhere says
that depreciable asset shall be treated as short-term capital asset.
Section 54E [or say 54EC or 54F, etc.] is in independent provision which
is not controlled by section 50. If the conditions necessary under section
54E are complied with by the assessee, he will be entitled to the benefit
envisaged in section 54E, even on transfer of depreciable assets held for
more than 36 months. [CIT v Assam Petroleum Industries (P.) Ltd.
(2003) 131 Taxman 699 (Gau). See also CIT v ACE Builders Pvt. Ltd.
(2005) 144 Taxman 855 (Bom)].
Page 39 of 63
On the same analogy benefit under section 54EC or 54F shall be

available in the case of depreciable asset if these are held for more than
36 months. (Now the period of holding is reduced from 36 to 24 months
for determining Long Term Capital Asset)
AMENDMENTS IN THE FINANCE (NO.2) ACT, 2014:
Earlier due to Various Decision of Courts ceiling limit of Rs. 50Lakh was
taken as per financial year. Because the words used in proviso to Section
54EC is “any financial year” and not “relevant financial year”.
This means that the assessee cannot invest more than Rs. 50 lacs during
one financial year under 54EC bonds but he can do so in two different
financial years provided that the financial year falls within the six
months time limit after the sale of asset.Reliance is placed on:
AspiGinwala v. Asstt. CIT [2012] 20 taxmann.com 75 (Ahd. - Trib.)
But, After the Amendment vide Finance (No.2) Act, 2014 The investment
in capital gains bonds for section 54EC exemption is now being restricted
to Rs.50 lakh both in the year of transfer of the capital asset and in the
subsequent year, so that one can’t claim exemption of Rs.100 lakh for
investments made in both the years.
The above amendment has taken effect from 01.04.2014
❖ If assessee takes any loan or advance on the security of
Bonds/Units as specified in section 54EC then he shall be
deemed to have converted the said bonds into money on the
date on which such loan or advance is taken and capital gain
exempted earlier shall be taxable to the assessee in the year
of such conversion
❖ Capital Gain on transfer of asset, other than a residential

house [Section 54F]:
Any long-term capital gain, arising to an individual or HUF, from the
transfer of any capital asset, other than residential house property, shall
be exempt in full, if the entire net sales consideration is invested in
purchase of one residential house within one year before or two years
after the date of transfer of such an asset or in the construction of one
residential house within three years after the date of such transfer.
Where part of the net sales consideration is invested, it will be exempt
proportionately.
The above exemption shall be available only when the assessee does not
own more than one residential house property on the date of transfer of
such asset exclusive of the one which he has bought for claiming
exemption under section 54F.
Section 54 and 54F are comparable in many respects. Hence, the
law and precedents relating to section 54 as to whether the house
property on which investment is made is residential or not, the law
relating to time limits, the precedent that construction could start
earlier though completed within three years are all equally
Page 40 of 63
applicable for section 54F. Hence, for judicial decisions for section
54F, refer to the judicial decisions given under section 54.
Circular : No. 743, dated 6-5-1996.
Taxability of unutilised deposit under the Capital Gains Accounts
Scheme, 1988 in the hands of the legal heirs of the assessee
1. Under sections 54, 54B, 54D, 54F and 54G of the Income-tax Act,
1961, capital gain is not chargeable to tax if the amount of capital gain
or net consideration has been utilised for specified purposes by the
assessee within the stipulated period laid down in the relevant section.
These provisions also provide for the deposit in specified Banks, etc., of
the amount of capital gain which is not utilised by the assessee for the
acquisition of new assets before the date of furnishing the return of
income under section 139(1). The amount of capital gain already utilised
for the acquisition/construction of new asset together with amount
deposited is deemed to be the cost of new asset and, consequent¬ly, this
amount is not chargeable to capital gain in the year of transfer of asset.
The provisions of sections 54, 54B, 54D, 54F and 54G further provide
that if the amount deposited is not utilised wholly or partly for the
prescribed purposes, within the period specified, the amount not so
utilised shall be charged under section 45 as the income of the financial
year in which the period of two/three years (as prescribed in the relevant
section) from the date of transfer of the original asset expires.
2. A question has been raised regarding the taxability of the unutilised
deposit amount in the case of an individual who dies before the expiry of
the stipulated period.
3. The matter has been considered by the Board and it is clarified that in
such cases the said amount cannot be taxed in the hands of the
deceased. This amount is not taxable in the hands of legal heirs also as
the unutilised portion of the deposit does not partake the character of
income in their hands but is only a part of the estate devolving upon
them.
Page 41 of 63
CHAPTER VII:- Redevelopment issues in case of Builders,

Members, Land Owner, Society, etc
❖ REDEVELOPMENT FROM VIEW POINT OF FLAT OWNER

DEVELOPMENT RIGHTS – WHO ARE ENTITLE – SOCIETIES OR
MEMBERS?
In respect of Tenants co-partnership co-operative societies, which are of
the nature of “Flat Owners Societies” in which the flats are acquired by
the society from the builder on ownership basis and thereafter Society is
formed, and land is conveyed to the society and individual members
acquire ownership rights over the building and underneath the
development rights.
This concept has been recognized under Bombay stamp Act as on the
conveyance in favour of the housing societies, stamp duty paid by the
purchasers of flats on ownership agreements is deducted from the stamp
duty payable on the market value of the property transferred in favour of
the society as per proviso to article 25 of schedule 1 of Bombay Stamp
Act.
Circular No. F.N. 4 / 28 / 68 – WT DT. 10.0.1969 AND 27.01.1969
explaining the provisions of section 5(1)(iv), the Board clarify that flats
vest with individual members of society.
❖ Additional Area expected at Redevelopment
Liability of Income/Capital Gain Tax, if any, on:-
A. Additional area in the hands of individual members.
Ans. As per Section 54 of the Income Tax Act, 1961, if any residential
property which was held for a period of more than 24 months is sold or
given for redevelopment and the new flat is purchased or acquired within
a period of 1 year before or 2 years after the sale or constructed within 3
years after the sale then capital gain arising on the transfer of the old flat
will be exempt to tax u/s. 54 of the Income Tax Act, 1961 to the extent of
the cost of such new flat.
In the case of redevelopment, the new flat to be acquired is treated as
constructed for the purpose of the Section 54. Thus, if the new flat is
acquired by the owner within a period of 3 years from the surrender of
the original flat then the capital gain arising from the sale of the original
flat can be claimed to be exempted u/s. 54 of the Income Tax Act.
If the new flat is not acquired by the owner within a period of 3years then
the Assessing Officer at his discretion can disallow the same at any time
during the assessment.
However, allotment of a flat or a house by a cooperative society, of which
the assessee is the member, is also treated as construction of the house
[Circular No. 672, dated 16-12-1993]. Further, in these cases, the
assessee shall be entitled to claim exemption in respect of capital gains
even though the construction is not completed within the statutory time
Page 42 of 63
limit. [Sashi Varma v CIT (1997) 224 ITR 106 (MP)]. Delhi High Court
has applied the same analogy where the assessee made substantial
payment within the prescribed time and thus acquired substantial
domain over the property, although the builder failed to hand over the
possession within the stipulated period. [CIT v R.C. Sood (2000) 108
Taxman 227 (Del)].
Hence, relying upon the above judgments, even if in the case of
development, the new flat is acquired by the owner after a period of 3
years from the surrender of the old flat, an assessee can claim exemption
u/s. 54.
If the new flat acquired to claim exemption u/s. 54 is sold within a
period of three years from the date of purchase then the capital gain
exemption claimed earlier would become taxable in the year the new flat
is transferred.
Thus, in your case, the Receipt of extra carpet area over and above the
existing area could be claimed as exemption u/s. 54 of the Income Tax
Act, 1961.
Further, we would like to state that under the definition of “Transfer”
according to Sec 2(47) Income Tax Act, 1961, transfer, in relation to a
capital asset, includes sale, exchange, or relinquishment of the asset or
the extinguishment of any rights therein or the compulsory acquisition
thereof under any law.
An exchange involves the transfer of property by one person to another
and reciprocally the transfer of property by that other to the first person.
There must be a mutual transfer of ownership of one thing for the
ownership of another. Hence, the acquisition of new flat would be
considered as exchange and would be considered as transfer for the
purpose of capital gain.
Argument could not be made that no cost is incurred by any member for
the acquisition of the new flat and hence capital gain cannot be
computed and the case does not fall within the ambit of Section 55(2).
The member is forgoing his rights in the old flat. And hence, it would be
considered as the cost of acquisition of the new flat.
However, if the residential flat is held for a period of less than 24 months
than the receipt of extra area by the individual members would be
taxable in the hands of the individual members.
B. Cash compensation received upon surrender of entitled
additional area, in part or in full, by an individual member.
Ans. If the Individual member is surrendering a part of the existing area
then the Individual member would be liable to pay Capital Gain Tax. The
sale consideration would be calculated as per Section 50C of the Income
Tax Act, which is as follows:
“Where the consideration received or accruing as a result of the transfer
by an assessee of a capital asset, being land or building or both, is less
than the value adopted or assessed or assessable by any authority of a
State Government for the purpose of payment of stamp duty in respect of
such transfer, the value so adopted or assessed or assessable shall, for
Page 43 of 63
the purposes of section 48, be deemed to be the full value of the

