The Income Tax Department has sought re-examination of several exemptions provided to the real estate sector.
According to the Budget proposals of the Central Board of Direct Taxes (CBDT), the department is of the view that builders are seeking bulk deductions through shady industrial undertakings.
These exemptions under Sections 80I, 80IA, 80IB and 80IAB deal with deduction from total income from an industrial undertaking. Under Section 80IB, deductions from profits are allowed only if the undertaking is located in industrially backward districts.
However, it had been observed that the deductions were claimed even if the manufacturing activity was carried out only partly in backward areas and a major portion of the facility was based in city limits, said an official source.
Similarly, under Section 80IB(10), deduction on construction of housing projects is available if the total commercial content in the housing project does not exceed 5 per cent of the aggregate built-up area or 200 sq feet, whichever is less.
However, deduction is being claimed by some builders, who are selling commercial plots above the stipulated limit but by entering into more than one agreement with one person and showing it as sale of two properties.
Section 80IA provides for deduction on expenses on those private sector projects where the builders invest in the development of infrastructure, and not for builders who merely undertake the civil construction or any other work contracts.
However, there is confusion since various appellate authorities have held that the deductions are available in respect of undertakings which only develop and do not operate and maintain the infrastructure facility.
The department has also sought an amendment to abolish the project completion method for accounting of the income of builders for taxation purposes.
Sources explained that under the project completion method, income is assessed only when a real estate project gets completed, which usually spans over a number of years. In reality, these builders receive advance for booking which is never returned.
Regarding the valuation of the property, the department has sought an amendment that in cases where the assessee differs on the value assessed by the stamp valuation authority and the matter has been referred to the valuation officer, then higher of the value of the stamp valuation authority and the valuation officer will be taken as the full value of consideration of the property.
This could be done with an amendment to Section 50C. Similarly, when big companies or financial institutions float real estate ventures, they loan the builders or employees for procuring property.
Interest payable by such assessees is deductible under Section 24 of the Income Tax Act . However, later when interest payable is waived by the bank or the institution, the benefits that accrue to the assessees cannot be taxed.
On the other hand, the assessee has already availed the deduction of the interest paid on such loans. Therefore, an amendment could be inserted in the Section 24 (B) of the Income Tax Act to empower the department to tax the cessation of liability.
Similarly, lease rental income earned from putting the property on rent should not be shown as business income, but income from other sources. This is because huge income from property lease is used to set off expenses from other activities, which are unrelated to real estate.