Real Estate Industry
June 2010
Ashutosh Chaturvedi
Annu Gupta
PricewaterhouseCoopers
PwC
Broad Contents
Real Estate Industry Trends
Real Estate – Typical Models
Tax Issues
Direct Tax benefits
Direct Tax Code
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Real Estate Industry Trends
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Development and Key Drivers
 Estimated economic value : accounting for 5% of
GDP. (Services : 57%, Agriculture : 17%)
 India leads the top real estate investment markets in
Asia for 2010.
 Top investment destinations : Mumbai & Delhi
 Increase in share of real estate in overall FDI pier
from 10.2% in FY 2008-09 to 11% in FY 2009-10
(Services Sector comprising financial and non
financial services sector -21% of total FDI inflows)
 Affordable Housing is expected to drive the future
growth in the real estate sector.
 Real Estate growth to be driven by infrastructure
growth in the commercial and residential space.
Key Drivers of Indian Real Estate
Sector
• Robust & sustained macro
economic growth
• Upsurge in industrial & business
activities
• Significant rise in consumerism
• Rapid Urbanization
• Creation of demand for
housing/commercial real estate
• Favourable demographics
• Political stability
• Mature and progressive domestic
market
• Developing financial markets
 Allocation for urban development were increased by
more than 75% from US $ 660.3 million to US$ 1.17
billion in 2011.
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Slide 4
Economic Outlook
General
 Fundamental of Real Estate Industry improving due to better liquidity condition and higher
demand in the residential segment
 Demand in commercial segment remains weak impacted by oversupply and scale back of
expansion plans.
 Gross Revenue of Real estate companies to increase in FY 11
Key Risks
 Competitive environment coupled with fluctuations in material prices amongst the key issues to
be faced in FY 11.
 Ability of leveraged players to service their interest costs and fulfill their immediate term debt
obligations continue to remain the concern
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Slide 5
Key Legislations/Regulations involved
•
•
•
•
SEBI
Tax Laws
Exchange Control
Foreign Direct Investment
• Stamp Duty Laws
• Accounting Implications
• Companies Act
• Competition Act
Multiple law affect
Real Estate Industry
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Slide 6
Real Estate – Typical Models
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Typical Real Estate Models
Residential Model : Purchase/Sale Model
Purchase Of
Land
 Timing of taxability
in the hands of
SellerOn signing of
Agreement to Sell or
Possession or
Registration of the
Sale Deed
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\
Advance Money
Received for
Purchase of flat
Construction
of Property
Possession /
Registration
Of Property
 Recognition of
 Is advance
received
pursuance to letter
of allotment
taxable as
income?
Revenue & Expense Whether on basis of
percentage
completion or
completed contract
method?
 Applicability of
Guidance note for
recognition of
Revenue for Real
estate Sales
Slide 8
What is the Timing of taxability: Whether on signing of
Agreement to sell or Registration of sale deed?
TPA - Where an agreement to sell executed to transfer property with reasonable
certainty, and transferee has taken possession thereof - even if the sale deed is not
registered, transferor right on such property against the transferee is barred.
* Taxability on execution of agreement to Sell
- Madathil Brothers v DCIT (HC Chennai) (2007) 301 ITR 345
- CIT v Podar Cement Pvt.Ltd (SC) (1997) 226 ITR 625
- CIT v Ved Parkash & Sons (HUF) (HC P&H) (1994) 207 ITR 148
** Taxability on execution of registered Sale deed
- ACIT v Karnataka Minerals and Manufacturing Co.Ltd. (ITAT Bangalore) 2009-TIOL-159
- CIT v F.X. Periera and Sons (Travancore) Pvt. Ltd. (HC Kerala) (1989) 184 ITR 461
- Hall and Anderson (Private) Ltd. v CIT Calcutta (HC Calcutta) (1962) 47 ITR 790
Slide 9
Construction Contracts
Types of Construction Contract
Fixed Price Contract
- the contractor agrees to a fixed
contract price or fixed rate per
unit of output, which
- in some cases is subject to cost
escalation.
Cost plus Contract
- the contractor is reimbursed for
allowable or otherwise defined
costs, plus percentage of these
costs or a fixed rate

Contract Revenue and Costs should be recognized as revenue and expenses by
reference to the stage of completion of the contract activity at the reporting date.