consideration received or accruing as a result of such transfer.
Provided that where the date of the agreement fixing the amount of
consideration and the date of registration for the transfer of the capital
asset are not the same, the value adopted or assessed or assessable by
the stamp valuation authority on the date of agreement may be taken for
the purposes of computing full value of consideration for such transfer:
(Inserted w.e.f. 1st April, 2017)
Provided further that the first proviso shall apply only in a case where
the amount of consideration, or a part thereof, has been received by way
of an account payee cheque or account payee bank draft or by use of
electronic clearing system through a bank account, on or before the date
of the agreement for transfer (Inserted w.e.f.1st April, 2017)
Provided also that where the value adopted or assessed or assessable by
the stamp valuation authority does not exceed one hundred and five per
cent of the consideration received or accruing as a result of the transfer,
the consideration so received or accruing as a result of the transfer shall,
for the purposes of section 48, be deemed to be the full value of the
consideration.”
However, if the Individual member is surrendering a part of the
additional area then the Individual member would be liable to pay capital
gain tax on the same. Because the consideration received in monetary
terms as against exchange of old flat and not invested in residential flat
as per section 54.
C. Society receiving amenities and facilities for the common use
of its members and their families.
Ans. If the Society is receiving for amenities and facilities for the common
use of its members and their families then the same is not taxable in the
hands of the Society or the Individual members as there is no cost of
acquisition of the same.
In deciding the case of JETHALAL D.MEHTA V. DY. CIT [(2005) 2 SOT
422 (MUM.), Hon. Income Tax Appellate Tribunal mainly relied upon
Supreme Court decision in the case of CIT V. B.C.SRINVASA SHETTY
128 ITR 294 in which it was decided that if there is no cost no capital
gain can be worked out hence amount received is to be treated as exempt
receipt.
❖ Corpus Money expected at Redevelopment
Liability of Income/Capital Gain Tax, if any, on:-
A Corpus Money received by the Society from the Developer in
lieu of surrender of part entitlement of FSI/Development
Rights, such funds being invested by the Society to earn
interest income to meet/subsidize the maintenance costs of
its Redeveloped premises and property.
Ans. If at the time of Redevelopment, the Society was not in possession of
unutilized FSI/Development Rights, then the Society would not be liable
to pay any Capital Gain Tax on the receipt of the Corpus Money on
surrender of a part of FSI/Development Rights.
Page 44 of 63
Further, if the Society has unutilized FSI/Development Rights in its

possession at the time of Redevelopment, then the receipt of the Corpus
Money on surrender of the part of FSI/Development Rights would be
taxable in the hands of the Society.
Also,in the case of (1) New Shailaja CHS v. ITO (ITA NO. 512/M/2007.
BENCH B dated 2nd Dec, 2008 (mum.)and (2) ITO v. LOTIA COURT
CO- OP. HSG. SOC. LTD. (2008) 12 DTR (MUMBAI)(TRIB) 396 it was
held that where the assessee, a Co-op. Hsg. Soc. Ltd. Became entitled,
by the virtue of Development Control Regulations, to Transferable
development Rights (TDR) and the same was sold by it for a price to a
builder , the question arose whether the transaction of sale receipt could
be taxed. It was held that though the TDR was a Capital Asset, there
being no ‘cost of acquisition’ for the same, the consideration could not be
taxed. The same is held in the cases of NEW SHAILAJA CHS LIMITED
(ITA NO. 512/MUM./2007), OM SHANTI CO-OP. HSG. SOC. LTD. (ITA
NO.2550/MUM./2008) & LOTIA COURT CO-OP. HSG. SOC. LTD. (ITA
NO. 5096/MUM./2008).
Further, in the case of MAHESHWAR PRAKASH 2 CHS LTD. 24 SOT
366 (MUM.), it was held that the assessee-society acquired the right to
construct the additional floors by virtue of DCR, 1991 which could not be
available to the assessee on expenditure of money. Prior to DCR, 1991,
no society had any right to construct the additional floors, so it was not a
tradable commodity. Suddenly by virtue of DCR, 1991, the right was
conferred by the Government on the assessee. Such right exclusively
belonged to the building owned by the society. It could not be transferred
to any other building.
Similarly, similar right belonging to other societies could not be
purchased by the assessee for the purpose of constructing additional
floors in its own building. Therefore, such right had no inherent quality
of being available on expenditure of money and, therefore, cost of such
asset could not be envisaged. Hence, the said view was fully justified in
terms of the decision of the Apex Court in the case of B.C. Shrinivasa
Shetty.
Therefore, the right acquired by the assessee did not fall within the ambit
of section 45 itself. The amended provisions of section 55(2) were also not
applicable, since such right was not covered by any of the assets
specified in section 55(2)(a).
Therefore, the money` received by the assessee from the developer was
not chargeable to tax under section 45. Therefore, the impugned orders
passed by the lower authorities were to be set aside.
B Corpus Money received by the Society from the Developer (as

described in A above) and subsequently distributed to its
members. Whether such incomes enlisted above at A, & B, if
taxable, shall be treated as Capital Gains or deemed to be
income earned in the year of receipt.
Page 45 of 63
Ans. As per Maharashtra Co-op. Societies Act, 1960, a Co-operative

