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JAMIA

MILLIA
ISLAMIA
IRAM
PEERZADA

[PROPERTY AS STOCK IN
TRADE]
SUBMITTED TO- Ms. RAVEENA

ACKNOWLEDGEMENT
Before I start off on this endeavor that has been given to me as the tax law project
in the sixth semester of this joyful ride that I have undertaken under the flagship of
The Faculty of Law, Jamia Millia Islamia, I would like to thank everybody who
has been instrumental in my successful completion of my projects.
First, I would like to acknowledge the immense contribution that my teacher of tax
law, Ms. Raveena has had on this project. By creating the basic framework of the
subject in my mind through his excellent lectures he also contributed in the
creation of the basic framework and limitations of my topic in my mind.
Next, it would be my duty to thank the excellent library staff in the Faculty of Law,
Jamia Millia Islamia for their never ending readiness to help anyone in finding
exact readings for any such subject that he/she is researching.
Lastly, I would like to thank my classmates who never backed off when I needed
them to clarify any concept that I couldnt catch during the process of the class.

INDEX

INTRODUCTION
SECTION -22, Income from house property
SECTION- 43CA
ANALYSIS OF PROVISION OF SEC 43CA
REDEVELOPMENT AGREEMENT
CANCELLATION AGREEMENT
CONSTITUTIONAL VALIDITY OF PROVISION OF SEC 43CA

TABLE OF CASES

CIT v. Ansal House Financing Co. Ltd.(2013)


Alapati Venkataramaih v. CIT
Smt. Kishori Sharad Gaitonde v. ITO
Heatex Products P. Ltd. V. ACIT
Arif Akhatar Hussain v. ITO (2011)
Gyan Chand Batra v. ITO
K.P. Varghese v. ITO
A. Sanyasi Rao

The income tax act, 1961


The income tax act, 1961 is the charging statute of income tax in India. It provides
for levy, administration, collection and recovery of income tax. Recently the
government of India has brought out a draft statute called The Direct Taxes Code
intended to replace Income Tax Act and the Wealth Tax Act,1957. Public
commentary has been called for the draft bill. 1
Under this project the following provisions have been covered:1) House property income- Section 22
2) Transfer of business assets Section 43CA

1 Ministery of Finance Direct Tax Code

Section 22:
Income from house property
The annual value of property consisting of any buildings or lands appurtenant
thereto of which the assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession carried
on by him the profits of which are chargeable to income- tax, shall be chargeable to
income- tax under the head" Income from house property".
Conditions for House Property to be taxable
Three conditions are to be satisfied for property income to be taxable under this
head.
1. The property should consist of buildings or lands appurtenant thereto.
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any business or
profession carried on by him, the profits of which are chargeable to income-tax.
Salient Features:
1. The term building includes residential houses, bungalows, office buildings,
warehouses, docks, factory buildings, music halls, lecture halls, auditorium etc.
2. Rental income from a vacant plot of land (not appurtenant to a building) is not
chargeable to tax under the head Income from house property, but is taxable
either under the head Profits and gains of business or profession or under the head
Income from other sources, as the case may be.
3. However, if there is land appurtenant to a house property, and it is let out along
with the house property, the income arising from it is taxable under this head.
4. It is only the owner (or deemed owner) of house property who is liable to tax on
income under this head. Owner may be an individual, firm, company, cooperative
society or association of persons. The property may be let out to a third party either
for residential purposes or for business purposes.

5. Annual value of property is assessed to tax in the hands of the owner even if he
is not in receipt of the income. This is very important to note. We will cover this in
detail in Part-II and Part-III of this series of posts also. This essentially means that
if your house property is capable of generating income (and actually it is not), you
are liable to pay taxes on the deemed income.
6. Income from subletting is not taxable under section 22. For example, A owns a
house property. He lets it out to be B. B further lets it (or a portion of it) out to C.
Rental income of A is taxable under the head Income from house property.
However, since B is not the owner of the house, his income is not taxable as
income from house property, but as income from other sources under section 56.

HOUSE PROPERTY INCOME


Tax rental income from house property even if not let out
Stock-in-trade in case of builders / developers
No distinction between capital asset & business asset/stock in trade
Property consists of any buildings or lands appurtenant thereto

Assessee is the owner

Any portion of property used for business or profession purposes are excluded

Property includes both

residential and

Commercial

Chargeability as per sec.23

Applicable from:

Completion of construction and ready to use i.e. under-construction property not


covered
Whether only after OC or once construction completed

Decision of Delhi High Court:

CIT v. Ansal Housing Finance & Leasing Co. Ltd. 2 wherein it was held as
underHouse properties consisting stock-in-trade or trading assets made no difference
from assessing the income from these properties under the head income from
house property;

Even though the flats are not let out, the incidence of tax is based on
ownership and once the assessee is owner of the properties, ALV is to be adopted
for taxing the income;

Parliament has resorted to several presumptive methods for purpose of


calculation of income and collection of tax;

Alternate argument that assessee is occupier of properties and in course of


business therefore falls under exclusion - also rejected since legislative intention
was active user of premises for business purposes and not mere passive possession
for business purposes.

