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Capital gains tax on part payments
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The issue in question is whether the land owner has to pay capital gains tax only after the full amount is received or even for part payment, notes C.H. Gopinatha Rao
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— PHOTO: M.A. SRIRAM
Tax assistance: To help taxpayers plan their income tax affairs well in advance and to avoid long drawn and expensive litigation, a scheme of Advance Rulings has been introduced under the Income-tax Act, 1961.
We know that profits or gains arising from the transfer of a residential building are liable for Capital Gains Tax and the assets held for more than three years are qualified for long term Capital Gains Tax. There are instances when land owners execute power of attorney in favour of a developer. The land owner transfers undivided share of land to the developer or his nominee (s) in exchange for flats offered by the developer. In some cases, the owner also
receives cash in addition to the flats. In a few cases, the owner sells the property to the developer after receiving part payment. The developer promises to pay the balance amount in instalments within a specified period. The issue in question is whether the land owner has to pay capital gains tax only after the full amount is received or even for the part payment? What happens when the period of payments extends more than one year? Can he or she make the payment of tax for the amount received in that year?
The ruling given by Authority of Advance Ruling on August 30, 2007 in a particular case may be helpful in this regard. In order to help the tax-payers plan their income-tax affairs well in advance and to avoid long drawn and expensive litigation, a scheme of Advance Rulings has been introduced under the Income-tax Act, 1961.
In one of the cases (294 ITR 196 ( AAR) )with the Authority of Advanced Ruling, it was held that the irrevocable General power of attorney executed by the owners in favour of the developer must be regarded as a transaction in the eye of law. The ruling implies that the capital gains tax arises on the date of execution of the general power of attorney. For example, if the power of attorney was executed on May 2006 after receiving part amount and the balance was paid in instalments till say August -2007 the capital gains tax must be held to have arisen during that year 2006-07 itself for the entire amount promised to be paid by the developer.
Hypothetical situation
The authority of advanced ruling further observed that what will happen if during the year following the one in which the deemed transfer took place, the proposed venture collapses for reasons such as refusal of permissions, the developer facing financial crunch etc. By that time the owner would have received only a part of the agreed consideration, but is obliged to file the return showing the entire capital gain based on the full sale price whether or not received during the year of deemed transfer.
In such an eventuality, the hardship may be caused to the owner who would have paid full tax.
On deep consideration, however, we find that the construction of the relevant provision should not be controlled by giving undue importance to such hypothetical situations. Normally the owner executes a POA or does similar act to let the transferee take possession only after the basic permissions are granted and is satisfied about the ability of transferee /developer to fulfill the contract. In spite of that, if such rare situations take place, the owner /transferor will not be without remedy. He can file a revised return and make out a case for exclusion or reduction of income. However, if the time limit for filing a revised return expires, the difficulty will arise. It is for Parliament or the Central Government to provide a remedy to the assessees in such cases.”
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