Society cannot distribute the corpus funds to its Individual member, it
can only declare dividends.
However, the declaring of Dividends has lots of restrictions and
formalities.
C. Liability of Income Tax, if any, on interest income arising from
investment of such Corpus Money by the Society in the Co-
operative/other Banks.
Ans. If the Society receives interest income form a Co-operative bank
then the same is exempt from tax. And, if the interest income is received
from other banks than the same is taxable and the Society has to pay tax
on the same.
However, as per Hon’ble Tribunal Judgment in the case of ITO v. Sagar
Sanjog C.H.S. Ltd., ITA Nos. 1972 to 1974 and 2231 to 2233/
Mum./ 2005(BCAJ) it was held that the interest income earned out of
the fund money invested went to reduce the maintenance. According to
the tribunal, the interest would have been taxable, had there been
surplus left after it being adjusted against the maintenance expenses.
The tribunal also noted that there was nothing on record to suggest that
the interest income would be given to members on dissolution of the
Society.
Thus, even the interest income received from other than Co-operative
Bank and spent on Society’s work then the concept of Mutuality will
apply and is not liable to tax but this view is not free from litigation.
❖ Rent for Temporary Alternative Accommodation including
Deposits, if any:
Rental allowance may be received by individual members in the event of
need for Relocation during Redevelopment. Such amounts may be
utilized in part or in full towards rent paid for alternative premises or
may remain entirely unspent if the member already has his/her own
alternative accommodation. Such allowance may be received for about
three years, either together in one tranche in advance or in installments
on a staggered basis.
Liability of Income Tax, if any, on such Rental Allowance, including
Deposits, if any, received by the individual members.
A. Whether such income, if taxable, shall be treated as income
earned in the year of receipt (if received on a staggered basis)
or entirely as income in one year (if received fully in advance)
Ans. In order to get the old building redeveloped, the existing structure
of the old building is required to be demolished and hence, it is
necessary to vacant the same. To facilitate redevelopment and to
compensate the flat owners for the hardship to be faced by them in this
regard, the Developer might offer them Rent compensation which they
would be paying for the temporary accommodation during the period of
redevelopment.
Page 46 of 63
The Rent Compensation so provided by the developer to the owner

should be expended by the owners for the purpose of their temporary
accommodation and other expenditure related thereto.
If the actual rent paid by the flat owners is less than the Rent
compensation received by them from the redeveloper then the excess of
such amount received will be taxable under the head Income from Other
Sources, otherwise, the Rent compensation received by the flat owners
from the redeveloper is not taxable.
The Rent Compensation given to the Individual Members shall be taxable
in the year of receipt if the Rent Compensation is received on staggered
basis and the whole is not spend by the Individual Members on their
alternative accommodation.
However, if the Rent Compensation is given to the Individual Members in
one tranche in advance, then the Rent Compensation received by the
Individual Members would be taxable on proportionate basis if the same
is not spend on the Alternative Accommodation.
❖ Hardship Allowance/ Compensation for Inconvenience.

Members opting not to be temporarily relocated during the
Redevelopment may receive “Hardship Allowance” from the Developer.
Members agreeing to be temporarily relocated during Redevelopment may
receive “Compensation for Inconvenience” from the Developer.
A. Liability of Income Tax, if any, on such Allowance/
Compensation and if taxable, mode of computation i.e.
whether as income in the year of receipt or whether on a
staggered basis as received.
Ans. Along with extra area and Rent compensation, the redevelopers
also offer lumpsum amount to the flat owners in addition to extra area
and compensation.
In the case of CIT V. B.C.SRINVASA SHETTY 128 ITR 294 in which it
was decided that if there is no cost no capital gain can be worked out
hence amount received is to be treated as exempt receipt.
Hence, the Hardship Allowance and the Compensation for Inconvenience
is not taxable in the Hands of the Individual Members as Hardship
Allowance and Compensation for Inconvenience can’t be worked out in
monetary terms and have no cost. Since there is no cost of acquisition,
as per Income Tax Act, 1961, the receipt would be treated as a Capital
Receipt and thus, is exempt from tax.
❖ Taxability on reimbursement of expenses from developer.
A. Liability of Income Tax, if any, on the Society/ individual
members for Reimbursement from Developer of Expenses such
as Stamp Duty, Fees of Consultants (Architect, Lawyers,
Chartered Accountants, etc.) cost of updating members and
holding General Body meetings, Administrative Expenses
towards the Redevelopment Process, etc. incurred/ to be
incurred.
Page 47 of 63
Ans. Anything amount which is reimbursed by the Developer is not

taxable either in the hands of the Society or the Individual
Members, provided that the entire amount of reimbursement is
been spent on the expenses it is reimbursed for.
Thus, if excess amount is reimbursed by the Developer than the
amount which is actually spent for the purpose than the excess
amount would be taxable on the receipt of the same.
However, in the case of a Society, if excess amount is reimbursed to
a Society by the Developer than actually spent by the Society, and
the excess amount so received is been used by the Society for
payment of expenses which are for the welfare of the Society or the
Individual Members than the excess amount received by the
Society would not be taxed and hence, would be exempt. Otherwise
the excess amount received by the Society would be taxable.
❖ Liquidation & Disbursement of Existing Sinking Fund.
A. Liability of Income/Capital Gain Tax, if any, on the Society/
individual members upon liquidation and disbursement to
existing members (with permission from Registrar/any other
authority) of existing, unutilized Sinking Fund (generated by
annual contributions from members and bank interest earned
thereon.) prior to induction of new members arising from
saleable portion of Redeveloped premises.
Ans. In our view, the Sinking Fund is to be used on the property itself
either for the purpose of development or Heavy Repair.
However, if the Registrar gives permission then the Sinking Fund
could be distributed amongst the Individual Members which again
has a number of restrictions.
This distribution of Sinking Fund after the permission of the
Registrar would be taxable in the hands of the Individual Members
to the extent of the interest on such a fund. The distribution of the
principal amount would not be taxable in the hands of the Society
or the Individual Members.
❖ TDS on receipt.
A. Whether tax shall be deducted at Source (TDS) from Corpus
Money, Allowances, Compensations, Reimbursement of Fees of
Consultants and other Expenses, Rent for Temporary
Alternative Accommodation and Deposits or any other form of
receipt in the hands of the Society/ its individual members.
Ans. As per the Income Tax Act, 1961, no TDS is to be deducted on the
amount reimbursed by the Developer to the Society or the
Individual Members or on other items such as Corpus Money,
Allowances, Compensations, Reimbursement of Fees of
Consultants and other Expenses, Rent for Temporary Alternative
Accommodation and Deposits or any other form of receipt.
However, when the Society makes payments such as Professional
Fees, Contractor, etc, the Society is to Deduct Tax at Source at the
Page 48 of 63
rate given herebelow and pay the same to the Income Tax
Department and file the Quarterly Returns:
Contractor 1% in the case of individual/HUF

2% in the case of others u/s 194C
Rent 10% u/s 194I
Professional Fees 10% u/s 194J
Commission & Brokerage 5% u/s 194H
❖ Tax Planning (Saving) Instrument.