2 (2013)354 ITR 180(Del)

Section 43CA:
Special provision for full value of consideration for transfer of assets other than
capital assets in certain cases.
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 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 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.
(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).
(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.
Some of the features of section 43CA
1. Applicable to only land and building or both and not any other type of capital
asset.
2. For the computation of business profits, in cases where the actual value received
on transfer is lower than the stamp duty value, then the stamp duty value shall be
deemed to be the consideration received.
3. Similar to section 50C, here too the assessee can claim before the assessing
officer that the stamp duty value exceeds the fair market value as on the date of
transfer and ask him to refer the valuation of the land or building to the valuation
officer.

4. Where the builder/developer has entered into an agreement with buyer for
transfer of land and building and also fixes the consideration for such transfer at an
earlier date, but the transfer takes place at a later date, in such cases the stamp duty
value as on the date of agreement is to be compared with the fixed consideration.
However the condition is that part or full payment should have been received by
any mode other than cash on or before the date of agreement for transfer.

TRANSFER OF BUSINESS
ASSETS S.43CA

Provision summarized:

Consideration received or accrued


On Transfer of asset other than capital asset
Assets means land or building or both
Consideration is less than value adopted / assessed/assessable by stamp duty
authority
Stamp duty value will be considered as Full value of consideration on transfer of
asset
DVO valuation option available as provided in sec.50C(2) & adoption of value
as per sec.50C(3)
Sub-sec. (3) provides date of agreement fixing value of consideration for
transfer of assets and date of registration of such transfer of asset is different, then

Stamp duty value to be adopted as on the date

of agreement and not date of registration

Sub-sec.4 states that this option is available only if consideration or part of


consideration is received on or before the date of agreement for transfer of asset by
any mode other than cash.

Analysis of Provision of s.43CA:


TRANSFER
Transfer of asset other than capital asset
Sec.50C covered cases of capital asset
Hence, this section introduced to cover transfer of assets other than capital assets
Definition of Transfer not provided in this section
Whether definition of Transfer as provided in sec.2(47) can be applied
Sec.2(47) applies only to transfer of capital assets
Sec.2(47) is very wide and categorically refers to in relation to capital asset,
hence, should not be applied to sec.43CA
In such situation, definition of Transfer as per provisions of Transfer of Property
Act , 1882 (TOPA) should govern this provision
Sec.5 of TOPA provides an act by which a living person conveys property, in
present or in future, to one or more other living persons, or to himself and one or
more other living persons & living persons include company, AOP, BOI.
Thus, as per TOPA, transfer of property implies conveyance, which is complete
by registration of immovable properties
Sec.43CA also recognize date of registration of agreement for applying stamp
duty valuation and hence, the definition of transfer as provided in TOPA should be
made applicable
Supreme Court in Alapati Venkataramiah v. CIT3
(corresponding to s.45) held as under-

in context of s.12B

Before section 12B of the 1922 Act, can be attracted, title must pass to the
company by any of the modes mentioned in section 12B, of the 1922 Act i.e., sale,
exchange or transfer.
3 57 ITR 185(SC)

It is true that the word transfer is used in addition to the word sale but even so,
in the context transfer must mean effective conveyance of the capital asset to the
transferee. Delivery of possession of immovable property cannot by itself be
treated as equivalent to conveyance of the immovable property.
However, 43CA also covers cases of stamp duty value assessable and not
assessed, hence, registration of agreement even if not done, still provision to apply
(similar to sec.50C), hence, definition of TOPA may stand modified to this extent

Land or Building or both

No definition of land or building in the Income-tax Act;

Land or Building may include part thereof;

Land or building may also include any rights therein

Thus, flat or unit or premises in a building, whether residential or


commercial would be included

However, since definition of capital asset excludes stock in trade but not
other business assets, possible only stock in trade is covered u/s.43CA

Hence, this provision mainly or rather covers only those assessees dealing in
real estate and treats the land or building as his stock in trade and therefore does
not merely cover builders or developers

