MUMBAI: Bombay high court has issued a notice to the attorney general and sought a reply from revenue authorities after an association of real estate developers challenged a new income tax provision that seeks to curb tax evasion due to "sales at values lower than the government's ready reckoner rates".
The income tax authorities say the new provision is aimed at curbing the huge cash flow in real estate deals. The order passed this week by a bench of Chief Justice Mohit Shah and Justice B P Colabawalla comes in response to a petition filed by the Maharashtra Chamber of Housing Industry (MCHI). The association has challenged the constitutional validity of Section 43CA and Section 56(2) inserted last April in the Income Tax Act. The HC, however, has not stayed the effect of the section, which the developers say appears to be unreasonable, excessive, regressive and discriminatory, against freedom of trade.
The amendment is for computing business income and includes income from transfer of land or building. It seeks to impose tax on income earned through sale of property, based on the ready reckoner rates or stamp duty value even if the sale was for a lower amount. Senior counsel Parimal Shroff, who represented ,MCHI, argued that there "could be various circumstances when land or building and flats would be sold at a value lower than the ready reckoner values".
He said such reasons fall in two categories. One would be factors that influence the market value of a property and the other includes "economic and business considerations". He cited 13 such circumstances where lower prices would be charged. It could be because developers want to dispose their excess inventory, strategize to penetrate the market, for restructuring purposes and in a business crisis.
Shroff said, "The stock in trade has to be converted into money daily, since business, like government, do not run on guarantee or stock and unless there is a mechanism that determines real estate price everyday, instead of annually as is done at present, a builder has to strike a deal at the best price available that day."
Counsel Beni Chaterjee appearing for the I-T department submitted in court that the "law was amended to curb the huge flow of cash circulating in real estate deals. It is a reasonable amendment and its sole purpose to check cash component in property deals, especially for stock in trade of developers". An illustration of what the new provision does is when an owner sells a flat he bought for Rs 5 lakh at Rs 10 lakh after a few years, after factoring in the inflation rate, a tax would be liable on the difference provided Rs 10 lakh is based on the ready reckoner rate. If the RR value was Rs 12 lakh than the additional two lakh would be considered as taxable income too.