A. Recommendation of umbrella of designated schemes, funds,
securities, etc. under which the Society/ its individual
members may invest taxable proceeds, if any, to minimize the
impact of Income/ Capital Gain Tax.
Ans. In our view, whether there would be any capital gain tax liability
arising on account of such transactions of Redevelopment, is not
free from litigation, in view of the fact that various litigations are
going on in various courts in our country and the issue would
finally be settled when the Supreme Court decides the matter.
It is also to be noted that even the Supreme Court changes its view
from time to time depending on the frequent amendments in the
Income Tax Laws.
Further we would like to state that Income Tax Department have
filed appeal before Hon. High Court and, if the court allows them
against the assessee then the same would be taxable for the Society
otherwise till now it is tax free. Even assuming that Hon High Court
decide the case against the assessee then assessee will be liable to
pay tax with interest but no penalty can be charged in view of
decision of Supreme Court decided in the case of Reliance Petro
products Pvt. Ltd. Vs. CIT (2010) 322 ITR 158 (SC) on the
principle that if assessee give all particulars of income in return
and claim certain wrong deduction due to ignorance of highly
technical law then that will not attract penalty u/s 271(1)(c)/270A
of the Income Tax Act, 1961.
Further we would like to say that based on the above, till now the
Corpus received by the Society and the individual members is tax
free but in case the High Court decides the case against the Society
then to be on the safer side and to avoid litigation with the Income
Tax Department, we suggest that recipient can invest the same in
Specified Bonds to claim exemption u/s. 54EC of the Income Tax
Act. One can earn interest by investment in the Bonds for 5 yrs
which would be an added benefit. The interest so earned would be
taxable.
Page 49 of 63
❖ Tax Liability on Restructuring of Society.

A. Whether the composition of the Society may need to be
restructured in any manner so as to facilitate minimization of
the tax liability. OR
B. Whether admission of new members (from saleable portion.) in

the existing Society or their Accommodation as an independent
new Society would have any bearing on the tax liability of the
Society/its individual members.
Ans. No, the composition of the Society need not be restructured in any
manner so as to facilitate minimization of the tax liability.
The admission of the new members to the existing Society or their

accommodation to the new Society would not make much
difference to the tax liability of the Society or its Individual
Members.
However, it would be advisable to admit the new members to the

existing Society because due to increase in the number of the
Members of the Society, the fixed charges or expenses of the
Society like maintenance, etc would be distributed amongst the
Members.
❖ REDEVELOPMENT FROM THE VIEW POINT OF LAND OWNER

When a Joint Development Agreement is entered between Land Owner
and Developer to develop a land The Land Owner shall provide land to
Developer for development of project and In Consideration of this, the
Developer can provide specified developed area to Land Owner or he can
give money as well as developed area to the land owner as per terms
agreed between them.
Point of Taxation in the hands of Land Owner and Valuation
Earlier, i.e. before assessment year 2018-19 there was dispute between
assesse (land owner) and income tax department for taxation of joint
development agreement wherein income tax department levied taxes in
hands of land owner at the time of execution of agreement with developer
however, land owner prefer to pay tax after receipt of his share of
developed area. This was causing lot of hardship to land owner because
there was no cash flow at the time of JDA. To remove the considerable
hardship faced by land owner and to end the existing dispute an
amendment was brought in Finance Act, 2017 for taxation of JDA which
are discussed as under :-
Page 50 of 63
The finance act 2017 has inserted a sub section 5A to section 45 which
is effective from01.04.2018 i.e. AY 2018-19 (definition of the said section
is already discussed in Chapter IV)
As per the provision of Section 45(5A) the capital gain tax will accrue in
hands of the landowner (being Individual/ HUF) when they gets their
share of developed land with completion certificate from competent
authority. Sale consideration in hands of Land Owner will be the
Valuation of his Developed Portion workout by Stamp Authority for
working of stamp duty as on date of issuing completion certificate. This
amount will further increased by the amount of monetary consideration
received or receivable under JDA.
For Example:-
Mr. A (Individual) was owner of 10 acre land which was purchased by
him in year 2005. During financial year 2017-18 he entered into JDA
with developer wherein it is agreed that developer shall give ten lakh
rupees and 1000 sq. fit developed area in consideration of land. On
07.07.2019 project completion certificate has issued and on that date
stamp duty value of 1000 sq. fit is Rs. 30,00,000/- Now tax-ability in
hands of Mr. A will be as follows:-
The gain will be taxed in AY 2020-21 and for this purpose sale
consideration of land will be Rs. 40,00,000/- (Rs.30 Lakh Stamp Value of
Developed Area and Rs.10,00,000/- monetary consideration received
under JDA). Mr. A will be allowed benefit of cost of land against sale
consideration and balance gain will be taxable in his hands as capital
gain in AY 2020-21. If the land was long term capital asset. Then the
benefit of Indexation will also be allowable to Land Owner and he can
avail exemption u/s 54, 54EC, 54F etc.
Thus Land Owners will require to pay tax in respect of their share of
developed area along with monetary consideration as agreed in JDA only
after obtaining completion certificate from the competent authority.
However, if the land owner is other than individual or HUF, then taxation
will govern by old proviso of law. Generally it depends upon the drafting
& conditions of agreement. But, generally gain will be taxable in the year
when the Possession of property transferred to developer for
development.
Nature of Gain
Nature of gain depends upon the classification of assets by the land
owner. If the and is classified as Capital Asset (Investment) in books of
account. Then the gain will be capital. However, if the Land is classified
as Stock in trade, then the gain will be Business Income and will be
taxable in the year when Risk & Reward of Land transferred to Developer
which may the year when the JDA was executed.
Thus, the tax treatment will depends upon the treatment of land in
books of Land Owner.
Page 51 of 63
❖ TDS liability
Section 194IC deals with TDS in respect to an agreement governed by
sub-section (5A) of section 45.
Sec 194IC is reproduced for our ready reference
194-IC. Notwithstanding anything contained in section 194-IA, any person
responsible for paying to a resident any sum by way of consideration, not
being consideration in kind, under the agreement referred to in sub-section
(5A) of section 45, shall at the time of credit of such sum to the account of
the payee or at the time of payment thereof in cash or by issue of a cheque
or draft or by any other mode, whichever is earlier, deduct an amount
equal to ten per cent of such sum as income-tax thereon.
Thus, as per the above provision the developer is required to deduct 10%
TDS on Monetary consideration payable to Land Owners while making
payment or crediting consideration in Land Owners account maintain in
his books of account whichever is earlier.
❖ REDEVELOPMENT FROM THE VIEW POINT OF DEVELOPER
Charge-ability of income depends upon Revenue Recognition. As the
developer is dealing in real estate business. Hence, the Income will be
business Income and Guidance Note on “Recognition of Revenue by Real
Estate Developer” is relevant for revenue recognition.
Guidance Note on “Recognition of Revenue by Real Estate Developers” is
a re-commendatory in nature. A member should ordinarily follow
recommendations in a guidance note relating to an auditing matter
except where he is satisfied that in the circumstances of the case, it may
not be necessary to do so.
As Per Section 145 of the IT Act, this refers to the method of accounting
regularly employed by an assessee as well as to the notification by the
Central Government of the Accounting Standards to be followed by any
class of assessee or in respect of any class of income. Pursuant to the
powers Under Section 145(2) notification dt. 25th Jan., 1996 was
formulated. The notification does not prescribe a method of accounting
for any particular class of assessees or classes of income as is evident
from the reading of the said notification.
Thus, it is liberty of the assessee that which method he wants to follow
for revenue recognition.(The method of accounting for real estate
developer is discussed in Chapter III)
Direct Taxes Committee of ICAI made detailed representation to Central
Board of Direct Taxes during the Direct Tax Workshop with CBDT which
was followed by written representation to Chairman, CBDT on
31.03.2016 and Hon’ble Finance Minister, on 7.04.2016. On invitation
by CBDT subsequently, the ICAI representatives met Joint Secretary
(TPL-I) and Director (TPL-III) at North Block, New Delhi on 18th April,
2016 and 27th April, 2016 and made detailed presentation on difficulties
that would be faced by stakeholders on implementation of ICDS. The
representations made by ICAI were considered positively by the Expert
Committee on ICDS in meeting held on 12.05.2016 and ICAI was asked
to prepare detailed FAQs and amendments to ICDS which were
Page 52 of 63
submitted on 20.05.2016. The FAQ No. 15 deal with this situation which
is as under:-
Question 15: Since there is no specific scope exclusion for Real
estate development activity and BOT projects from ICDS IV on
Revenue Recognition, please clarify whether ICDS III and IV should
be applied by real estate developers and BOT operators. Also, there
is no specific exclusion for lease income in ICDS IV. Please clarify
whether ICDS IV is applicable for lease income.
Answer: The Accounting Standards Committee has recommended that
separate ICDS should be notified for real estate development activity,
BOT projects and Leases. A draft ICDS on Leases was also published for
public comments but not finally notified. Hence, pending notification of
specific ICDS to deal with these revenue items, they shall continue to be
governed by existing tax laws. It is clarified that ICDS III and ICDS IV do
not apply to these business activities.
Thus, As per ICAI it is clarified that revenue recognition of real estate
developer will be governed by old law. As per old law and judicial finding
the developer can follow any method with consistency.
However, Recently Central Board of Direct taxes released draft ICDS on
Real Estate Transaction on May 11, 2017 wherein real estate developer
are require to compulsory follow the percentage of completion method for
taxation with cooling period for old projects. Till date that ICDS is not
notified. Therefore, we cannot comment on same. Today’s Law position
can be change as per the final ICDS comes in effect in Future.
Thus the developer’s Income will be taxable as Business Income. .
The point of taxation will depends upon the method adopted by the
developer. IF adopt Project Completion Method then income will be tax in
the year when project gets completed.And if adopt percentage completion
method, then income will be taxed in phase manner as per the works
completed in respective year.
Page 53 of 63
CHAPTER VIII: Some additional concepts with respect to

