The Budget will hit as far as purchase and sale of real estate goes. The circle rate through which the State Government levies stamp duty is used as a base to calculate capital gain tax.
Sale and purchase of real estate on income to be taxed on deemed basis even if you pay at market rate which is less than the circle rate, the department will take the circle rate and difference between circle rate & consideration received is taxed as deemed income and tax will be calculated accordingly under section 43CA w.e.f. 1st April 2014. Earlier year 2002-03 while introducing section 50C, one is already taxed notionally for all Capital Assets and now also taxed it on land and building ever if it held at “stock in trade”.
How one is taxed on Notional Income
Property which has sold out exists in B locality of Delhi and property has valued as under; Previously the income, which has taxed, is Rs. 1,00,000 @ 30% in case of Company / partnership or as per slab rate applicable to individual or HUF or AOP / BOI . Now after taking circle rate instead of market rate, additional income as notional income Rs. 2,00,000 (3,00,000 - 1,00,000) has taxed under the proposed section.
Cyprus is the only country where the depositor's money in bank has been proposed to be taken percentage straight to cover fiscal deficit and to save it for crisis.
GIVEN IS THE TAXABIlITY ON ASSESSEE UNDER VARIOUS SECTIONS
Taxability in the hand of Transferor
Assets being land or building or both held as stock in trade.
Sub-section (1) of proposed section 43CA in Finance Bill, 2013
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.
Assets being land or building or both held as capital assets
Sub-section (1) Section 50C of Income Tax Act in the year 2002-03 by Finance Act 2002.
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.
Sub-section (2) of proposed section provides that 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).
Sub-section (2) and sub-section (3) of section 50C provides where assessee claims before the Assessing Officer that the value adopted or assessed by the stamp valuation authority exceeds the fair market value of the property then the Assessing Officer may refer the valuation of the capital asset to the Valuation Officer as per the provisions contained in the Wealth-tax Act.
Sub-section (3) & (4) of proposed section 43CA is as under
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.
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 any mode other than cash on or before the date of agreement for transfer of the asset.
Taxability in the hand of Transferee
To tax on immovable property
Sub clause (b) of section 56(2)(vii) to provide that where any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration, shall be chargeable to tax in the hands of the individual or HUF as income from other sources.
TDS on Transfer of Immovable Property other than Agricultural land
Under the existing provisions of the Income-tax Act, tax is required to be deducted at source on certain specified payments made to residents by way of salary, interest, commission, brokerage, professional services, etc. On transfer of immovable property by a non-resident, tax is required to be deducted at source by the transferee. However, there is no such requirement on transfer of immovable property by a resident except in the case of compulsory acquisition of certain immovable properties.
Now a new Section 194-IA to provide that every transferee, at the time of making payment or crediting of any sum as consideration for transfer of immovable property (other than Agricultural land) to a resident transferor, shall deduct tax at the rate of 1% of such sum. It is further proposed that no deduction of tax under this provision shall be made where the total amount of consideration for the transfer of an immovable property is less than Rs. 50 lakh
Section 43CA has been introduced to overrule the decided cases given box under the provisions of section 50C where transfer of immovable property held by the transferor as stock-in-trade has been held to be not taxable.
Double Taxation: Combined reading of section 43CA or 50C and section 56(2)(vii)(b) arise double taxation on same transactions and will lead to multiple litigation - (may help to advocate colleague of our respect FM). The land or building is a Capital Asset, transferred for a value less than the Stamp Duty Value, the notional difference amount is taxable in the hands of the Transferor as Capital Gain under Section 50C, and if the asset is held as Stock in Trade, taxable as profit and gains of business or profession, in the hands of the transferor by the proposed Section 43CA. To tax the notional amount again in the hands of the transferee under section 56(2)(vii)(b), leading to Double Taxation.
Currently in the real estate market, the income from transfer of immovable property held as stock-in trade accounted on the basis of method of accounting regularly adopted by the developer i.e. percentage completion method or project completion method
Following complexity also arises
Fundamental principle for valuation of stock is - cost or market value whichever is lower. The adoption of the stamp duty value as market value will result into higher profitability, where stamp duty value exceeds the fair market value and if stamp duty value is lower, it resulting into business loss.
How the accounting entry of difference notional income affect in the trading (profit and loss account) of a real estate trader or builder where actual inflow of money does not come and it is a just deeming income by proposed section.
First in free market “circle rates” by State Government say for eg. Delhi is higher comparing to actual average transactions rate of real estate.