Expected Loss to be recognized immediately.

Stage of completion of a contract may be determined by following methods:
Proportion of costs to the estimated total cost
Surveys of work performed
Physical proportion of contract work
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Slide 10
Illustration on AS-7
Initial amount of revenue agreed in contract (A)
YEAR
I
YEAR
9000
9000
Variation (C)
II
200
Total Contract Revenue
9000
9200
Contract Costs incurred upto the reporting date
2093
6168
Contract costs to complete
5957
2032
Total Estimated costs (B)
8050
8200
Estimated Profit (A+C-B)
950
1000
Stage of Completion
26%
74%
Recognized in
year I (26%)
(X)
To be Recognized
in year II (48%)
(Y)
Total Recognition
(74%) (X+Y)
Revenue (P)
2340
4468
6808
Expenses (Q)
2093
3975
6068
Profit (P-Q)
247
493
740
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Slide 11
Guidance Note on Recognition of Revenue on Real Estate
Sales
Recognition of revenue incase of real estate sales
 Seller has transferred to the buyer all significant risks and rewards of ownership and retains no
effective control to a degree usually associated with ownership
 No significant uncertainty exists regarding the amount of consideration that will be derived from
real estate sales
 It is not unreasonable to expect ultimate collection
 Where the seller is obliged to perform any substantial acts after the transfer of all significant
risks and rewards of ownership, revenue is recognized on proportionate basis by applying AS-7
Example:
A building on which construction is not yet completed though all significant risks and rewards of
ownership are transferred.
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Slide 12
Typical Real Estate Models
Residential Model : Joint Development Agreement
Development
Agreement
Construction
of Property
Sale of developed
Of Property
Allocation of developed
Property/ sale proceeds
between
landowner & Developer
 When transfer of development rights is chargeable to tax?
 Is there any AOP exposure?
 Computation of income of owner?
 Whether amount receivable chargeable as business income or capital gains?
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Slide 13
When is Transfer of Development Rights chargeable to Tax?
 Agreement has all elements of transfer at the stage of entering into the agreement and therefore,
there was inescapable conclusion that there was transfer of property by the owner to the
developer . Also, as stipulated by the agreement, the owner had decided to hand over his share
of built up area to the builder for sale (CIT v Askok Kapur) 213 CTR 241Delhi HC (2007)
 The assessee had entered into a Joint Development agreement with a builder. The plot was
handed over in 1995. Date of transfer was held as date on entering into a development
agreement. Any capital gains that will arise will be in the year of transfer (Vemanna Reddy (HUF)
v ITO 114 TTJ 246 (ITAT Bangalore)
 Transfer of capital asset and capital gains payable in the year of execution of the GPA. (Jasbir
Singh Sarkaria 294 ITR 196) (AAR)(2007)
 Capital gain is to be levied on giving physical possession of the property even though the final
sale deed is not registered. (Gripwell Industries Ltd. V ITO) 284 ITR 188 ITAT Mumbai (2005)
 Capital Gains had accrued to the assessee when he had executed a general power of attorney in
favour of the builder or developer of land and handed over the possession to the builder for
construction of flats (Dnyaneshwar N. Mulik v ACIT) 98 TTJ 179 ITAT Mumbai 2007
 Capital Gain chargeable on handing over possession of the property (Maya Shenoy v CIT) 124
TTJ 692 ITAT Hyderabad 2008
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Slide 14
AOP exposure in a Joint Development Agreement
Fundamental tests laid down by judicial pronouncements* for determination of AOP:
− existence of two or more parties
− coming together for a common purpose
− common action on part of the constituent members
− joint and several liability, and
Is it beneficial to be taxed as AOP??
Implications
Taxable as AOP
Liability of Members
Liability of Members of the AOP is Unlimited.
Taxability of JV
Taxed at Maximum Marginal Rate (‘MMR’)
Taxability of Members
Exempt in the hands of members of AOP. MAT implications may arise where the
member is paying tax under MAT provisions.
Carry forward of
losses
Losses would be carried forward by AOP.
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Slide 15
Computation of Income of owner
Facts :
 Landowner to contribute land for development of property
 Landowner to get 40% of constructed portion of flats
 Developer to keep 60% of constructed portion of flats
Calculation of Taxability of Landowner
Capital Gain
=
On sale of Land
(FMV of 40% flats – land cost of 40% flats)
(-) 60% CoA of Land
XXXX
Capital Gain*
=
On sale of 1 Flat
Sale Consideration to end user
(-) 1/40 of (FMV of 60% of land)
XXXX
* Would it be Capital Gain Or Business Income ?
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Slide 16
Whether income of land owner is taxable as Business income or
Capital Gain on sale of property?
Capital Gain:

Raja Bahadur Kamakhya Narian Singh v. CIT
(1970) 77 ITR 253 (SC)

CIT v. Sugar Dealers (1975) 100 ITR 424 (HC
Allahabad) 1973

CIT v. H.Holck Larsen (1986) 160 ITR 67 (SC)

Janak S. Rangwalla v ACIT (11 SOT 627) ITAT
Mumbai

CIT v. H.Holck Larsen (1986) 160 ITR 67 (SC)

Fidelity Northstar Funds v DIT (198 Taxation 75)
(AAR)
 Whether purchase and sale was allied to his
usual trade or business/was incidental to it or
was an occasional independent activity?
 Whether scale of activity is substantial,
continuous and regular?
 Whether purchases are made out of own funds
or borrowings?
 Objects in the MOA and AOA
Business Income :

G. Venkataswami Naidu & Co v CIT 35 ITR 594
(SC) 1958

CIT v . Associated Industrial Development Co. (P)
Ltd 82 ITR 586 (SC) 1971

Raja Bahadur Visheshwara Singh v. CIT (1961)
41 ITR 685 (SC) 1960

Dalhousie Investment Trust Co. Ltd v. CIT 68 ITR
486 (SC) 1967
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 The time devoted to the activity and the extent to
which it is the means of livelihood.
 The characterization of property in the books of
account.
Slide 17
Typical Real Estate Models
Commercial – Lease Model
Purchase Of
Land
Construction of
Property
Lease of
Commercial Property
 Recognition of Revenue & Expense - Applicability of Guidance note for recognition of
Revenue for Real estate developers – Fixed Asset
 Income from lease of land/property - Chargeable as ‘Business income’ or ‘House Property
Income’?
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Slide 18
Whether on Letting – Income chargeable as Business Income or
House property Income?
Pure Letting: Income from House Property
 Shambhu Investment Pvt Ltd v. CIT (263 ITR
143) (SC)
 East India Housing and Land Development
Trust Ltd v. CIT (42 ITR 49) (SC)
 Ballygunge Bank Ltd. v. CIT [1946] 14 ITR 409
(Cal)
 CIT v. Chennai Properties and Investment Ltd
(266 ITR 685) (Madras HC)
 National Storage Pvt. Ltd. (48 ITR 577) HC
 CIT v New India Industries Ltd. (HC Bombay)
 Indian City Properties Limited (55 ITR 262)
Calcutta
Composite Letting: Business Income
 CIT v. National Storage Pvt Ltd (56 ITR 596)
 Manohar Singh v. CIT (58 ITR 592) (Punjab HC)
 Associated Building Co Ltd (137 ITR 339) (Bom
HC)
 Bharat Hotels Ltd (53 ITD 450) (Delhi ITAT)
 PFH Mall and Retail Management Ltd v ITO
(110 ITD 337) (Cal)
 CIT v Kongarar Spinners Pvt. Ltd. (208 ITR
645) (Mad)
 Karnani Properties Ltd. v. CIT (82 ITR 547)
(SC)
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Principles for determination of the nature of
income:
 If the main Intention is to exploit the immovable property, it
is Income from House Property vz. If it ancillary or
supporting the commercial activity - it would be Business
Income
 If a person is just holding leasehold rights, it would be
business income, while if he is the owner of the property,
it will be Income from House Property
 Composite letting – (eg. Business convention centre) –
Business Income
 Even if a company was formed with the objective of
developing and setting up markets rental income will be
income from house property.
 In case of asset being let out temporarily and assessee
intends to restart its business, it shall be business income
 Where the rental and the service arrangement are
separable, then the rental income should be characterized
as HP income and the service income should be regarded
as Business Income
Slide 19
Other Direct Tax Benefits
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Tax Holidays
Benefits for Developers/ Co-developers
 SEZ Development :
-
100% income tax holiday for 10 consecutive years out of 15 years (from year of SEZ
notification) on profits derived from SEZ development.
Exemption from payment of DDT
Exemption from MAT
Tax holiday on lease of land
Issue:
• Whether Income of developer Income from Business or House Property also
eligible for exemption?