Builders and Developers
❖ FAQ’S
Q. In case of deduction u/s 80IB(10) can it be claimed even after
the period of tax holiday as provided in said section in case of
unsold stock held by the developer?
When construction is completed before 31.03.2008, but the sale of some
flats take place in subsequent years, deduction u/s 80 – IB (10) can be
claimed. Generally, in incentive provisions granting tax holidays, there is
always a specification as to the number of years the tax holiday can be
enjoyed. But, in Section 80 – IB (10), there is no specification as to the
number of years the tax holiday is available.
Q. Disclosure in the course of Search – whether income must be
taxed on completion of the project?
The conduct of search and seizure operation in a particular year does not
lead to an inference that the undisclosed income detected as a
consequence thereof has to be taxed in the assessment year relevant to
the previous year in which search was conducted. In other words,
accounting of profits has yet to be made on the basis of method of
accounting followed by the assessee.
It is held that Undisclosed income in the form of ‘on money’ stood
established by seizure of document r/w statement recorded under s.
132(4); however in computing undisclosed income, expenditure incurred
has to be allowed; income discovered has to be taxed in assessment
years as per method of accounting followed by assessee.
Dhanvarsha Builders & Developers (P) Ltd. vs. DCIT [(2006) 102 ITD
375 (Pune)]
❖ CONCEPT OF DEEMED RENT UNDER SECTION 23(5)
Where the property consisting of any building or land appurtenant there
is held as stock-in-trade and the property or any part of the property is
not let during the whole or any part of the previous year, the annual
value of such property or part of the property, for the period up to two
years from the end of the financial year in which the certificate of
completion of construction of the property is obtained from the
competent authority, shall be taken to be nil
❖ Analysis of Section 23(5)
• This Section is introduced by the Finance Act 2017 w.e.f A.Y. 2018-
19.
• This section is applicable to real estate developer.
• It provides notional rent on the unsold inventory lying with the
developer as stock in trade and two years from the end of financial
year in which completion certificate from the competent authority
is obtained is lapsed.
Page 54 of 63
Chapter IX:- Some additional concepts with respect to Capital

Gains.
CAPITAL ASSET
Definition of Capital asset is given under section 2(14) which is very vide
in nature and covered the right in capital asset also. Only those item are
not covered under capital asset which are specifically excluded from
capital asset.
Some Amendment with respect to Definition of capital asset.
By the provision of “Sec. 2(14) Capital Asset”, Rural agriculture land was
exempt from capital gain. For being rural agriculture land, land must be
satisfied certain condition laid down in section 2(14).The Finance
Minister amended this conditions through Finance Bill 2013-14. For,
Simplicity we discuss effect of this amended in two part.
A. Criteria for being rural agriculture prior to 01/04/2013
B. Criteria for being rural agriculture after to 01/04/2013
Criteria for being rural agriculture prior 1-04-2013:
Prior to 01/04/2013 this section are applicable:
2(14)(iii) [Agricultural land in India, not being land situate-
(a) in any area which is comprised within the jurisdiction of a
municipality (whether known as a municipality, municipal corporation,
notified area committee, town area committee, town committee, or by any
other name) or a cantonment board and which has a population of not
less than ten thousand according to the last preceding census of which
the relevant figures have been published before the first day of the
previous year; or
(b) in any area within such distance, not being more than eight
kilometers, from the local limits of any municipality or cantonment board
referred to in item (a), as the Central Government may, having regard to
the extent of, and scope for, urbanization of that area and other relevant
considerations, specify in this behalf by notification in the Official
Gazette;]
Thus, if these conditions are satisfied than land will agriculture land.
Land is situated in any within the jurisdiction of a municipality or a
cantonment board having population of less than 10000.
Land is situated outside the notified distance from jurisdiction of
municipality. Govt. can notified maximum distance of 8Km.
If this condition was satisfied than land is rural agriculture land. And not
liable for capital gain tax.
How to measure distance was not given in the definition. Therefore it was
taken by road. And same view was followed in following judicial
pronouncement.
(1) CIT V.LAL SINGH [2010] 195 TAXMAN 420 (PUNJ. & HAR.)
Page 55 of 63
(2) CIT V. SANTINDER PAL SINGH [2010] 188 TAXMAN 54 (PUNJ. &
HAR.)
(3) LAUKIK DEVELOPERS V. DY .CIT [2007] 105 ITD 657 (MUMBAI)
Criteria for being rural agriculture After 1-04-2013:

After 01/04/2013 this section are applies as follow:
As Per Section 2(14)" capital asset" means property of any kind held by
an assessee, whether or not connected with his business or profession,
but does not include-
(iii) Agricultural land in India, not being a land situated
(A) In any area which is comprised within the jurisdiction of a

municipality (whether known as municipality, municipal corporation,
notified area committee, town area committee, town committee, or by any
other name) or a cantonment board and which has a population of not
less than ten thousand [according to the last preceding census of which
the relevant figures have been published before the first day of the
previous year]; or
b) In any area within the distance, measured aerially,-
(I) Not being more than two kilometers, from the local limits of any
municipality or cantonment board referred to in item (a) and which has a
population of more than ten thousand but not exceeding one lakh; or
(II) Not being more than six kilometers, from the local limits of any
population of more than one lakh but not exceeding ten lakh; or
(III) Not being more than eight kilometers, from the local limits of any
population of more than ten lakh.
Explanation.—For the purposes of this sub-clause, "population" means the
population according to the last preceding census of which the relevant
figures have been published before the first day of the previous year;
Thus, if this condition is satisfied then agriculture land will be rural
agriculture and accordingly not liable for capital gain tax.
Land is situated in any within the jurisdiction of a municipality or a
cantonment board having population of less than 10000.
Distance of land from municipality and population limit.
Distance Population
Within 2 kilometers 10,000-1,00,000
2 kilometers – 6 kilometers 1,00,000-10,00,000
6 kilometers – 8 kilometers More than 10,00,000
Page 56 of 63
The distance from the Municipal Corporation measurement:

Such distance is to be measured on straight line aerially as crow flies.
The shortest aerial distance has to be considered. Such shortest aerial
distance is defined as “A straight line distance between two places.’’ A
human would travel further to get from one point to another due to
obstacles or lack of roads or trails, but a crow can go in a straight line
between them. Humans have to follow roads which have their twists and
turns. But, a crow does not have to face the barriers that humans face.
Hence, we measure the straight line distance between two places.
“The distance as the crow flies is a way to describe the distance between
two locations without considering all the variable factors. As an example,
traveling from California to maine involves a rather indirect route
around, over and through mountain ranges and so forth. The driving
distance might be about 3,500 miles, but the distance as the crow flies is
about 2,800 miles.
Human [By road]
Crow’s flight straight line distance (aerial measurement)
This amendment apply in relation to assessment year 2014-15 and

subsequent assessment years.
Effect of the amendment
a) Distance from jurisdiction or municipality or cantonment board within
which agricultural land is to be considered as urban land has been
changed from uniformly 8 kms to within 8 kms depending on population
of municipality or cantonment board.
b) Distance to be measured straight line aerially as crow flies and not by
road method which was used by courts in various decision. This
amendment overcomes above court decisions which say that distance
should be measured by road.
c) More land will be covered under the urban land because aerially
distance covered more area.
d) Earlier only notified area were covered under the distance criteria but
from now any area will be covered under the distance criteria.
Page 57 of 63
❖ Points to be kept in mind while deciding issue related to

Agriculture land:-
• There should be agriculture Land.

• The land to be situated in India.
• Land Situated in Overseas is not consider for agriculture land Even
that land is agriculture land in India.
• There is not word used in section Urban agriculture land and Rural
Agriculture land
• Where agricultural land was converted into residential plots and not
used for agricultural purpose it will be taxable.
• Distance from specified area will be calculated aerially.
• A Certificate from Patwari or Talati or specified officer should be
obtained by person claiming benefit of agriculture Land.
• There should be documents for Income and Expenditure connected
with Agriculture activity.
❖ Judicial Rulings related to Section 2(14)(iii) – Agricultural

Land in India
Citation
(i) [2012] 23 taxmann.com 341 (Kar.):
Even in absence of any notification issued by Central Government

under section2(14)(iii)(d) for including an area up to 8 kms. from
municipal limit to render land as a capital asset, same would be
treated as agricultural land
(ii) [2016] 73 taxmann.com 312 (Madras)

Where assessee earned profit on sale of land, in view of fact that land
was classified as agricultural land in revenue records, it was given on
lease for agricultural purpose and it had not been converted into non-
agricultural land prior to sale, profit earned from sale of it could not be
brought to tax
(iii) [2017] 80 taxmann.com 41 (Bombay)
Where assessee sold a piece of land in view of fact that assessee had
planted various fruit bearing trees on land and produce was being
used for personal consumption and, moreover, assessee had not filed
an application for conversion of land for non-agricultural propose, it
was not a 'capital asset' under section 2(14) and, thus, gain arising
from sale of it was exempt from tax.
❖ Compulsory Acquisition of Agriculture Land -Section 10(37)–
It is provision to save assessee due to hardship of provision
of section 2(14)(iii)
in the case of an assessee, being an individual or a Hindu undivided
family, any income chargeable under the head "Capital gains" arising
from the transfer of agricultural land, where—
(i) such land is situate in any area referred to in item (a) or item (b) of
sub-clause (iii) of clause (14) of section 2;
Page 58 of 63
(ii) such land, during the period of two years immediately preceding the
date of transfer, was being used for agricultural purposes by such
Hindu undivided family or individual or a parent of his;
(iii) such transfer is by way of compulsory acquisition under any law, or
a transfer the consideration for which is determined or approved by the
Central Government or the Reserve Bank of India;
(iv) such income has arisen from the compensation or consideration for
such transfer received by such assessee on or after the 1st day of April,
2004.
Explanation.—For the purposes of this clause, the expression
"compensation or consideration" includes the compensation or
consideration enhanced or further enhanced by any court, Tribunal or
other authority;
❖ Judicial Rulings related to Section 10(37)

Citation
(i) [2020] 113 taxmann.com 572 (Bangalore - Trib.)
Interest received on enhanced compensation under section 28 of
Land Acquisition Act, 1894 is eligible for exemption under section
10(37)
(ii) [2015] 62 taxmann.com 345 (Karnataka)

Where assessee was not carrying on any agricultural activity in
land in question in preceding two years prior to its compulsory
acquisition, appellant would not be entitled to benefit of section
10(37)
(iii) [2017] 86 taxmann.com 121 (Delhi)

Where State Government had acquired assessee's agricultural
land located in municipal limits, in terms of section 10(37)(i),
income arising from transfer of land would not form part of total
income
(iv) [2017] 80 taxmann.com 84 (SC)