Whether tenancy rights included

May not get covered since not a case of transfer of asset being land or building refer Smt. Kishori Sharad Gaitonde v. ITO4; Tejinder Sing 5 (ITAT Kol)
However, rights in immovable property is also immpovable property but,
question arises whether the tenancy rights can be shown as stock in trade of assesse
4 (Mum) [ITA 1561/M/09]
5 (50 SOT 391) (ITAT kol)

Whether leasehold rights included

May not get covered since not transfer of asset being land or building refer
decisions rendered in context of sec.50C i.e. Atul Puranik6; Heatex Products P.
Ltd. V. ACIT7
However, now-a-days, builders develop (mainly in respect of commercial
space) and lease it out whether provision of s.43CA applies Depends on facts
in most cases refundable security deposit is taken, if it is a case of non-refundable
deposit and small rent, provision may get hit

Whether sale of FSI / TDR covered

Under sec.50C, it has been held that sale of TDR is not land or building and
therefore not covered u/s.50Crefer- Atul Puranik (ITA no. 3051 /Mum / 2010)

TDR is development right granted under DCR, 1991

FSI/TDR are benefits arising from land

Sec.3(26) of General Clauses Act, 1897, immovable property includes


benefit arising out of land

6 132 ITD 499 (Mum)


7 (Mum) ITAD

Development Agreement

Whether development rights covered

Except for case where such rights are treated as stock in trade, it will fall
within the definition of capital asset u/s.2(14)

Arif Akhatar Hussain v. ITO8

Held, transfer of development rights is transfer of capital assets and therefore


provisions of section 50C will be applicable
Taking this into consideration, let us now consider various situations as to whether
there could be implications of sec.43CA
A)
Landowner reserves all rights with him and only allows for construction of
building and pays for amount of construction
Irrespective of whether the landowner is trader or dealer in real estate, in such
case, there may not be transfer u/s.43CA
It would be rather a case of contract whereby the contractor is only given rights
of development and paid for the same
The owner of land and building would then be the same person.
Conversely, even if the contractor is builder or developer, provisions of sec.43CA
may not apply to him since he is not transferring land or building but merely
constructing
B)
Land owner getting fully paid up as per agreed amount and no further rights
in constructed building
In such cases, generally there is irrevocable POA entered for land as well as
clauses are put in respect of conveyance of land to the ultimate society, etc.
8 2011 (140) TTJ 413 (Mum)

Thus, there would be transfer of land as well as potentials of land i.e. FSI, etc.
and hence, if the landowner is dealing or trading in land or otherwise, provisions of
sec.43CA may be applicable
If the landowner is not treating the asset as stock in trade, then sec.50C would
apply to him as held in Arif Akhatar case, supra, Mumbai ITAT.
C)
Land owner getting compensated partly by cash and party by constructed
area
Here again there is transfer of land and building
Constructed area is given free of cost i.e. it is part of overall consideration
Same situation as per (B) above and the value as assessed by Stamp duty
authorities for such type of agreements will be the consideration for 43CA / 50C
D)

Land owner getting compensated fully by constructed area

Here also there will be transfer of land and building


Constructed area is given free of cost i.e. consideration for transfer of
development rights
Same outcome as in (C) earlier
Further 43CA will be applicable when the builder sells to third parties

Food for Thought: Constructed area agreement to be given to landowner


again registered what happens

Redevelopment Agreement

Here issue arises with respect to existing owners of flat vis--vis


redeveloped new flats received by them
Existing flat owners getting extra area
Agreement is made generally as

Permanent Alternate Accommodation on Ownership Basis

However, it is new flat received with extra area hence may be treated as
transfer

Flat owner would be getting free of cost but there is element of stamp duty
on such agreements

Both section 43CA as well as section 56 may apply one to the seller and
other to the buyer

In books of builder, there is no sale reflected for such flats and it only goes
as part of overall cost of construction, however, registered agreement may be
called for
Transfer of asset into partnership firm, etc.

Dealer in land joins hands with another builder / developer for joint
construction and sale thereof

45(3) may not apply in such a case since 45(3) applies to transfer of capital
asset and land being stock in trade, is outside scope of capital asset

In such situation, it may be considered as transfer of land, being stock in


trade into PF, hence, 43CA applicable

Possible solution may be Joint Venture

Cancellation of Agreement
Cases of cancellation of agreement
First time agreement entered into with builder, 43CA applies and sale value
accounted in books of account as per agreement, but only for taxation purposes,
AO applies stamp duty valuation
Such agreement gets cancelled either in the same year of in subsequent year
It may be treated as purchase of flat by builder at the price paid to the seller (i.e.
to the person cancelling the agreement)
Second sale of the same asset On second sale again 43CA will be applicable
Issue is what is the cost to be taken against the sale of same asset second time
will the same be amount assessable to tax at the time of first sale i.e. whether the
differential value be added to cost of purchase of asset upon cancellation
Reference to Jaipur ITAT in Gyan Chand Batra v. ITO9

Investor Allotment, etc.