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Slide 21
Tax Holidays
 Housing Projects Section 80IB(10):
- 100% income tax holiday for projects where a housing project has been approved on or
after April 1 ,2005
- Construction to be completed within five years from the financial year in which a housing
project is approved
- Maximum built up area of 1,000/ 1,500 sq ft for residential unit [based on city of location],
project land area minimum 1 acre;
- Commercial space to be higher of 3% of aggregate built up area/ 5,000 sq ft.
 Hotels/Convention Centers: ( Section 80-ID)
- 100% income-tax holiday – for 5 Years
- Companies engaged in hotel business or in business of building, owning and operating
convention centre
- Hotel and convention centre located in NCR (Delhi and specified adjoining areas)
- Construction completed or started functioning before 31st July, 2010`
Issues for Consideration:
 Long Gestation Period before hotels start making profits
 Deduction only for 5 years
 Is the Section actually giving any benefit to Hotel industry?
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Slide 22
FDI in Real Estate
General:
 100% FDI under Automatic Route (ONLY Construction
Development)
 Minimum Investment
- USD 10mn for WoS
- USD 5mn for J/V
 Funds to be brought within six months of commencement of
business
 Minimum Area
- development of serviced housing plots : 10 hectares
- other construction development : 50,000 sq meters
•
•
•
•
•
•
•
•
Construction Development
includes:
Townships
Housing
Built-up infrastructure
Commercial premises
Resorts
Educational institutions
Recreational facilities
City and regional level
infrastructure
 50% of project to be completed within 5 yrs from obtaining
statutory clearances.
 Lock in period : 3 years
 Sale of undeveloped plots not permitted
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Not applicable to
SEZs, Hotels and
Hospitals
Slide 23
Agriculture Income – Case Study
Assessee had shown certain income from film shooting in his gardens where he used to grow
agriculture produce.
Held that shooting of films has no nexus with agriculture operations and nexus claimed by
assessee was non existent. Income held as business income.
B Nagi Reddi v CIT (2002) 125 Taxman 20
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Slide 24
Budget 2010 - Wish list
Direct Tax
 Infrastructure status was expected to be granted to integrated townships and group housing
development for facilitating tax holiday : not granted
 Relief to home loan borrowers by way of standalone deduction of Rs. 1 lakh on repayment of
principal as well as hike in interest deduction from Rs.150,000 to Rs. 300,000 : not granted
 Tax holiday for housing projects was expected to be reintroduced and time limit for completion
of existing projects was to be extended : granted
 Clarification was expected on pending issues related to Real Estate Mutual Funds and Real
Estate Investment Trust like valuations, taxes etc. Clarification not yet issued
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Slide 25
Direct Tax Code
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Direct Tax Code : Income from House Property
 Concept of DTC for presumptive rent @ 6% of the rateable value or cost of construction /
acquisition – rolled back
 Calculation of Gross rent:
– For let out house property - amount of rent received or receivable
– For house property not let out - Nil
 Deduction for taxes, interest, etc. not available in case of house property not let out
 Interest on borrowings for construction / acquisition allowed only for one self-occupied house
property
– Subject to maximum ceiling of Rs. 1.5 lakh
 Overall limit of deduction for savings to be calibrated accordingly – details not provided
 Standard deduction reduced from 30% to 20 %
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Slide 27
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Thank you