Where assessee's agricultural land was compulsorily acquired by
following entire procedure prescribed under Land Acquisition Act,
merely because compensation amount was agreed upon after
negotiation between parties would not change character of
acquisition from that of compulsory acquisition to voluntary sale
so as to deny exemption under section 10(37) to assesse
(v) [2014] 41 taxmann.com 430 (Gujarat)

Merely because assessee was staying away from agricultural land
or was pursuing some other business would not be sufficient to
hold that land was not used for agricultural purposes, thus,
exemption claimed by assessee under section 10(37) on
enhanced compensation received on compulsory acquisition of
agricultural land could not be denied.
Page 59 of 63
(vi) [2014] 47 taxmann.com 406 (Gujarat)

Assessee could be allowed exemption under section 10(37), even
if agricultural land was not cultivated by assessee himself but
through hired labourer or other family member.
❖ TRANSFER IS A PRE-REQUISITE FOR TAXING CAPITAL GAIN

BECAUSE CAPITAL GAIN IS CHARGEABLE IN THE YEAR
WHEN ASSET IS TRANSFER:
Capital gain arises only when there is a transfer of capital asset. If the
capital asset is not transferred or if there is any transaction which is not
regarded as transfer, there will not be any capital gain. However w.e.f. AY
2000-2001 section 45(1A) has been inserted to provide that in case of
profits or gains from insurance claim due to damage or destruction of
property, there will be capital gain on such deemed transfer although no
asset has been actually transferred in such case.
❖ Judicial pronouncements — whether a transaction
constitutes transfer or not?
Where an assessee gives up the right to claim specific performance
for purchase of immovable property it is relinquishment of a
capital asset and thus transfer:
The assessee had entered into an agreement to purchase certain property.
Both parties reserved the right to specific performance of the agreement.
Nearly four years thereafter, again another agreement was entered into in
the nature of deed of cancellation, by which the assessee agreed for
termination of the earlier agreement and allowed the owner of the land to
sell the said property to any person and at any price of his choice. As a
consideration for this, the assessee was paid a sum of Rs. 6,00,000 apart
from being refunded the advance of Rs. 40,000. The question that arose
for consideration was as to whether the amount of Rs. 6,00,000 received
by the assessee from the vendor could be treated as capital gains in the
hands of the assessee.
K.R. Srinath v Asstt. CIT (2004) 268 ITR 436 (Mad)
There is no transfer in family settlement:
Where a family settlement/ arrangement is arrived at in order to avoid
continuous friction and to maintain peace among the family members, the
family arrangement is governed by the principles which are not applicable
to dealing between strangers. So, such bona fide realignment of interest,
by way of effecting family arrangements among the family members would
not amount to transfer. CIT v A.L. Ramanathan (2000) 245 ITR 494
(Mad) In this case the court followed the decision of the Supreme Court in
general law laid down in the case of Kale v Deputy Director of
Consolidation (1976) AIR 1976 SC 807.
Giving up the right to obtain conveyance of immovable property
amounts to transfer of a capital asset:
Where the assessee had paid the earnest money and acquired right to
obtain conveyance of immovable property, such earnest money paid shall
be cost of acquisition of such right and if such right is given up, there is a
Page 60 of 63
transfer of a capital asset and the compensation received for giving up

such right is the consideration price. CIT v Vijay Flexible Container
(1990) 186 ITR 693 (Bom)
In case of litigation pending, no capital gain tax unless the case is

decided:
The AO hold that the income accrues on the date when an enforceable debt
is created in favour of the Assessee. However, the Court held to consider
the issue as to whether the income would accrue even when the very
existence of the income is under doubt and a subject matter of litigation.
Further, the subject matter of litigation cannot be a subject matter of tax
avoidance.
ITO v. M/s. S. P. BUILDERS, CIT(A) XII/ 12(3)(4)/ IT – 184/07-08.
❖ PIECEMEAL TRANSFER
In AJAI KUMAR SHAH JAGATI V ITO (1995) 55 ITD 348 (DEL.)
AND M/S G. G. DANDEKAR MACHINES WORKS LTD V. JCT, ITA
NO. 181/MUM/2001, BENCH – F, DATED 28TH FEBRUARY,2007,
possession of only a part of property was transferred against
proportionate consideration received during the relevant assessment
year. It was held that capital gains arising only on the said proportion
amount of consideration could be charged in the relevant year and not
on the entire consideration stipulated in the sale agreement.
❖ CAPITAL ASSETS CAN EITHER BE SHORT-TERM CAPITAL
ASSET OR LONG-TERM CAPITAL ASSET
Short-term capital asset: A capital asset held by an assessee for not
more than 36 months immediately preceding the date of its transfer is
known as a short term capital asset. The criteria of 36 months have
been reduced to 24 months in the case of immovable property being
land, building, and house property, from FY 2017-18. For instance, if
you sell house property after holding it for a period of 24 months, any
income arising will be treated as long-term capital gain provided that
property is sold after 31st March 2017.
Long-term capital asset: It means a capital asset which is not a
short-term capital asset. In other words, if the asset is held by the
assessee for more than 24 months or 12 months, as the case may be,
such an asset will be treated as a long-term capital asset. The reduced
period of aforementioned 24 months is not applicable to movable
property such as jewellery, debt-oriented mutual funds etc. They will
be classified as a long-term capital asset if held for more than 36
months as earlier. Some assets are considered short-term capital
assets when these are held for 12 months or less. This rule is
applicable if the date of transfer is after 10th July 2014 (irrespective of
what the date of purchase is).
Key Changes
Page 61 of 63
Time limit of qualifying as a long term capital asset in case of unlisted

share and units of mutual funds (other than equity oriented funds) is
now reduced from 36 months to 24 months.
Thus, period of holding of a capital asset is relevant for determining
whether capital asset is short-term or long-term.
Inclusion of certain period for computing the period of holding of an
asset:
Case Inclusion of period
(ii) Property acquired in any mode given Include the holding
under section 49(1) (e.g. by way of gift period of previous
will, etc.) owner also.
❖ Judicial decisions for determining period of holding

Property constructed on a land purchased earlier: In case of property is
constructed on a site purchased much earlier, the question arises
whether the period of holding the asset i.e., the property, should be
reckoned from the date of completion of the construction of the
property or from the date of acquisition of the land.
The correct position is that the asset consists of two components: (1)
Land and (2) Building. When the property is sold, the period of holding
has to be reckoned separately for the land and the building. The
consideration received can also be split into two parts relating to each
component.
In CIT v Vimal Chand Golecha (1993) 201 ITR 442 (Raj), the land
was purchased in 1962 and building was constructed thereon in the
accounting years relevant to assessment years 1968-69, 1969-70 and
1970-71. The building was sold in 1970. It was held that the gains
attributable to land were assessable as long-term capital gains. The
gains attributed to the building were however, short-term capital
gains. Similar decision was held in the cases of CIT v Lakshmi B.
Menon (2003) 264 ITR 76 (Ker) and CIT v C.R. Subramanian
(2000) 242 ITR 342 (Kar).
Agreeing with the above Rajasthan High Court view, it has been held
that land can be considered a separate capital asset even if a building
is constructed thereon. Thus, where the land is held for more than a
prescribed period, the gains arising from the sale of the land can be
considered as long-term capital gains even though the building
thereon, being a new construction, is held for a period less than the
prescribed one.
CIT v Dr. D.L. Ramachandra Rao (1999) 236 ITR 51 (Mad)
CIT v Citibank N.A. (2004) 260 ITR 570 (Bom)
In the above cases, the burden will be on the assessee to satisfy how
much of the sale proceeds should be apportioned for the land and how
much of the sale proceeds pertained to the structure.
Page 62 of 63
CIT v Estate of Omprakash Jhunjhunwala (2002) 254 ITR 152

