|Exchange of property results in capital gain tax liability|
TAX TALK-10.10.2016-THE HITAVADA
CA. NARESH JAKHOTIA
Exchange of property results in capital gain tax liability
My father co-owns a plot with his brother. A builder has approached for development of it. He is ready to give certain sum and 3 flats in exchange.
1) Father and uncle own only one house each in different cities currently.
2) The uncle bought another flat this financial year which is under construction and possession expected next year (Agreement is done though).
“A taxpayer may engineer his transactions to minimize taxes, but he cannot make a transaction appear to be what it is not”- Irving Loeb Goldberg
Though transactions may sound simple from the commercial angel, it is not so from the income tax point of view. The complexity and tax implications need to be understood beforehand as stitch in time saves nine.
The capital gain liability arises whenever capital asset is transferred & is irrespective of the consideration whether received in cash or in Kind.
In your case, your father & uncle would be entering in to a development agreement with a builder whereby (i) construction would be done by the builder for many flats (ii) land owners would be getting 3 flats and (iii) builder would be getting balance flats against construction of entire building.
In short, against transfer of certain share of land in favor of developer, land owner would be getting constructed flats. There is a misconception amongst taxpayer as most of them believes in “no cash-no tax”. It is not so. Tax liability could arise even without involvement of any cash elements in the transactions. In the present case, even if the land owners are not getting any amount in cash, still the transactions could result in income tax liability. Reason: It is exchange of property whereby share in the land is exchanged against the constructed flat. “Exchange” of property results in capital gain tax liability. The taxation of such transactions is complicated affair. The most important mute question here is the “Year of taxability” of the transactions. There are no set guidelines as to the date, Year of taxability, the manner of ascertainment of the capital gains in the hands of the owner in such cases (whether on completion of contract or on transfer of undivided interest to the Builder or prospective flat owners before the completion of construction).
The capital gain tax liability arises in the year in which “transfer” took place. Under the Income Tax Act-1961, transfer includes “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” [Section 2(47)(v)]. Effectively, any transaction which allows possession to be taken over or retained in part-performance of the contract would come within the ambit of “Transfer”. So, if the land owners have granted the possession to the developer not in the capacity of buyer but only in the capacity of developer, even then it may be treated as Transfer u/s 2(47)(v).
With above point in mind, two probability as to the year of taxability of such transaction could be the year in which (a) the Development agreement is signed or
(b) construction is completed and Flats are handed over back by the builder to the land owners.
If the Development agreement grants an unqualified, uninterrupted and irrevocable right of possession to the developer at the time of signing the documents, then capital gain shall be chargeable to tax in the year of executing Development Agreement itself. However, if the development agreement stipulates the transfer (or possession) of land to the builder at the time of handing over of the 3 constructed flats to the landowners, capital gain shall be chargeable to tax in the year of completion of construction and handover of all the flats to the land owners.
Coming to the specific issues raised in the query, it may be noted that:
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
or email it at firstname.lastname@example.org]