Cases of investor flats i.e. investors are allotted flats, which are later either sold by
them to third party or to builder
On launching project, investors book flats at price which is lower that stamp duty
price what happens when investor cancels such booking subsequently at market
value which is equal to or more than stamp duty value?
What happens if the investor sells the rights to third party at market price and the
builder is confirming party to the agreement which is registered subsequently?
9 [2010]6ITR (Trib.)147(Jp.)

What happens in above situations where the construction of building is yet to


commence or has commenced and partly completed but not fully
What happens if the project launched finally does not go through for whatever
reasons and the project is abandoned

What will be the situation where the investors are allotted flats / rights in
flats much prior to AY 14-15, however, all the aforesaid situation happens in AY
14-15

Provision requires amount paid otherwise in cash prior to date of agreement


what happens if the date of agreement entered into is one day or couple of days
prior to payment in cheque Further whether it is date of payment or date of actual
encashment of cheque in bank account of the builder / developer

Any implication of a case of conversion of capital asset into stock in trade


and the said stock in trade is sold / transferred in AY 14-15

What happens where the flat is sold earlier to date of amendment, possession
also given, BMC taxes, other charges also levied however agreement is
registered in AY 2014-15 whether provisions of 43CA applicable

What happens in the earlier case whether the purchaser has already sold the
asset in his balance sheet and is offering income from house property in respect of
the same will this make any difference

Sale to be recognized when

43CA deeming provisions whether taxability deemed to be income in


year of agreement / registration of agreement OR still can be said to be taxable
only as per the method of accounting followed

What happens if in between the completion of project, the earlier sale is


cancelled and new sale takes place in respect of same property.

Constitutional Validity of Provision of sec.43CA


Whether valid
Whether can be challenged
Earlier Legislature brought similar provisions by way of sections 52(2) and
Chapter XX-C but omitted from Statute
K.P. Varghese v. ITO10 provision of sec.52(2) can be invoked only if revenue
establishes that there is under statement of consideration
Sec.52(2) provided that if fair market value of property transferred exceeded sale
consideration by more than 15% than

department could adopt the fair market value for computation of capital gain

No other condition was provided

As the section provided, the assessee could not even prove that consideration
recorded is the correct consideration

In the case before the Supreme Court, the difference was more than 15% and
therefore the AO added the difference to capital gain
A. Sanyasi Rao11 provision of sec.44AC was read down by the SC
S. 44AC was inserted to provide that business income for specified business of
country liquor, timber, etc shall be deemed to a specified percentage of purchase
price in auction and under new S. 206C tax shall be collected at source at the time
of collection of purchase price.
10 131 ITR 597(SC)
11 219 ITR 330(SC)


It was provided that normal computation provisions of S. 28 to 43C will not
apply and income shall be deemed to be specified percentage

Assessee could not demonstrate that its income was lower than the specified
percentage

The honble Supreme Court, though upheld the constitutional validity, it was
held that

tax can be collected at source at specified percentage u/s. 206C,

but provisions of S. 44AC which provided that income shall be deemed at


specified percentage was read down, and

it was held that in assessment, the assessee will have a right to demonstrate
his income is lower.
A. Sanyasi Rao provision of sec.44AC was read down by the SC

S. 44AC was inserted to provide that business income for specified business
of country liquor, timber, etc shall be deemed to a specified percentage of purchase
price in auction and under new S. 206C tax shall be collected at source at the time
of collection of purchase price.

It was provided that normal computation provisions of S. 28 to 43C will not


apply and income shall be deemed to be specified percentage

Assessee could not demonstrate that its income was lower than the specified
percentage

The honble Supreme Court, though upheld the constitutional validity, it was
held that

tax can be collected at source at specified percentage u/s. 206C,

but provisions of S. 44AC which provided that income shall be deemed at


specified percentage was read down, and

it was held that in assessment, the assessee will have a right to demonstrate
his income is lower.

Impact of above two decisions

All subsequent legislative action of deeming income

though deem income

but it provides an option to the assessee to demonstrate that income is not


what is deemed.

The trend in recent years is that presumptions provided are more rule based

no discretion to the Assessing Officer

BIBLIOGRAPHY
Income Tax- V.K.Singhania ed.2016
www.indiankanoon.com
Manupatra
http://shodhganga.inflibnet.ac.in