Capital gains tax
Sudipto Bose
(Querist) 16 June 2012
This query is : Resolved
My Mother is owner of freehold property in Delhi she has entered into an agreement with a builder to construct 4 floors in which 3 floors will be owned by her and 1st floor will be owned by the builder.She will also receive 40 lacs. The plot was purchased in 1971. However as per compromise agreement reached in court with her 3 children the 3 floors will be gifted to her 3 children after the construction. The approx value of three flats is 3 crores.
1. Can she transfer the owenership of the flats by gifting to the 3 children with in six months from date of completion of the building.What will be the implecations from the Capital Gains tax point of view?
2. Will she have to pay Capital gain tax on 40 lakh or on 3crore 40 lakhs?
3. Will she have to wait for three years for transfering the ownership of the flats to the 3 children so that capital gains tax on only Rs 40 lacs have to be paid
A V Vishal
(Expert) 17 June 2012
The developer is not a transferee/purchaser coming within the purview of Section 53-A of the Transfer of Property Act, 1882.
The developer does not buy any land or property from the owners.
The right to develop the property granted to a developer as provided in the development agreement does not constitute a contract to a transfer of any immovable property as between the owner and the developer, to attract the provisions of Section 53-A of the Transfer of Property Act, 1882 between them.
The developer only nominates the prospective buyers. The developer enters the property only for the purposes of development of the property and not as a purchaser/ transferee. The GPA given to a developer is only to enter into agreements with the prospective buyers for and on behalf of the owner and not for executing the sale deeds. There will be a restrictive clause in the GPA to this effect.
Only the prospective buyers are the purchasers/transferees in respect of the flats/ apartments purchased by them together with the corresponding shares of undivided interests, rights and titles in the land.
The prospective buyers of flats/apartments are never put into possession of them before the sale deeds are executed and registered in their favour and hence (i.e. there is no scope for invoking the provisions of Section 2(47)(v) read with Section 45 of the Income Tax Act, 1961 and the provisions of Section 53-A of the Transfer of Property Act, 1882).
It is only the developer who develops the land by the construction of flats/apartments together with common ways, infrastructure, amenities and facilities both for the owners of land as well as for the prospective buyers of flats/apartments and his profit margins are assessable as business income.
In the hands of the owners, the chargeability to tax the gains made by them will be treated as follows:
a.Only as and when the flats or apartments constructed by the developer on the developer's share of the land is sold or transferred to the prospective buyers, capital gains can be taxed on the owners in the years in which such sale or transfer takes place.
The consideration for the sale of the developer's share of land will be equal to the cost of the flats or apartments built by the developer for the owners. On the occupancy of these flats or apartments being given to the owners after the completion of the construction of the same as per the specifications and dimensions mutually agreed to between the owners and the developer, the consideration to be given to the owners becomes fully discharged.
b.When the owners get more flats or apartments than what they can personally use and occupy, they effect sales of such additional flats or apartments. When such sales are made, the following position will emerge:
If the sales are made within three years from the date when occupancy was given to the owners, the further gains made by them on sale of the super built-up area will be treated as short-term capital gains and if the sale of the super built-up area is effected after a period of three years after taking possession, the gains will be treated as long-term capital gains.
However, it is to be noted that the consideration for the sale of undivided share of the land relating to the owners' share of apartments will be taxed as long-term capital gains only as the same were always held by the owners and transferred at any time to the developer or his nominees.
Where the owners retain one flat each out of the total number of apartments allotted to them towards their share, each of them will be entitled to claim exemption under Section 54F of the Income Tax Act on the cost of construction of such retained apartment, subject to other conditions under Section 54F being fulfilled by them.
Shonee Kapoor
(Expert) 18 June 2012
Thanks Vishal for such a detailed reply.
Regards,
Shonee Kapoor
harassed.by.498a@gmail.com
R K JAIN
(Expert) 19 June 2012
Acquisition of new flat under a development agreement with a builder in exchange of old flat amounts to construction of new flat and therefore,the time period from the date of transfer as mentioned in section 54 of IT Act would apply for the acquisition of new flat. The acquisition of a new flat under a development agreement in exchange of the old flat amounts to construction of new flat and transfer under section 2(47) of the IT Act. So, I think you can not transfer the flat before 3 years to avoid the tax under IT Act.