(Cal)
Period of holding of share in the co-operative housing society: While
computing the capital gain tax in case of transfer of his shares by a
person who is a member of cooperative housing society, the relevant
date would be date on which the member acquires the shares in the
cooperative housing society and the date on which member had sold
his shares therein. Thus, where the assessee acquired shares in the
society on 6-9-1979 and was allotted flat on 15-11-1979. He was given
possession of flat in October 1981, and sold the shares of the society
along with the flat, on 4-12-1982, the capital gains arising from the
sale were long term capital gains, shares having been held for more
than 36 months.
CIT v Anilben Upendra Shah (2003) 262 ITR 657 (Guj)
Similarly, the assessee became a member in Venus Apartments
(Galaxy Co-operative Housing Society). He was allotted a flat in the
building of the society by resolution dated 4-11-1980, passed by the
managing committee of the society. On the date of allotment, i.e., 4-
11-1980, the property was under construction and came to be
completed on 12-9-1983. Physical possession was handed over to the
assessee on 12-9-1983. On 30-4-1984, the flat was sold by the
assessee for a consideration of Rs. 3,75,000. The assessee worked out
long-term capital gains at Rs. 1,59,395. The Assessing Officer did not
accept the stand of the assessee that the assessee had become the
owner of the property as per resolution dated 4-11-1980.
According to the Assessing Officer the assessee had held the property
for a period of less than 36 months and as such was liable to short-
term capital gains tax, it was held that the assessee in the present
case was allotted a share by the co-operative housing society on 4-11-
1980, and the sale of the same took place on 30-4-1984, i.e., after a
period of 36 months. The Tribunal was therefore justified in holding
that the capital gains arising were long-term capital gains and the
assessee was entitled to deduction from such gains as per law.
CIT v Jindas Panchand Gandhi (2005) 279 ITR 552 (Guj)
Right to acquire any house property: Where a flat is booked with a
builder under a letter of allotment or an agreement for sale, this would
represent only a right to acquire a flat and if such right is acquired
more than 36 months back, it becomes a long-term asset. However,
when the possession of the flat is taken, the period of holding would
once again commence from the date of the possession of the flat as the
small right to acquire a flat merged into larger right and small right
upon a merger would lose its existence.
❖ COST OF ACQUISITION
Cost of acquisition of an asset is the value for which it was acquired
by the assessee. Expenses of capital nature for completing or
acquiring the title of the property are includable in the cost of
acquisition.
❖ Judicial decision on cost of acquisition:
Page 63 of 63
Cost of acquisition of an asset acquired from the previous owner in

any mode given u/s 49(1): In this case, the cost of acquisition is taken
as the cost to the previous owner and it is this cost which will have to
be indexed. For the purpose of indexation the year in which the asset
was first held by the assessee (not the previous owner) is to be
considered. The indexation will be done as under:
COA to the previous owner X CII of the year of transferCII of the
year in which the asset is first held by the assessee
However, in the case of Mrs. Pushpa Sofat (2002) 81 ITD 1
(Chd)(SMC), the indexation of cost was allowed from the date of
acquisition of the asset by the previous owner and not the date when
the asset was acquired by the assessee from the previous owner under
any mode given under section 49(1).
Now, the Hon’ble Bombay High Court also take a same view in
case of CIT V/S Manjula J. Shah [2012]204TAXMAN691(Bom HC)
that under any mode given under section 49(1) indexation will be
allowed from the date when previous owner acquired property.

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Page 1 of 63

LIST OF ABBREVIATIONS USED

CAPITAL GAINS ON IMMOVABLE PROPERTY

Chapter I: Basics regarding Capital Gain on Sale of Property

➢ Profits or gains arising from the transfer of an immovable property,

➢ The Incidence of tax on Capital Gains would arise in the previous

➢ Exception to Section 45(1): As per section 45(1), capital gain is

• Section 45(1A): Insurance Claims for damage or destruction

➢ An immovable property, being land or building or both, held for a

➢ Transfer of a short term capital asset gives rise to Short Term

➢ STCG arising on account of transfer of short term capital

Full Value of Consideration XXX

Less: Cost of Acquisition (XX)

The STCG computed as above forms part of total income and is

➢ LTCG arising on account of transfer of long term capital

Full Value of Consideration XXX

Indexation is a process by which the cost of acquisition is adjusted

Indexed cost of acquisition is computed with the help of

Indexed cost of improvement is computed with the help of

➢ Rate of Taxation for LTCG:

The LTCG Computed as above is chargeable to tax at special rate of

Where the actual sale consideration receivable for the transfer of a

adopted or assessable by Stamp Valuation Authority for the

In other words, while computing Capital Gains: Full Value of

Where the amount of actual purchase consideration payable by a

Section 54 54EC 54GB 54F

in Gain to Specified bonds of ion tion is to

exemptio will be of such

Note 3: Amount of deduction as claimed under section 80C to be

Where loan was taken for purchase of residential house property

➢ Scenario 1: Seller and Buyer both are resident:

1. In case the total amount of purchase consideration payable for

2. Such TDS is required to be deducted at the time of payment or

3. The Buyer is required to deduct tax at higher rates of 20% in

4. The tax so deducted has to be deposited by the Buyer with the

5. The Buyer is also required to furnish a TDS certificate as per

7. The Seller can claim a refund of the TDS in his income-tax

➢ Scenario 2: Seller is a Non-resident and Buyer is Resident:

1. If the immovable property is being purchased from a person who

2. Such TDS is required to be done at the time of payment or credit

3. The tax so deducted has to be deposited by the buyer with the

4. Seller may also apply for a certificate of low or Nil deduction of

5. The Buyer will also need to have a Tax Deduction Account

6. The Buyer is also required to furnish the applicable Quarterly

Quarter Ending on Due date for filing TDS

❖ SOME IMPORTANT TAX PLANNING TIPS

• One should ensure that some re-investments to be done as per

• One should also ensure that transactions relating to immovable

Chapter II: Basics concept of Joint Development Agreement

❖ Types of Joint Development Arrangements

1. Owner of an old house is ready to develop the property in modern

2. Large real estate project for development of residential or

❖ Section 45(5A) of Income Tax Act, 1961

To minimize the hardship to the assessee, the amendment was bought

Section 45(5A). Notwithstanding anything contained in sub-section (1),

Explanation.—For the purposes of this sub-section, the expression—

(i) “competent authority” means the authority empowered to approve the

(ii) “specified agreement” means a registered agreement in which a person

(iii) “stamp duty value” means the value adopted or assessed or